2 0 2 1 A N N U A L R E P O R T
ARCH CAPITAL GROUP LTD.
BOOK VALUE PER
COMMON SHARE3
USD
$0
$5 $10 $15 $20 $25 $30 $35
GROSS
PREMIUMS
WRITTEN
2
$12.5B
NET LOSS
RESERVES
2
$12.2B
TOTAL
CAPITALIZATION
2
$16.3B
TOTAL
ASSETS
2
$45.1B
FINANCIAL
H I G H L I G H T S1
GROSS PREMIUMS WRITTEN ($B)2
UNDERWRITING INCOME ($B)2
$12.5
$9.6
$1.2
$0.5
2020
2021
+30.2%
2020
2021
+140.0%
ANNUALIZED
GROWTH
RATE OF
15.0%
FROM 2001
NET INCOME ($B)
NET INCOME RETURN ON
AVERAGE COMMON EQUITY
$2.1
16.7%
$1.4
11.8%
2020
2021
+50.0%
2020
2021
+490 bps
AFTER-TAX OPERATING INCOME
PER COMMON SHARE1
BOOK VALUE PER
COMMON SHARE3
$3.58
$1.36
$33.56
$30.31
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 Somers Holdings Ltd.
3 Excludes the effects of stock options and restricted stock
units outstanding.
2020
2021
+163.2%
2020
2021
+10.7%
R
A
E
Y
21
20
19
18
17
16
15
14
13
12
11
10
09
08
07
06
05
04
03
02
01
AMOUNTS IN MILLIONS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS
2021
2020
Change
Book value per common share at year end
$33.56
$30.31
Net income available to common shareholders
$2,093
$1,364
Per share
$5.23
$3.32
Net income return on average common equity
16.7%
11.8%
11%
54%
58%
After-tax operating income*
$1,435
$557
158%
Per share
$3.58
$1.36
163%
Operating return on average common equity*
11.5%
4.8%
*This letter contains several non-GAAP financial measures, including
after-tax operating income, operating return on average common
equity and underwriting income. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations –
Comment on Non-GAAP Financial Measures” on pages 59-61 of
the Company’s Annual Report on Form 10-K, filed with the SEC on
February 25, 2022 (the “Form 10-K”) and “Comments on Regulation
G” on pages 7-11 of the Press Release issued by the Company
on February 9, 2022 titled “Arch Capital Group Ltd. Reports 2021
Fourth Quarter Results” and filed by the Company on Form 8-K
on February 9, 2022 (the “4Q Press Release”) for a discussion of
“non-GAAP financial measures” as defined in Regulation G. The
reconciliation of our non-GAAP financial measures to the relevant
GAAP financial measures can be found in the Form 10-K on page
58 under the caption “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Financial
Measures—Operating Return on Average Common Equity,” page
61 under the caption “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Results of
Operations,” pages 107-113 in note 4, “Segment Information,” to
our consolidated financial statements in Item 8 of our Form 10-K,
and page 2 of the 4Q Press Release. A copy of the Form 10-K and 4Q
Press Release is available on the Company’s website, and the Form
10-K accompanies this letter.
TO OUR SHAREHOLDERS
Arch celebrated its 20th anniversary in 2021, marking a key milestone in our Company’s
history. Since the beginning, we have maintained a clear strategy for managing our
capital in the insurance industry. First, focus on specialty lines where we can apply our
expertise. Second, hire outstanding people. Third, work to ensure we are effectively
allocating capital to the most attractive opportunities. And fourth, employ a cycle
management philosophy that encourages our underwriting teams to grow aggressively
during favorable market conditions and remain disciplined in soft markets.
Throughout our history, we have not deviated from this playbook, and have established
a culture of success and performance that — along with our exceptional people —
differentiates Arch from its peers. I’m incredibly proud of what we have accomplished at
Arch so far — and I am enthusiastic about our future as we usher in the next 20 years.
In 2021, despite another year of elevated catastrophes affecting the property casualty
(P&C) industry, a second year of navigating the COVID-19 pandemic and economic
uncertainty around the world, our employees, once again, rose to the occasion in
order to deliver for our clients and shareholders in a challenging environment. Their
care and compassion is broad, extending from our core philanthropic pillars of health,
housing and education to causes that address current events, such as the ongoing
conflict in Ukraine. All are ways our employees actively demonstrate one of our core
values: “Striving to Make a Difference.”
MARC GRANDISSON
CHIEF EXECUTIVE OFFICER
ARCH CAPITAL GROUP LTD.
All major metrics of financial performance were favorable, as reflected in the table above. Most importantly, we continued to grow
the Company’s book value per share (BVPS), which we consider to be the most important measure of value creation. We delivered
an increase of nearly 11% in BVPS in 2021, marking 13 consecutive years of growth. BVPS has grown at a compounded annual
growth rate of 15% since the Company’s founding in 2001, underscoring our commitment to create significant long-term value for
our shareholders.
Historically, Arch has responded quickly to favorable market conditions, and 2021 was no different. Consistent with our cycle
management philosophy, we had pared back our underwriting volumes across many P&C lines during the most recent soft
market, which gave us the option to deploy substantially more capacity during the improved P&C markets of 2020 and 2021. Since
2020, we have grown substantially, writing more business in lines that provided the greatest opportunity to generate appropriate
risk-adjusted returns. All told, in 2021, our net premiums written (NPW) grew by 31% in our Insurance segment and 32% in our
Reinsurance segment. The combined $7.4 billion of NPW in our P&C units was a record for Arch.
Diversification is an important part of our playbook, and we believe it provides shareholders with superior returns through market
cycles. Since entering the mortgage insurance business in 2013, our Mortgage segment has provided both diversification and
performance to our global operations. During the soft market, when opportunities in the P&C business were relatively limited, we
grew our Mortgage segment into another highly profitable earnings engine. Those efforts are paying dividends as the Mortgage
team delivered over $950 million of pre-tax underwriting income in 2021.
On the heels of a profitable 2021, we believe we’re well positioned to continue the upward trajectory in 2022 and beyond. We
believe market conditions remain attractive and our diversified model and strong balance sheet enable us to actively pursue the
opportunities that generate the most value for our shareholders.
Financial Results*
After-tax operating income was $3.58 per share in
2021, increasing 163% over 2020. Operating return
on average common equity was 11.5% and BVPS grew
by approximately 11% for the year. Cash flow from
operations remained strong at $3.4 billion, up from
$2.7 billion in 2020.
Underwriting Results*
Underwriting income was $1.2 billion in 2021, more than
double 2020’s $481 million. We achieved these results despite
a second consecutive year of elevated losses from catastrophic
events including Hurricane Ida and Winter Storm Uri in the
United States and severe flooding in Central Europe. All three
of our business segments — Insurance, Reinsurance and
Mortgage — had underwriting profits in 2021. We’re proud of
this accomplishment and believe it represents only a portion of
the earnings potential of our diversified platform.
Investment Results
Investable assets totaled $27.4 billion at the end of 2021, up
slightly from a year earlier in a challenging environment for fixed
income investors. In managing our 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. Total return
was 1.9% in 2021, lower than the 7.8% returned in 2020. The
increase in interest rates, combined with investor concerns about
inflation, led to a decrease in unrealized gains on our balance
sheet for many fixed income securities and adversely affected
our performance.
At the end of 2021, approximately 74% of the portfolio was
invested in fixed maturity and short-term securities with an
average credit quality of “AA-/Aa3” and an average effective
duration of a relatively short 2.7 years, reflecting our view of
the risk and return trade-offs in the fixed income markets. In
addition to investing in fixed income securities, we invest a
portion of the portfolio in equities and alternative investments,
which performed well in 2021.
Net investment income was $347 million in 2021, down 11% from
2020 on a per-share basis primarily due to lower interest rates
affecting our fixed income portfolio. Net investment income
does not include equity in net income of investment funds
accounted for using the equity method. These investments,
which are primarily of a fixed income nature, contributed $366
million to pre-tax income in 2021, or $0.92 per share, more than
double their contribution in 2020.
Segment Performance
Arch is a global company based in Bermuda. We write commercial
property casualty insurance and reinsurance primarily from
operations in Bermuda, the United States, Canada, Europe and the
United Kingdom, and write mortgage insurance and reinsurance
primarily in the United States, Bermuda, Europe and Australia.
2
Insurance: Net premiums written were $4.1 billion in 2021,
increasing 31% from 2020. Underwriting income was $117 million
in 2021, compared with an underwriting loss in 2020, even though
both years saw significant catastrophe losses for the P&C industry.
We have leaned into a hardening insurance market for the past
two years as rate increases have been above long-term loss cost
trends. In 2021, business growth occurred across most sectors, with
Professional Lines and Programs exhibiting strong advances.
Reinsurance: Net premiums written were $3.3 billion in 2021,
advancing 32% over 2020. Underwriting income was $170 million,
up sharply from $16 million in 2020. We grew in nearly every
reinsurance line, reflecting our diversified specialty mix of business
and our larger participation in quota share reinsurance, which
allows us to participate directly in the improved premium rates of
cedents. Despite substantial growth across most of our portfolio,
we remain underweight in property catastrophe reinsurance as the
current rate environment does not justify deploying more capital
into this sector.
Mortgage: Net premiums written were $1.3 billion in 2021, essentially
unchanged from 2020 as refinance activity declined in 2021. The
segment’s underwriting income remained excellent, improving to
$953 million in 2021 from $594 million in 2020. Insurance in force,
the ultimate driver of mortgage insurance earnings, increased to
$460.6 billion at the end of 2021 from $423.5 billion a year earlier.
We continue to focus on the more attractive returns available in
higher credit quality business instead of broadly chasing top-line
growth — a luxury afforded to us by our diversified model.
Corporate Initiatives
We continued to increase our fee-based, third-party capital
management business in which we leverage our skills to write
insurance and reinsurance for others. In July, we acquired Watford
Holdings Ltd. (Watford) alongside two private equity partners. In
November, Watford was rebranded Somers Group Holdings Ltd.
Other acquisitions in 2021 included Westpac Lenders Mortgage
in Australia, strengthening our non-U.S. mortgage
Insurance
insurance business; Somerset Bridge Group Limited, Southern Rock
Holdings Limited and affiliates, which includes Somerset’s motor
managing general agent, distribution capabilities and fully integrated
claims operation; and a 29.5% minority stake in Coface, a French-
based global leader in trade credit insurance. The Somerset and
Coface investments support our strategy of developing diversified
sources of underwriting income.
Doing the right thing every day is core to our character. In line
with our values, the Company believes environmental, social and
governance (ESG) considerations are integral to our business’
operations and daily decision-making. We are proud of our
reputation as a company that places ethics and integrity at the
forefront and our consistent efforts to support and give back to the
communities where we live and work. We are committed to sharing
ESG disclosures and heightened transparency around our strategy
and risk mitigation efforts.
for
Capital Allocation and Management
Arch is recognized as a reliable manager of capital
with a strong balance sheet and a history of optimizing
opportunities
Capital
management is an integral part of our overall strategy and
we have always had a two-pronged approach: primarily,
to deploy capital
into strengthening or expanding
our operations and, secondarily, to return it to our
shareholders — preferably through share repurchases.
deployment.
capital
In 2021, we were able to both reinvest in our businesses
and return capital to shareholders. We reacquired $1.2
billion of our common stock — fully 7.7% of the shares
outstanding at the start of the year. Over the course of
our 20-year history, we have returned more than $5.3
billion through stock buybacks. We remain steadfast
in allocating our capital to the areas with the greatest
opportunity to enhance shareholder returns.
With respect to the structure of our capital, we have
always utilized a conservative level of leverage. At the end
of 2021, the Company’s ratio of debt and hybrids to total
capital was 21.8%, down from 22.1% at the end of 2020.
3
Arch People
In an industry where talent is a key differentiator, Arch boasts
more than 5,000 exceptional employees around the world who
work every day to help our clients, shareholders, communities
and one another achieve their greatest potential. In 2021, we
made several new hires to enhance our capabilities while
promoting high performers from our deep bench to ensure
continuity among our talented management team.
Corporate
Christine Todd joined Arch as Senior Vice President, Chief
Investment Officer. She previously was Head of Fixed Income,
U.S., for Amundi U.S., one of the world’s
largest asset
management firms. Todd succeeded Preston Hutchings, who
retired from the Company after 16 years.
Insurance
Peter Danza was promoted to Executive Vice President, Human
Resources for Arch Insurance North America. Danza has been
with Arch since 2003.
Anne Hardner was promoted to Executive Vice President,
Executive Assurance for Arch Insurance North America. Hardner
has been with Arch since 2009.
Catherine Kelly was promoted to Executive Vice President,
Corporate Underwriting for Arch Insurance North America. Kelly
has been with Arch since 2009.
Jason Kittinger was promoted to Chief Operating Officer of Arch
Insurance International. Kittinger has been with Arch since 2002.
Silvia Martinez joined Arch Insurance International as Senior
Vice President and General Counsel. Martinez previously served
as Group General Counsel and Company Secretary for Aspen
Insurance Group.
Tom Rivers joined Arch Insurance International as Chief Risk
Officer. Rivers previously served as Chief Risk Officer for AXIS
Managing Agency.
Santiago “Santi” Hernandez was promoted to Chief Executive
Officer of Arch Re Facultative. Hernandez joined Arch Re
Facultative in 2007 and most recently served as President.
Peder Moeller was promoted to Chief Executive Officer of Arch
Reinsurance Company (U.S.). Moeller joined Arch in 2007 and,
prior to his recent promotion, served as Chief Underwriting
Officer for Arch Reinsurance Company (U.S.).
Scott Montgomery was promoted to President, Arch Re
Facultative. Montgomery joined Arch in 2007.
Vanessa Hardy Pickering joined Arch Re Ltd. as Chief Financial
Officer. She previously was Chief Financial Officer of Hamilton
Re and Group Treasurer of Hamilton Insurance Group.
Eileen Sorabella was promoted to Executive Vice President
and General Counsel of the Worldwide Reinsurance Group.
Sorabella joined Arch in 2017 and previously held the role of
General Counsel, Reinsurance North America.
Mortgage
Bruce Hope-MacLellan was hired as the Chief Operating
Officer for Arch LMI (Australia). Hope-MacLellan previously held
the role of Director, Enterprise Transformation for DQA.
Parker Ross was hired as the Global Chief Economist for the
Global Mortgage Group. Ross previously served as the Head of
Corporate Economics for JPMorgan Chase & Co.
Mark Rowe joined Arch Insurance International as Chief
Compliance Officer. Rowe previously served as Head of
Compliance for AXIS Managing Agency.
Allan Voltz was promoted to Chief Strategy Officer, Global
Mortgage Group. Voltz joined Arch in 2017 and most recently
served as Senior Vice President of Pricing and Analytics for Arch
U.S. MI.
Kirsten Valder was promoted to Chief Administrative Officer of
Arch Insurance International. She has been with Arch since 2014.
Reinsurance
Jessica Bongiorno was promoted to Chief Underwriting Officer
Property & Specialty of Arch Reinsurance Company (U.S.).
Bongiorno has been with Arch since 2006.
Joshua Hackett was promoted to Chief Underwriting Officer
Casualty & Specialty of Arch Reinsurance Company (U.S.).
Hackett joined Arch in 2016.
Arch Board of Directors
In 2021, we also welcomed two new members to the Arch Capital
Board of Directors, bringing new perspectives and broadening
the Board’s talent and outlook for the next stage of our growth.
Francis Ebong has an extensive background in technology
and innovation and is currently Managing Director, Program
research and
Management at X, Alphabet’s
development division.
in-house
Eileen Mallesch has broad finance and business strategy expertise
in the insurance, telecommunications and consumer products
industries, including serving as Senior Vice President and Chief
Financial Officer for Nationwide’s Property and Casualty segment.
4
Outlook
The industry faces many challenges at this time, including
inflation, cyberthreats, continued low interest rates and the
impact of climate change. We do not downplay any of these
challenges. Nonetheless, we believe opportunities abound
in the current market for a well-capitalized, highly focused
insurer like Arch. Although every year is different and markets
aren’t always predictable, we have demonstrated an ability to
perform well relative to our peers over a variety of insurance
market and economic conditions. I remain enthusiastic about
the coming year and the opportunities available to Arch in
each of its three business segments.
In closing, we thank our distributors and clients. We deeply
appreciate your business and strive at all times to serve
your needs. We thank our employees for their amazing
contributions and extraordinary dedication. And we thank
you, our shareholders, for your confidence and support.
Marc Grandisson
Chief Executive Officer
Arch Capital Group Ltd.
5
Key Ratios
Loss Ratio
Underwriting Expense Ratio
2021
64.6%
32.1%
2020
72.9%
31.6%
Combined Ratio
96.7%
104.5%
Providing Customer-Focused Solutions
Arch Insurance is a global insurer offering superior coverage and
service across a wide range of industries to its clients and brokers.
Our approach to doing business is based on collaboration,
responsiveness and commitment. We participate in specialty
lines where the talent and knowledge of our employees are a
competitive differentiator and embrace a customer-focused
mindset and a determination to find effective solutions.
Growth and Discipline
In 2021, Arch Insurance continued its growth trajectory despite
a volatile environment. In total, the segment achieved a 31%
increase in net premiums written. In addition to growing our top
line, we continued to improve the underlying fundamentals of
our business, resulting in a current accident year combined ratio
(excluding catastrophes) of 92%, down from 95% in 2020.
Arch Insurance North America continued to embrace its
role as a carrier of choice and achieved growth in all major
distribution channels (retail, wholesale and delegated authority).
An expanded appetite within the specialty middle market
sector, specifically for Energy, Construction, Private Equity and
Healthcare accounts, contributed meaningfully to our 2021
growth. Our ability to deploy capacity in response to emerging
needs has always been part of our strategy, and growth in the
Cyber Liability market is a prime example of executing on this
strategy. We achieved pricing improvement in nearly every line
of business as we continued to lean into this dynamic market.
Our diverse portfolio and ability to quickly respond to changing
trends has us well-positioned for continued growth and success.
Calendar Year Net Premiums Written by Line ($M)
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Other
Lenders Products
Travel, Accident and Health
Excess and Surplus Casualty
Construction and National
Accounts
Programs
Professional Lines
Property, Energy, Marine
and Aviation
2013
2014
2015
2016
2017
2018
2019
2020
2021
Professional Lines includes Professional Liability, Executive Assurance and Healthcare business. Excess and Surplus Casualty includes
Casualty and Contract Binding business. Other includes Alternative Markets, Excess Workers’ Compensation and Surety business.
OPERATIONS
LAUNCHED IN
UNITED KINGDOM
APPROVED TO
WRITE BUSINESS
IN GERMANY
TORONTO
BRANCH
OPENED
LLOYD’S SYNDICATE 2012
COMMENCED
UNDERWRITING IN LONDON
ROAMRIGHT TRAVEL
ACCIDENT INSURANCE
LAUNCHED
ARCH INSURANCE CANADA LTD.,
A CANADA DOMESTIC COMPANY,
COMMENCED OPERATIONS
MCNEIL & CO.
ACQUISITION
BARBICAN ACQUISITION
AND UK REGIONAL
DIVISION FORMED
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
6
Professional Lines
Property, Energy, Marine and Aviation
Programs
Other
Excess and Surplus Casualty
Construction and National Accounts
Travel, Accident and Health
Warranty and Lender Solutions
28%
19%
14%
10%
9%
9%
7%
4%
Insurance Net Premiums Written
$4.1B
For 2021
Arch Insurance International completed integrations of Barbican
Group Holdings and the UK Regional business (both acquired
in 2019), and is now focused on optimizing favorable market
conditions and increasing market share in lines of business
where the odds of achieving strong margins are favorable. The
UK Regional Division was recognized as the top Commercial
Lines Insurer and top Small and Medium Enterprise (SME)
Commercial Lines Insurer in the Insurance Age 2021 Broker
Survey — an impressive accomplishment for an organization
that was only founded in 2019.
Continuously Pursuing Innovation
and Improvement
Our global “Speed to Market” initiative is an internal program
designed to accelerate new product delivery. An emphasis on
continuous improvement and finding ways to more rapidly
respond to market needs remains a differentiator for Arch
Insurance.
Embracing insurtech through our Digital Partners group
remains a priority as we develop and deliver new products
through digital distribution methods. We currently have 11
digital partners with steadily increasing premiums and a clear
path for accelerating future growth.
to
A Focus on Culture
We continued to deliver the “Arch Experience,” an internal
initiative designed
instill and reinforce critical and
differentiating Arch behaviors. The program provides
opportunities to identify and share the stories that help drive
our success and make our culture unique. Additionally, last year
we introduced Arch Insurance’s new brand promise, “Pursuing
Better Together,” a commitment to our brokers, colleagues and
other partners to:
Listen, share insights and work together to deliver
informed solutions.
Build trusting, respectful and responsive relationships.
Understand our clients’ goals and explore
possibilities together.
Arch Insurance carried forward its commitment to diversity
and inclusion (D&I) efforts in 2021. Across the segment,
nearly all employees participated
in either unconscious
bias or inclusive leadership training — a key mechanism for
promoting understanding and growth. We’ve also partnered
with organizations that are committed to improving the overall
representation of diverse candidates in the insurance industry,
including INROADS, Gamma Iota Sigma, the International
Association of Black Actuaries and the Spencer Educational
Foundation, as a way to recruit more diverse talent for our
internship and early career programs.
OPERATIONS
LAUNCHED IN
UNITED KINGDOM
APPROVED TO
WRITE BUSINESS
IN GERMANY
TORONTO
BRANCH
OPENED
LLOYD’S SYNDICATE 2012
COMMENCED
UNDERWRITING IN LONDON
ROAMRIGHT TRAVEL
ACCIDENT INSURANCE
LAUNCHED
ARCH INSURANCE CANADA LTD.,
A CANADA DOMESTIC COMPANY,
COMMENCED OPERATIONS
MCNEIL & CO.
ACQUISITION
BARBICAN ACQUISITION
AND UK REGIONAL
DIVISION FORMED
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
7
Key Ratios
Loss Ratio
Underwriting Expense Ratio
Combined Ratio
2021
67.8%
26.4%
94.2%
2020
75.3%
24.2%
99.5%
Specialized Reinsurance Solutions
Arch Re is a leading, diversified reinsurer offering treaty and
facultative property, casualty and specialty reinsurance 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. Our experienced team delivers
value for clients and brokers by engaging on the most complex
challenges and developing customized solutions that meet our
customers’ needs.
A Growth Story
At Arch Re, we pride ourselves on delivering creative capital
solutions to our clients, enabling them to better manage their
risk appetite and navigate the volatile market environment by
leveraging our global reinsurance expertise and capabilities.
In 2021, the Reinsurance Group generated $5.1 billion of Gross
Premiums Written, a 47% increase from 2020. Additionally,
Calendar Year Net Premiums Written by Line ($M)
despite the heavy catastrophe year, we posted a 94%
combined ratio (a 5.3 point improvement from 2020) and
ultimately delivered $170 million of pre-tax underwriting
income. Over the past 20 years, our weighted average
combined ratio has been 87%.
In a year where Property Catastrophe rates were relatively less
attractive, we focused our attention on growth areas where we
can further leverage our expertise such as Specialty, Casualty
and Marine.
Enhancing Our Platform
Actively seeking new opportunities to grow our reinsurance
platform and further deploy our expertise is a key strategy for
our long-term success. To that end, we are always looking for
opportunities to acquire teams and companies that align with
both our business and philosophy. In July, along with two
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Other
Marine, Aviation
and Space
Specialty
Property
Catastrophe
Property excl.
Property Catastrophe
Casualty
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Casualty includes Executive Assurance, Professional Liability, Workers’ Compensation, Healthcare, Motor XOL 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.
FIRST
REINSURANCE
TREATY BOUND
SURETY
BOOK
PURCHASED
FLATIRON RE
LAUNCHED
PROPERTY FACULTATIVE
UNDERWRITERS
ESTABLISHED
ARCH RE EUROPE
UNDERWRITING DAC
OPENED IN IRELAND
ARIEL RE CREDIT AND
SURETY ACQUISITION
IN SWITZERLAND
CO-FOUNDED
WATFORD RE
PRECISION
MARKETING ASIA
PACIFIC ACQUISITION
WATFORD,
SOMERSET BRIDGE
ACQUISITIONS
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
8
Property
Specialty
Casualty
Property Catastrophe
Marine and Aviation
Other
31%
29%
25%
7%
5%
3%
Reinsurance Net Premiums Written
$3.3B
For 2021
private equity partners, we acquired Watford Holdings Ltd.
before rebranding the company as Somers Group Holdings Ltd.
(Somers) in November. This marked a strategic repositioning
for Somers, which facilitates a more traditional reinsurance
business model while providing Arch Re with meaningful third-
party capacity.
Additionally, in August, we completed the acquisition of
Somerset Bridge Group Limited and Southern Rock Holdings
Limited, which includes Somerset’s motor managing general
agent, distribution capabilities, insurer and fully integrated
claims operation — expanding our UK motor insurance and
reinsurance capabilities with a fully integrated platform.
Increased Focus on Third-Party Capital
Arch Re continued to expand its third-party capital capabilities
in 2021 with double digit growth in assets under management
from 2020, allowing us to enhance our client and broker
relationships by providing broader solutions as we leverage our
underwriting expertise and generate fee income. In addition
to the Somers acquisition, we issued our first retrocession
focused property catastrophe bond, Claveau Re Ltd., and
continued to expand our presence at Lloyd’s Syndicate 1955.
Investing in Our People
Despite another year of navigating the COVID-19 pandemic,
our employees continue to adapt to the changing environment
in order to meet the moment — finding balance between
working in a mostly remote work environment and strategically
engaging with clients around the globe.
Throughout 2021, we sought opportunities to increase our
diversity and inclusion (D&I) efforts. All members of the Arch
Re leadership team, along with more than 90 other leaders,
participated in the Yale School of Management Fostering
Inclusion and Diversity leadership program that is now
offered regularly to any interested employee. Additionally,
our Diversity and Inclusion Advisory Committee partnered
with Howard University to provide internship opportunities
for students in its insurance program, beginning in 2022.
In December, Arch Re was able to rely on its deep bench to
make several promotions. Peder Moeller was promoted to CEO
of Arch Reinsurance Company (U.S.) and Santiago Hernandez
was promoted to CEO of Arch Re Facultative. These leaders,
and their teams, will help ensure continuity and continued
growth for our franchise.
FIRST
REINSURANCE
TREATY BOUND
SURETY
BOOK
PURCHASED
PROPERTY FACULTATIVE
FLATIRON RE
LAUNCHED
UNDERWRITERS
ESTABLISHED
ARCH RE EUROPE
UNDERWRITING DAC
OPENED IN IRELAND
ARIEL RE CREDIT AND
SURETY ACQUISITION
IN SWITZERLAND
CO-FOUNDED
WATFORD RE
PRECISION
MARKETING ASIA
PACIFIC ACQUISITION
WATFORD,
SOMERSET BRIDGE
ACQUISITIONS
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
9
Key Ratios
Loss Ratio
Underwriting Expense Ratio
Combined Ratio
2021
4.4%
22.7%
27.1%
2020
37.8%
21.2%
59.0%
This transaction further establishes Arch as a market leader
that provides innovative solutions and excellent service to
clients across Australia.
Overall, our
International MI units grew total premiums
written by over 51%. Australian premiums grew significantly
due to higher origination volume and, to a lesser extent, the
WLMI acquisition. Our Credit Risk Transfer and Services group
underwrote approximately $1.7 billion of GSE Credit Risk
Transfer limit — leading to the highest annual volume of GSE
credit risk transfers booked since the unit’s formation.
Arch also maintained its leadership position in the mortgage
insurance-linked notes (MILN) market — one it established
in 2015. In 2021, Arch MI completed three Bellemeade Re
Insurance-Linked Note securitizations garnering $1.9 billion of
indemnity reinsurance protection.
Innovation and Thought Leadership
Dating back to 2009, when Arch MI introduced the industry’s
first risk-based pricing engine, we have been regarded as the
industry standard for thought leadership and innovation.
In 2021, we introduced the Arch Mortgage Guaranty Company
(AMGC) EqualAccess Homeownership Program designed
to help low- to moderate-income and minority borrowers
attain homeownership. Qualifying borrowers have access to
lower down payment options and additional considerations,
Arch MI U.S. Only As of December 31, 2021
2.36%
$70.6
BILLION
Delinquency Rate
Risk-in-Force
Before reinsurance
and risk-sharing
operations.
facilitates
A Global Leader in Residential Mortgage Credit Risk
Arch’s Global Mortgage Group
sustainable
homeownership through the aggregation, management and
syndication of mortgage credit risk worldwide. We believe our
highly skilled workforce and commitment to technology and
analytics make us the most effective and engaged mortgage
credit risk manager in the industry. Through our insurance,
reinsurance and capital markets operations in the United States,
Australia, Bermuda and Europe, 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 insurance
protection needed to support 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 2021, we helped over 343,000
borrowers in the U.S. purchase or refinance a home.
In 2021, we produced $105.8 billion of new insurance written
(NIW) at Arch MI U.S. Combined with the solid performance
of insured loans originated in prior years and contributions
from our Credit Risk Transfer and Services and International
businesses, the Mortgage Group generated $953 million in
underwriting income in the year, a 60% increase from 2020.
Expanding Our Diversified Platform
While the traditional U.S. MI market remains the most significant
contributor to our bottom line, 2021 provided opportunities to
further diversify our franchise for the long term.
In August, we completed the acquisition of Westpac Lenders
Mortgage Insurance Limited (WLMI), an Australian Prudential
Regulation Authority authorized captive lenders mortgage
insurance (LMI) provider to the Westpac Group. As part of the
agreement, WLMI, which has been rebranded as Arch Lenders
Mortgage Indemnity Ltd., will remain Westpac’s exclusive
provider of LMI on new mortgage originations through 2031.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
10
UNITED GUARANTY (LATER ARCH
MI) INTRODUCED FIRST MI
RISK-BASED PRICING
ARCH INSURANCE EUROPE
ADDED MI TO ITS
UNDERWRITING PLATFORM
CMG/PMI
ACQUISITION
COMPLETED
FIRST
BELLEMEADE RE
MILN ISSUED
UNITED
GUARANTY
ACQUISITION
ARCH LMI PTY
LTD AUSTRALIA
APPROVED
WESTPAC LMI
ACQUISITION
Global Mortgage Group Insurance In Force (IIF) and Underwriting Income
As of December 31, 2021
Global Mortgage Group Insurance in Force (IIF) and Underwriting Income
As of December 31, 2021
IIF International Mortgage Insurance/Reinsurance
IIF U.S. Credit Risk Transfer (CRT) and Other
IIF U.S. Primary Mortgage Insurance
Underwriting Income $M
$1,041
$1,200
$461
$1,000
$953
$858
$384
7%
21%
$691
$352
7%
21%
$424
9%
25%
$418
8%
23%
$594
15%
24%
72%
72%
69%
66%
61%
M
$
e
m
o
c
n
I
g
n
i
t
i
r
w
r
e
d
n
U
$800
$600
$400
$200
$0
B
$
)
F
I
I
(
e
c
r
o
F
n
i
e
c
n
a
r
u
s
n
I
$600
$500
$400
$300
$200
$100
$0
2017
2018
2019
2020
2021
This chart contains certain non-GAAP financial measures. For 2020 and 2021, references to the comparable GAAP measures and the reconciliation of such non-GAAP financial measures to the relevant GAAP
financial measures are found on page 1 of this letter. For 2017-2019, the comparable GAAP measures and reconciliation of such non-GAAP financial measures to the relevant GAAP financial measures are
found on pages 102-109 in note 4, “Segment Information,” to our consolidated financial statements in Item 8 of the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, 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.
including allowances for nontraditional credit and nonoccupant
borrowers, to help make homeownership attainable to a wider
array of creditworthy borrowers. Now, even more people will
have an opportunity to build wealth and long-term security
through homeownership. The EqualAccess Homeownership
Program
just another example of Arch’s outside-the-
box thinking and commitment to enabling the possibility of
homeownership.
is
We also maintained our commitment to thought leadership by
continuing to deliver the Arch MI PolicyCast, a biweekly video
podcast that touches on key issues facing the housing finance
industry, including housing policy and affordable housing.
Additionally, loyal followers were able to read Arch MI’s Housing
and Mortgage Market Review (HaMMR), which provides housing
sector forecasts and information on long-term trends, for the
19th consecutive year. Offerings like the HaMMR and PolicyCast
are just two reasons the industry looks up to Arch MI.
A Committed and Engaged Culture
A commitment to culture and an engaged workforce continue
to play crucial roles in Arch’s differentiation and success.
Employees in our Greensboro, North Carolina, headquarters
voted Arch MI one of the “Best Places to Work” for the third
consecutive year in the annual survey conducted by the Triad
Business Journal.
Creating a work environment where everyone can bring their
authentic selves to work is a critical component of an inclusive
workplace with a free exchange of ideas. In 2021, Arch MI
introduced D&I Champions and Advocates, volunteer positions
that support D&I efforts to promote diversity, equity, inclusion
and belonging for all employees. This group works behind the
scenes to support existing D&I groups, which are focused on
communications, measurement, people and culture. Arch
MI’s efforts around D&I are being noticed. In May, the Global
Mortgage Group was recognized by the Triad Business Journal
as a Leader in Diversity — a company that demonstrates
respect for the inclusive treatment of others and advocacy for
underrepresented groups.
Arch also welcomed its second Arch MI Scholar, part of a
partnership that began in 2020 with North Carolina Agricultural
and Technical State University — the nation’s largest historically
Black college, which is located in Greensboro. The scholarship
program is designed to provide financial support and real-
world experiences for high-achieving students.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
11
UNITED GUARANTY (LATER ARCH
MI) INTRODUCED FIRST MI
RISK-BASED PRICING
ARCH INSURANCE EUROPE
ADDED MI TO ITS
UNDERWRITING PLATFORM
CMG/PMI
ACQUISITION
COMPLETED
FIRST
BELLEMEADE RE
MILN ISSUED
UNITED
GUARANTY
ACQUISITION
ARCH LMI PTY
LTD AUSTRALIA
APPROVED
WESTPAC LMI
ACQUISITION
Expanding Environmental, Social and Governance
Our focus on Environmental, Social and Governance (ESG)
factors pushes us to not only assess and address risk, but
also seize opportunities across our business, through our
investments and in the communities where we live and work. In
2021, we prioritized companywide ESG integration by focusing
on the ESG topics most relevant to our industry and Company,
publishing our second Sustainability Report and Sustainable
Accounting Standards Board (SASB) Report. Recognizing the
need for effective disclosures regarding climate-related risks
and opportunities, we published our first Task Force on Climate-
related Financial Disclosures (TCFD) Report. The latest about
our sustainability practices, including reports and disclosures, is
available at archgroup.com/esg. We are committed to sharing
our ongoing integration of ESG topics within five key areas:
business, operations, investments, people and communities.
Enabling Possibility and Integrating ESG
all areas of our operations puts us in a strong position to
protect our people and the customers who entrust us with their
personal information and business.
We believe the integration of ESG factors into investment
analysis contributes to
improved returns and reduced
risk over the long term, and aligns with our policyholders’,
shareholders’ and other stakeholders’ best interests. When it
comes to our investments, we consider ESG factors for assets
managed both internally and those managed by third parties.
We opportunistically seek ESG-positive “impact” investments
and aim to create positive and measurable effects on society
while delivering competitive financial market returns. We
adopted a Responsible Investment Policy in 2022 that reflects
our approach to sustainable value creation by specifying
governance, engagement and employee training as well as
Our Business
Our Operations
Our Investing
Our People
Our Communities
As a global (re)insurer, we provide
services and insurance coverages
that allow our clients to rebuild
after major losses and improve
their resilience; we integrate
ESG considerations into our
underwriting to reduce risk and
take advantage of opportunities
for the benefit of our stakeholders.
By actively managing ESG
risks and embedding compliance,
transparency, data protection and
resiliency across all areas of our
operations, we protect our people
and customers who entrust us
with their personal information
and business.
We believe incorporating
material, nonfinancial ESG
factors into investment selection
and risk management has the
potential to enhance long-term
investment returns.
We are committed to
investing in the success of our
employees as individuals and
professionals to create
long-term sustainable
growth as an organization.
Striving to make a
difference by investing
in our communities
is one of Arch’s core
values, woven into the
fabric of our culture.
Across our business, we strive to manage ESG risks in the interest
of our insureds. As a global (re)insurer, we provide services
and insurance coverages that allow our clients to rebuild after
major losses and improve their resilience in a changing world.
Understanding environmental and social issues means we
can reduce risks and take advantage of opportunities in our
underwriting for the benefit of our shareholders, customers and
other stakeholders. Our risk management process monitors
and manages risk, including climate risk and other risk tied
to catastrophic events worldwide. We incorporate complex,
dynamic factors like increased population density with elements
such as our views on increased frequency and severity of natural
catastrophes. Our integrated approach aligns with our corporate
values and supports our core business strategy.
incorporate sustainability and
We
responsible, ethical
practices within our operations to support our employees and
stakeholders. Actively managing ESG risks and embedding
compliance, transparency, data protection and resilience across
a thoughtful approach to considering ESG factors in our
investment process for all assets under our management.
Investing in the success of our people as individuals and
professionals is central to creating long-term sustainable growth
as an organization. Our holistic approach to human capital
management provides an unparalleled employee experience.
This enables us to attract and retain a diverse, talented and
innovative workforce and grow an inclusive culture where
employees are engaged, developed, rewarded and fulfilled.
One of Arch’s core values is striving to make a difference by
investing in our communities. While the COVID-19 pandemic
continues to cause hardship across the globe, it 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, and the environment.
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, 2021
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 5.45% Series F preferred share
Depositary shares, each representing a 1/1,000th interest in a 4.55% Series G preferred share
Trading Symbol (s)
ACGL
ACGLO
ACGLN
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 $14.3 billion.
As of February 21, 2022, there were 379,042,099 of the registrant’s common shares outstanding.
Portions of Part III and Part IV incorporate by reference our definitive proxy statement for the 2022 annual meeting of shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
ARCH CAPITAL GROUP LTD.
TABLE OF CONTENTS
Item
Page
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
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.
[RESERVED]
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
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
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
33
54
54
54
54
55
56
57
89
90
166
166
167
167
167
167
168
168
168
169
180
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 and addition 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
2021 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 replacement of LIBOR with
alternative benchmark rates;
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 new
guidance implementing the Tax Cuts and Jobs Act of 2017 and the possible implementation of the Organization for
Economic Cooperation and Development (“OECD”) Pillar I and Pillar II initiatives; 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
2021 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 $16.3 billion in capital at December 31, 2021, 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 2021, we wrote $9.0 billion of net premiums and
reported net income available to Arch common shareholders
of $2.1 billion. Book value per share was $33.56 at
December 31, 2021, compared to $30.31 per share at
December 31, 2020.
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.archgroup.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 U.S. Securities and Exchange Commission
(“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, reinsurance and mortgage insurance businesses.
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 (U.K.)
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 2019 also contributed to
our reinsurance operations. On August 6, 2021, Arch Re
Bermuda completed the acquisition of Somerset Bridge
Group Limited, Southern Rock Holdings Limited and
affiliates (“Somerset Group”). The acquisition includes
insurance managing general agent,
Somerset’s motor
distribution capabilities
through direct and aggregator
channels, affiliated insurer and fully integrated claims
operation. See “Operations—Reinsurance Operations” for
further details on our reinsurance operations.
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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
Guaranty Corporation (“UGC”). 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 insurance and
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 was authorized in 2011 to provide mortgage
insurance products and services to the European and U.K.
markets. In 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. We expanded our presence in Australia in
August 2021 by acquiring Westpac Lenders Mortgage
Insurance Limited, another APRA-approved writer of
lenders’ mortgage insurance, which has since been renamed
Arch Lenders Mortgage Indemnity Ltd. (“Arch Indemnity”).
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 Somers
Holdings Ltd. (formerly Watford Holdings Ltd.). Somers
Holdings Ltd. is the parent of Somers Re Ltd. (formerly
Watford Re Ltd.), a multi-line Bermuda reinsurance company
(together with Somers Holdings Ltd., “Somers”). In the 2020
fourth quarter, Arch Capital, Somers, and Greysbridge Ltd., a
wholly-owned subsidiary of Arch Capital, entered into an
Agreement and Plan of Merger (as amended, the “Merger
Agreement”). Arch Capital assigned its rights under the
Merger Agreement
to Greysbridge Holdings Ltd.
(“Greysbridge”). The merger and the related Greysbridge
equity financing closed on July 1, 2021. Effective July 1,
2021, Somers
is wholly owned by Greysbridge, and
Greysbridge is owned 40% by Arch, 30% by certain funds
managed by Kelso & Company (“Kelso”) and 30% by certain
funds managed by Warburg Pincus LLC (“Warburg”). In
2017, we acquired approximately 25% of Premia Holdings
is
Ltd. Premia Holdings Ltd.
the parent of Premia
Reinsurance Ltd., a multi-line Bermuda reinsurance company
(together with Premia Holdings Ltd., “Premia”). In 2021, the
Company completed the share purchase agreement with
Natixis, a French financial services firm, to purchase 29.5%
of the common equity of Coface SA (“Coface”), a France-
based leader in the global trade credit insurance market. See
“Operations—Other Operations” for further details on
Somers, Premia and Coface.
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, 2022. Since the inception of the share
repurchase program in February 2007 through December 31,
2021, Arch Capital has repurchased 420.7 million common
shares for an aggregate purchase price of $5.3 billion. At
December 31, 2021, the total remaining authorization under
the share repurchase program was $1.2 billion. 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 2021 fiscal
year, we repurchased 31,486,830 shares for an aggregate
amount of $1.23 billion under our share repurchase program.
OPERATIONS
We classify our businesses into three underwriting segments–
insurance, reinsurance and mortgage and two operating
segments– corporate and ‘other.’ For an analysis of our
underwriting results by segment, see note 4, “Segment
Information,” to our consolidated financial statements in Item
8 and “Management’s Discussion and Analysis of Financial
of
Condition
Operations.”
of Operations—Results
and Results
COVID-19 Pandemic
The global pandemic resulting from
the coronavirus
(including variants of the coronavirus such as Delta and
Omicron, “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 5,200 employees working
from home to maintain business continuity. Where possible,
we have encouraged employees to return to our offices,
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taking into account their health and safety, as well as our
changing business practices. 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
Australia. Our
in Bermuda are
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
Specialty”), Arch Indemnity Insurance Company (“Arch
Indemnity Insurance”) 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 Columbia, Puerto Rico and the U.S. Virgin Islands
and an authorized insurer in one state. Arch Indemnity
Insurance is an admitted insurer in 50 states and the District
of Columbia. Arch P&C, which is not currently writing
business, is an admitted insurer in 40 states and the District
of Columbia and is filing applications for admission in all
remaining states where it is not yet admitted. 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. (“Arch Insurance Canada”), 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.) and our 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. 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.
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
insurance
experienced
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
oversees all aspects of
the underwriting product
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.
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in charge of each region
insurance group has five regional offices, and the
is primarily
executive
responsible for all aspects of
the marketing and
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.
• 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
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
scalable
to niche opportunities, quality
access
businesses, or lines with reliable defensive qualities.
Our insurance group writes business in the U.S. on both a
U.S. admitted and U.S. non-admitted basis. Our insurance
group focuses on various specialty lines, as described in note
4, “Segment Information,” to our consolidated financial
statements in Item 8.
Philosophy. Our
group’s
Underwriting
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
insurance
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 financial
and operational due diligence 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 obligations 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
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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. See note 8, “Reinsurance,” to
our consolidated financial statements in Item 8.
financial
analysis
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—Summary of Critical
Accounting Estimates—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. Our
insurance group’s claims
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 Bermuda has also been approved as a “certified
reinsurer” in certain U.S. states that allow reduced collateral
for reinsurance ceded to such reinsurers. 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
insurer
in Guam. Our property
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
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 2012 and 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
maintains
reinsurance
centralized
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
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-
and miscellaneous
assessments
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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.
treaty operations participate
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
their
companies for
reinsurance treaties, for unusual risks or for amounts in
excess of the limits on their reinsurance treaties.
individual risks not covered by
For additional information regarding the business written by
the reinsurance group, please refer to note 4, “Segment
Information,” 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
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.
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—
Summary of Critical Accounting Estimates—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.
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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
insurers on both a proportional and non-
mortgage
proportional basis globally; direct mortgage insurance in the
EEA and U.K. through Arch Insurance (EU), in Australia
through Arch LMI and Arch Indemnity, 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.
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
experienced
mortgage
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.
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
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.
In 2019, Arch LMI was authorized by APRA to write
lenders’ mortgage insurance. In August 2021, we acquired
Arch Indemnity, which is also authorized by APRA to write
lenders’ mortgage insurance. Arch LMI and Arch Indemnity
are headquartered in Sydney, Australia and focus on
providing direct lenders’ mortgage insurance and reinsurance
to the Australian market.
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
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 insurance business. 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.
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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
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
cover new originations
structured
to cover one or more portfolios of
transactions
previously originated residential loans. In Australia,
Arch LMI and Arch Indemnity provide
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
a portion of 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 2019 we established Arch Credit Risk Services (Bermuda)
(“Arch CRS”) Ltd. Arch CRS is licensed by the Bermuda
Monetary Authority (“BMA”) as an insurance agent in
Bermuda. Arch CRS 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
6.3% and 5.4% of our gross premiums written for the years
ending December 31, 2021 and 2020, respectively. No other
customer accounted for greater than 2.8% and 3.2% of the
gross premiums written for the years ending December 31,
2021 and 2020, respectively. The percentage of gross
premiums written on our top 10 customers was 22.7% and
22.0% as of December 31, 2021 and 2020, 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.
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Risk Management. Exposure to mortgage risk is monitored
globally and managed through underwriting guidelines,
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
risk management policies, see
a discussion of our
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Summary of Critical
Accounting Estimates—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
their obligations under
the agreements, our mortgage
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.
Retention workouts
loan
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
grade
assets. Somers’
In 2014, we and HPS Investment Partners, LLC (formerly
Highbridge Principal Strategies, LLC) (“HPS”), sponsored
the formation of Somers. Arch Re Bermuda invested $100.0
million in Somers common equity. Somers’ strategy is to
combine a diversified reinsurance and insurance business
with a disciplined investment strategy comprised primarily of
non-investment
own
credit
management and board of directors are responsible for its
results and profitability. Arch Re Bermuda has appointed
three directors to serve on the seven person board of directors
of Somers. In the 2020 fourth quarter, Arch Capital, Somers
and Greysbridge, a wholly-owned subsidiary of Arch Capital,
entered into a Merger Agreement pursuant to which, among
other things, Arch Capital agreed to acquire all of the
common shares of Somers not owned by Arch for a cash
purchase price of $35.00 per common share. Arch Capital has
assigned
to
Greysbridge. The merger and the related Greysbridge equity
financing closed on July 1, 2021. Effective July 1, 2021,
Somers is wholly owned by Greysbridge, and Greysbridge is
owned 40% by Arch, 30% by certain investment funds
managed by Kelso and 30% by certain investment funds
managed by Warburg. See note 12, “Variable Interest Entity
and Noncontrolling Interests,” to our consolidated financial
statements in Item 8 for further details.
the Merger Agreement
rights under
its
In 2017 we and 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
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in each case pursuant
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,
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,” to our consolidated
financial statements in Item 8 for further details.
In 2021, the Company completed the share purchase
agreement with Natixis to purchase 29.5% of the common
equity of Coface. This is a long-term, strategic investment in
Coface, and fits with Arch’s efforts to develop uncorrelated
sources of underwriting income. Our companies share a focus
on specialty underwriting where knowledge and expertise
create value for our clients, and trade credit contributes to
Arch’s specialty-driven business model. Arch has appointed
four directors to serve on the ten person board of directors of
Coface.
HUMAN CAPITAL
We are driven by our common purpose of “Enabling
Possibility” for our customers, our communities and our
employees. This purpose is supported by our collaborative,
results-driven culture which relies on our dedicated, engaged
and talented people. By offering a meaningful and inclusive
employee experience, we not only help people perform at
their best among colleagues who care, but also support our
strategy of delivering specialty products and innovative
solutions to our customers in each of our business segments.
As of February 15, 2022, we had just over 5,200 employees
globally, compared to around 4,500 last year, which directly
speaks to our ability to grow and retain our talent despite the
challenges we all faced with the global pandemic. We have
approximately 3,100 employees in North America (U.S.,
Canada and Bermuda), 1,300 employees in Europe and the
U.K. and 900 employees in the Philippines and the rest of the
world.
Our People and Culture. In 2021, we conducted our bi-
annual employee engagement survey. We believe the results
demonstrated the success of programs, such as our employee
networks, regular Company-wide “town hall” meetings and
frequently and
to communicate more
other efforts
transparently with our employees. Our employee overall
engagement score was 87%, up from 84% and 10 points over
the external norm. 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 were clearly reflected
in the results.
Through the global pandemic, the spirit of agility that is part
of our entrepreneurial roots allowed us to transition virtually
overnight to a home-based employee population. Since the
start of the pandemic we recognized and supported the
wellness needs of our employees. We provided additional
resources including webinars with a psychologist who
resilience and continued our
specializes
ArchCares program
to
to provide
employees affected by COVID-19.
financial support
in building
An important part of our culture is building an inclusive,
diverse workforce. By better reflecting the demographics in
the markets in which we operate while also actively instilling
norms for inclusive behavior, we leverage all the best
contributions and thinking across our Company. To that end,
we are committed to further integrating diversity and
inclusion principles in our operations. In 2021, our six
employee networks provided a forum to share ideas, build
community and belonging, and contribute meaningfully to
include
business outcomes. Importantly, our networks
significant ally
the
inclusive behavior of our people.
representation, which underscores
Talent Acquisition, Development, Rewards and Retention.
Our employees are our greatest asset, and we maintain a
sharp focus on improving the ways we attract, develop and
retain our high-performing talent. Our goal is to cultivate a
workplace culture where all our employees can thrive by
building awareness of inclusive practices and incorporating
them into our regular course of business. We provide unique
career growth opportunities through a combination of on-the-
job training, exposure to top-notch colleagues who coach and
mentor, 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 programs to support employee mental and
physical well-being. We recognize the financial burden of
educational loans in the United States and have supported our
employees with a student debt assistance program. Since the
inception of the program in 2018, Arch has contributed $3.2
million to this program, including $0.9 million in 2021. We
also match eligible contributions to qualified charitable
organizations and employees are eligible to receive time-off
to volunteer with an eligible non-profit organization. Our
Arch Achieve program has recognized over 400 employees
for excellence since its inception in 2009, and each recipient
is awarded shares of our common stock (or a cash bonus in
certain cases), to recognize their accomplishments.
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We also encourage employees to continue their educational
and professional development through tuition reimbursement
plans. To attract the best talent to our industry, we 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. As part of our talent attraction, we have
targeted programs aimed at diversifying our workforce.
Experienced professionals at Arch may participate
in
manager and leadership development programs and, for our
mortgage
the
opportunity
to seek a Mortgage Bankers Association
Certified Banker designation.
insurance segment employees, we offer
RESERVES
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 “Summary of Critical Accounting Estimates” 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,”
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.
to our consolidated
Unpaid and paid losses and loss adjustment expenses
recoverable were approximately $5.9 billion at December 31,
2021. 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, 2021, total investable assets held by Arch
were $27.4 billion. 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.
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
forms of
capital
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.archgroup.com
(Investor
Relations-Credit Ratings) contains information about our
ratings, but such
is not
incorporated by reference into this report.
information on our website
COMPETITION
The worldwide insurance markets 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 primarily on the basis of overall
financial strength, ratings assigned by independent rating
agencies, geographic scope of business, strength of client
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13
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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, Allianz, American
Financial Group, Inc., American International Group, Inc.,
Aviva, AXA XL, AXIS Capital Holdings Limited, Berkshire
Hathaway, Inc., Chubb Limited, CNA Financial Corp.,
Convex, 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,
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
U.S. mortgage
the mortgage
insurance subsidiaries of Essent Group Ltd., Enact Holdings
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 multi-line reinsurers. These transactions
continue to create opportunities for multi-line 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 multi-line
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
allocation,
planning process,
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
for each of
the following major risks: underwriting
(insurance) risk including pricing, reserving and catastrophe;
investment including market and liquidity risks; strategic
risk; group risk including governance and capital market risk;
credit risk; and operational risk,
including regulatory,
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 the,
approach and procedures to control and or mitigate these
risks. The actions and policies implemented to 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.
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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
is
significant business developments. Board approval
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
the CRO. Risk owners have ultimate
owners and/or
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 periodic
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 next 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
the FIR Committee meeting are
matters reviewed at
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
important 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 also important parts of
our business strategy, tailored specifically to fit into our
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.
business
including
We also take the results of the ORSA into account within our
system of governance,
capital
product
management,
development. The results of the ORSA also contribute to
various elements of our 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 “Summary of Critical
Accounting Estimates” 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
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
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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
certain solvency and
liquidity standards, auditing 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 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.
to maintain
required
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. 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 (the
“Companies Act”), 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.
Policyholder Priority. The Insurance Amendment (No. 2)
Act 2018 amended the Insurance Act to provide for 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.
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
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situations
in emergency
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.
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.
Fit and Proper Controllers. The BMA maintains supervision
over the controllers of all Bermuda registered insurers,
brokers, agents and insurance marketplace providers. For so
long as the shares of Arch Capital are listed on the NASDAQ
or another recognized stock exchange, any person who,
directly or indirectly, becomes a holder of at least 10%, 20%,
33% or 50% of our common 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 common
shares and direct, among other things, that voting rights
attaching to the common shares shall not be exercisable.
Economic Substance Act. In December 2018, 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
fund
leasing, headquarters, shipping,
management, financing,
following activities: banking,
insurance,
the
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.
the existing provisions of (a)
Companies that are licensed under the Insurance Act and
thereby carry on insurance as a relevant activity are generally
considered to operate in Bermuda with adequate substance if
the
they comply with
Companies Act relating to corporate governance; and (b) the
Insurance Act, that are applicable to the economic substance
requirements, and the Registrar will have regard to such
companies’ compliance 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.
Insurance Sector Operational Cyber Risk Management Code
of Conduct (“Cyber Risk Management Code of Conduct”).
The Cyber Risk Management Code of Conduct was
established in October 2020. All Bermuda insurers, insurance
managers and intermediaries registered under the Insurance
Act are required to company with the BMA’s Cyber Risk
Management Code of Conduct, which established duties,
requirements and standards to be complied by each registrant
in relation to operational cyber risk management.
United States
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.
in
insurance and/or reinsurance subsidiaries domiciled
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
investors. Generally,
is designed
supervision
rather
than
and
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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
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.
commissioner
obtained
and
has
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.
includes provisions
The National Association of Insurance Commissioners
(“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 the degree to
which insurance companies are supporting those non-
insurance entities.
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
the payment of dividends or other
generally
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.
limit
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
for
requirements
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
relating
to
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. All 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
reinsurers” based upon less than 100% collateralization. As
of January 20, 2022 Arch Re Bermuda is approved as a
“certified reinsurer” in 36 states with applications pending in
nine additional states.
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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-U.S. 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 January 5,
2022, the NAIC reports that 46 U.S. states have adopted the
2019 amendments to the Credit for Reinsurance Model Law
with an additional four 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
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. All states have enacted the ORSA
Model Act or substantially similar legislation.
together contain
that
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
expanded breach notification
requirements. A significant and growing number of states
have adopted versions of this model law, with more expected
to follow. In addition, certain state insurance regulators are
and meeting
relating
requirements
risks which expand existing
developing or have developed regulations that may impose
to cybersecurity on
regulatory
insurance and reinsurance companies (potentially including
insurance and reinsurance companies that are not domiciled,
but are licensed, in the relevant state). Many regulators,
including the Federal Trade Commission (“FTC”), the New
York Department of Financial Services (“NYDFS”), and the
US Department of the Treasury’s Office of Foreign Assets
Control (“OFAC”), have issued new guidance on managing
regulatory
cybersecurity
requirements. Additional guidance that is applicable to us is
expected. Privacy legislation and regulation has also become
an issue of increasing focus of the federal government and in
many states. The California Consumer Privacy Act of 2018
(“CCPA”), which 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. The CPRA also charges
this new privacy agency with issuing a wide array of new
regulations, including relating to the use of automated
decision-making.
A range of new cybersecurity and privacy laws are also under
consideration in other states, as well as by the federal
government. As part of this trend, Virginia and Colorado
adopted new comprehensive data privacy legislation in 2021
that provide consumer privacy rights and protections like
those in the CCPA and CPRA, but currently exempt entities
subject
their
the Gramm-Leach-Bliley Act
requirements.
from
to
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
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,
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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 supplemental
disclosures schedules 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.
increased
their oversight of
Climate Change and Financial Risks. U.S. state insurance
regulators have
insurance
company governance, reporting and disclosure relating to the
potential risks presented by climate change and one or more
states may adopt climate-change-related requirements that
impact our insurance and reinsurance companies. In 2020,
NYDFS issued a circular letter stating that NYDFS expects
the
in New York
insurers authorized
integrate
to
consideration of climate
their governance
into
risks
frameworks, risk management processes and business
strategies, including the designation of a board committee or
member and senior management function to be accountable
for the company’s assessment and management of the
financial risks from climate change. In 2021, NYDFS issued
additional Guidance for New York Domestic Insurers on
Managing the Financial Risks from Climate Change that
reiterates many of the principles outlined in the 2020 circular
letter.
is
Federal Regulation. Although state regulation
the
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 (“U.S. Treasury”), which is not a federal
regulator or supervisor of insurance, but monitors the
the
insurance
industry for systemic risk, administers
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. In August 2021, the
FIO announced that it was requesting information and
soliciting public comment on the insurance sector and
climate-related financial risks. Among its priorities were
increasing the FIO’s engagement on climate-related issues
and leveraging the insurance sector’s role in achieving
climate change goals outlined in President Biden’s May 2021
Executive Order entitled “Climate-Related Financial Risk”.
Certain other federal laws also directly or indirectly impact
mortgage insurers, including the Real Estate Settlement
Procedures Act of 1974 (“RESPA”), the Homeowners
Protection Act of 1998 (“HOPA”),
the Equal Credit
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.
Insurer
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
Private Mortgae
Eligibility Requirements
(“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,
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original loan-to-value, original credit score of performing
loans, and the delinquency status of non-performing loans).
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
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. 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 Lloyd’s. 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.
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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.
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
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.
The U.K. government commenced a post-Brexit review of
Solvency II in June 2020. The response to the review,
published in early July 2021, suggests that there will likely be
changes in the U.K. Solvency II framework, including the
removal of certain prescriptive requirements. In parallel, the
PRA is also undertaking a review of Solvency II and,
launched a quantitative impact study which contains both
quantitative studies and qualitative questions intended to
guide future reforms of Solvency II in the U.K. Additionally,
the U.K. government has undertaken a Future Regulatory
Framework Review to determine how the financial services
regulatory framework should adapt to the U.K.’s new
position outside of the EU.
In January 2022, the U.K. Parliament launched an inquiry
into the U.K. insurance and reinsurance industry and,
specifically, into the regulation of the London market, the
U.K.’s market for commercial and wholesale specialty risks.
The inquiry will review the extent to which regulatory policy
is well-designed and proportionately applied, the possibilities
for optimizing policy following Brexit, the roles of the
current U.K. regulators, such as the FCA and the Bank of
England, as well as the appropriateness of regulation. The
result of these reviews by the U.K. government may have an
impact on whether
is granted Solvency II
equivalence status by the EU in any of the three areas to
which equivalence applies.
the U.K.
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
compensate
FSMA
under
to
power to impose on all insurers. Arch Insurance (U.K.) could
be required to pay levies to the FSCS.
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
from Arch
business
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
Despite the loss of passporting rights, AMAL, Syndicate
2012 and Syndicate 1955 are still able to write business in the
EEA via the Lloyd’s Insurance Company, S.A. (“Lloyd’s
Brussels”). However, Lloyd’s is still in discussions with the
Belgium Financial Services Markets Authority (“FSMA”)
and the National Bank of Belgium regarding the Lloyd’s
Brussels operating model. In January 2021, Lloyd’s released
a communication stating that its discussions with supervisors
had focused on certain risk placement services for open
market business which was being performed by managing
agents on behalf of Lloyd’s Brussels. Lloyd’s Brussels is in
an ongoing dialogue with the Belgium FSMA in its effort to
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overhaul its initial underwriting structures and is deploying
significant efforts and investment to adjust its operating
model to satisfy the Belgian authority in the post-Brexit
environment. This may have an impact on the way managing
agents and syndicates access and operate on the Lloyd’s
platform. Lloyd’s Brussels is seeking to ensure that the
claims it pays and complaints it processes preserve the
objectives of policyholder protection and market discipline
under the Insurance Distribution Directive.
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, U.K. firms are 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. continues to 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-
U.K. 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 and entered into force on May 1,
2021. The TCA did not preserve the status of financial
services and as a result, under the provisions of the TCA,
EEA financial institutions (including our Irish operating
subsidiaries) 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.”
Social
and Governance
(“ESG”)
Environmental,
Considerations. In 2019, the U.K. government published its
Green Finance Strategy which announced the government’s
long-term ambition to “green” the financial system and align
it with the U.K.’s 2050 “Net Zero” (i.e.,100% greenhouse gas
emissions reduction) target under the Climate Change Act
2008. In November 2020, the U.K. government announced
proposals to require mandatory climate risk disclosures
(aligned with the Recommendations of the Taskforce on
Climate-related Financial Disclosures (“TCFD”)) across all
sectors of the U.K. economy.
approach. The Roadmap presented
In 2021, the U.K. government published its Greening Finance
Roadmap to Sustainable Investing (the “Roadmap”), which
announced proposals to extend the scope of the U.K.’s
sustainable finance framework beyond climate change, under
a 3-phase
the
government’s strategy to deliver on the first phase by
introducing
Sustainability Disclosure
Requirements (“SDR”), which would require corporate
disclosures, asset manager and asset owner disclosures, and
investment product disclosures covering a broader range of
sustainability topics. The FCA is reviewing how SDR should
be implemented.
economy-wide
Finance
Taxonomy Regulation
The Roadmap also confirms that the U.K. will adopt a
“Green Taxonomy” based on the architecture of the EU
Sustainable
(“EU
Taxonomy”), which will set out the criteria that specific
economic activities must meet in order to be considered to be
'Taxonomy-
environmentally sustainable and
aligned’. Reporting on Taxonomy-alignment will form part
of the disclosures made by corporates and asset managers and
asset owners.
therefore
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 Limited
(“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
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as an insurance and reinsurance intermediary in July 2014.
(EU) and Arch
Arch Re Europe, 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.
Insurance
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.
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. However, following on from the
recommendation of
European Systemic Risk Board's
December 15, 2020 to suspend restrictions on dividend
distributions, share buy-backs and payment of variable
remuneration from September 30, 2021, the CBOI modified
its guidance, with effect from October, 1 2021, so that the
general restrictions on the payment of dividend distributions
or variable remuneration are no longer in place. The CBOI
still requires (re)insurance firms to notify it in advance of any
proposed distribution.
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,
Arch Re Europe, Arch
(EU) and 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,
to financial and operational
they will remain subject
supervision by the CBOI only. Arch Insurance (EU) has
branches in Italy, Denmark and 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 branches in the U.K. and 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.”
in
firms
Ireland
for all
regulated
ESG Considerations. ESG matters have been on the CBOI's
agenda for a number of years. In November 2021, the CBOI
issued its expectations in respect of climate and broader ESG
issues
(including
(re)insurers). The CBOI's expectations focus on five key
areas: governance, risk management, scenario analysis
(including, but not limited to, stress testing for the purposes
of the ORSA), disclosures and strategy and business model
risk. The CBOI has indicated that its expectations will be
applied in a proportionate manner. It is anticipated that the
CBOI will issue more detailed guidance on its expectations in
the future. It is expected that over time, disclosures in respect
to ESG matters may be captured in the Solvency and
Financial Condition Reports of Arch's Irish entities. See also
"European Union – ESG Considerations".
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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
“delegated acts” and binding
technical standards, and
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
that
prudential perspective, suggesting
there are no
fundamental changes needed but
that a number of
amendments are required to ensure the regime continues as a
well-functioning risk-based regime.In September 2021, the
European Commission published legislative proposals for
amendments to the Solvency II Directive arising out of
EIOPA's review of the Solvency II regime. The proposed
amendments
including
proportionality, quality of supervision, sustainability risks
and group and cross-border supervision. The European
Parliament and the Council will consider the proposed
amendments and it is anticipated that the amendments will be
approved and in force by 2023 or 2024.
a number of
cover
areas
lost
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 was originally envisaged
that there would be a level of cooperation in relation to
financial services, to be reflected in a Memorandum of
Understanding between the U.K. and the EU However, while
the text of the Memorandum of Undertaking has been agreed
in principle, a formal version has not yet been published. See
“Risk Factors—Risks Relating to Our Industry, Business and
Operations—The U.K.’s Withdrawal from the EU could
adversely affect us.”
Arch Re Europe and Arch Insurance (EU), being established
in Ireland and authorized by the CBOI, are able to establish
branches and provide reinsurance services, subject to similar
regulatory notifications and there being no objection from the
CBOI and the Member States concerned 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
the EEA
reinsurance contracts with undertakings
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
insurance and
reinsurance groups. However, as a
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
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.
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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
in
mandatory Data Protection
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. On June 30, 2021 the EU Commission
formally adopted an adequacy decision for the U.K., meaning
data can flow freely from the EU to the U.K. This adequacy
decision will remain in place for four years (until June 27,
2025) after which the adequacy decision may be renewed if
the U.K. continues to ensure an adequate level of data
protection. Additionally, the EU Commission will monitor
developments in the U.K., with the EU Commission having
the power to suspend, repeal or amend the adequacy decision
if the U.K. deviates from the level of protection currently in
place.
ESG Considerations. A comprehensive package of measures
to facilitate the progression towards sustainable economic
activities was approved in principle by the European
Commission in April 2021. In August 2021, two delegated
regulations (the “EC Regulations”) amending sectoral
legislation, including the Solvency II Directive and the
Insurance Distribution Directive, were published. The EC
Regulations focus on the integration of sustainability into key
activities including product oversight and governance, risk
management and suitability assessment procedures. The EC
Regulations are expected to apply from August 2022.
The European Commission has also published its proposal
for a Corporate Sustainability Reporting Directive (“CSRD”),
which is intended to replace the current Non-Financial
Reporting Directive (“NFRD”). The CSRD will expand the
scope of sustainability reporting obligations to any European
listed company or any company (including (re)insurers)
meeting certain criteria. A draft of the CSRD is expected to
be published in early 2022 and come into effect in December
2022, with in-scope companies expected to start reporting
relevant information for financial years starting on or after
January 1, 2023. Certain of our European subsidiaries may
meet these criteria and become subject to these sustainability
reporting obligations. In addition, the reporting standards
under the CSRD, which will provide in-scope companies
with the technical detail on the information that will need to
be disclosed and reported, are currently anticipated to be
adopted by the European Commission by October 31, 2022.
An additional ESG framework, the EU Taxonomy, came into
force in July 2020, with in-scope companies required to
comply with certain reporting obligations from January 1,
2022. The EU Taxonomy (which is a classification standard
for reporting) sets out six environmental objectives with
which companies' economic activities must comply if they
are to be described as environmentally sustainable. These six
environmental objectives are: (1) climate change mitigation,
(2) climate change adaptation, (3) sustainable use and
protection of water and marine resources, (4) transition to a
circular economy, (5) pollution prevention and control and
(6) the protection and restoration of biodiversity and
ecosystems. In addition, reporting obligations apply to in-
scope companies regarding (1) the financial products they
provide and (2) the environmental sustainability of an in-
scope company's activities, which is to be disclosed in non-
financial statements that are currently required under the
NFRD (and subsequently under the CSRD once it is
implemented). Currently, these reporting obligations would
not apply to Arch's European entities (on the basis that (1)
they do not provide financial products within the meaning of
the EU Taxonomy (in particular, financial products for
insurance entities means
investment
products) and (2) as detailed above, they do not fall within
scope of the sustainability reporting obligations of the
NFRD). However as indicated above, if the CSRD is
implemented in the currently proposed form, certain of our
European entities will fall within the scope of certain
reporting obligations.
insurance based
In tandem with all of the above, EIOPA continues to publish
detailed guidelines,
recommendations and expectations
relating to ESG matters and how these should be managed
and considered by the (re)insurance sector.
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
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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
institutions across banking,
prudential supervision of
insurance and superannuation and promotes financial stability
in Australia. Arch Indemnity has been authorized to conduct
monoline lenders’ mortgage insurance business in Australia
since June 2002 and was acquired by Arch Capital on August
30, 2021. 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 and Arch Indemnity as general as an
insurance providers in Australia include requirements on
minimum capital levels and compliance with corporate
governance standards,
the risk management
including
strategy for our Australian mortgage insurance business.
in Australia
through Lloyd’s. This
Our group also conducts property and casualty insurance
business
insurance
business is managed by and distributed through local
coverholders and is subject to Lloyd’s Supervision. In
addition, the business is subject to local Australian prudential
regulatory oversight by APRA, and additional separate
financial services market conduct
the
Australian Securities and Investments Commission.
regulation by
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
Hong Kong
Taxation of Arch Capital
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.
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
ARCH CAPITAL
27
2021 FORM 10-K
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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
regulations
United States. Arch Capital and its non-U.S. subsidiaries
believe they have conducted their operations and currently
intend to conduct their operations going forward in a manner
that has not caused them and will not cause them to be treated
as engaged in a trade or business in the U.S. and, therefore,
has not been and will not be required to pay U.S. federal
income taxes (other than U.S. excise taxes on insurance and
reinsurance premiums 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”), U.S. Treasury
(“Treasury
Regulations”) or court decisions, there can be no assurance
that our position on being engaged in a trade or business in
the U.S. is correct. 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 effectively
connected income computed in a manner 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 Treasury
Regulations. Penalties may be assessed for failure to file tax
returns. In addition, in such case, a 30% branch profits tax
would be imposed on net income after subtracting the regular
corporate tax and making certain other adjustments.
“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 that is 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
Treasury 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 Arch Capital
believes that its Bermuda insurance subsidiaries have been
eligible for Treaty benefits to date, there can be no assurance
that this is the case or that the Bermuda insurance
subsidiaries will continue to be eligible for Treaty benefits.
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 an applicable treaty.
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 taxable years after 2025) 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
Final Treasury
Regulations interpreting the base erosion and anti-abuse tax
were issued in December 2019.
reinsurance
premiums).
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
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2021 FORM 10-K
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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 (increasing to 25% with effect from April 1, 2023).
Canada. 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 foreign branch
corporate 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 each
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%.
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 and Arch Indemnity, Australian
incorporated and tax resident companies, are 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.
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) and to common shares and preferred shares
beneficially owned by such holder and held as capital assets.
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 holding or
considering 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 or considering an investment in our
ARCH CAPITAL
29
2021 FORM 10-K
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common shares or preferred shares, you should consult your
tax advisor.
For purposes of this discussion, the term “U.S. Person”
means a person that is, for U.S. federal income tax purposes:
•
•
•
•
an individual who is a citizen or resident of the U.S.;
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; or
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.
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.
holder 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
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 generally will 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 other taxable disposition of common shares or
preferred shares, as applicable.
United States—Redemption of Preferred Shares. A
redemption of the preferred shares will be treated under
Section 302 of the Code as a dividend to the extent we have
earnings and profits allocable to such shares, 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 if it (1) is
substantially 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. holder 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
preferred shares depends on the facts and circumstances as of
the time the determination is made.
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Taxation of Our U.S. Shareholders
Controlled Foreign Corporation Rules. We or any of our
non-U.S. subsidiaries generally will be treated as a CFC with
respect to any taxable year if at any time during such taxable
year, one or more “10% U.S. 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
Treasury Regulations thereunder). Moreover, with respect to
insurance income (including reinsurance income), the “more
than 50%” requirement described in the preceding sentence is
replaced with a more expansive “more
than 25%”
requirement. For taxable years beginning on or before
December 31, 2017, a 10% Shareholder means any U.S.
Person 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 U.S. Person 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% U.S.
Shareholder. Due to the repeal of Section 958(b)(4) of the
Code under the Tax Cuts Act, all non-U.S. subsidiaries
directly or indirectly owned by Arch Capital are treated as
constructively owned by its U.S. 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% U.S.
Shareholder with respect to us or any such non-U.S.
subsidiary (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.
Related Person Insurance Income Rules. In general, with
respect to RPII (a limited category of insurance income, as
defined below), the CFC rules are expanded in two
significant respects. First, in determining CFC status, as well
as determining which U.S. shareholders are subject to current
taxation with respect to a CFC’s RPII (whether or not
currently distributed), all U.S. shareholders (as opposed to
only 10% U.S. Shareholders) are taken into account. Second,
the amount of stock in a foreign corporation that all U.S.
shareholders, in the aggregate, must own for such corporation
to be treated as a CFC is reduced from more than 50% (by
vote or value), and more than 25% (by vote or value) with
respect to insurance income generally, to 25% or more (by
vote or value). Generally, RPII
income
(including reinsurance income) of a foreign corporation with
respect to which the insured is a United States shareholder of
the foreign corporation or a related person to such a
shareholder.
insurance
is
Under one exception to the foregoing RPII rules, U.S.
shareholders are not required to include a CFC’s RPII
currently in income if the CFC’s gross RPII is less than 20%
of its total gross insurance income for the taxable year in
question (the “RPII 20% gross income exception”).
intercompany
Under current law, we currently expect each of our non-U.S.
subsidiaries to satisfy the RPII 20% gross income exception,
and
therefore we currently do not expect any U.S.
shareholder to be required to include RPII in income
currently (although there can be no assurance that this is or
will continue be the case). However, recently proposed
Treasury Regulations (issued on January 24, 2022), if
finalized in their current form, would for the first time (on a
prospective basis) expand the definition of RPII to include
certain
(including
reinsurance income) in a manner that could cause certain of
our foreign subsidiaries not to satisfy the RPII 20% gross
income exception. In such event, (1) as noted above, all U.S.
shareholders (not just 10% U.S. Shareholders) would be
required to include RPII in income currently, whether or not
distributed, and (2) as noted below, U.S. shareholders that are
tax exempt entities would be required to treat such RPII
inclusions as unrelated business taxable income. Current and
prospective U.S. holders should consult their own tax
advisors as to the potential impact of these recently proposed
Treasury Regulations.
insurance
income
Section 953(c)(7) of the Code generally provides that Section
1248 of the Code (which generally would require a U.S.
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2021 FORM 10-K
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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 U.S. 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 Treasury Regulations do not
address the question, 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 non-U.S. 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
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
Treasury 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.
that Section 1248 and
If the IRS or U.S. Treasury were to make Section 1248 of the
Code 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 of the Code 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. Current and
prospective U.S. holders that are tax exempt entities should
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
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 ended
on or before December 31, 2021 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
the
ARCH CAPITAL
32
2021 FORM 10-K
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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.
insurance
regarding
regulations”)
On December 4, 2020, the IRS issued certain final Treasury
Regulations (the “2020 final PFIC insurance regulations”)
and revised proposed Treasury Regulations (the “2020
proposed PFIC
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 a
holder that is, for U.S. federal income tax purposes, an
individual, corporation, estate or trust that is not a U.S.
holder (a “Non-U.S. holder”) 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 or such person is
present in the U.S. for 183 days or more in the taxable year
the gain is recognized and certain other 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.
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.
owners. The U.S. has entered
intergovernmental
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 generally will 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.
Current and prospective investors should 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.
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
including our
information provided
“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
RISK FACTORS SUMMARY
The following is a summary description of the material risks
and uncertainties to which we may be exposed. Each of these
risks could adversely affect our business, financial condition
and results of operations, and any such effects may be
material. These and other risks are more fully described after
this summary description.
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Risks Relating to Our Industry, Business and Operations
• We operate in a highly competitive environment.
• The insurance and reinsurance industry is highly cyclical,
and we may at times experience periods characterized by
excess underwriting capacity and unfavorable premium
rates.
• 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.
• The impacts of the COVID-19 pandemic, the shift to a
COVID-19 endemic approach and related risks could
materially affect our results of operations, financial
position and/or liquidity.
• The impact of climate change will affect our loss limitation
methods, such as the purchase of third party reinsurance
and catastrophe risk modeling and risk selection in ways
which may adversely impact our business, financial
condition and results of operations.
• Our insurance and reinsurance subsidiaries are subject to
supervision and regulation. Changes to existing regulation
and supervisory standards, or failure to comply with
applicable
requirements, could adversely affect our
business and results of operations.
change which may
• We are subject to ongoing legal and policy actions around
climate
additional
requirements which may prompt us to shift our risk
selection and business strategy away in ways which may
adversely impact our results of operations.
result
in
• Our customers and policyholders may also be impacted by
regulatory, technological, market or other risks relating to
climate change in ways which we cannot predict with
certainty and adversely impact our results of operations.
• As we continue to incorporate climate change in our
business strategy, we cannot be certain that shareholders,
investors and other influential environmental groups will
agree with our approach, which may adversely impact our
ability to raise funds in the capital markets, our share price
and our results of operations.
• 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.
• 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.
• Underwriting risks and reserving for losses are based on
probabilities and related modeling, which are subject to
inherent uncertainties.
• 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 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.
• 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.
• Emerging claim and coverage issues, including issues
relating to the COVID-19 pandemic, may adversely affect
our business.
• 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.
• Our information technology systems may be unable to
meet the demands of customers and our workforce.
• Technology failures and cyber attacks, including, but not
limited to, ransomware, exploitation in software or code
with malicious intent, state-sponsored cyber attacks, may
impact us or our business partners and service providers,
causing a disruption in service and operations which would
negatively impact our business and/or expose us to
litigation.
• Cyber incidents or data breaches caused by bad actors or
unintentional human error
including
personal data, we maintain or use during our business
operations may result in regulatory fines or action,
reputation damage and a disruption in our business
operations.
impacting data,
• 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.
• Our ability to execute successfully our business strategy,
continue to grow and innovate and offer our employees a
dynamic and supportive workplace depends on
the
recruitment, retention and promotion of talented, agile,
diverse and resilient employees at all levels of our
organization.
• Our success will depend on our ability to maintain and
internal
enhance effective operating procedures and
controls and our ERM program.
• Exposure to credit risk inherent in certain of our business
operations.
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• Applicable laws and regulations relating to economic trade
sanctions and foreign bribery laws.
• The U.K.’s withdrawal from the EU and the impact
thereof.
Risks Relating to Financial Markets and Investments
• Adverse developments in the financial markets (including
as a result of the COVID-19 pandemic) and their potential
to limit our access to capital or adversely affect our
policyholders, reinsurers and retrocessionaires.
• 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.
• Foreign currency exchange rate fluctuation, as well as
uncertainty relating to the determination of LIBOR and the
replacement thereof with alternative benchmark rates.
• Uncertainty relating to the determination of LIBOR and the
phasing out and replacement of LIBOR after 2021 may
adversely affect the value of our investment portfolio, our
cost of capital, net investment income and mortgage
reinsurance costs.
• The determination of the amount of current expected credit
losses (“CECL”) allowances taken on our investments is
highly subjective and could materially impact our results of
operations or financial position.
• Inability of our reinsurance subsidiaries to provide required
collateral.
Risks Relating to Our Mortgage Operations
• The ultimate performance of the Arch MI U.S. mortgage
insurance portfolio remains uncertain.
• The amount of mortgage insurance we write in the U.S.
could decline, which would reduce our 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.
• 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.
Risk Relating to Our Company
• 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.
• There are regulatory limitations on the ownership and
transfer of our common shares.
• Arch Capital is a holding company and is dependent on
dividends and other distributions from its operating
subsidiaries.
• General market conditions and unpredictable factors could
adversely affect market prices for our outstanding preferred
shares.
• Dividends on our preferred shares are non-cumulative.
• Our preferred shares are equity and are subordinate to our
existing and future indebtedness.
• The voting rights of holders of our preferred shares are
limited.
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 tax liabilities of our U.S. subsidiaries may increase,
including as a result of changes in tax law.
• The
impact
of
implementation of the Tax Cuts Act.
enactment
the
and
continuing
shareholders
• Recently proposed Treasury Regulations, if finalized in
their current form, could (on prospective basis) cause our
U.S.
tax-exempt U.S.
(including
shareholders)to be subject to current U.S. federal income
tax on the portion of our earnings attributable to certain
intercompany
(whether or not
distributed).
reinsurance
income
• We may become subject to taxes in Bermuda after March
31, 2035.
• 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.
• Legislation enacted in Bermuda as to Economic Substance
may affect our operations.
• 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.”
• Application of the EU Anti-Tax Avoidance Directives.
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
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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
frequency of occurrence or severity of
competition,
catastrophic events, levels of capacity, general economic
conditions, changes in equity, debt and other investment
markets, changes in legislation, case law and prevailing
liability and other factors. Demand for
concepts of
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.
We have large aggregate exposures to natural and man-made
catastrophic events. Natural catastrophes can be caused by
including hurricanes, floods, wildfires,
various events,
tsunamis, windstorms, earthquakes, hailstorms, tornadoes,
explosions, severe winter weather, fires, droughts and other
natural disasters. The frequency and severity of natural
catastrophe activity has also been greater in recent years. Due
to climate change caused in part by human actions and other
related factors. Catastrophic events caused by humans may
include acts of war, acts of terrorism and political instability.
Catastrophes can 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
the potential
resulting from several factors,
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. In estimating our losses from catastrophic events our
considerations can include factors such as overall market
losses, additional claims information from our clients,
multiple model views and proprietary scenario testing.
including
The impact of the COVID-19 pandemic, the shift to a
COVID-19 endemic approach and related risks could
materially affect our results of operations, financial position
and/or liquidity.
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. The
emergence of variants of the original coronavirus, such as
Delta or Omicron, create a high level of unpredictability for
our business and the global economy. A further prolonged
COVID-19 pandemic, or a shift to a COVID-19 endemic
approach, may result in fundamental shifts in the global
economy which 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 future business,
results of operations and financial 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. The pandemic initially resulted in
a sharp contraction in the global economy, tightening
liquidity and increasing volatility and uncertainty in the
capital markets. Coincident global mitigation responses
stabilized markets and stimulated economic recovery. During
the second quarter of 2020, pandemic-driven dislocations had
a negative effect on the performance of our investment
portfolio, after which valuations recovered. Continued
maintenance of the low interest rates to combat the economic
headwinds of the pandemic could negatively impact the net
investment
fixed maturity portfolio.
Conversely, the tightening of financial conditions as the
in our
income
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36
2021 FORM 10-K
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pandemic threat to the economy eases may drive rising
interest rates and increase the potential for realized and
unrealized losses in the fixed income portion of the portfolio.
Certain lines of our business may require additional forms of
collateral in the event of a decline in the fair value of
those repayment
securities and benchmarks
mechanisms are linked. The impact of an ongoing 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.
to which
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.
We have large aggregate exposures to natural and man-made
catastrophic events. Natural catastrophes can be caused by
including hurricanes, floods, wildfires,
various events,
tsunamis, windstorms, earthquakes, hailstorms, tornadoes,
explosions, severe winter weather, fires, droughts and other
natural disasters. The frequency and severity of natural
catastrophe activity has also been greater in recent years due
to climate change caused in part by human actions and other
related factors. Catastrophic events caused by humans may
include acts of war, acts of terrorism and political instability.
Catastrophes can 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
the potential
resulting from several factors,
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. In estimating our losses from catastrophic events our
considerations can include factors such as overall market
losses, additional claims information from our clients,
multiple model views and proprietary scenario testing.
including
The impact of climate change will affect our loss limitation
methods, such as the purchase of third party reinsurance and
catastrophe risk modeling and risk selection in ways which
may adversely impact our business, financial condition and
results of operations.
Changing weather patterns and climatic conditions, such as
global warming, have added to the unpredictability, severity
and frequency of natural disasters. Uncertainty about
complexities of climate change affects our ability to assess
with certainty the full impact of climate change and creates
uncertainty about future trends and exposures. Although the
loss experience of catastrophe insurers and reinsurers has
historically been characterized as low frequency, climate
change has impacted the frequency and severity of extreme
weather events and natural catastrophes such as hurricanes,
tornado activity, other windstorms, floods and wildfires in
recent years 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.
Climate change may make modeled outcomes less certain or
produce new, non-modeled risks. 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
also
operations. Climate
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.
change-related
risks may
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.
can
include more
the purchase of
controls
We attempt to manage our exposure to these risks relating to
climate change through the use of underwriting controls, risk
third-party reinsurance.
models, and
restrictive
Underwriting
underwriting criteria such as higher premiums and
deductibles, or
losses retained, and more specifically
excluded policy risks. Our deductible in connection with a
catastrophic event is determined by market capacity, pricing
conditions, regulatory capital requirements 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.
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Our insurance and reinsurance subsidiaries are subject to
supervision and regulation. Changes to existing regulation
and supervisory standards, or failure to comply with
applicable requirements, could adversely affect our business
and results of operation.
geographies and
these exposures
the Board considers
regularly. We may make strategic business decisions to
address or respond to some of the legal and policy changes
relating to climate change, but there is no assurance that these
decisions will adequately address these exposures.
Our insurance and reinsurance subsidiaries conduct business
globally and are subject to varying degrees of regulation in
the various jurisdictions in which they conduct business,
including by state, federal and national insurance regulators.
The purpose of insurance laws and regulations generally is to
protect policyholders and ceding insurance companies, not
our shareholders. See “Regulation” in Item 1.
We may not be able to comply fully with, or obtain
appropriate exemptions from, these statutes and regulations,
which could result in restrictions on our ability to do business
or undertake activities that are regulated in one or more of the
jurisdictions in which we conduct business and could subject
us to fines and other sanctions. Regulatory authorities also
may seek to exercise their supervisory or enforcement
authority in new or more extensive ways, such as imposing
increased capital requirements. These actions, if they occur,
could affect the competitive market and the way we conduct
our business and manage our capital and could result in lower
revenues and higher costs. As a result, such actions could
have a material effect on our results of operations and
financial condition.
We are subject to ongoing legal and policy actions around
climate change which may result in additional requirements
which may prompt us to shift our risk selection and business
strategy away in ways which may adversely impact our
results of operations.
Governments, regulators, legislators and influential non-
governmental organizations continue to focus on enacting
laws, regulations and other requirements relating to climate
change. We are subject to some of these changing laws,
regulations and public policy debates, which are difficult to
predict and quantify and may have an adverse impact on our
business. Legislative and regulatory initiatives and court
decisions following major catastrophes could force expansion
of certain insurance coverages for catastrophe claims or
otherwise adversely
impact our business. Additionally,
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.
Our efforts to address these exposures are based in part on
the outcomes of our loss mitigation measures and risk
modeling, our financial results of operations and our
communications with our customers and shareholders. We
also continue to monitor changes across our industry and
Our customers and policyholders may also be impacted by
regulatory, technological, market or other risks relating to
climate change in ways which we cannot predict with
certainty and adversely impact our results of operations.
Our policyholders and customers are located primarily in
countries and regions, such as the U.S., U.K. and EU, where
there are regulatory, policy, legal and technological changes
resulting from actions relating to climate change. In some
cases, those policyholders and customers may not be able to
shift their business strategies or adjust adequately to these
changes, and their businesses may be negatively impacted or,
in some cases, cease to exist. As a result, our results of
operations may be impacted by the loss of those customers or
a shift in their patterns or levels of insurance coverage in
ways we cannot predict.
As we continue to incorporate climate change in our business
strategy, we cannot be certain that shareholders, investors
and other influential environmental groups will agree with
our approach, which may adversely impact our ability to
raise funds in the capital markets, our share price and our
results of operations.
Shareholders and investors have placed increased importance
on how we are addressing ESG issues. ESG encompass a
wide range of issues, including climate change and other
environmental risks. Our leadership and Board are actively
engaged in understanding the ever-changing ESG landscape
and assessing our business operations to ensure that our
business strategy reflects our values that our success depends
on our commitment to a diverse workforce, an informed and
active dialogue about ESG issues with our customers and
shareholders and the strength of our ERM framework. We
cannot predict whether our business decisions, business
strategy and disclosures relating to climate change and other
ESG
the expectations or particular
requirements of certain key institutional shareholders in
particular. We may be adversely impacted if key institution
shareholders do not agree with, or are not satisfied with, our
business strategy and approach to climate change and decide
to sell or not purchase our equity or debt instruments.
issues will meet
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.
Actions of the federal, state and local government in the U.S.
and other countries where we do business, to address and
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that seeks
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
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, December 4, 2020 and June 30, 2021, the GSEs
published guidance clarifying the applicability of the reduced
delinquent loan charges on loans (1) with their first missed
payments occurring between March 1, 2020 and March 31,
related
tax sharing and
to COVID-19. Additionally,
2021, or (2) subject to a forbearance plan in response to a
through
hardship
December 31, 2021, the GSEs temporarily required eligible
insurers to obtain prior approval of dividends or entering into
any new arrangements or altering any existing arrangements
intercompany expense-sharing
under
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. The pandemic has resulted, and may continue 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 entering mortgage
forbearance programs that allow borrowers to defer mortgage
payments, which may have an adverse impact on our results
or 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.
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
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
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to (i) a mandatory deductible of 20% of our prior year’s
direct earned premium for covered property and liability
coverages, and (ii) an industry aggregate retention of $37.5
billion. The program trigger for calendar year 2022 and any
program year thereafter through 2027 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,
there may be significant reporting
the
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, 2021, 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, 2021.
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.
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 the maximum probable loss resulting from a severe
economic event impacting the housing market. We also seek
to limit our loss exposure by geographic diversification,
including by pricing adjustments in our U.S. mortgage
insurance business. Geographic pricing decisions and zone
limitations
judgments,
involve significant underwriting
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. Underwriting is
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involving
judgment,
in claims
inherently a matter of
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
that substantially exceed our
could result
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
the extent of eliminating our
operations, possibly
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.
to
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 or the impact of
climate change could also have a material impact on our
ability to manage our risk aggregations through 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
and
retrocessional arrangements.
reinsurance
through
risk
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. The counterparties are
also subject to the same global increase in cyber incidents,
including ransomware, and we cannot offer assurances that
and
these
organizational controls to mitigate these risks. Consequently,
we assume a degree of credit and operational risk of those
parties, and a material failure to manage their risks may result
in material losses or damage to us.
counterparties
sufficient
technical
have
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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 coverage, 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.
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
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 pricing and 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, pricing and origination systems. We
also rely on electronic
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.
integrations
in our
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The COVID-19 pandemic has placed
increased and
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 failures and cyber attacks, including, but not
limited to, ransomware, exploitation in software or code with
malicious intent, state-sponsored cyber attacks, may impact
us or our business partners and service providers, causing a
disruption in service and operations which would negatively
impact our business and/or expose us to litigation.
technology
information
the electronic
significant portion of
We rely on information technology systems to process,
transmit, store and protect
information,
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, malicious actors, 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 negative impact on our operations and
possibly our results.
solutions, and on-premise
We are dependent on certain third party technology service
providers and other service providers to operate our business,
notably major cloud providers, Software-as-a-Service (or
SaaS)
including
proprietary and open source solutions. We also outsource
certain 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
our ability to conduct business operations, monetary and
reputational damage or harm to our competitive position.
software,
Cyber incidents or data breaches caused by bad actors or
including
unintentional human error
personal data, we maintain or use during our business
fines or action,
operations may result
in regulatory
reputation damage and a disruption
in our business
operations.
impacting data,
We use data, including the personal data of our employees,
customers and policyholders, as part of our business
operations. While we believe we have effective technical and
organizational measures in place to prevent, detect, manage
and mitigate the impact of data breaches caused by malicious
actors, systemic failures or human error, we cannot offer
complete assurances that significant data breaches will not
occur. 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.
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 modify their evaluation
criteria, heighten the level of scrutiny they apply when
analyzing companies in our industry, adjust upward the
capital and other requirements employed in their models and/
or discontinue credit and debt instruments or other structures
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deployed 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 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
issuer ratings, see “Ratings”
in Item 1. For further
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 ability to execute successfully our business strategy,
continue to grow and innovate and offer our employees a
dynamic and supportive workplace depends on
the
recruitment, retention and promotion of talented, agile,
diverse and resilient employees at all
levels of our
organization.
The COVID-19 pandemic has triggered a major shift to
employees working remotely, with many employees opting
to continue to work remotely or in a hybrid work model.
Employers are confronting unprecedented, complex and
constantly changing regulations and court rulings relating to
employee vaccination mandates and other safety precautions.
Since the COVID-19 pandemic, the number of employees
who have chosen to leave their employment positions has
risen across many industries, including financial services and
insurance. We provide a work environment and culture which
reflects our goal to “Enable Possibility”. We offer flexible
work arrangements, when possible, for our employees
globally, as well as competitive compensation packages
which include participation in our Employee Stock Purchase
Plan and the possibility of equity awards at certain job levels.
Over the past few years, we have also implemented and
expanded our
leveling and
learning programs, career
employee networks, all of which we believe will help us
retain talent. Our leadership and Board promote the goals of
building a diverse employee population and fostering an
environment that allows us to fully leverage and engage that
diversity as a competitive edge which benefits both our
employees and our business. While our efforts to attract,
develop and retain talented employees continues to be a top
priority, current job market conditions present challenges for
us and may adversely impact our ability to fully realize our
business strategy.
Our success will depend on our ability to maintain and
enhance effective operating procedures and internal controls
and our ERM program.
technology
requirements,
internal authorization, failure
information
We operate within an ERM framework designed to identify,
assess and monitor our risks. We consider underwriting,
reserving, investment, credit and operational risk in our ERM
framework. Losses, reputational damage, regulatory fines and
litigation are among the adverse impacts which can arise if
we fail to operate an effective ERM framework. Operational
risk and losses can result from, among other things, fraud,
errors, failure to document transactions properly or to obtain
to comply with
proper
regulatory
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 our 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.”
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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.
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.
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, including the
increasing uncertainty level of disruptions, and heightened
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 addition, our
policyholders, reinsurers and retrocessionaires may be
affected by developments in the financial markets, which
could adversely affect their ability 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.
Disruption in the financial markets and the downturn in
global economic activity resulting from the COVID-19
pandemic adversely affect the performance of our investment
portfolio and the significant, continued volatility in financial
markets, changes in interest rates, increases in credit spreads,
a lack of pricing 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 continue to 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
financial
information to us one month to three months following the
report
their
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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
(67.1% as of December 31, 2021). 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
types of securities, as well as sector
securities or
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
phasing out and replacement of LIBOR after 2021 may
adversely affect the value of our investment portfolio, 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
interest rates for loans, securities, derivative contracts and
other financial instruments. 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 with respect to
indebtedness denominated in U.S. Dollars. In 2017, the
ARRC identified the Secured Overnight Financing Rate
(“SOFR”), and in April 2018, the Federal Reserve Bank of
New York began publishing the SOFR. SOFR is a measure
of the cost of borrowing cash overnight, collateralized by
U.S. Treasury securities, and is based on directly observable
U.S. Treasury-backed repurchase transactions. Although the
U.S. Treasury-backed overnight repo market is highly liquid,
there is currently no robust market for determining forward-
looking, SOFR term rates. Because SOFR is an overnight
risk-free rate, whereas LIBOR has various terms and an
embedded credit charge, the transition from LIBOR to SOFR
will require adjustments, which may continue to vary for
certain forms of indebtedness and financial instruments as the
relevant markets adapt to SOFR’s implementation. Similar
alternative benchmark replacements will be required to be
implemented in respect of indebtedness and other financial
instruments that are currently based on LIBOR quotes for
currencies other than the U.S. Dollar. Uncertainty as to the
nature of such potential changes, alternative reference rates
and other related adjustments and reforms may adversely
affect the value of and trading market for LIBOR-based
securities, including those held in our investment portfolio or
used in the valuation of certain embedded derivatives.
Moreover, the transition from LIBOR to SOFR and other
the
alternative
performance of our investment portfolio, our cost of capital
and our cost of issuing Bellemeade mortgage risk transfer
securities, and could require changes to our current asset
liability strategies.
rates may adversely affect
reference
In order to mitigate the potential adverse effects on our cost
of capital caused by the uncertainty of the timing and impact
of the phase-out of LIBOR, we entered into certain
amendments to our credit facilities in 2021 in order to replace
the LIBOR-based benchmarks for borrowings and letters of
credit denominated in British Pounds Sterling and Euros with
the Sterling Overnight Index Average (“SONIA”) and the
Euro Inter-bank Offered Rate (“EURIBOR”), respectively, as
SONIA and EURIBOR have emerged as preferred alternative
benchmarks with respect to certain indebtedness and other
financial
these currencies.
Similarly, for indebtedness denominated in U.S. Dollars, our
credit facilities contain mechanics
that provide for a
transition from a LIBOR benchmark to a benchmark based
on SOFR or a similar replacement benchmark, which
transition may be effected, in specified circumstances, even
before LIBOR is formally phased out for the applicable
tenors. However, there can be no assurance that these
mitigation efforts will adequately protect against increases or
volatility in our cost of capital.
instruments denominated
in
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While we have also reviewed our products, investment
portfolio and other contractual obligations for LIBOR
exposure and believe we have either appropriate fallback
language or have moved to other benchmark rates, we do not
believe that it is possible to predict how markets will respond
to the transition to SOFR, or any other reference rate, on new
or existing financial instruments or quantify the potential
effect of any such event on us at this time.
The determination of the amount of current expected credit
losses (“CECL”) allowances taken on our investments is
highly subjective and could materially impact our results of
operations or financial position.
On a quarterly basis, we review our investments by applying
an approach based on the CECL and whether declines in fair
value below the cost basis requires an estimate of the
expected credit loss. There can be no assurance that our
management has accurately assessed the level of the credit
loss allowance taken reflected in our financial statements.
Furthermore, additional allowance may need to be taken or
allowances provided for in the future. Further, rapidly
changing and unpredictable credit and equity market
conditions could materially affect the valuation of securities
carried at fair value as reported within our consolidated
financial statements and the period-to-period changes in
value could vary significantly.
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.
including, among others, changes
The frequency and severity of claims we incur is uncertain
and will depend largely on general economic factors outside
in
of our control,
unemployment, home prices and interest rates in the U.S.
Inflated home prices followed by a decline in home values
could significantly decrease a borrower’s equity in their
home, which would limit their ability to sell the property
without incurring a loss, and could increase the frequency
and severity of claims. Deteriorating economic conditions in
the U.S., potentially due to prolonged recessionary conditions
related 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.
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.
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The private mortgage
insurers’ principal government
competitor is the Federal Housing Administration (“FHA”).
Future changes to the FHA program, including any reduction
to mortgage insurance premiums charged may negatively
impact the amount of mortgage insurance we write in the
U.S.
On January 14, 2021, the Federal Housing Finance Agency
(“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. In September 2021, the FHFA and
the Treasury Department agreed to suspend certain portions
of the PSPAs for one year to review the extent to which these
requirements are redundant or inconsistent with existing
FHFA standards, policies, and directives that mandate
sustainable lending standards. In addition, on January 5,
2022, FHFA announced that beginning on April 1, 2022,
Fannie Mae and Freddie Mac will increase upfront fees for
“high-balance loans” (mortgages in excess of $647,000) and
mortgages on second homes. These actions could cause a
decline in the volume of low-down payment home mortgage
purchases by the GSEs and could decrease demand for
mortgage insurance, decrease our U.S. new insurance written
and reduce mortgage insurance revenues.
Finally, FHFA directed the GSEs to submit Equitable
Housing Plans by the end of 2021 to identify and address
barriers to sustainable housing opportunities, including the
GSEs' goals and action plans to advance equity in housing
finance for the next three years; directed the GSEs to expand
their streamlined refinance programs; and directed the GSEs
to make permanent desktop appraisals by incorporating the
practice into their Selling Guides, which originally was a
temporary practice implemented in light of Covid-19. These
changes, along with any new practices or programs
implemented under the GSEs’ Equitable Housing Plans, may
the underwriting and servicing standards on
impact
mortgages purchased by the GSEs and could increase the
presence of multiple higher-risk characteristics in our insured
loan portfolio.
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.
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, 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, 2021. 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.
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
loan-to-value
ratio at
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approach, the capital relief benefits of mortgage insurance
would be diminished, which could adversely affect the
demand for mortgage insurance.
for Fannie Mae and Freddie Mac
On December 17, 2020, the FHFA published a new capital
that
framework
significantly increases minimum capital requirements for
these GSEs. The new rule requires each GSE to maintain
both higher minimum capital ratios and capital “buffers” to
avoid restrictions on capital distributions and discretionary
bonus payments. The rule also imposes a risk-weight floor of
10 percent on retained CRT positions.
The new framework continues to take into account the
benefits of mortgage insurance, provided the mortgage
insurer is compliant with the PMIERs. The amount of capital
relief afforded for mortgage insurers will depend on a
number of factors, including the GSEs’ determination of the
creditworthiness of the mortgage insurer. It is possible that
the higher capital standards imposed on the GSEs will result
in increased fees for homebuyers that will reduce the demand
for mortgage loans, and therefore the demand for mortgage
insurance. Further, the GSEs will independently determine
the creditworthiness of mortgage insurance counterparties,
which could affect the competitive position of individual
mortgage insurance providers. Moreover, the higher risk-
residential mortgages could be
capital charges
incorporated into the PMIERs standards, thereby requiring
mortgage insurers to hold higher capital levels in order to be
recognized as approved counterparties for the GSEs. This
could have a negative impact on our return on equity.
for
On September 27, 2021, FHFA published a proposed
revision to the capital standards that would roll back some of
the increases in required capital that were adopted in 2020.
This proposal would also reduce the risk-weight floor on
retained CRT positions from 10 percent to 5 percent. If this
proposal is adopted, it would moderate the potential adverse
consequences that could result from the capital framework
adopted in 2020.
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;
and for limitations on a shareholder’s right to raise proposals
or nominate directors at general meetings. Our bye-laws
provide that certain provisions that 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
to a 15% Holder; or amendment of
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provisions; provided, however, the super majority vote will
not apply to any transaction approved by the board.
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
to pay
insurance and reinsurance subsidiaries
of our
dividends to Arch Capital and to intermediate parent
companies owned by Arch Capital could be constrained by
our dependence on
from
financial
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;
whether the ratings on any series of our preferred shares
provided by any ratings agency have changed;
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 F or series G 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,
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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 F and series G 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
holders of such series in the event of a liquidation,
dissolution or winding-up of Arch Capital.
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 F or series G
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 F or series G 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
tax
increase,
including as a result of changes in tax law.
liabilities of our U.S. subsidiaries may
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
insurance and reinsurance
than U.S. excise
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
assurance that the IRS will not contend successfully that
Arch Capital or its non-U.S. subsidiaries are engaged in a
taxes on
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. jurisdictions. There is no
assurance that any such legislative proposal will not be
enacted into law or that any such enacted law would not
materially increase our income tax liabilities or those of our
subsidiaries.
The continuing 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 taxable
years after 2025) 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.
Recently proposed Treasury Regulations, if finalized in their
current form, could (on prospective basis) cause our U.S.
shareholders (including tax-exempt U.S. shareholders) to be
subject to current U.S. federal income tax on the portion of
intercompany
our
is
income
reinsurance
distributed).
income (whether or not such
earnings attributable
certain
to
Unless an exception applies, U.S. shareholders generally are
required to include currently in income a portion of any RPII
recognized by our foreign subsidiaries, whether or not
distributed. Generally, RPII is insurance income (including
reinsurance income) of a foreign corporation with respect to
which the insured is a United States shareholder of the
foreign corporation or a related person to such a shareholder.
ARCH CAPITAL
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2021 FORM 10-K
Table of Contents
Under one exception to the foregoing RPII rules, U.S.
shareholders are not required to include a CFC’s RPII
currently in income if the CFC’s gross RPII is less than 20%
of its total gross insurance income for the taxable year in
question (the “RPII 20% gross income exception”).
intercompany
Under current law, we currently expect each of our non-U.S.
subsidiaries to satisfy the RPII 20% gross income exception,
and
therefore we currently do not expect any U.S.
shareholder to be required to include RPII in income
currently (although there can be no assurance that this is or
will continue be the case). However, recently proposed
Treasury Regulations (issued on January 24, 2022), if
finalized in their current form, would for the first time (on a
prospective basis) expand the definition of RPII to include
certain
(including
reinsurance income) in a manner that could cause certain of
our foreign subsidiaries not to satisfy the RPII 20% gross
income exception. In such event, (1) all U.S. shareholders
(not just 10% U.S. shareholders) would be required to
include RPII in income currently, whether or not distributed,
and (2) U.S. shareholders that are tax exempt entities would
be required to treat such RPII inclusions as unrelated
business taxable income. Current and prospective U.S.
shareholders should consult their own tax advisors as to the
potential
these recently proposed Treasury
Regulations.
impact of
insurance
income
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.
Legislation enacted in Bermuda as to Economic Substance
may affect our operations.
Pursuant to the Economic Substance Act 2018 (as amended)
of Bermuda and related regulations (the “ES Act”), which
came into force on January 1, 2019, 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 ES Act may require
in-scope Bermuda entities which are engaged in such
“relevant activities” to be directed and managed in Bermuda,
have an adequate level of qualified employees in Bermuda,
incur an adequate level of annual expenditure in Bermuda,
maintain physical offices and premises in Bermuda or
perform core income-generating activities in Bermuda. The
list of “relevant activities” includes carrying on any one or
more of the following activities: banking, insurance, fund
leasing, headquarters, shipping,
management, financing,
distribution and service center, intellectual property and
holding entities. An in-scope Bermuda entity that carries on a
relevant activity is obliged under the ES Act to file a
declaration with the Bermuda Registrar of Companies on an
annual basis containing certain information. 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 non-compliance with its economic
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.
ARCH CAPITAL
52
2021 FORM 10-K
operations and results. Pillar II addresses the remaining
BEPS risk of profit shifting to entities in low tax jurisdictions
by introducing a global minimum tax (15%) 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 October
2021, 136 jurisdictions agreed on a two-pillar solution to
address the tax challenges arising from the digitalization of
the economy. In December 2021, the OECD released Model
Rules for implementation of Pillar II but have not yet
released detailed commentary necessary to fully interpret the
application of the rules including potential co-existence with
the U.S. Global Intangible Low-Taxed Income (“GILTI”)
rules. The OECD expects the rules to be enacted into
domestic legislation in 2022 in order for the rules to be
effective from 2023 (with a key element of the rules, the
Undertaxed Payment Rule (“UTPR”), deferred for one year
until 2024).
The adoption of these rules may increase the complexity and
costs associated with tax compliance and may adversely
affect our financial position 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
standards 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). On
December 22, 2021, the European Commission published a
proposal for a Directive (“ATAD III”) laying down rules to
prevent the misuse of shell entities for improper tax purposes
and amending the Directive on administrative cooperation
(Directive 2011/16/EU). If adopted, ATAD III will be
effective from January 1, 2024. ATAD and ATAD III could
result in increased tax liabilities and/or compliance costs and
administrative burden for us.
Table of Contents
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
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 I 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. 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 impact of regulations and licensing requirements
that 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 of the financial services sector” may require further
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
ARCH CAPITAL
53
2021 FORM 10-K
Table of Contents
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 2022.
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, 2021, 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.
ARCH CAPITAL
54
2021 FORM 10-K
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
HOLDERS
As of February 21, 2022, and based on information provided to us by our transfer agent and proxy solicitor, there were 1,052
holders of record of our common shares (NASDAQ: ACGL) and approximately 143,000 beneficial holders of our common
shares.
The following table summarizes our purchases of common shares for the 2021 fourth quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
Issuer Purchases of Common Shares
Period
10/1/2021-10/31/2021
11/1/2021-11/30/2021
12/1/2021-12/31/2021
Total
Total Number of
Shares Purchased (1)
1,188,948
4,183,059
3,342,978
8,714,985
$
$
$
$
Average Price Paid
per Share
38.82
42.18
42.32
41.78
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)
1,174,663
4,159,310
3,334,127
8,668,100
$
$
$
$
1,498,782
1,323,335
1,182,234
1,182,234
(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, 2021 under Arch Capital’s $1.5 billion share repurchase authorization, authorized by the
board of directors of ACGL on October 8, 2021. Repurchases under this authorization may be effected from time to time in open market
or privately negotiated transactions through December 31, 2022.
ARCH CAPITAL
55
2021 FORM 10-K
Table of Contents
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, 2021 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
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
$100.00
$105.19
$92.90
$149.11
$125.40
$154.54
$100.00
$121.83
$116.49
$153.17
$181.35
$233.41
$100.00
$122.39
$116.64
$146.82
$157.04
$187.31
(1)
(2)
(3)
Stock price appreciation plus dividends.
The above graph assumes that the value of the investment was $100 on December 31, 2016.
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. [RESERVED]
ARCH CAPITAL
56
2021 FORM 10-K
Arch Capital Group Ltd.S&P 500 IndexS&P 500 Property & Casualty Insurance Index12/31/1612/31/1712/31/1812/31/1912/31/2012/31/21$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, 2021 and 2020. Comparisons between 2020
and 2019 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, 2020 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 $16.3 billion in
capital at December 31, 2021. Through operations in
Bermuda, the United States, United Kingdom, Europe,
Canada, Australia and Hong Kong, we write 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 that cycle, a “hard”
market is evidenced by high premium rates, restrictive
underwriting standards, favorable terms and conditions, and
underwriting gains. A hard market is eventually followed by
a “soft” market which has the opposite characteristics of low
premium rates, relaxed underwriting standards, broader terms
and conditions, and underwriting losses. Market conditions in
the property and casualty arena 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
Our three areas of focus during the year have remained
constant. In our property and casualty segments we continued
to focus and grow in sectors where rates allow for returns that
are substantially higher than our cost of capital. Our
mortgage insurance segment has transitioned, for the most
part, from forbearance to recovery and produced results that
made a significant contribution to our underwriting income.
We have also continued to focus on actively managing our
investments and capital to enhance our returns.
In keeping with our longstanding underwriting approach, we
look for acceptable books of business to underwrite without
sacrificing discipline. Our corporate culture of being patient
in soft markets while maintaining an agile mindset is a key to
our success and allows us to seize opportunities when the
odds for success are more in our favor. The 2021 year
reflected the benefits of attractive pricing in almost all of our
insurance markets. As a result, we currently expect favorable
market conditions to continue in 2022, partially due to the
compounding of rate-on-rate increases and the rebalancing of
our mix of business. We believe that this time-tested strategy
of protecting capital through soft markets and increasing our
writings in hard markets gives us the best chance to generate
superior risk adjusted returns over time. As long as rate
increases support returns above our required thresholds, we
expect to continue to grow our writings.
ARCH CAPITAL
57
2021 FORM 10-K
Table of Contents
The property casualty industry is facing many degrees of
uncertainty, including heightened catastrophe activity, rising
inflation, COVID’s ongoing influence on the global economy
and perennially low interest rates. These factors continue to
influence the trajectory and market acceptance of rate
increases and reinforce why we remain optimistic that
improved economics in the property casualty market will be
sustainable for some time.
Rate improvements have enabled us to continue to expand
writings in our property casualty segments as we have been
for two years now. Rate momentum remained healthy and
rate increases were well above the long-term loss cost trends
and have spread to more lines than last year. Our early focus
on Lloyd’s and business in the U.K. has improved our scale
and our economics in this market. Some of our business lines
that were most impacted by COVID, like travel, are
recapturing some of the lost volume as both business and
consumer travel increases.
In reinsurance, strong growth was observed across most of
our lines of business, a reflection of our diversified specialty
mix of business and our larger participation in quota share
reinsurance which allows us to participate in the improved
premium rates of cedents more directly. 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. While property catastrophe rates were
up broadly at January 1, 2022 renewals, the increases were
not enough for us to deploy more capital into our peak zones.
However, we found many opportunities to grow in the other
93% of our reinsurance business that is specialty in nature,
including property excluding property catastrophe.
For our U.S. primary mortgage operations, delinquencies
continue to be lower than our expectations at the beginning
of the COVID-19 pandemic. Overall, the U.S. market
remains competitive but rational and our mortgage business
continues to generate returns on capital in the mid teens.
Outside of the U.S., we increased our writings in Australia as
a result of the housing market remaining strong and due to
our acquisition of Westpac’s LMI business.
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 (“GSEs”). In addition, we enter into
aggregate excess of loss mortgage reinsurance agreements
with various
reinsurance companies
domiciled in Bermuda and issue mortgage insurance linked
notes, increasing our protection for mortgage tail risk. The
Bellemeade structures provide approximately $4.6 billion of
aggregate reinsurance coverage at December 31, 2021.
special purpose
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 $33.56 at December 31, 2021, a 10.7%
increase from $30.31 at December 31, 2020. The growth in
2021 reflected strong underwriting returns and income from
operating affiliates.
is
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
period. After-tax operating
to Arch
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 11.5% for 2021, compared to 4.8% for
2020. Returns
reflected strong
underwriting returns and income from operating affiliates,
while the 2020 period reflected the impact of COVID-19 on
underwriting results.
the 2021 period
for
ARCH CAPITAL
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2021 FORM 10-K
Table of Contents
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 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 for Arch common
shareholders on the capital held in the business, and
compares the return generated by our investment portfolio
against benchmark returns.
The following table summarizes the pre-tax total return
(before investment expenses) of investments held by Arch
compared to the benchmark return (both based in U.S.
Dollars) against which we measured our portfolio during the
periods:
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
%
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
100.00 %
Pre-tax total return (before investment
expenses):
Year Ended December 31, 2021
Year Ended December 31, 2020
Arch
Portfolio (1)
Benchmark
Return
Hedge Fund Research HFRX ED Distressed Restructuring Index
(Flagship Funds)
Dow Jones Global ex-US Select Real Estate Securities Total
Return Net Index
1.90 %
7.77 %
1.20 %
7.16 %
FTSE Nareit All Mortgage Capped Index Total Return USD
Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD
ICE BoAML 20+ Year Canada Government Index
(1) Our investment expenses were approximately 0.32% and 0.31%,
respectively, of average invested assets in 2021 and 2020.
Total
Total return for our investment portfolio outperformed the
benchmark return index in 2021 and reflected the impact of
strong returns on alternatives and equities, partially offset by
low returns on our fixed income portfolio.
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, 2021, the benchmark
return index had an average credit quality of “Aa3” by
Moody’s, an estimated duration of 3.14 years.
index should not be
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 net income return on average common equity (the
most directly comparable GAAP financial measures) in
accordance with Regulation G is included under “Results of
Operations” below.
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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. The
loss on redemption of preferred shares related to the
redemption of the Company's Series E preferred shares in
September 2021 had no impact on shareholders' equity or
cash flows. Due to these reasons, we exclude net realized
gains or losses, equity in net income or loss of investments
accounted for using the equity method, net foreign exchange
gains or losses, transaction costs and other and loss on
redemption of preferred shares from the calculation of after-
common
tax operating
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
to Arch common
presenting net
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.
to our
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
‘other’ segment. Such measures represent
the pre-tax
profitability of our underwriting operations and include net
premiums earned plus other underwriting income, less losses
and loss adjustment expenses, acquisition expenses and other
operating expenses. Other operating expenses include those
operating expenses that are incremental and/or directly
individual underwriting operations.
attributable
Underwriting income or loss does not incorporate items
included in our corporate segment. While these measures are
to our
presented
in note 4, “Segment Information,”
they are
consolidated financial statements
considered non-GAAP financial measures when presented
elsewhere on a consolidated basis. The reconciliations of
underwriting income or loss to income before income taxes
(the most directly comparable GAAP financial measure) on a
consolidated basis and a subtotal before the contribution from
the ‘other’ segment, in accordance with Regulation G, is
shown in note 4, “Segment Information,” to our consolidated
financial statements in Item 8.
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, income from operating affiliates and
other non-underwriting related items are not allocated to each
underwriting segment.
income or
loss before
Along with consolidated underwriting income, we provide a
subtotal of underwriting
the
contribution from the ‘other’ segment. Through June 30,
2021, the ‘other’ segment included the results of Somers
Holdings Ltd. (formerly Watford Holdings Ltd.). Somers
Holdings Ltd. is the parent of Somers Re Ltd., a multi-line
Bermuda reinsurance company (together with Somers
Holdings Ltd., “Somers”). Pursuant to GAAP, Somers was
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considered a variable interest entity and we concluded that
we were the primary beneficiary of Somers. As such, we
consolidated the results of Somers in our consolidated
financial statements through June 30, 2021. In the 2020
fourth quarter, Arch Capital, Somers, and Greysbridge Ltd., a
wholly-owned subsidiary of Arch Capital, entered into an
Agreement and Plan of Merger (as amended, the “Merger
Agreement”). Arch Capital assigned its rights under the
Merger Agreement
to Greysbridge Holdings Ltd.
(“Greysbridge”). The merger and the related Greysbridge
equity financing closed on July 1, 2021. Effective July 1,
2021, Somers
is wholly owned by Greysbridge, and
Greysbridge is owned 40% by Arch and 30% by certain
funds managed by Kelso and 30% by certain funds managed
the governing documents of
by Warburg. Based on
Greysbridge, we concluded that, while we retain significant
influence over Greysbridge, Greysbridge does not constitute
a variable interest entity. Accordingly, effective July 1, 2021,
we no longer consolidate the results of Somers in our
consolidated financial statements and footnotes.
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
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
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.
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
Loss on redemption of preferred shares
Income tax expense (benefit) (1)
Year Ended December 31,
2021
2020
$ 2,093,405 $ 1,363,909
(307,466)
(814,808)
(366,402)
(146,693)
(42,743)
1,199
15,101
41,836
80,591
9,964
—
64,145
After-tax operating income available to Arch
common shareholders
$ 1,434,930 $
557,108
Beginning common shareholders’ equity
$ 12,325,886 $ 10,717,371
Ending common shareholders’ equity
12,715,896
12,325,886
Average common shareholders’ equity
$ 12,520,891 $ 11,521,629
Annualized net income return on average
common equity %
Annualized operating return on average
common equity %
16.7
11.5
11.8
4.8
(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 operating
segments– corporate and ‘other.’ Our insurance, reinsurance
and mortgage segments each have managers who are
responsible for the overall profitability of their respective
segments and who are directly accountable to our chief
operating decision makers, the Chief Executive Officer of
Arch Capital, 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
intangible assets and
the exception of goodwill and
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2021 FORM 10-K
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accordingly, investment income is not allocated to each
underwriting segment.
Premiums Written.
segments using
We determined our
the
reportable
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:
2021
$ 5,867,734
Gross premiums written
(1,719,541)
Premiums ceded
Net premiums written
4,148,193
Change in unearned premiums (521,725)
3,626,468
Net premiums earned
—
Other underwriting income
Year Ended December 31,
2020
$ 4,688,562
(1,525,655)
3,162,907
(291,487)
2,871,420
(31)
% Change
25.1
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income (loss)
(2,344,365)
(606,265)
(558,906)
$ 116,932
(2,092,453)
(418,483)
(489,153)
$ (128,700)
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
64.6 %
16.7 %
15.4 %
96.7 %
72.9 %
14.6 %
17.0 %
104.5 %
(8.3)
2.1
(1.6)
(7.8)
segment
insurance
consists of our
The
insurance
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.
The following tables set forth our insurance segment’s net
premiums written by major line of business:
Year Ended December 31,
2021
Amount
$ 1,177,144
770,954
595,824
383,580
359,458
305,390
146,984
408,859
$ 4,148,193
%
28.4
18.6
14.4
9.2
8.7
7.4
3.5
9.9
100.0
2020
Amount
$
743,486
619,034
437,973
%
23.5
19.6
13.8
364,104
11.5
297,330
9.4
212,974
156,119
331,887
$ 3,162,907
6.7
4.9
10.5
100.0
Professional lines
Property, energy,
marine and aviation
Programs
Construction and
national accounts
Excess and surplus
casualty
Travel, accident and
health
Lenders products
Other
Total
31.2
26.3
Net premiums written by the insurance segment were 31.2%
higher in 2021 than in 2020. 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.
190.9
% Point
Change
Net Premiums Earned.
The following tables set forth our insurance segment’s net
premiums earned by major line of business:
Year Ended December 31,
2021
Amount
Professional lines
$
942,817
2020
Amount
$
655,872
517,247
432,854
%
26.0
19.4
14.0
%
22.8
18.0
15.1
702,693
506,867
Property, energy,
marine and aviation
Programs
Construction and
national accounts
Excess and surplus
casualty
Travel, accident and
health
Lenders products
Other
Total
381,306
10.5
387,934
13.5
318,027
255,590
153,958
365,210
8.8
7.0
4.2
10.1
270,620
190,944
114,687
301,262
9.4
6.6
4.0
10.5
$ 3,626,468
100.0
$ 2,871,420
100.0
Net premiums written are primarily earned on a pro rata basis
over the terms of the policies for all products, usually 12
months. Net premiums earned by the insurance segment were
26.3% higher in 2021 than in 2020, reflecting changes in net
premiums written over the previous five quarters.
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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,
2021
2020
65.0 %
(0.4) %
64.6 %
73.2 %
(0.3) %
72.9 %
The insurance segment’s current year loss ratio was 8.2
points lower in 2021 than in 2020. The 2021 loss ratio
included 5.6 points of current year catastrophic event activity,
primarily related to Hurricane Ida and winter storms Uri and
Viola, compared to 9.5 points in 2020, which included
exposure to the COVID-19 global pandemic. The balance of
the change in the 2021 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
$16.2 million, or 0.4 points, for 2021, compared to $7.8
million, or 0.3 points, for 2020. 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.
2021
$ 5,093,930
Gross premiums written
(1,839,556)
Premiums ceded
Net premiums written
3,254,374
Change in unearned premiums (413,931)
2,840,443
Net premiums earned
Year Ended December 31,
2020
$ 3,472,086
(1,014,716)
2,457,370
(295,141)
2,162,229
% Change
46.7
32.4
31.4
Other underwriting income
(loss)
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income
3,669
4,454
(1,924,719)
(536,754)
(212,810)
$ 169,829
(1,628,320)
(354,048)
(168,011)
$ 16,304
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
67.8 %
18.9 %
7.5 %
94.2 %
75.3 %
16.4 %
7.8 %
99.5 %
941.6
% Point
Change
(7.5)
2.5
(0.3)
(5.3)
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
32.1% in 2021, compared to 31.6% in 2020, with the increase
primarily reflected growth in lines of business with higher
acquisition costs, partially offset by 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,
2021
2020
Amount
%
Amount
%
Property excluding
property catastrophe
Other Specialty
Casualty
Property catastrophe
Marine and aviation
Other
Total
$ 1,004,086
955,474
808,164
233,260
171,753
81,637
$ 3,254,374
30.9
29.4
24.8
7.2
5.3
2.5
100.0
$
697,086
709,308
542,319
286,210
141,414
81,033
$ 2,457,370
28.4
28.9
22.1
11.6
5.8
3.3
100.0
Gross premiums written by the reinsurance segment in 2021
were 46.7% higher than in 2020, while net premiums written
were 32.4% higher than in 2020. 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:
Year Ended December 31,
2021
2020
Amount
%
Amount
%
Property excluding
property catastrophe
Other Specialty
Casualty
Property catastrophe
Marine and aviation
Other
Total
$
836,573
818,801
666,754
280,738
152,955
84,622
$ 2,840,443
29.5
28.8
23.5
9.9
5.4
3.0
100.0
$
562,208
626,409
549,056
237,736
109,624
77,196
$ 2,162,229
26.0
29.0
25.4
11.0
5.1
3.6
100.0
Net premiums earned in 2021 were 31.4% higher than in
2020, reflecting changes in net premiums written over the
previous five quarters, including the mix and type of business
written.
Other Underwriting Income (Loss).
Other underwriting income in 2021 was $3.7 million,
compared to $4.5 million in 2020.
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,
2021
2020
74.1 %
(6.3) %
67.8 %
81.5 %
(6.2) %
75.3 %
The reinsurance segment’s current year loss ratio was 7.4
points lower in 2021 than in 2020. The 2021 loss ratio
included 16.5 points for current year catastrophic event
activity, primarily related to Hurricane Ida and winter storms
Uri and Viola, as well as other minor global events,
compared to 20.1 points in 2020. The 2020 period loss ratio
included exposure to the COVID-19 pandemic. The balance
of the change in the 2021 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
$178.8 million, or 6.3 points, for 2021, compared to $134.0
million, or 6.2 points, for 2020, 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.
The underwriting expense ratio for the reinsurance segment
was 26.4% in 2021, compared to 24.2% in 2020, with the
increase primarily resulting from changes in mix of business
to lines with higher acquisition costs and expenses related to
favorable development of prior year loss reserves.
Mortgage Segment
The following tables set forth our mortgage segment’s
underwriting results.
Year Ended December 31,
2020
$ 1,473,999
(194,149)
1,279,850
2021
$ 1,507,825
(246,757)
1,261,068
% Change
2.3
22,351
1,283,419
17,665
118,085
1,397,935
20,316
(56,677)
(97,418)
(194,010)
$ 952,979
(528,344)
(134,240)
(162,202)
$ 593,465
4.4 %
7.6 %
15.1 %
27.1 %
37.8 %
9.6 %
11.6 %
59.0 %
(1.5)
(8.2)
60.6
% Point
Change
(33.4)
(2.0)
3.5
(31.9)
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
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
Premiums Written.
The following table sets forth our mortgage segment’s net
premiums written by underwriting location (i.e., where the
business is underwritten):
Net premiums written by underwriting
location
United States
Other
Total
Year Ended December 31,
2021
2020
$
914,477 $ 1,021,950
257,900
346,591
$ 1,261,068 $ 1,279,850
Gross premiums written by the mortgage segment in 2021
were 2.3% higher than in 2020, primarily reflecting growth in
Australian single premium mortgage insurance and due to the
acquisition of Westpac Lenders Mortgage Insurance Limited
in 2021, which was partially offset by a lower level of U.S.
primary mortgage insurance monthly and single premium
volume. Net premiums written for 2021 were 1.5% lower
than in the 2020 period. Net premiums written for the 2021
period reflected a higher level of premiums ceded than in the
2020 period.
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The persistency rate of the U.S. primary portfolio of
mortgage loans was 62.4% at December 31, 2021 compared
to 58.7% at December 31, 2020, with the increase primarily
reflecting a lower level of refinancing activity due to a higher
interest rate environment. 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,
2021
2020
$
970,507 $ 1,158,563
239,372
312,912
$ 1,283,419 $ 1,397,935
Net premiums earned for 2021 were 8.2% lower than in
2020, primarily reflecting a lower level of earnings from
single premium policy terminations.
Other Underwriting Income.
Other underwriting income, which is primarily related to
GSE risk-sharing transactions, was $17.7 million for 2021,
compared to $20.3 million for 2020.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage
segment’s loss ratio:
Current year
Prior period reserve development
Loss ratio
Year Ended December 31,
2021
2020
17.6 %
(13.2) %
4.4 %
39.2 %
(1.4) %
37.8 %
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 2021 or
2020.
Current Year Loss Ratio.
The mortgage segment’s current year loss ratio was 21.6
points lower in 2021 compared to 2020. The percentage of
loans in default on U.S. primary mortgage insurance
decreased from 4.19% at December 31, 2020 to 2.36% at
December 31, 2021.
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
the number of
losses would
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
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.
Prior Period Reserve Development.
The mortgage segment’s net favorable development was
$169.6 million, or 13.2 points, for 2021, compared to $19.0
million, or 1.4 points, for 2020. 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 22.7% for 2021, in line with 21.2% for 2020, with the
increase primarily due to a lower level of net premiums
earned in the U.S. primary mortgage insurance business.
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Corporate Segment
The corporate segment results include net investment income,
net realized gains or losses, equity in net income or loss of
investments accounted for using the equity method, other
income (loss), corporate expenses, transaction costs and
other, amortization of intangible assets, interest expense, net
foreign exchange gains or losses, income taxes, income from
operating affiliates and items related to our non-cumulative
preferred shares. Such amounts exclude the results of the
‘other’ segment.
Net Investment Income.
The components of net investment income were derived from
the following sources:
Fixed maturities
Equity securities
Short-term investments
Other (1)
Gross investment income
Investment expenses (2)
Year Ended December 31,
2021
2020
$
307,536 $
358,804
42,094
6,799
68,411
424,840
(78,032)
28,007
6,573
77,951
471,335
(69,427)
Net investment income
$
346,808 $
401,908
(1) Amounts include dividends and other distributions on investment
funds, term loan investments, funds held balances, cash balances and
other.
Investment expenses were approximately 0.32% of average invested
assets for 2021, compared to 0.31% for 2020.
(2)
The pre-tax investment income yield was 1.41% for 2021,
compared to 1.78% for 2020. The lower level of net
investment income for 2021 compared to 2020 reflected
lower yields available in the financial markets. The pre-tax
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.
Net Realized Gains (Losses).
We recorded net realized gains of $299.2 million for 2021,
compared to net realized gains of $813.8 million for 2020.
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
relative value
rebalance our portfolios or due
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),” and note 9, “Investment Information—
Allowance for Credit Losses,” to our consolidated financial
statements for additional information.
Equity in Net Income (Loss) of Investments Accounted for
Using the Equity Method.
We recorded $366.4 million of equity in net income related
to investments accounted for using the equity method for
2021, compared to $146.7 million for 2020. Investments
accounted for using the equity method totaled $3.1 billion at
to $2.0 billion at
December 31, 2021, compared
December 31, 2020. 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.
Other Income (Loss)
Other income of $10.2 million for 2021 period primarily
reflected our investment in corporate-owned life insurance.
Corporate Expenses.
Corporate expenses were $77.1 million for 2021, compared
to $68.5 million for 2020. 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 $1.1 million for 2021,
compared to $9.5 million for 2020. Amounts in both periods
are primarily related to acquisition activity.
Amortization of Intangible Assets.
Amortization of intangible assets for 2021 was $82.1 million,
compared to $69.0 million for 2020. Amounts in 2021 and
2020 primarily related
to amortization of finite-lived
intangible assets. The increase in amortization of intangible
assets expense was a result of acquisitions closed during the
2021 period. See note 2, “Acquisitions."
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Interest Expense.
Other Segment
Through June 30, 2021, the ‘other’ segment included the
results of Somers. Pursuant
to GAAP, Somers was
considered a variable interest entity and we concluded that
we were the primary beneficiary of Somers. As such, we
consolidated the results of Somers in our consolidated
financial statements through June 30, 2021. In July 2021, we
announced the completion of the previously disclosed
acquisition of Somers by Greysbridge. Based on
the
governing documents of Greysbridge, the Company has
concluded that, while it retains significant influence over
Somers, Somers no longer constitutes a variable interest
entity. Accordingly, effective July 1, 2021, Arch no longer
consolidates the results of Somers in its consolidated
financial statements. 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.
SUMMARY OF CRITICAL ACCOUNTING
ESTIMATES
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
revenue
reserves,
insurance
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.
Interest expense was $131.1 million for 2021, compared to
$120.2 million for 2020. 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.
Net Foreign Exchange Gains or Losses.
Net foreign exchange gains for 2021 were $42.9 million,
compared to net foreign exchange losses for 2020 of $80.2
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 5.6% for 2021, compared to an
expense of 7.4% for 2020. The effective tax rate for 2021
period included discrete income tax benefits of $39.3 million,
compared to a benefit of $2.5 million for 2020. The discrete
tax items in the 2021 period primarily relate to the release of
valuation allowances on certain international deferred tax
assets. 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 2021
and 2020.
Income (Loss) from Operating Affiliates.
We recorded $264.7 million of net income from our
operating affiliates in the 2021 period, compared to income
of $16.8 million in the 2020 period. Results for the 2021
period included a one-time gain of $95.7 million recognized
from the Company’s investment in Greysbridge and a one-
time gain of $74.5 million recognized from the Company’s
investment in Coface SA (“Coface”), a France-based leader
in the global trade credit insurance market.
Loss on Redemption of Preferred Shares.
In 2021, we redeemed all 5.25% Series E preferred shares
and recorded a loss of $15.1 million to remove original
issuance costs related to the redeemed shares from additional
paid-in capital. Such adjustment had no impact on total
shareholders’ equity or cash flows.
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Loss Reserves
losses and
to establish reserves for
We are required by applicable insurance laws and regulations
and GAAP
loss
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.
At December 31, 2021 and 2020, our Loss Reserves, net of
unpaid losses and loss adjustment expenses recoverable, by
type and by operating segment 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,
2021
2020
$ 2,102,891 $ 2,051,640
3,889,823
5,941,463
4,269,904
6,372,795
1,733,571
426,531
2,656,527
4,816,629
741,897
226,604
968,501
—
—
—
—
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
4,578,359
426,531
7,153,035
4,810,671
312,793
7,075,610
$ 12,157,925 $ 12,199,074
At December 31, 2021 and 2020, the insurance segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
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,
2021
2020
$ 1,673,615 $ 1,482,820
1,395,067
816,495
699,354
517,692
98,910
48,946
882,179
$ 6,372,795 $ 5,941,463
1,490,206
657,307
793,187
599,093
96,051
58,351
1,004,985
(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.
At December 31, 2021 and 2020, the reinsurance segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
Casualty (1)
Other specialty (2)
Property excluding property catastrophe (3)
Marine and aviation
Property catastrophe
Other (4)
Total net reserves
December 31,
2021
2020
$ 2,123,360 $ 1,995,849
917,178
594,033
204,205
268,858
114,825
$ 4,816,629 $ 4,094,948
1,113,766
711,859
246,861
486,911
133,872
(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, 2021 and 2020, the mortgage segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
U.S. primary mortgage insurance (1)
U.S. credit risk transfer (CRT) and other
International mortgage insurance/
reinsurance
Total net reserves
December 31,
2021
710,708 $
112,549
2020
649,748
134,857
145,244
968,501 $
119,017
903,623
$
$
(1) At December 31, 2021, 27.0% of total net reserves represent policy
years 2011 and prior and the remainder from later policy years. At
December 31, 2020, 28.3% of total net reserves represent policy years
2011 and prior and the remainder from later policy years.
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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, 2021 by underwriting
segment. The scenarios shown in the tables summarize the
effect of (i) changes to the expected loss ratio selections used
at December 31, 2021, 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, 2021, 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.
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
$
44,245 $
317,483
149,689
145,365
73,192
165,701
148,642
132,792
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
$
(41,610) $
(316,771)
(149,618)
(141,854)
(35,731)
(144,688)
(118,728)
(89,390)
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
159,539 $
86,426
30,662
28,532
13,801
7,253
184,503
79,244
77,092
46,563
21,679
4,901
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)
$
(159,539) $
(86,397)
(142,727)
(98,539)
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
(30,662)
(28,532)
(13,924)
(7,253)
(70,358)
(30,353)
(22,699)
(4,688)
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, 2021 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, 2021 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
approximately 34% of the unpaid principal balance at
December 31, 2021), we estimated that our loss reserves
would change by approximately $28.0 million at
December 31, 2021. For every one percentage point change
in our primary net default to claim rate (which we estimate to
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2021 FORM 10-K
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be approximately 39% at December 31, 2021), we estimated
a $24.0 million change in our loss reserves at December 31,
2021.
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, 2021, 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
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,
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, 2021. Accordingly, the reserving for incurred
losses in these lines of business could be subject to greater
variability. See Item 1A, “Risk Factors – Risks Relating to
Our Industry, Business & Operations – Underwriting risks
and reserving for losses are based on probabilities and related
modeling which are subject to inherent uncertainties.”
Mortgage Operations Supplemental Information
The mortgage segment’s insurance in force (“IIF”) and risk
in force (“RIF”) were as follows at December 31, 2021 and
2020:
(U.S. Dollars in millions)
December 31,
2021
2020
Amount
%
Amount
%
Insurance
Segment
Reinsurance
Segment
Mortgage
Segment
Total
Insurance In Force (IIF) (1):
U.S. primary mortgage
insurance
U.S. credit risk transfer
(CRT) and other (2)
International mortgage
insurance/reinsurance (3)
Total
Risk In Force (RIF) (4):
U.S. primary mortgage
insurance
U.S. credit risk transfer
(CRT) and other (2)
International mortgage
insurance/reinsurance (3)
Total
$ 280,945
61.0 $ 280,579
66.2
110,018
23.9
103,535
24.4
69,655
$ 460,618
15.1
39,425
100.0 $ 423,539
9.3
100.0
$
70,619
84.3 $
70,522
90.5
5,120
6.1
4,699
6.0
7,983
83,722
9.5
100.0 $
2,673
77,894
3.4
100.0
$
(1) Represents the aggregate dollar amount of each insured mortgage
(2)
loan’s current principal balance.
Includes all CRT transactions, which are predominantly with GSEs,
and other U.S. reinsurance transactions.
Includes risks primarily located in Australia.
(3)
(4) The aggregate dollar amount of each insured mortgage loan’s current
principal balance multiplied by the insurance coverage percentage
specified in the policy for insurance policies issued and after contract
limits and/or loss ratio caps for risk-sharing or reinsurance.
Loss
Reserves (1)
Simulation
results:
90th
percentile (2)
10th
percentile (3)
$6,372,795
$4,816,629
$968,501
$12,157,925
$7,670,396
$5,851,277
$1,159,743
$14,001,252
$5,128,642
$3,903,565
$791,504
$10,398,665
(1) Net of reinsurance recoverables.
(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 $1.8 billion, or
$4.60 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
$1.8 billion, or $4.39 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
illnesses and other
to provide meaningful
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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, 2021:
The following tables provide supplemental disclosures on
risk in force for our U.S. primary mortgage insurance
business at December 31, 2021 and 2020:
(U.S. Dollars in
millions)
IIF
RIF
Delinquency
(U.S. Dollars in millions)
Amount
%
Amount
%
Rate (1)
December 31,
2021
2020
Amount
%
Amount
%
Policy year:
2011 and prior $ 11,245
1,785
2012
4,206
2013
4,822
2014
8,703
2015
14,344
2016
13,128
2017
14,046
2018
25,841
2019
82,502
2020
100,323
2021
$ 280,945
Total
2,509
4.0 $
451
0.6
1,148
1.5
1,328
1.7
2,340
3.1
3,841
5.1
3,436
4.7
3,562
5.0
6,467
9.2
20,341
29.4
35.7
25,196
100.0 $ 70,619
3.6
0.6
1.6
1.9
3.3
5.4
4.9
5.0
9.2
28.8
35.7
100.0
9.24 %
2.33 %
2.63 %
3.14 %
2.67 %
3.29 %
4.09 %
5.28 %
3.13 %
0.97 %
0.29 %
2.36 %
(1) Represents the ending percentage of loans in default.
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:
Credit quality (FICO):
>=740
680-739
620-679
<620
Total
$ 42,451
23,646
4,196
326
$ 70,619
60.1 $ 40,774
24,498
33.5
4,837
5.9
413
0.5
100.0 $ 70,522
57.8
34.7
6.9
0.6
100.0
Weighted average FICO
score
746
743
Loan-to-Value (LTV):
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
Total
$
7,538
38,829
20,006
4,246
$ 70,619
10.7 $
55.0
28.3
6.0
8,643
37,877
20,013
3,989
100.0 $ 70,522
12.3
53.7
28.4
5.7
100.0
Weighted average LTV
92.8 %
92.8 %
Total RIF, net of
external reinsurance
$ 54,574
$ 56,658
(U.S. Dollars in
millions)
IIF
RIF
Delinquency
Amount
%
Amount
%
Rate (1)
(U.S. Dollars in millions)
Policy year:
2011 and prior $ 14,588
3,651
2012
7,546
2013
8,261
2014
15,032
2015
24,958
2016
24,748
2017
27,304
2018
48,304
2019
5.2 $
1.3
2.7
2.9
5.4
8.9
8.8
9.7
17.2
3,327
992
2,107
2,273
4,048
6,648
6,413
6,918
12,001
2020
Total
106,187
$ 280,579
37.8
25,795
100.0 $ 70,522
4.7
1.4
3.0
3.2
5.7
9.4
9.1
9.8
17.0
36.6
100.0
(1) Represents the ending percentage of loans in default.
11.36 %
2.98 %
3.30 %
4.06 %
3.72 %
4.77 %
5.52 %
6.76 %
4.61 %
0.76 %
4.19 %
Total RIF by State:
Texas
California
Florida
Illinois
North Carolina
Minnesota
Georgia
Massachusetts
Michigan
Virginia
Others
Total
December 31,
2021
2020
Amount
%
Amount
%
$
$
5,594
5,559
3,303
2,933
2,921
2,916
2,902
2,537
2,492
2,446
37,016
70,619
7.9 $
7.9
4.7
4.2
4.1
4.1
4.1
3.6
3.5
3.5
52.4
100.0 $
5,636
5,261
3,632
2,762
2,622
2,520
2,959
2,464
2,073
2,526
38,067
70,522
8.0
7.5
5.2
3.9
3.7
3.6
4.2
3.5
2.9
3.6
54.0
100.0
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, 2021 and 2020:
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2021 FORM 10-K
Year Ended December 31,
2021
2020
agreements, our insurance or reinsurance operations would
be liable for such defaulted amounts.
Table of Contents
(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
Ending delinquent number of loans (1)
52,234
35,554
(59,372)
(771)
27,645
20,163
102,324
(68,691)
(1,562)
52,234
Ending number of policies in force (1)
1,171,835
1,245,771
Delinquency rate (1)
2.36 %
4.19 %
Losses:
Number of claims paid
Total paid claims
Average per claim
Severity (2)
Average reserve per default (in
thousands) (1)
771
30,979
40.2
80.8 %
$
$
1,562
64,903
41.6
92.4 %
26.7
$
12.6
$
$
$
(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 8 to 1
at December 31, 2021, compared to 9.3 to 1 at December 31,
2020.
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
facultative
reinsurance
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. Estimating reinsurance recoverables can be more
subjective than estimating the underlying reserves for losses
and loss adjustment expenses as discussed under the heading
“Loss Reserves”
reinsurance
recoverables may be affected by deemed inuring reinsurance,
industry losses reported by various statistical reporting
services, and other factors. 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
In particular,
above.
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.”
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 29.3% of gross premiums
written for 2021, compared to 26.3% for 2020. 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 be responsible 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.
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,
2021, our estimated off-balance sheet maximum exposure to
loss from such entities was $42.2 million. See note 12,
“Variable Interest Entity and Noncontrolling Interests,” to
interest entities
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Table of Contents
our consolidated financial statements in Item 8 for additional
information.
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
the portion of
Unearned premium reserves represent
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
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, 2021:
Other specialty
Property excluding
property catastrophe
Casualty
Marine and aviation
Property catastrophe
Other
Total
Gross
Amount
December 31, 2021
Acquisition
Expenses
Net
Amount
$
421,504 $
(118,878) $
302,626
288,622
275,889
149,161
25,097
48,733
(88,745)
(76,342)
(34,338)
(2,723)
(4,142)
199,877
199,547
114,823
22,374
44,591
$ 1,209,006 $
(325,168) $
883,838
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.
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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
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
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
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2021 FORM 10-K
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interest
income. Evaluating
rates of defaulted loans moving to claim, as well as recent
trends in the rate at which loans are prepaid, and incorporates
anticipated
the expected
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.
Significant Accounting Pronouncements
For all other significant accounting policies see note 3,
“Significant Accounting Policies” and note 3-(s), “Recent
Accounting Pronouncements” to our consolidated financial
in Item 8 for disclosures concerning our
statements
companies significant accounting policies and
recent
accounting pronouncements.
FINANCIAL CONDITION
Investable Assets
No premium deficiency charges were recorded by us during
2021 or 2020.
At December 31, 2021, total investable assets held by Arch
were $27.4 billion.
Fair Value Measurements
Investable Assets Held by Arch
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, 2021 by valuation hierarchy.
Reclassifications
We have reclassified the presentation of certain prior year
information to conform to the current presentation, including
the correct presentation of ‘income (loss) from operating
affiliates’ on its consolidated statements of income for all
periods presented to reclass such item from ‘other income
(loss)’. We also changed the presentation of ‘investment in
operating affiliates’ on our consolidated balance sheet for all
periods presented to reclass such item from ‘other assets’.
Such reclassifications had no effect on our net income,
shareholders’ equity or cash flows.
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.
At December 31, 2021, approximately $18.5 billion, or 67%,
of total investable assets held by Arch were internally
managed, compared
to $19.2 billion, or 71%, at
December 31, 2020.
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75
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Table of Contents
The following table summarizes the fair value of investable
assets held by Arch:
The following table summarizes our fixed maturities and
fixed maturities pledged under securities lending agreements
(“Fixed Maturities”) by type:
Investable assets (1):
December 31, 2021
Fixed maturities (2)
Short-term investments (2)
Cash
Equity securities (2)
Other investments (2)
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, 2020
Fixed maturities (2)
Short-term investments (2)
Cash
Equity securities (2)
Other investments (2)
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)
Estimated
Fair Value
% of
Total
$ 18,414,807
1,832,522
858,668
1,830,663
1,432,553
3,077,611
67.1
6.7
3.1
6.7
5.2
11.2
(4,671)
$ 27,442,153
—
100.0
2.70
AA-/Aa3
1.63 %
$ 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 %
(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.
December 31, 2021
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, 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
Estimated
Fair Value
% of
Total
$ 6,941,879
408,477
404,666
1,046,484
4,772,764
2,144,079
2,696,458
$ 18,414,807
$ 8,039,745
616,619
492,734
390,990
5,354,863
2,310,157
1,566,188
$ 18,771,296
37.7
2.2
2.2
5.7
25.9
11.6
14.6
100.0
42.8
3.3
2.6
2.1
28.5
12.3
8.3
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, 2021
U.S. government and gov’t agencies (1)
AAA
AA
A
BBB
BB
B
Lower than B
Not rated
Total
December 31, 2020
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
$ 5,063,191
3,783,386
2,459,413
2,943,594
2,936,398
501,588
371,747
43,756
311,734
$ 18,414,807
$ 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
27.5
20.5
13.4
16.0
15.9
2.7
2.0
0.2
1.7
100.0
31.8
16.6
11.0
20.0
14.4
3.1
1.4
0.3
1.4
100.0
(1)
Includes U.S. government-sponsored agency mortgage backed
securities and agency commercial mortgage backed securities.
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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:
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
Estimated
Fair Value
Gross
Unrealized
Losses
% of
Total Gross
Unrealized
Losses
Severity of gross
unrealized losses:
December 31, 2021
0-10%
10-20%
20-30%
Greater than 30%
$ 12,231,146 $
16,884
2,593
684
Total
$ 12,251,307 $
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 $
(166,867)
(2,412)
(759)
(916)
(170,954)
(55,542)
(12,183)
(406)
(1,785)
(69,916)
97.6
1.4
0.4
0.5
100.0
79.4
17.4
0.6
2.6
100.0
The following table summarizes our top ten exposures to
fixed income corporate issuers by fair value at December 31,
2021, excluding guaranteed amounts and covered bonds:
Bank of America Corporation
JPMorgan Chase & Co.
The Goldman Sachs Group, Inc.
Citigroup Inc.
Morgan Stanley
Wells Fargo & Company
Blackstone Inc.
Dai-ichi Life Holdings, Inc.
Apple Inc.
Westpac Banking Corporation
Total
Estimated
Fair Value
Credit
Rating (1)
$
406,807
338,647
237,628
220,915
198,106
183,261
128,138
109,924
109,008
107,678
$ 2,040,112
A-/A2
A-/A2
BBB+/A2
BBB+/A3
BBB+/A1
BBB+/A1
NA/Baa3
AA-/A1
AA+/Aaa
AA-/Aa3
(1)
Average credit ratings as assigned by S&P and Moody’s,
respectively.
Agencies
Investment
Grade
Below
Investment
Grade
Total
$ 268,229 $ 129,296 $
10,952 $ 408,477
1,046,484
97,984
2,696,458
152,551
$ 290,427 $ 3,599,505 $ 261,487 $ 4,151,419
926,302
2,543,907
22,198
—
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
Dec. 31, 2021
RMBS
CMBS
ABS
Total
Dec. 31, 2020
RMBS
CMBS
ABS
Total
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,
2021
883,722 $
2020
676,437
$
455,467
491,474
341,139
418,528
$ 1,830,663 $ 1,436,104
(1) Primarily in consumer non-cyclical, technology, communications,
consumer cyclical and financial at December 31, 2021.
(2) Primarily in corporate and MBS at December 31, 2021.
(3) Primarily in large cap stocks, foreign equities, technology and utilities
at December 31, 2021.
The following table summarizes our other investments and
other investable assets:
Lending
Term loan investments
Investment grade fixed income
Private equity
Energy
Credit related funds
Infrastructure
Real estate
Total fair value option
December 31,
2021
2020
536,345
484,950
147,810
91,126
81,692
70,278
20,352
—
1,432,553
572,636
380,193
138,646
48,750
65,813
90,780
165,516
18,013
1,480,347
Other investable assets
—
500,000
Total other investments
$ 1,432,553 $ 1,980,347
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The following table summarizes our investments accounted
for using the equity method, by strategy:
Reinsurance Recoverables
December 31,
The following table details our reinsurance recoverables at
December 31, 2021:
Credit related funds
Private equity
Real estate
Equities
Lending
Infrastructure
Energy
Fixed income
Total
2021
$ 1,022,334 $
436,042
396,395
395,090
376,649
230,070
119,141
101,890
2020
740,060
235,289
258,518
343,058
179,629
175,882
115,453
—
$ 3,077,611 $ 2,047,889
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, 2021
and 2020 segregated by level in the fair value hierarchy.
Somers Re
Fortitude Reinsurance Company Ltd.
Hannover Rück SE
Swiss Reinsurance America Corporation
Partner Reinsurance Company of the U.S.
Everest Reinsurance Company
Munich Reinsurance America, Inc.
XL Re
Lloyd’s syndicates (2)
Berkley Insurance Company
All other -- “A-” or better
All other -- rated carriers
All other -- not rated (3)
Total
A.M. Best
Rating (1)
A-
A
A+
A+
A+
A+
A+
A+
A
A+
% of
Total
6.7
2.4
1.8
1.7
1.4
1.4
1.3
1.2
1.1
1.0
49.7
0.1
30.2
100.0
(1) The financial strength ratings are as of February 4, 2022 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 91% 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.
Reserves for Losses and Loss Adjustment Expenses
We establish 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,
in our financial
from
statements. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Summary of
Critical Accounting Estimates—Loss Reserves” and see Item
1 “Business—Reserves” for further details.
the reserve estimates reflected
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Shareholders’ Equity and Book Value per Share
Total shareholders’ equity available to Arch was $13.5
billion at December 31, 2021, compared to $13.1 billion at
December 31, 2020. The increase in 2021 primarily reflected
income from
the
operating affiliates, partially offset by the impact of a higher
level of catastrophic activity on underwriting returns.
impact of underwriting returns and
The following table presents the calculation of book value
per share:
(U.S. dollars in thousands, except share
data)
December 31,
2021
2020
Total shareholders’ equity available to
Arch
Less preferred shareholders’ equity
$ 13,545,896 $ 13,105,886
780,000
830,000
Common shareholders’ equity available to
Arch
$ 12,715,896 $ 12,325,886
Common shares and common share
equivalents outstanding, net of treasury
shares (1)
Book value per share
378,923,894
406,720,642
$
33.56 $
30.31
(1) Excludes the effects of 17,083,160 and 17,839,333 stock options and
729,636 and 1,153,784 restricted stock and performance units
outstanding at December 31, 2021 and 2020, respectively.
LIQUIDITY
Liquidity is a measure of our ability to access sufficient cash
flows to meet the short-term and long-term cash requirements
of our business operations. In 2021, Arch Capital completed
a $500.0 million underwritten public offering of 20.0 million
depositary shares, each of which represents a 1/1,000th
interest in a share of its 4.55% Non-Cumulative Series G
Preferred Shares. See note 21, “Shareholder’s Equity.”
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 2021, Arch Capital received dividends of $1.8 billion from
Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda-
based reinsurer and insurer which can pay approximately
$3.8 billion to Arch Capital in 2022 without providing an
affidavit to the Bermuda Monetary Authority (“BMA”). In
2021, Arch-U.S. received $200.0 million of dividends from
Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S.,
which received a total of $300.0 million of ordinary and
extraordinary dividends, $140 million from United Guaranty
Residential Insurance Company (“UGRIC”) and $160
million from Arch Mortgage Insurance Company (“AMIC”).
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.
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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
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
capitalization
insurance and reinsurance
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, 2021 and 2020, such amounts
approximated $8.2 billion and $7.7 billion, respectively.
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 operating affiliates 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 $3.0 billion at December 31, 2021 and
are callable by our investment managers. The timing of the
funding of investment commitments is uncertain and may
require us to access cash on short notice.
Cash Flows
The following table summarizes our cash flows from
investing and financing activities, excluding
operating,
amounts related to the ‘other’ segment:
Year Ended December 31,
2021
2020
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
$ 3,380,700 $ 2,705,054
(3,301,816)
(1,870,885)
856,771
(1,243,613)
Effects of exchange rate changes on foreign
currency cash
Increase (decrease) in cash
(30,524)
235,678 $
17,822
277,831
$
Cash provided by operating activities for 2021 was higher
than in 2020, primarily reflected a higher level of premiums
collected than in the 2020 period.
Cash used for investing activities for 2021 was lower than in
2020. Activity for 2021 period reflected cash used to invest
in Coface and Somers, while the 2020 period reflected a
higher level of securities purchased, and the investing of
proceeds from our issuance of the senior notes.
Cash used for financing activities for 2021 was higher than in
2020. Activity for 2021 period, primarily reflected $485.8
million inflow from issuance of preferred shares, $450.0
million related to redemption of our Series E preferred shares
and $1.2 billion of repurchases under our share repurchase
program. Activity for the 2020 period primarily reflected the
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issuance of $1.0 billion of our senior notes and $83.5 million
of repurchases under our share repurchase program.
Capital Adequacy
Investments
At December 31, 2021, our investable assets were $27.4
billion. The primary goals of our asset liability management
process are to meet our 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.
CAPITAL RESOURCES
The following table provides an analysis of our capital
structure:
(U.S. dollars in thousands, except
share data)
Senior notes
December 31,
2021
2020
$ 2,724,394 $ 2,723,423
Shareholders’ equity available to Arch:
Series E non-cumulative preferred shares
Series F non-cumulative preferred shares
Series G non-cumulative preferred shares
Common shareholders’ equity
Total
—
330,000
500,000
450,000
330,000
—
12,715,896
12,325,886
$ 13,545,896 $ 13,105,886
Total capital available to Arch
$ 16,270,290 $ 15,829,309
Debt to total capital (%)
Preferred to total capital (%)
Debt and preferred to total capital (%)
16.7
5.1
21.8
17.2
4.9
22.1
See note 19, “Debt and Financing Arrangement" and note 21,
financial
“Shareholder’s Equity”,
statements in Item 8 for additional information on capital
structure.
to our consolidated
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.
to maintain compliance with
In addition, AMIC and UGRIC (together, “Arch MI U.S.”)
are required
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, 2021 with a PMIER sufficiency ratio of
197%, compared to 173% at December 31, 2020.
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
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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.
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.
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,
guarantees
contractual
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, 2021, Arch
repurchased approximately 420.7 million
Capital has
common shares for an aggregate purchase price of $5.3
billion. At December 31, 2021, $1.2 billion 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, 2022. The
the
repurchase transactions under this program will depend on a
the
variety of
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.
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, 2021:
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
297,488
988,720
5.144 %
500,000
495,063
4.011 %
5.031 %
500,000
450,000
497,633
445,490
$ 2,750,000 $ 2,724,394
(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 2021 and 2020, we made interest payments of $131.0 million and $110.5 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):
Assets
Total investments
Cash
Investment in operating affiliates
Due from subsidiaries and affiliates
Other assets
Total assets
Liabilities
Senior notes
Due to subsidiaries and affiliates
Other liabilities
Total liabilities
Non-cumulative preferred shares
Revenues
Net investment income
Net realized gains (losses)
Equity in net income (loss) of investments accounted for using the equity method
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) from operating affiliates
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
Net income available to Arch common shareholders
December 31, 2021
December 31, 2020
Arch Capital
Arch-U.S.
Arch Capital
Arch-U.S.
$
$
2,038 $
16,317
6,877
—
9,615
34,847 $
137,124 $
18,392
26,000
37,040
218,556 $
172 $
18,932
7,731
—
10,659
37,494 $
396,547
11,368
—
201,515
34,405
643,835
1,286,208
—
24,767
1,310,975
495,063
521,839
47,410
1,064,312
1,285,867
—
23,270
1,309,137
494,944
586,805
41,876
1,123,625
$
830,000 $
— $
780,000 $
—
Year Ended
Year Ended
December 31, 2021
December 31, 2020
Arch
Capital
Arch-U.S.
Arch
Capital
Arch-U.S.
$
1,524 $ 11,596 $
53 $ 18,084
—
—
72,437
18,149
(2,110)
—
1,524
102,182
(2,057)
71,818
58,741
7
5,875
47,292
—
65,566
40,445
3
26,096
2,507
46,687
7,227
47,566
—
130,566
53,167
106,014
54,793
(129,042)
49,015
(108,071)
(8,106)
—
(12,513)
(590)
—
—
(437)
2,689
—
(129,632)
36,502
(108,508)
(5,417)
(48,343)
(15,101)
—
—
(41,612)
—
—
—
$ (193,076) $ 36,502 $ (150,120) $
(5,417)
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Contractual Obligations
The following table provides an analysis of our contractual commitments at December 31, 2021:
Payment due by period
Total
2022
2023 and
2024
2025 and
2026
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
Senior notes (including interest payments)
Total contractual obligations and commitments
$ 17,757,156 $ 4,893,981 $ 5,830,065 $ 2,711,728 $ 4,321,382
3,246
362,086
36,422
—
11,838
1,832,127
148,598
114,143
382
252,498
31,275
4,961
6,167
584,992
32,064
58,191
2,043
632,551
48,837
50,991
2,973,492
2,973,492
—
—
—
5,290,334
4,657,932
$ 28,127,688 $ 8,675,702 $ 6,818,116 $ 3,252,802 $ 9,381,068
253,629
251,958
126,815
(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.
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
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, 2021.
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.
ARCH CAPITAL
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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
rating
party
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
reinsurance provider.
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.
The ratings issued on our companies by these agencies are
announced publicly and are available directly from the
(Investor
agencies. Our website www.archgroup.com
Relations-Credit Ratings) contains information about our
ratings, but such
is not
incorporated by reference into this report.
information on our website
CATASTROPHIC EVENTS AND SEVERE
ECONOMIC EVENTS
We have large aggregate exposures to natural and man-made
catastrophic events, pandemic events like COVID-19 and
severe economic events. Natural catastrophes can be caused
by various events, including hurricanes, floods, windstorms,
earthquakes, hailstorms, tornadoes, explosions, severe winter
weather,
fires, droughts and other natural disasters.
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
possible
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.
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
doing so. Moreover,
the clarity and
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
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
limitations
geographic diversification. Geographic zone
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
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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, 2022,
our modeled peak zone catastrophe exposure is a windstorm
affecting the Northeast U.S., with a net probable maximum
pre-tax loss of $748 million, followed by windstorms
affecting Florida Tri-County and the Gulf of Mexico with net
probable maximum pre-tax losses of $727 million and $649
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, 2022, our modeled peak zone
earthquake exposure
(San Francisco area earthquake)
represented approximately 78% 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, 2022, our modeled
RDS loss was 6.3% 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
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 “—Summary of Critical Accounting Estimates
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—Ceded Reinsurance” for a discussion of our catastrophe
reinsurance programs.
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, 2021. 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, 2021
presents hypothetical losses in cash flows, earnings and fair
values of market sensitive instruments which were held by us
on December 31, 2021 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
materially from
to actual
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.
these projected results due
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
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
funds
securities and
investments, equity
accounted for using the equity method which invest in fixed
income securities (collectively, “Fixed Income Securities”)
and the corresponding change in unrealized appreciation. As
investment
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, 2021 and 2020:
(U.S. dollars in
billions)
Dec. 31, 2021
Interest Rate Shift in Basis Points
-100
-50
-
+50
+100
Total fair value
$ 25.79
$ 25.44
$ 25.21
$ 24.75
$ 24.43
Change from base
2.3 %
0.9 %
(1.8) %
(3.1) %
Change in
unrealized value
Dec. 31, 2020
$ 0.58
$ 0.23
$ (0.45)
$ (0.78)
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
$ 0.75
$ 0.38
$ (0.38)
$ (0.75)
the effect of credit spread
In addition, we consider
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
the portfolio at
environment would have had on
December 31, 2021 and 2020:
(U.S. dollars in
billions)
Dec. 31, 2021
Credit Spread Shift in Percentage
-100
-50
-
+50
+100
Total fair value
$ 26.17
$ 25.69
$ 25.21
$ 24.72
$ 24.24
Change from base
3.8 %
1.9 %
(1.9) %
(3.8) %
Change in
unrealized value
Dec. 31, 2020
$ 0.97
$ 0.48
$ (0.48)
$ (0.97)
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
$ 0.48
$ 0.25
$ (0.25)
$ (0.48)
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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, 2021, our portfolio’s VaR was estimated to be
4.83%, compared to an estimated 4.30% at December 31,
2020.
Equity Securities. At December 31, 2021 and 2020, the fair
value of our investments in equity securities (excluding
securities included in Fixed Income Securities above) totaled
$1.4 billion and $1.1 billion, respectively. These investments
are exposed to price risk, which is the potential loss arising
from decreases in fair value. An immediate hypothetical 10%
decline in the value of each position would reduce the fair
value of such investments by approximately $137.5 million
and $109.5 million at December 31, 2021 and 2020,
respectively, and would have decreased book value per share
by approximately $0.36 and $0.27, respectively. An
immediate hypothetical 10% increase in the value of each
position would increase the fair value of such investments by
approximately $137.5 million and $109.5 million at
December 31, 2021 and 2020, respectively, and would have
increased book value per share by approximately $0.36 and
$0.27, respectively.
Investment-Related Derivatives. At December 31, 2021, the
notional value of all derivative instruments (excluding
foreign currency forward contracts which are included in the
foreign currency exchange risk analysis below) was $6.4
billion, compared to $8.6 billion at December 31, 2020. If the
underlying exposure of each investment-related derivative
held at December 31, 2021 depreciated by 100 basis points, it
would have resulted in a reduction in net income of
approximately $63.8 million, and a decrease in book value
per share of $0.17, compared to $85.7 million and $0.21,
respectively, on
investment-related derivatives held at
December 31, 2020. If the underlying exposure of each
investment-related derivative held at December 31, 2021
appreciated by 100 basis points, it would have resulted in an
increase in net income of approximately $63.8 million, and
an increase in book value per share of $0.17, compared to
$85.7 million and $0.21, respectively, on investment-related
derivatives held at December 31, 2020. 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.
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,
2021
December 31,
2020
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)
$
(825,371) $
(309,968)
1,095,706
695,355
15,151
1,108,161
Net exposures denominated in foreign
currencies
$
285,486 $ 1,493,548
Pre-tax impact of a hypothetical 10%
appreciation of the U.S. Dollar against
foreign currencies:
Shareholders’ equity
Book value per share
Pre-tax impact of a hypothetical 10%
decline of the U.S. Dollar against foreign
currencies:
Shareholders’ equity
Book value per share
$
$
$
$
(28,549) $
(0.08) $
(149,355)
(0.37)
28,549 $
0.08 $
149,355
0.37
(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.
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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.
Table of Contents
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.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page No.
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
Consolidated Balance Sheets
At December 31, 2021 and December 31, 2020
Consolidated Statements of Income
For the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows
For the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
Note 1 - General
Note 2 - Acquisitions
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 - Subsequent Events
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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, 2021 and 2020, 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, 2021,
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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2021, 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, 2021, 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, 2021, the Company’s total reserve for losses and
loss adjustment expenses was $17.8 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 25, 2022
We have served as the Company’s or its predecessor’s auditor since 1995.
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Table of Contents
Assets
Investments:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
December 31,
2021
2020
Fixed maturities available for sale, at fair value (amortized cost: $17,973,823 and $18,143,305; net of allowance for
credit losses: $2,883 and $2,397)
$
17,998,109 $
18,717,825
Short-term investments available for sale, at fair value (amortized cost: $1,734,738 and $1,924,292; net of allowance
for credit losses: $0 and $0 )
Collateral received under securities lending, at fair value (amortized cost: $0 and $301,089)
Equity securities, at fair value
Other investments (portion measured at fair value: $1,973,550 and $3,824,796)
Investments accounted for using the equity method
Total investments
Cash
Accrued investment income
Securities pledged under securities lending, at fair value (amortized cost: $0 and $294,493)
Investment in operating affiliates
Premiums receivable (net of allowance for credit losses: $39,958 and $37,781)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses:
$13,230 and $11,636)
Contractholder receivables (net of allowance for credit losses: $3,437 and $8,638)
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: 583,289,850 and 579,000,841)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 204,365,956 and 172,280,199)
Total shareholders' equity available to Arch
Non-redeemable noncontrolling interests
Total shareholders' equity
Total liabilities, noncontrolling interests and shareholders' equity
1,734,716
—
1,804,170
1,973,550
3,077,611
26,588,156
858,668
85,453
—
1,135,655
2,633,280
5,880,735
1,828,691
1,729,455
901,841
60,179
944,983
2,453,849
45,100,945 $
17,757,156 $
6,011,942
1,583,253
1,832,127
242,352
2,724,394
—
—
64,850
1,329,742
31,545,816
1,924,922
301,096
1,444,830
4,324,796
2,047,889
28,761,358
906,448
103,299
294,912
129,291
2,064,586
4,500,802
1,986,924
1,234,075
790,708
92,743
692,863
1,724,288
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
9,233
58,548
830,000
648
2,085,075
14,455,868
(64,600)
(3,761,095)
13,545,896
—
13,545,896
45,100,945 $
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
$
$
$
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
Year Ended December 31,
2021
2020
2019
$
8,082,298 $
389,118
379,845
22,073
366,402
10,244
9,249,980
6,991,935 $
519,608
823,460
26,784
146,693
29
8,508,509
4,584,803
1,303,178
998,595
79,157
82,955
139,470
(41,529)
7,146,629
4,689,599
1,004,842
875,176
81,988
69,031
143,456
83,634
6,947,726
5,786,498
627,738
363,198
24,861
123,672
—
6,925,967
3,133,452
840,945
800,997
80,111
82,104
120,872
20,609
5,079,090
Income before income taxes and income (loss) from operating affiliates
2,103,351
1,560,783
1,846,877
Income taxes:
Current tax expense (benefit)
Deferred tax expense (benefit)
Income tax expense
Income (loss) from operating affiliates
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
295,533
(166,951)
128,582
264,693
2,239,462 $
(82,613)
2,156,849
(48,343)
(15,101)
2,093,405 $
197,662
(85,824)
111,838
16,766
1,465,711 $
(60,190)
1,405,521
(41,612)
—
1,363,909 $
144,361
11,449
155,810
2,233
1,693,300
(56,981)
1,636,319
(41,612)
—
1,594,707
5.34 $
5.23 $
3.38 $
3.32 $
3.97
3.87
$
$
$
$
Weighted average common shares and common share equivalents outstanding
Basic
Diluted
391,748,715
400,345,936
403,062,179
410,259,455
401,802,815
411,609,478
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,
2021
2020
2019
$
2,239,462 $
1,465,711 $
1,693,300
(386,929)
(116,068)
(64,482)
1,671,983
(82,613)
13,984
1,603,354 $
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
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)
Non-cumulative preferred shares
Balance at beginning of year
Preferred shares issued
Preferred shares redeemed
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
Issue costs on preferred shares issued
Reversal of issue costs on preferred shares redeemed
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
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
Year Ended December 31,
2021
2020
2019
$
780,000 $
500,000
(450,000)
830,000
780,000 $
—
—
780,000
643
5
648
638
5
643
1,977,794
(14,179)
15,101
86,053
20,306
2,085,075
12,362,463
—
12,362,463
2,239,462
(82,613)
(48,343)
(15,101)
14,455,868
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
780,000
—
—
780,000
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
488,895
212,091
(178,720)
501,295
(502,997)
15,188
13,486
(12,400)
(64,482)
(1,204)
(78,086)
(64,600)
(2,503,909)
(1,257,186)
(3,761,095)
13,545,896
—
$
13,545,896 $
258,486
252,530
(9,721)
501,295
(46,395)
33,336
659
(12,400)
488,895
(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)
13,105,886
823,007
13,928,893 $
(2,382,167)
(23,880)
(2,406,047)
11,497,371
762,777
12,260,148
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
Purchase of operating affiliate
Impact of the deconsolidation of the variable interest entity
Purchases of fixed assets
Other
Net cash provided by (used for) investing activities
Financing Activities
Proceeds from issuance of preferred shares, net
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,
2021
2020
2019
$
2,239,462 $
1,465,711 $
1,693,300
(427,367)
(844,625)
(377,967)
(464,050)
82,955
87,094
(47,951)
69,031
71,262
(14,013)
82,104
66,417
1,762,190
936,039
(685,214)
(263,243)
500,065
(340,376)
3,427,555
(35,451,858)
(1,175,480)
(1,859,096)
33,577,445
918,145
1,765,533
1,628,755
(40,072)
165,272
—
(753,916)
(349,202)
(41,394)
(523,864)
(2,139,732)
485,821
(450,000)
(1,234,294)
6,418
—
—
—
15,971
—
(1,907)
(3,278)
(48,280)
(1,229,549)
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)
17,741
179,055
724,643
903,698
109,463
126,945
Effects of exchange rate changes on foreign currency cash and restricted cash
(34,047)
22,289
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
24,227
1,290,544
1,314,771 $
386,846
903,698
1,290,544 $
286,810 $
139,301 $
202,940 $
133,491 $
$
$
$
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 common shares of
Arch Capital.
owned
by Greysbridge Holdings
The Company’s consolidated financial statements included
the results of Somers Holdings Ltd. (formerly Watford
Holdings Ltd.) and its wholly owned subsidiaries (“Somers”)
through June 30, 2021. Effective July 1, 2021, Somers is
wholly
Ltd.,
(“Greysbridge”) and Greysbridge is owned 40% by the
Company, 30% by certain investment funds managed by
Kelso & Company (“Kelso”) and 30% by certain investment
funds managed by Warburg Pincus LLC (“Warburg”). Based
on the governing documents of Greysbridge, the Company
concluded that, while it retains significant influence over
Somers, Somers no longer constitutes a variable interest
entity. Accordingly, effective July 1, 2021, Arch no longer
consolidates the results of Somers in its consolidated
financial statements and footnotes. See note 12, “Variable
Interest Entity and Noncontrolling Interests”.
The Company has reclassified the presentation of certain
prior year information to conform to the current presentation,
including the correct presentation of ‘income (loss) from
operating affiliates’ on its consolidated statements of income
for all periods presented to reclass such item from ‘other
income (loss)’. The Company also changed its presentation
of ‘investment in operating affiliates’ on its consolidated
balance sheet for all periods presented to reclass such item
from ‘other assets’. Such reclassifications had no effect on
the Company’s net
income,
shareholders’ equity or cash flows. Management views the
impact of the prior period misclassification as not material to
the financial statements on a quantitative and qualitative
basis. See note 9. Tabular amounts are in U.S. Dollars in
thousands, except share amounts, unless otherwise noted.
income, comprehensive
2. Acquisitions
Westpac Lenders Mortgage Insurance Limited (“WLMI”)
On August 31, 2021, the Company completed the acquisition
of WLMI, an Australian Prudential Regulation Authority
authorized captive lenders mortgage insurance (“LMI”)
provider to the Westpac Banking Corporation (“Westpac”).
As part of the acquisition, WLMI will retain its existing risk
in force and remain Westpac’s exclusive provider of LMI on
new mortgage originations for a period of 10 years. Upon
completion of this transaction, the Company renamed WLMI
to Arch Lenders Mortgage Indemnity Limited (“Arch
Indemnity”). Arch Indemnity will become the Company’s
primary provider of LMI to the Australian market.
Somerset Bridge Group Limited, Southern Rock Holdings
Limited and affiliates (“Somerset Group”)
On August 6, 2021, the Company completed the acquisition
of Somerset Group. The acquisition includes Somerset
Group’s motor
agent,
through direct and aggregator
distribution capabilities
channels, affiliated insurer and fully integrated claims
operation.
insurance managing general
the
In connection with
Company increased its goodwill and intangible assets by
$350.1 million.
the acquisitions noted above,
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.
3.
Significant Accounting Policies
(a) Basis of Presentation
(“Arch P&C”), Arch
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
Company
Insurance
Company (“Arch Indemnity Insurance”), Arch Insurance
Canada Ltd. (“Arch Insurance Canada”), Arch Reinsurance
Europe Designated Activity Company (“Arch Re Europe”),
Arch Mortgage
(“AMIC”), Arch
Insurance Company
Mortgage Guaranty Company, United Guaranty Residential
Insurance Company (“UGRIC”), Arch Indemnity, Arch
Insurance (EU) Designated Activity Company (“Arch
Insurance (EU)”), Arch Insurance (U.K.) Limited (“Arch
Insurance (U.K.)”) and the Company’s participation on
Lloyd’s of London syndicates 2012 (“Arch Syndicate 2012”)
Indemnity
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 1955
(“Arch Syndicate 1955”). All significant
intercompany transactions and balances have been eliminated
in consolidation.
requires management
The preparation of financial statements in conformity with
to make estimates and
GAAP
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.
(b) Premium Revenues and Related Expenses
Insurance.
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 that
are derived from multiple sources which
the
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
the reported
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
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
their
third parties for reasonableness based on
these
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
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
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
acquisition expenses, are recorded based upon the projected
experience under such contracts.
include provisions
traditional
The Company also writes certain reinsurance business that is
intended to provide insurers with risk management solutions
that complement
these
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
reinsurance. Under
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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.
Mortgage. 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, 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
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
receivable
review of amounts
its ongoing
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
reinsurance
contract. The Company’s
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
adjustment expenses. For each underwriting year,
the
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.
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A premium deficiency occurs if the sum of anticipated losses
and loss adjustment expenses, unamortized acquisition costs
and maintenance costs exceed unearned premiums (including
expected future premiums) and anticipated
investment
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
anticipated
the expected
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 2021, 2020 or 2019.
(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
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
expected
the
Company reassesses the estimated ultimate liability and the
future payment obligations. Periodically
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.
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
the
transaction, with a
corresponding charge or credit to income.
the reinsurance
inception of
(e) Reinsurance Ceded
levels of risk with other
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
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
the Company's
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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
reinsurance
its
recoverables. The Company
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
maturity
investments as
“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
services, or when such prices are not available, by reference
to broker or underwriter bid
indications. Short-term
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.
Prior to the termination of its program in 2021, the Company
entered into securities lending agreements with financial
institutions to enhance investment income whereby it loaned
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 maintained legal control over the securities it lent,
retained the earnings and cash flows associated with the
loaned securities and received a fee from the borrower for the
temporary use of the securities. Collateral received was
required at a rate of 102% or greater of the fair value of the
loaned securities including accrued investment income and
was 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
the Company’s
are subsequently adjusted based on
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.
includes equity
investment portfolio
The Company’s
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, short-term investments 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.
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as
treated
collateralized
The Company invests in reverse repurchase agreements that
receivables.
are generally
Receivables for reverse repurchase agreements are reflected
in “Other investments” or “Short-term investments” in the
Company's consolidated balance sheet depending on their
terms. These agreements are recorded at their contracted
resale amount plus accrued interest, other than those that are
repurchase
accounted
transactions,
the
in
purchased assets that are received as collateral.
fair value.
the Company obtains an
interest
reverse
for at
In
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
available for sale
investments. The Company derives
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
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.
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differ
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
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 2021, 2020, and 2019, the Company did not designate
any derivative instruments as hedges under the relevant
accounting guidance. See note 11, “Derivative Instruments”
for additional information.
(j) Reserves for Losses and Loss Adjustment Expenses
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
loss adjustment expenses, established by
losses and
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
information derived by
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
incorporating both
combination of reserving methods,
Company and industry loss development patterns. The
Company selects the initial expected loss and loss adjustment
expense ratios based on
its
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.
insurance
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
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
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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
is
for
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
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
its
in accounting
The Company applies a fair value based measurement
method
share-based payment
for
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
criteria.
performance
year performance period based on achievement of the
share-based
specified
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
retirement eligibility, attribution of
employees near
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.
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
liabilities are periodically reviewed for
indicators of
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) Investment in Operating Affiliates
Investment in operating affiliates primarily represent the
Company’s investments in which it has significant influence
and which are accounted for under the equity method of
accounting. In applying the equity method of accounting,
investments in operating affiliates are initially recorded at
cost and are subsequently adjusted based on the Company’s
proportionate share of net income or loss of the operating
affiliate. The Company records its proportionate share of
other comprehensive income or loss of the operating affiliate
as a component of other comprehensive income. Adjustments
are based on the most recently available financial information
from the operating affiliate. Changes in the carrying value of
these investments are recorded in income (loss) from
operating affiliates.
(s) Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2019-12, “Simplifying the
Accounting for Income Taxes.” This ASU eliminates certain
exceptions for recognizing deferred taxes for investments,
performing intraperiod tax allocations and 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 adoption of this guidance did not have
a material effect on the Company’s consolidated financial
statements.
Recently Issued Accounting Standards Not Yet Adopted
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
to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
•
•
•
•
that permits an entity
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.
4. Segment Information
The Company classifies its businesses into three underwriting
segments– insurance, reinsurance and mortgage– and two
operating segments– corporate and ‘other.’ The Company
determined its reportable segments using the management
approach described
regarding
disclosures about segments of an enterprise and related
information. The accounting policies of the segments are the
same as those used for the preparation of the Company’s
consolidated financial statements. Intersegment business is
allocated to the segment accountable for the underwriting
results.
in accounting guidance
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
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:
•
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
crime, professional
liability,
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
commercial
products offering general
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
clients. Coverages for marine include hull, war, specie
and liability. Aviation and stand-alone terrorism are
also offered.
Travel, accident and health: specialty travel and
accident and related insurance products for individual,
group travelers, travel agents and suppliers, as well as
accident and health, which provides accident, disability
and medical plan insurance coverages for employer
groups, medical plan members, students and other
participant groups.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reinsurance segment consists of
the Company’s
reinsurance underwriting units which offer specialty product
lines on a worldwide basis. Product lines include:
•
•
•
•
•
•
Casualty: provides coverage to ceding company clients
on third party liability and workers’ compensation
exposures from ceding company clients, primarily on a
treaty basis. Exposures
include, among others,
executive assurance, professional liability, workers’
compensation, excess and umbrella liability, excess
motor and healthcare business.
Marine and aviation: provides coverage for energy,
hull, cargo, specie, liability and transit, and aviation
business, including airline and general aviation risks.
Business written may also include space business,
which includes coverages for satellite assembly, launch
and operation for commercial space programs.
Other specialty: provides coverage to ceding company
clients for proportional motor and other lines including
surety, accident and health, workers’ compensation
catastrophe, agriculture, trade credit and political risk.
Property catastrophe: provides protection for most
catastrophic losses that are covered in the underlying
policies written by reinsureds, including hurricane,
earthquake, flood, tornado, hail and fire, and coverage
for other perils on a case-by-case basis. Property
catastrophe reinsurance provides coverage on an excess
of loss basis when aggregate losses and loss adjustment
expense from a single occurrence of a covered peril
exceed the retention specified in the contract.
Property excluding property catastrophe: provides
coverage for both personal lines and commercial
property exposures and principally covers buildings,
structures, equipment and contents. The primary perils
in this business include fire, explosion, collapse, riot,
vandalism, wind,
tornado, flood and earthquake.
Business is assumed on both a proportional and excess
of loss basis. In addition, facultative business is written
which focuses on commercial property risks on an
excess of loss basis.
Other. includes life reinsurance business on both a
proportional and non-proportional basis, casualty clash
business and, in limited instances, non-traditional
business which is intended to provide insurers with risk
management solutions
traditional
reinsurance.
that complement
and
The mortgage segment includes the Company’s U.S. primary
mortgage insurance, U.S. credit risk transfer (“CRT”) which
are predominately with government sponsored enterprises
and
international mortgage
(“GSE”)
reinsurance operations. AMIC and UGRIC (combined “Arch
MI U.S.”) are approved as eligible mortgage insurers by
Federal National Mortgage Association (“Fannie Mae”) and
Federal Home Loan Mortgage Corporation (“Freddie Mac”),
each a GSE. Arch MI U.S. also includes Arch Mortgage
Guaranty Company, which is not a GSE-approved entity.
insurance
The corporate segment results include net investment income,
net realized gains or losses (which includes changes in the
allowance for credit losses on financial assets and net
impairment losses recognized in earnings), equity in net
income or loss of investments accounted for using the equity
method, other income (loss), corporate expenses, transaction
costs and other, amortization of intangible assets, interest
expense, net foreign exchange gains or losses, income taxes,
income or loss from operating affiliates and items related to
the Company’s non-cumulative preferred shares. Such
amounts exclude the results of the ‘other’ segment.
The ‘other’ segment included the results of Somers through
June 30, 2021. In July 2021, the Company completed the
previously disclosed acquisition of Somers by Greysbridge.
Based on the governing documents of Greysbridge, the
Company concluded
it retains significant
that, while
influence over Somers, Somers no longer constitutes a
variable interest entity. Accordingly, effective July 1, 2021,
Arch no longer consolidates the results of Somers in its
consolidated financial statements (see note 12, “Variable
Interest Entity and Noncontrolling Interests”).
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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 and income
(loss) from operating affiliates
Income tax expense
Income (loss) from operating affiliates
Net income (loss)
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
$ 5,867,734
(1,719,541)
4,148,193
(521,725)
3,626,468
—
(2,344,365)
(606,265)
(558,906)
116,932
$
Year Ended December 31, 2021
Reinsurance
$ 5,093,930
(1,839,556)
3,254,374
(413,931)
2,840,443
3,669
(1,924,719)
(536,754)
(212,810)
169,829
$
Mortgage
$ 1,507,825
(246,757)
1,261,068
22,351
1,283,419
17,665
(56,677)
(97,418)
(194,010)
952,979
$
Sub-Total
$ 12,463,788
(3,800,153)
8,663,635
(913,305)
7,750,330
21,334
(4,325,761)
(1,240,437)
(965,726)
1,239,740
$
Other
457,465
(102,763)
354,702
(22,734)
331,968
739
(259,042)
(62,741)
(32,869)
(21,945)
Total
$ 12,752,487
(3,734,150)
9,018,337
(936,039)
8,082,298
22,073
(4,584,803)
(1,303,178)
(998,595)
1,217,795
346,808
299,207
366,402
10,244
(77,119)
(1,103)
(82,057)
(131,060)
42,854
2,013,916
(128,348)
264,693
2,150,261
42,310
80,638
—
—
—
(935)
(898)
(8,410)
(1,325)
89,435
(234)
—
89,201
389,118
379,845
366,402
10,244
(77,119)
(2,038)
(82,955)
(139,470)
41,529
2,103,351
(128,582)
264,693
2,239,462
(2,346)
(1,953)
(4,299)
—
2,147,915
(48,343)
(15,101)
(78,314)
8,934
—
—
(78,314)
2,156,849
(48,343)
(15,101)
$ 2,084,471
$
8,934
$
2,093,405
64.6 %
16.7 %
15.4 %
96.7 %
67.8 %
18.9 %
7.5 %
94.2 %
4.4 %
7.6 %
15.1 %
27.1 %
55.8 %
16.0 %
12.5 %
84.3 %
78.0 %
18.9 %
9.9 %
106.8 %
56.7 %
16.1 %
12.4 %
85.2 %
Goodwill and intangible assets
$
256,434
$
183,523
$
505,026
$
944,983
Total investable assets
Total assets
Total liabilities
$ 27,442,153
45,100,945
31,545,816
$
$
—
$
944,983
—
—
—
$ 27,442,153
45,100,945
31,545,816
(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 and income
(loss) from operating affiliates
Income tax (expense) benefit
Income (loss) from operating affiliates
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)
$
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
$
Year Ended December 31, 2020
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
146,693
29
(68,492)
(9,456)
(69,031)
(120,214)
(80,161)
1,496,126
(111,812)
16,766
1,401,080
—
—
—
(4,040)
—
(23,242)
(3,473)
64,657
(26)
—
64,631
519,608
823,460
146,693
29
(68,492)
(13,496)
(69,031)
(143,456)
(83,634)
1,560,783
(111,838)
16,766
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
Corporate expenses
Transaction costs and other
Amortization of intangible assets
Interest expense
Net foreign exchange gains (losses)
Income (loss) before income taxes and income
(loss) from operating affiliates
Income tax benefit
Income (loss) from operating affiliates
Net income
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
Year Ended December 31, 2019
$
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
$
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
491,067
348,037
123,672
(65,667)
(14,444)
(82,104)
(93,735)
(9,252)
1,785,204
(155,790)
2,233
1,631,647
Other
754,881
(222,019)
532,862
23,827
556,689
2,412
(453,135)
(105,980)
(51,651)
(51,665)
136,671
15,161
—
—
—
—
(27,137)
(11,357)
61,673
(20)
—
61,653
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
627,738
363,198
123,672
(65,667)
(14,444)
(82,104)
(120,872)
(20,609)
1,846,877
(155,810)
2,233
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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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)
Professional Lines (2)
Property, energy, marine and aviation
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
2021
Year Ended December 31,
2020
2019
$
942,817 $
702,693
506,867
381,306
318,027
255,590
153,958
365,210
655,872 $
517,247
432,854
387,934
270,620
190,944
114,687
301,262
$
3,626,468 $
2,871,420 $
499,224
298,966
414,103
325,687
200,615
305,085
66,079
287,321
2,397,080
$
$
2,813,039 $
1,125,192
209,962
4,148,193 $
2,158,415 $
856,572
147,920
3,162,907 $
1,983,476
559,214
99,036
2,641,726
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
Other Specialty (2)
Casualty (3)
Property catastrophe
Marine and aviation
Other (4)
Total
Net premiums written by underwriting location (1)
United States
Bermuda
Europe and other
Total
2021
Year Ended December 31,
2020
2019
$
$
$
836,573 $
818,801
666,754
280,738
152,955
84,622
2,840,443 $
562,208 $
626,409
549,056
237,736
109,624
77,196
2,162,229 $
828,504 $
687,622 $
1,557,294
868,576
1,001,990
767,758
$
3,254,374 $
2,457,370 $
362,841
478,517
429,288
90,934
48,274
56,535
1,466,389
529,943
578,618
494,162
1,602,723
(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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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,
2020
2019
2021
970,507 $
312,912
1,283,419 $
1,158,563 $
239,372
1,397,935 $
1,134,849
231,491
1,366,340
914,477 $
346,591
1,261,068 $
1,021,950 $
257,900
1,279,850 $
1,032,868
228,888
1,261,756
Year Ended December 31,
2020
2019
2021
138,551 $
118,356
15,235
6,578
190
53,058
331,968 $
245,272 $
186,717
23,037
1,130
429
103,766
560,351 $
63,403 $
91,499 $
199,800 $
354,702 $
115,471 $
97,753 $
324,365 $
537,589 $
246,894
185,547
13,399
3,503
—
107,346
556,689
127,176
52,065
353,621
532,862
$
$
$
$
$
$
$
$
(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
2021
16,513,929 $
Year Ended December 31,
2020
13,891,842 $
$
4,314,855
12,199,074
4,082,650
9,809,192
2019
11,853,297
2,814,291
9,039,006
4,940,987
(356,184)
4,584,803
4,851,051
(161,452)
4,689,599
3,297,037
(163,585)
3,133,452
Net losses and loss adjustment expense reserves of acquired business (1)
104,176
—
209,486
Retroactive reinsurance transactions (2)
(444,147)
182,210
(225,500)
Impact of deconsolidation of Somers (3)
(1,460,611)
—
—
Foreign exchange (gains) losses and other
1,181
179,190
36,003
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
(734,846)
(2,091,705)
(2,826,551)
(661,529)
(1,999,588)
(2,661,117)
12,157,925
5,599,231
12,199,074
4,314,855
$
17,757,156 $
16,513,929 $
(621,202)
(1,762,053)
(2,383,255)
9,809,192
4,082,650
13,891,842
(1)
(2)
(3)
Represents activity related to the Company’s acquisitions in the 2021 and the 2019 period. See Note 2.
See ‘Retroactive Reinsurance Transactions’ section.
See note 12.
Development on Prior Year Loss Reserves
Year Ended December 31, 2021
During 2021, the Company recorded estimated net favorable
development on prior year loss reserves of $356.2 million,
which consisted of net favorable development of $16.2
million from the insurance segment, $178.8 million from the
reinsurance segment, $169.6 million from the mortgage
segment, partially offset by $8.4 million of adverse
development from the ‘other’ segment (activity prior to the
deconsolidation of Somers).
The insurance segment’s net favorable development of $16.2
million, or 0.4 points of net earned premium, consisted of
$109.8 million of net favorable development in short-tailed
and long-tailed lines mostly offset by $93.5 million of net
adverse development
lines. Net
favorable development of $81.7 million in short-tailed lines
reflected $38.9 million of favorable development from
from medium-tailed
property (excluding marine), primarily from the 2018 to 2020
accident years (i.e., the year in which a loss occurred),
$26.7 million of favorable development in lenders products,
primarily from the 2020 accident year, and $16.2 million of
favorable development on travel and accident, primarily from
the 2016 to 2020 accident years. Net favorable development
of $28.1 million in long-tailed lines reflected favorable
in construction, national accounts and
development
alternative markets, primarily from the 2016 to 2019 accident
years, partially offset by adverse development in executive
assurance, primarily from the 2015, 2017 and 2018 accident
years. Net adverse development in medium-tailed lines
reflected $57.6 million of adverse development in contract
binding, primarily from the 2013 to 2019 accident years and
$30.8 million of adverse development
in professional
liability, primarily from the 2018 to 2020 accident years.
The reinsurance segment’s net favorable development of
$178.8 million, or 6.3 points of net earned premium,
consisted of $184.1 million of net favorable development
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from short-tailed and medium-tailed lines, partially offset by
$5.3 million of net adverse development from long-tailed
lines. Net favorable development of $175.5 million in short-
tailed lines reflected $123.3 million from other specialty
lines, primarily from the 2014 to 2019 underwriting years
(i.e., losses attributable to contracts having an inception or
renewal date within the given twelve-month period), and
$88.6 million of favorable development from property other
than property catastrophe business, primarily from the 2015
to 2020 underwriting years. Such amounts were partially
offset by adverse development of $36.4 million from
property catastrophe, primarily from the 2020 underwriting
year. Adverse development in long-tailed lines reflected an
increase in casualty reserves, primarily from the 2018
underwriting year.
The mortgage segment’s net favorable development of
$169.6 million, or 13.2 points of net earned premium.
Approximately a third of this development came from the
U.S. first lien portfolio, which benefited from improving
economic conditions and rising home prices, resulting in
reduced claim rate assumptions primarily associated with
pre-pandemic delinquencies. Various vintage CRT contracts
also experienced similar effects and contributed to the
favorable development, including the effect of contracts
called by the GSEs. Subrogation recoveries on second lien
and student loan business and international business also
contributed to the favorable development.
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, 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 business, including alternative markets and excess
workers’ compensation, across all accident years, and
$9.3 million of favorable development related to construction
business. Net adverse development in medium-tailed lines
reflected $37.9 million of adverse development in surety
accident year,
business, primarily
the 2019
from
$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.
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, and $53.6 million from other specialty lines, across
most 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
selections during 2020. Adverse
certain
development in long-tailed lines reflected an increase in
casualty reserves, primarily from
to 2015
underwriting years.
the 2012
ratio
loss
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,
which consisted of net
favorable development of
$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
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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
to 2017
aviation reserves, primarily from
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
insurance business. Such development was
mortgage
primarily driven by lower than expected claim rates on first
lien business and subrogation recoveries on second lien
business.
Retroactive Reinsurance Transactions
In 2021, the Company entered into a retroactive reinsurance
transaction with third party reinsurer to reinsure run-off
liabilities associated with certain U.S. insurance exposures.
In 2021, the Company entered into a reinsurance to close
with the related party, in connection with the 2018 and prior
years of account for certain London syndicate business. See
Note 16.
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.
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
exposures,
The Company determined the following to be insignificant
for disclosure purposes: (i) certain mortgage business,
including non-U.S. primary business, second lien and student
and
global mortgage
loan
participation in various GSE credit risk-sharing products, (ii)
certain reinsurance business, including casualty clash and
non-traditional lines and (iii) amounts associated with
Southern Rock Holdings Limited. See Note 2. Such amounts
are included as reconciling items.
reinsurance
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
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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
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
in estimating ultimate
Ultimate losses and loss adjustment expenses are generally
determined by projection 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
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
losses and
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
practices may also cause
future experience and/or
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
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These methods generally fall into one of the following
categories or are hybrids of one or more of the following
categories:
•
•
•
typically developed based upon
Expected loss methods - these methods are based on the
assumption that ultimate losses vary proportionately with
premiums. Expected loss and loss adjustment expense
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
incurred
including
that historical paid and
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
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
industry
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
development patterns, which are based on a combination of
company and
loss development patterns 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 2021 and 2018, the Company entered into loss portfolio
transfer and adverse development cover
reinsurance
agreements accounted for as retroactive reinsurance. The
agreements transfers Loss Reserves and future favorable or
adverse development on certain runoff programs and certain
third party occurrence business, within multi-line and other
specialty 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.
Unpaid loss and loss adjustment expenses recoverable at
December 31, 2021 included $390.1 million related to such
reinsurance agreements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021
Total of IBNR
liabilities plus
expected
development on
reported claims
627
$
25
3,098
3,804
874
8,248
9,136
6,667
66,698
158,163
Cumulative
number of
reported
claims
4,245
4,243
3,884
4,536
6,160
6,426
5,020
5,080
4,186
2,951
Accident
year
2012
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
$ 233,149
$ 232,498
$ 205,776
$ 199,469
$ 197,005
$ 192,993
$ 190,770
$ 178,616
$ 178,250
$ 178,343
Year ended December 31,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
$ 20,638
159,102
156,785
149,199
143,400
134,952
133,869
128,624
127,290
148,368
145,957
147,465
136,201
132,307
134,329
135,032
112,409
109,865
103,995
102,515
97,852
104,449
101,306
105,657
100,471
91,830
96,437
280,715
246,291
235,951
230,439
180,981
186,030
173,693
179,056
178,564
359,394
126,276
134,942
91,892
92,553
231,228
170,057
165,477
329,362
426,870
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 167,540
$ 161,831
$ 138,977
$ 179,945
$ 181,307
$ 173,184
$ 93,394
Total
$ 1,947,000
$ 174,032
$ 174,384
32,292
84,936
110,808
120,111
122,244
125,475
123,356
124,688
25,881
53,751
23,580
77,892
64,953
24,828
84,195
76,338
83,552
87,812
86,253
98,683
98,553
115,383
87,926
97,506
86,246
95,002
30,228
139,867
195,532
211,708
30,026
102,285
134,858
26,130
105,380
55,619
124,841
122,296
87,316
91,241
215,895
142,838
133,911
194,487
90,423
All outstanding liabilities before 2012, net of reinsurance
17,517
Liabilities for losses and loss adjustment expenses, net of reinsurance
$ 586,885
Total
1,377,632
Third party occurrence business ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2021
2012
unaudited
$ 241,368
2013
unaudited
$ 263,451
283,228
2014
unaudited
$ 269,204
297,225
330,015
2015
unaudited
$ 272,004
307,152
336,019
359,058
Year ended December 31,
2016
unaudited
$ 258,371
302,165
338,890
391,884
389,832
2017
unaudited
$ 253,758
282,122
343,113
398,908
394,485
417,377
2018
unaudited
$ 243,863
274,717
339,701
392,143
406,082
417,941
430,415
2019
unaudited
$ 244,448
272,849
344,197
391,455
399,571
422,624
453,190
456,353
$
6,984
$ 30,915
6,857
$ 58,650
29,265
9,228
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 108,660
101,293
71,624
44,605
11,709
$ 83,637
71,449
40,346
11,139
$ 130,098
122,288
112,702
88,515
41,979
13,408
$ 143,885
149,292
162,123
139,492
87,616
52,356
17,025
$ 155,085
164,403
191,305
181,704
136,870
99,874
63,848
18,431
2020
unaudited
$ 242,332
269,754
342,934
382,722
374,896
412,512
450,937
487,547
607,249
Total
$ 163,016
174,946
211,643
211,715
164,662
135,111
115,137
73,222
24,509
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
43,924
$
54,640
66,498
91,081
115,303
145,130
189,965
253,849
428,750
543,386
Cumulative
number of
reported
claims
65,731
67,113
75,904
78,785
79,005
84,692
77,700
84,895
89,560
65,477
2021
$ 239,075
270,558
343,569
386,801
367,818
407,115
451,459
481,045
616,910
622,713
$ 4,187,063
$ 168,119
184,800
224,101
227,697
194,773
165,606
154,248
121,859
76,743
26,301
1,544,247
242,741
$ 2,885,557
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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, 2021
2012
unaudited
$ 317,654
2013
unaudited
$ 320,207
301,956
2014
unaudited
$ 318,453
320,659
264,537
2015
unaudited
$ 313,907
324,442
279,846
258,989
Year ended December 31,
2016
unaudited
$ 291,316
320,524
299,104
277,615
275,394
2017
unaudited
$ 275,665
294,674
279,043
276,492
291,645
271,088
2018
unaudited
$ 277,683
291,205
282,058
260,063
308,453
286,565
273,521
2019
unaudited
$ 285,163
281,996
298,017
255,432
314,747
312,554
315,085
290,217
$ 17,718
$ 69,069
19,032
$ 121,211
87,458
13,817
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 190,395
179,395
129,712
52,046
10,568
$ 164,724
137,963
63,312
9,066
$ 209,295
198,008
173,089
100,089
68,226
9,306
$ 227,389
217,132
208,074
126,499
127,286
67,669
12,287
$ 251,313
238,951
229,958
174,161
158,230
113,208
68,424
12,418
2020
unaudited
$ 285,527
271,501
292,247
252,478
322,042
308,917
320,653
318,469
384,852
Total
$ 255,337
245,687
243,791
193,186
205,596
143,340
118,361
65,477
17,161
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
11,570
$
11,739
22,336
20,617
42,509
60,718
85,411
119,673
240,888
435,910
Cumulative
number of
reported
claims
15,576
15,696
15,676
14,724
15,749
16,404
15,854
12,982
10,049
8,550
2021
$ 286,118
273,948
288,318
267,925
327,230
323,854
337,083
318,498
414,580
516,420
$ 3,353,974
$ 260,173
247,078
249,960
216,986
242,431
196,125
158,709
122,362
87,547
23,349
1,804,720
64,171
$ 1,613,425
Multi-line and other specialty ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2021
2012
unaudited
$ 254,684
2013
unaudited
$ 265,479
266,089
2014
unaudited
$ 259,582
274,285
303,053
2015
unaudited
$ 257,240
265,594
327,098
335,250
Year ended December 31,
2016
unaudited
$ 256,379
265,672
319,706
358,587
409,367
2017
unaudited
$ 248,066
253,554
319,418
357,364
431,760
483,414
2018
unaudited
$ 248,310
254,916
318,297
365,362
428,579
502,068
513,466
2019
unaudited
$ 245,205
250,252
314,300
357,123
416,724
492,166
565,717
568,337
$ 78,523
$ 166,414
86,911
$ 190,754
151,897
108,003
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 223,798
214,941
235,079
236,516
176,238
$ 209,916
181,721
197,609
138,393
$ 232,640
226,769
267,959
278,265
305,250
181,454
$ 233,862
235,801
282,104
306,313
342,345
343,049
212,316
$ 237,221
237,863
292,638
321,395
363,392
381,419
390,009
212,629
2020
unaudited
$ 245,260
247,443
311,097
349,895
410,610
501,753
563,969
613,673
622,241
Total
$ 240,191
238,792
294,049
327,082
379,885
424,219
443,644
386,894
173,123
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
2,057
$
3,461
5,770
7,201
11,032
16,867
32,467
63,880
192,056
361,237
Cumulative
number of
reported
claims
55,219
71,613
109,575
148,924
175,261
219,810
247,052
235,824
149,004
75,250
2021
$ 243,849
246,682
310,097
347,669
408,621
505,135
566,283
641,832
572,265
637,258
$ 4,479,691
$ 239,928
239,831
295,551
330,872
385,890
446,749
480,852
488,094
311,112
157,346
3,376,225
22,375
$ 1,125,841
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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, 2021:
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
19.3 %
3.3 %
4.4 %
34.7 %
43.5 %
9.3 %
18.0 %
29.5 %
19.1 %
11.6 %
17.8 %
11.0 %
6.6 %
11.0 %
12.3 %
8.6 %
1.4 %
9.8 %
12.7 %
4.6 %
2.3 %
8.7 %
7.9 %
2.8 %
3.2 %
5.4 %
7.0 %
0.7 %
0.5 %
4.1 %
4.3 %
0.7 %
0.3 %
3.5 %
1.0 %
0.8 %
0.2 %
2.1 %
1.7 %
(0.1) %
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 projection 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
segment devote considerable effort 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.
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,
2021 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, 2021
2012
unaudited
$ 143,029
2013
unaudited
$ 141,202
166,016
2014
unaudited
$ 137,049
159,257
216,882
2015
unaudited
$ 125,104
155,066
222,109
223,208
Year ended December 31,
2016
unaudited
$ 115,131
148,784
219,355
221,922
215,222
2017
unaudited
$ 109,788
136,717
233,552
230,830
227,534
270,728
2018
unaudited
$ 118,457
135,155
230,019
238,126
251,415
257,088
281,141
2019
unaudited
$ 121,721
131,475
239,765
242,180
266,254
273,166
294,820
336,062
$
1,306
$
$ 14,690
9,930
3,920
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 36,562
8,486
43,069
2,480
40,804
20,275
5,739
$ 25,523
23,044
16,061
4,463
$ 47,807
54,567
63,441
47,288
25,649
6,429
$ 59,511
63,136
91,098
71,098
51,684
30,360
7,580
$ 69,877
70,803
114,456
96,835
86,798
64,075
31,218
15,815
2020
unaudited
$ 120,260
135,762
240,067
249,029
273,266
301,616
285,646
348,015
386,684
Total
$ 75,833
76,703
134,529
120,566
113,835
113,307
106,571
57,643
17,730
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
24,441
$
30,873
41,077
57,345
54,087
66,450
66,572
120,045
234,251
392,885
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
2021
$ 119,222
135,959
236,378
252,809
272,689
313,605
290,955
374,002
374,912
445,047
$ 2,815,578
$
79,364
81,856
145,376
138,035
132,814
137,921
129,196
96,935
50,603
14,794
1,006,894
297,823
$ 2,106,507
Property catastrophe ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2021
2012
unaudited
$ 149,957
2013
unaudited
$ 122,942
67,257
2014
unaudited
$ 108,590
47,780
45,159
2015
unaudited
$ 102,114
36,401
30,877
33,579
Year ended December 31,
2016
unaudited
$ 99,885
31,902
25,296
18,075
25,641
2017
unaudited
$ 99,071
29,345
22,412
11,580
18,719
87,504
2018
unaudited
$ 97,037
28,617
20,652
5,585
14,575
54,768
77,868
2019
unaudited
$ 97,145
27,727
19,945
3,775
10,772
50,553
60,418
38,570
$ 25,850
$ 70,832
12,200
$ 83,822
19,201
13,622
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 92,886
25,894
18,402
(2,518)
(6,722)
$ 90,727
24,038
19,939
(3,152)
$ 94,015
27,652
19,231
1,786
2,521
30,704
$ 94,625
27,891
18,821
2,050
2,796
32,228
27,497
$ 95,312
27,892
19,013
1,616
4,082
37,791
12,506
3,834
2020
unaudited
$ 96,531
27,865
19,841
3,130
8,362
36,846
41,642
24,808
267,750
Total
$ 95,414
28,597
19,154
1,705
3,312
27,797
24,259
12,680
53,275
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
105
$
(138)
(10)
67
881
(712)
4,783
4,576
40,561
61,821
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
2021
$
96,447
27,657
19,615
2,920
7,426
25,121
27,657
23,534
334,185
316,197
$ 880,759
$
95,606
28,346
19,241
1,781
3,668
14,969
(4,612)
18,134
155,063
64,764
396,960
2,449
$ 486,248
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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, 2021
2012
unaudited
$ 156,162
2013
unaudited
$ 121,808
115,473
2014
unaudited
$ 123,689
76,905
143,464
2015
unaudited
$ 119,124
70,558
117,448
215,095
Year ended December 31,
2016
unaudited
$ 114,699
66,208
99,328
189,109
177,039
2017
unaudited
$ 112,477
64,486
90,710
184,774
146,307
271,713
2018
unaudited
$ 111,001
63,702
88,438
189,045
138,375
253,859
225,638
2019
unaudited
$ 108,436
62,504
84,130
188,343
136,868
240,749
242,069
216,653
$ 26,153
$ 78,080
25,993
$ 93,198
42,737
23,496
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 102,844
52,997
71,692
119,237
33,400
$ 101,868
49,816
62,800
75,622
$ 103,480
53,796
76,634
149,814
95,616
27,569
$ 102,658
55,676
78,274
160,848
99,428
125,768
30,047
$ 102,598
61,183
78,657
166,025
104,984
158,066
108,863
43,230
2020
unaudited
$ 102,994
63,269
82,408
177,281
140,681
233,153
238,052
206,997
371,752
Total
$ 102,504
62,113
78,567
159,675
112,838
166,087
153,944
124,222
101,969
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
508
$
384
923
8,482
12,700
13,045
11,593
17,777
51,075
255,343
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
2021
$ 103,367
62,782
80,940
173,659
137,579
216,358
214,942
196,840
343,078
552,066
$ 2,081,611
$ 102,525
62,139
78,268
159,925
115,102
181,628
169,054
150,931
208,888
136,712
1,365,172
7,595
$ 724,034
Marine and aviation ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2021
2012
unaudited
$ 58,992
2013
unaudited
$ 58,868
38,881
2014
unaudited
$ 55,053
37,668
30,958
2015
unaudited
$ 52,286
36,653
29,159
33,646
Year ended December 31,
2016
unaudited
$ 51,079
35,251
27,373
37,505
27,351
2017
unaudited
$ 49,727
35,157
25,674
31,790
22,747
28,800
2018
unaudited
$ 46,046
34,415
23,677
31,736
23,567
26,346
28,017
2019
unaudited
$ 43,028
33,970
23,310
30,789
19,273
23,830
26,084
48,929
$
2,658
$ 11,433
4,945
$ 27,528
13,731
4,177
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 35,055
21,388
11,590
13,418
(7,333)
$ 33,313
18,415
7,985
7
$ 36,257
22,398
12,469
19,023
(1,687)
1,660
$ 37,746
23,672
14,645
20,861
521
6,541
2,005
$ 38,038
24,049
15,080
22,629
3,261
9,367
6,968
10,756
2020
unaudited
$ 41,182
30,316
22,031
28,464
16,969
20,827
24,615
55,307
83,457
Total
$ 38,131
23,786
15,956
22,306
5,864
11,030
11,236
21,580
9,220
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
1,005
$
2,394
4,909
3,867
6,708
6,387
6,452
15,112
36,671
89,459
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
2021
$
40,016
27,605
21,984
27,680
15,019
19,903
24,756
60,983
76,598
111,046
$ 425,590
$
38,116
23,753
16,036
22,445
6,767
11,632
13,585
29,068
26,519
8,643
196,564
16,855
$ 245,881
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Other specialty ($000’s)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2021
2012
unaudited
$ 222,558
2013
unaudited
$ 211,839
252,744
2014
unaudited
$ 202,046
226,032
274,826
2015
unaudited
$ 196,138
216,250
256,332
209,764
Year ended December 31,
2016
unaudited
$ 193,882
212,721
258,114
201,057
223,191
2017
unaudited
$ 196,539
213,614
251,474
199,468
220,661
269,254
2018
unaudited
$ 194,726
211,261
246,393
196,521
215,078
258,419
320,538
2019
unaudited
$ 189,193
210,825
248,083
196,840
209,564
247,203
316,231
360,854
$ 45,663
$ 121,679
57,317
$ 144,429
119,445
68,869
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 163,160
161,608
182,184
114,382
65,055
$ 155,445
145,521
146,652
54,359
$ 167,164
171,189
195,433
138,350
138,648
73,366
$ 171,519
176,483
201,974
145,419
162,661
164,829
71,167
$ 173,305
183,772
212,991
154,369
174,403
192,274
201,732
79,718
2020
unaudited
$ 181,246
204,894
243,652
193,626
215,614
245,505
308,190
341,409
533,861
Total
$ 173,606
184,111
215,597
162,314
186,247
199,051
231,358
158,132
97,617
Accident
year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development
on reported
claims
Cumulative
number of
reported
claims
$
2,392
6,409
7,857
8,549
13,182
30,855
40,807
51,165
102,130
300,667
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2021
$ 179,364
201,830
237,478
182,162
210,344
241,598
324,536
326,168
460,084
582,446
$ 2,946,010
$ 173,494
186,956
219,060
164,471
189,411
205,998
245,330
216,647
243,980
126,635
1,971,982
7,777
$ 981,805
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, 2021:
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
2.5 %
21.6 %
26.7 %
4.9 %
26.3 %
7.3 %
30.0 %
38.9 %
26.9 %
34.2 %
11.6 %
32.8 %
13.3 %
19.0 %
12.9 %
11.3 %
(14.2) %
5.8 %
10.3 %
5.2 %
9.6 %
(11.6) %
3.4 %
7.4 %
4.2 %
8.4 %
2.2 %
0.4 %
2.9 %
3.1 %
7.7 %
1.0 %
2.0 %
2.4 %
2.1 %
5.9 %
1.2 %
0.4 %
— %
0.9 %
4.4 %
(0.4) %
— %
0.1 %
0.8 %
3.0 %
0.2 %
— %
— %
(0.1) %
The Company’s mortgage segment includes (1) U.S. primary
mortgage insurance (2) U.S. credit risk transfer and other,
and (3) international mortgage insurance and reinsurance.
The latter two 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 primary 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
also reserves 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
and
documentation created in the reserving process are completed
in accordance with generally accepted actuarial standards.
arrears. The
actuarial
reviews
in
The selected assumptions reflect actuarial judgment based on
the analysis of historical data and experience combined with
information concerning current underwriting, economic,
judicial, regulatory and other influences on ultimate claim
settlements.
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information on the mortgage segment’s short-duration insurance contracts:
U.S. primary mortgage insurance ($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
unaudited
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
$ 520,835
$ 480,592
$ 475,317
$ 469,238
$ 467,296
$ 459,467
$ 458,065
$ 456,286
$ 456,331
$ 456,362
469,311
419,668
411,793
405,809
395,693
393,149
390,987
391,062
391,324
316,095
297,151
279,434
266,027
265,992
261,091
262,682
262,829
222,790
197,238
198,001
194,677
189,235
190,913
190,560
183,556
170,532
148,715
140,608
142,392
141,657
179,376
132,220
107,255
108,181
109,242
132,318
96,357
89,120
87,962
108,424
119,253
110,362
420,003
373,533
Total
144,375
$ 2,268,206
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
(106,065)
186,605
327,605
395,695
426,024
441,577
448,151
452,348
453,587
453,986
41,447
203,957
308,956
353,189
373,909
382,200
386,853
387,894
387,879
20,099
129,159
201,925
233,879
247,038
254,175
256,285
256,875
16,159
92,431
151,222
171,337
180,321
183,472
184,025
11,462
72,201
113,357
127,286
131,161
131,717
8,622
48,112
3,966
78,650
31,478
2,899
87,317
50,135
20,105
1,040
89,756
55,853
29,102
4,144
469
1,593,806
All outstanding liabilities before 2012, net of reinsurance
14,288
Liabilities for losses and loss adjustment expenses, net of reinsurance
$ 688,688
December 31, 2021
Total of
IBNR
liabilities plus
expected
development
on reported
claims
1
1
4
1
1
1
60
181
2,686
2,246
Cumulative
number of
paid claims
15,080
9,468
6,299
4,554
3,424
2,474
1,635
851
189
11
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, 2021:
Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
U.S. Primary
2.7 %
34.9 %
25.3 %
10.5 %
4.4 %
2.1 %
0.9 %
0.5 %
0.1 %
0.1 %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021:
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
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 (1)
Intercompany eliminations
Total for short duration lines
Lines other than short duration
Discounting
Unallocated claims adjustment expenses
December 31,
2021
$
586,885
2,885,557
1,613,425
1,125,841
2,106,507
486,248
724,034
245,881
981,805
688,688
441,459
11,886,330
354,432
1,537,549
921,086
199,485
592,879
484,598
118,939
111,298
373,292
48,259
887,457
(4,146)
5,625,128
76,240
(55,575)
225,033
245,698
Total gross reserves for losses and loss adjustment
expenses
$ 17,757,156
(1)
Includes unpaid loss and loss adjustment expenses recoverable of $390.1
million related to the loss portfolio transfer reinsurance agreements.
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:
Year Ended December 31, 2021
Premium
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
Balance at beginning of period
$
2,064,586 $
37,781
Change for provision of expected
credit losses (2)
Balance at end of period
$
2,633,280 $
2,177
39,958
Year Ended December 31, 2020
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)”.
(2) Amounts deemed uncollectible are written-off in operating expenses. For
the 2021 and 2020 periods, amounts written off totaled $3.8 million and
$2.8 million, respectively.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s reinsurance
recoverables:
Year Ended December 31, 2021
Reinsurance
Recoverables,
Net of
Allowance
Allowance for
Expected
Credit Losses
Balance at beginning of period
$
4,500,802 $
11,636
Change for provision of expected
credit losses
Balance at end of period
$
5,880,735 $
Year Ended December 31, 2020
Balance at beginning of period
Cumulative effect of accounting
change (1)
Change for provision of expected
credit losses
$
4,346,816 $
1,364
Balance at end of period
4,500,802 $
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)”.
Contractholder Receivables
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s contractholder
receivables:
Year Ended December 31, 2021
Contractholder
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
1,594
13,230
Balance at beginning of period
$
1,986,924 $
8,638
Change for provision of expected
credit losses
Balance at end of period
$
1,828,691 $
(5,201)
3,437
12,010
(1,738)
11,636
Year Ended December 31, 2020
Balance at beginning of period
Cumulative effect of accounting
change (1)
Change for provision of expected
credit losses
Balance at end of period
$
2,119,460 $
—
6,663
1,975
8,638
1,986,924 $
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)”.
The following table summarizes the Company’s reinsurance
recoverables on paid and unpaid losses (not including ceded
unearned premiums) at December 31, 2021 and 2020:
8. Reinsurance
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 rated carriers
% due from all other carriers with no A.M.
Best rating (1)
Largest balance due from any one carrier
as % of total shareholders’ equity (2)
December 31,
2021
2020
$ 5,880,735
$ 4,500,802
69.7 %
0.1 %
63.9 %
0.1 %
30.2 %
36.0 %
6.7 %
1.8 %
(1) At December 31, 2021 and 2020 period, over 91% and 94% of such
amount is collateralized through reinsurance trusts, funds withheld
arrangements, letters of credit or other, respectively.
(2) The 2021 period included impact of deconsolidation of Somers. See
note 12.
In
addition,
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
agreements,
reinsurance
subsidiaries would be liable for such defaulted amounts.
the Company’s
the Company’s
insurance or
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effects of reinsurance on the Company’s written and
earned premiums and losses and loss adjustment expenses
with unaffiliated reinsurers were as follows:
The following table summarizes the respective coverages and
retentions at December 31, 2021:
December 31, 2021
Year Ended December 31,
2020
2019
2021
$ 7,706,832 $ 6,553,910 $ 5,681,523
2,457,437
(2,099,893)
$ 9,018,337 $ 7,437,716 $ 6,039,067
5,045,655
(3,734,150)
3,534,158
(2,650,352)
$ 7,149,794 $ 6,361,451 $ 5,447,829
2,337,950
(1,999,281)
$ 8,082,298 $ 6,991,935 $ 5,786,498
3,213,873
(2,583,389)
4,333,873
(3,401,369)
$ 4,266,758 $ 4,392,392 $ 2,953,072
1,602,528
(1,422,148)
$ 4,584,803 $ 4,689,599 $ 3,133,452
2,826,820
(2,508,775)
2,204,323
(1,907,116)
Premiums Written
Direct
Assumed
Ceded
Net
Premiums Earned
Direct
Assumed
Ceded
Net
Losses and Loss
Adjustment Expenses
Direct
Assumed
Ceded
Net
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. See Note 12, “Variable Interest Entity and
Noncontrolling Interests.”
Bellemeade 2017-1 Ltd. (1)
Bellemeade 2018-1 Ltd. (2)
Bellemeade 2018-3 Ltd. (3)
Bellemeade 2019-1 Ltd. (4)
Bellemeade 2019-2 Ltd. (5)
Bellemeade 2019-3 Ltd. (6)
Bellemeade 2019-4 Ltd. (7)
Bellemeade 2020-2 Ltd. (8)
Bellemeade 2020-3 Ltd. (9)
Bellemeade 2020-4 Ltd. (10)
Bellemeade 2021-1 Ltd. (11)
Bellemeade 2021-2 Ltd. (12)
Bellemeade 2021-3 Ltd. (13)
Total
Remaining
Retention,
Net
Initial
Coverage at
Issuance
Current
Coverage
$ 368,114 $ 108,368 $ 125,926
122,118
128,020
97,845
156,419
181,583
116,292
222,567
154,732
129,824
149,189
139,763
140,545
$ 6,626,664 $ 4,649,174 $ 1,864,823
374,460
506,110
341,790
621,022
700,920
577,267
449,167
451,816
337,013
643,577
616,017
639,391
181,136
302,563
181,324
398,316
409,859
411,954
218,877
365,141
186,065
630,163
616,017
639,391
(4)
(5)
(1)
(2)
(3)
(8)
(6)
(7)
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 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.
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.
Issued in November 2020, covering in-force policies issued between
June 1, 2020 and August 31, 2020. $418 million was directly funded by
Bellemeade 2020-3 Ltd. with an additional $34 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
(10) Issued in December 2020, covering in-force policies issued between
July 1, 2019 and December 31, 2019. $321 million was directly funded
by Bellemeade 2020-4 Ltd. with an additional $16 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
(11) Issued in March 2021, covering in-force policies issued between
September 1, 2020 and November 30, 2020. $580 million was directly
funded by Bellemeade Re 2021-1 Ltd. with an additional $64 million
capacity provided directly to Arch MI U.S. by a separate panel of
reinsurers.
(9)
(12) Issued in June 2021, covering in-force policies issued between
December 1, 2020 and March 31, 2021. $523 million was directly
funded by Bellemeade Re 2021-2 Ltd. via insurance-linked notes, with
an additional $93 million capacity provided directly to Arch MI U.S.
by a separate panel of reinsurers.
(13) Issued in September 2021, covering in-force policies issued between
April 1, 2021 and June 30, 2021. $508 million was directly funded by
Bellemeade Re 2021-3 Ltd. via insurance-linked notes, with an
additional $131 million capacity provided directly to Arch MI U.S. by
a separate panel of reinsurers.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
9.
Investment Information
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for
sale:
December 31, 2021
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
Total
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
Estimated
Fair
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for
Expected Credit
Losses (2)
Cost or
Amortized
Cost
$
$
$
$
6,553,333 $
408,477
404,666
1,046,484
4,772,764
2,120,294
2,692,091
17,998,109
1,734,716
19,732,825 $
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 $
104,170 $
2,825
18,724
1,740
10,076
54,048
6,540
198,123
568
198,691 $
414,247 $
8,939
27,291
8,722
22,612
153,891
19,225
654,927
2,693
657,620 $
(69,194) $
(5,410)
(1,409)
(3,117)
(45,967)
(34,749)
(11,108)
(170,954)
(590)
(171,544) $
(34,388) $
(5,028)
(3,835)
(2,954)
(12,611)
(8,060)
(10,715)
(77,591)
(2,063)
(79,654) $
(2,037) $
(48)
(2)
(6)
—
(82)
(708)
(2,883)
—
(2,883) $
6,520,394
411,110
387,353
1,047,867
4,808,655
2,101,077
2,697,367
17,973,823
1,734,738
19,708,561
(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
(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.” In 2021, the Company terminated its securities lending program and no longer enters into securities
lending agreements with financial institutions.
(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.
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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:
December 31, 2021
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
Total
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
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
$
3,639,582 $
222,176
26,665
675,603
4,211,621
1,511,301
1,667,002
11,953,950
284,733
$ 12,238,683 $
(63,938) $
(3,545)
(385)
(2,805)
(44,180)
(31,983)
(9,853)
(156,689)
(590)
(157,279) $
98,867 $
46,809
16,361
5,908
33,373
62,957
33,082
297,357
—
297,357 $
(5,256) $
(1,865)
(1,024)
(312)
(1,787)
(2,766)
(1,255)
(14,265)
—
3,738,449 $
268,985
43,026
681,511
4,244,994
1,574,258
1,700,084
12,251,307
284,733
(14,265) $ 12,536,040 $
(69,194)
(5,410)
(1,409)
(3,117)
(45,967)
(34,749)
(11,108)
(170,954)
(590)
(171,544)
$
$
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 $
(34,388)
(5,028)
(3,835)
(2,954)
(12,611)
(8,060)
(10,715)
(77,591)
(2,063)
(79,654)
(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.” In 2021,
the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.
At December 31, 2021, on a lot level basis, approximately 4,700 security lots out of a total of approximately 10,240 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 $1.1 million. The Company believes that such securities were temporarily impaired at December 31, 2021. 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.
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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, 2021
December 31, 2020
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
$
300,889 $
299,772 $
348,200 $
8,355,255
4,689,155
505,758
13,851,057
408,477
1,046,484
2,692,091
17,998,109 $
8,339,387
4,684,393
493,927
13,817,479
411,110
1,047,867
2,697,367
17,973,823 $
10,629,959
4,881,564
482,180
16,341,903
630,001
389,900
1,634,804
18,996,608 $
$
339,951
10,340,819
4,654,754
448,139
15,783,663
626,368
384,254
1,627,384
18,421,669
(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.” In 2021,
the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.
Securities Lending Agreements
In 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with
financial institutions to enhance investment income. Prior to the termination of this program, the Company loaned certain of its
securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company
maintained legal control over the securities it lent (shown as ‘Securities pledged under securities lending, at fair value’ on the
Company’s balance sheet), retained the earnings and cash flows associated with the loaned securities and received a fee from
the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protected the
Company in the event a borrower became insolvent or failed to return any of the securities on loan from 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, 2021, the Company
had no cash collateral or security collateral due to the termination of the program. 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.
The carrying value of collateral held under the Company’s securities lending transactions by significant investment category
and remaining contractual maturity of the underlying agreements was as follows at December 31, 2020 (no balances at
December 31, 2021 due to the termination of the program):
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities, at Fair Value
Other Investments
At December 31, 2021, the Company held $1.8 billion of
equity securities, at fair value, compared to $1.4 billion at
December 31, 2020.
The following table summarizes the Company’s other
investments and other investable assets:
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,
2020
412,481 $
84,149
28,958
10,840
72,395
608,823
(89,215)
519,608 $
2021
330,061 $
34,843
42,396
6,928
62,895
477,123
(88,005)
389,118 $
2019
505,399
98,949
15,857
15,820
80,618
716,643
(88,905)
627,738
(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,
2020
2019
2021
$ 313,886 $ 595,941 $ 235,655
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,
$
2021
416,698
1,432,553
97,806
26,493
$
2020
843,354
2,331,885
557,008
92,549
1,973,550
3,824,796
—
500,000
$ 1,973,550
$ 4,324,796
(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:
Lending
Term loan investments
Investment grade fixed income
Private equity
Energy
Credit related funds
Infrastructure
Real estate
Total
December 31,
2021
536,345
484,950
147,810
91,126
81,692
70,278
20,352
—
2020
572,636
1,231,731
138,646
48,750
65,813
90,780
165,516
18,013
$ 1,432,553 $ 2,331,885
(156,791)
(117,282)
(104,612)
Investments Accounted For Using the Equity Method
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 :
Net realized gains (losses) on
securities sold
Net unrealized gains (losses)
on equity securities still held
at reporting date
Allowance for credit losses:
Investments related
Underwriting related
Net impairment losses
Derivative instruments (1)
Other (2)
7,953
116,781
13,028
601
15,881
13,656
14,629
2,279
41,910
(35,734)
15,869
3,801
122,606
26,849
11,313
48,746
102,394
97,768
(2,100)
1,062
—
(32,390)
(53,537)
(3,597)
(10,007)
(533)
179,675
3,575
—
—
(3,165)
119,741
(19,348)
The following table summarizes the Company’s investments
accounted for using the equity method, by strategy:
December 31,
Credit related funds
Private equity
Real estate
Equities
Lending
Infrastructure
Energy
Fixed income
Total
2021
$ 1,022,334 $
436,042
396,395
395,090
376,649
230,070
119,141
101,890
2020
740,060
235,289
258,518
343,058
179,629
175,882
115,453
—
$ 3,077,611 $ 2,047,889
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.
Net realized gains (losses)
$ 379,845 $ 823,460 $ 363,198
(1) See Note 11 for information on the Company’s derivative instruments.
2021 periods reflected $33.1 million of losses related to the Company’s
(2)
deconsolidation of Somers.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity in Net Income (Loss) of Investments Accounted For
Using the Equity Method
Limited Partnership Interests
The Company recorded equity in net income related to
investments accounted for using the equity method of $366.4
million for 2021, compared to $146.7 million for 2020 and
$123.7 million for 2019. 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).
initially
A summary of financial information for the Company’s
investment funds and operating affiliates 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,
2021
2020
$ 58,508,009 $ 44,131,377
49,078,464
69,648,905
17,944,325
6,054,189
$ 51,704,580 $ 43,024,275
Year Ended December 31,
2020
2021
$ 11,785,949 $ 5,762,098 $
3,238,606
1,656,029
$ 8,547,343 $ 4,106,069 $
2019
164,669
528,762
(364,093)
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
which may otherwise hinder
the general partner or
investment manager's ability to liquidate holdings in an
orderly fashion in order to generate the cash necessary to
fund extraordinarily large redemption payouts. A lockup
period
is
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
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
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,
2021
2020
Investments accounted for using the equity
method (1)
Investments accounted for using the fair
value option (2)
Total
$ 3,077,611 $ 2,047,889
170,595
184,720
$ 3,248,206 $ 2,232,609
(1) Aggregate unfunded commitments were $2.6 billion at December 31,
2021, compared to $1.8 billion at December 31, 2020.
(2) Aggregate unfunded commitments were $18.8 million at December 31,
2021, compared to $35.6 million at December 31, 2020.
Investments in Operating Affiliates
Investments in which the Company has significant influence
over the operating and financial policies are classified as
‘investments in operating affiliates’ on the Company’s
balance sheets and are accounted for under the equity
method. Such investments primarily include the Company’s
investment in Coface SA (“Coface”), Greysbridge and
Premia. Investments in Coface and Premia are generally
recorded on a three month lag, while the Company’s
investment in Greysbridge is not recorded on a lag.
In 2021, the Company completed the share purchase
agreement with Natixis to purchase 29.5% of the common
equity of 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 (approximately
$546 million) including related fees. Income (loss) from
operating affiliates reflected a one-time gain of $74.5 million
realized from the acquisition. As a result of equity method
accounting rules, approximately $36 million of additional
gain was deferred and will generally be recognized over the
next five years. As of December 31, 2021, the Company
owned approximately 29.86% of the issued shares of Coface,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or 30.10% excluding treasury shares, with a carrying value of
$630.5 million.
In July 2021, the Company announced the completion of the
previously disclosed acquisition of Somers by Greysbridge
for a cash purchase price of $35.00 per common share.
Effective July 1, 2021, Somers is wholly owned by
Greysbridge, and Greysbridge
the
Company, 30% by certain investment funds managed by
Kelso and 30% by certain investment funds managed by
Warburg. At December 31, 2021 the Company’s carrying
value in Greysbridge was $375.7 million, which reflected the
Company’s aggregate purchase price of $278.9 million along
with income (loss) from operating affiliates, which included a
is owned 40% by
the Company’s consolidated statements of
one-time gain of $95.7 million recognized from
the
acquisition. In addition, the ‘net realized gains (losses)’ line
on
income
included a $33.1 million loss as a result of deconsolidation of
Somers in the Company’s financial statements following the
close of the transaction. See note 12.
The Company recorded income from operating affiliates of
$264.7 million
income of
for 2021, compared
$16.8 million for 2020 and $2.2 million for 2019. The
income from operating affiliates for the 2021 period,
primarily related to the Company’s recent investments in
Coface and Greysbridge.
to
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:
Year Ended December 31, 2021
Balance at beginning of period
Additions for current-period provision for expected credit losses
Additions (reductions) for previously recognized expected credit losses
Reductions due to disposals (3)
Balance at end of period
Year Ended December 31, 2020
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
Balance at end of period
Structured
Securities (1)
Municipal
Bonds
Corporate
Bonds
Total
$
$
$
1,490 $
11 $
896 $
602
(847)
(443)
—
(9)
—
2,858
(320)
(1,355)
802 $
2 $
2,079 $
— $
— $
— $
517
2,942
(1,398)
(571)
$
1,490 $
—
67
6
(62)
11 $
117
7,644
(5,638)
(1,227)
896 $
2,397
3,460
(1,176)
(1,798)
2,883
—
634
10,653
(7,030)
(1,860)
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)”.
(3) Reduction for the 2021 periods primarily related to the Company’s deconsolidation of Somers.
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Restricted Assets
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Level 1:
Level 2:
December 31,
2021
2020
Level 3:
The levels in the hierarchy are defined as follows:
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
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 (1)
$ 4,223,955 $ 4,643,334
3,083,324
827,552
2,721,160
798,100
506,517
179,099
$ 8,249,732 $ 8,733,309
(1) 2020 balances included $1.036 billion related to Somers. See note 12.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and
restricted cash within the Consolidated Balance Sheets:
December 31,
2020
$ 858,668 $ 906,448 $ 726,230
2019
2021
456,103
177,468
$ 1,314,771 $ 1,290,544 $ 903,698
384,096
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
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
directly
the
from broker-dealers who are active
corresponding markets. Such quotes are subject to the
validation procedures noted above. Of the $23.8 billion of
financial assets and liabilities measured at fair value at
December 31, 2021, approximately $7.7 million, or 0.0%,
were priced using non-binding broker-dealer quotes. 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.
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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Short-term investments
The Company determined that certain of its short-term
investments held in highly liquid money market-type funds,
Treasury bills and commercial paper would be included in
Level 1 as their fair values are based on quoted market prices
in active markets. The fair values of other short-term
investments are generally determined using the spread above
the risk-free yield curve and are classified within Level 2.
Residential mortgage loans
The Company’s residential mortgage loans (included in
‘other assets’ in the consolidated balance sheets) include
amounts related to the Company’s whole mortgage loan
purchase and sell program. Fair values of residential
mortgage loans are generally determined based on market
prices. As significant inputs used in pricing process for these
residential mortgage loans are observable market inputs, the
fair value of these securities are classified within Level 2.
Contingent consideration liabilities
to
liabilities (included
the consolidated balance sheets)
in ‘other
Contingent consideration
include
liabilities’
in
amounts related
the Company’s 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
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.
liabilities,
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31,
2021:
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:
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 (3)
Residential mortgage loans
Fair value option:
Corporate bonds
Non-U.S. government bonds
Asset backed securities
Short-term investments
Equity securities
Other investments
Other investments measured at net asset value (1)
Total
$
6,553,333 $
408,477
404,666
1,046,484
4,772,764
2,120,294
2,692,091
17,998,109
— $
—
—
—
4,744,517
—
—
4,744,517
6,553,320 $
408,477
404,666
1,046,484
28,247
2,120,294
2,688,744
13,250,232
1,734,716
1,052,822
1,804,170
1,762,864
681,894
38,388
127,121
49,847
388,546
23,785
4,367
97,278
—
262,465
127,121
49,847
388,546
23,785
4,367
97,806
26,493
310,798
1,121,755
1,973,550
—
—
—
—
—
528
21,745
20,352
13
—
—
—
—
—
3,347
3,360
—
2,918
—
—
—
—
—
—
4,748
27,981
32,729
39,007
42,625
776,441
Total assets measured at fair value
$
23,687,513 $
7,602,828 $
14,923,923 $
Liabilities measured at fair value:
Contingent consideration liabilities
Securities sold but not yet purchased (2)
Derivative instruments (3)
Total liabilities measured at fair value
$
$
(16,960) $
—
(54,224)
(71,184) $
— $
—
—
— $
— $
—
(54,224)
(54,224) $
(16,960)
—
—
(16,960)
(1)
(2)
(3)
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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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Equity securities, at fair value
Short-term investments
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
1,460,959
1,401,653
1,924,922
1,920,565
7,856,558
630,001
494,522
389,900
93,721
2,433,733
1,631,378
13,529,813
17,291
4,357
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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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2021 and 2020:
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, 2021
Balance at beginning of year
$
3,426
$
13
$
985
$
67,103
$
68,988
$
42,015
$
(461)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)
Included in other comprehensive
income
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales (3)
Settlements
Transfers in and/or out of Level 3
(135)
133
—
—
—
(77)
—
Balance at end of year
$
3,347
$
Year Ended December 31, 2020
—
—
—
—
—
—
—
13
13
—
—
—
868
—
13,213
—
4,941
1,958
—
—
—
—
5,718
—
(998)
(53,203)
(69,181)
(46,773)
—
—
—
—
—
—
—
—
—
$
$
27,981
$
4,748
$
2,918
$
(16,960)
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)
—
—
Balance at end of year
$
3,426
$
13
$
985
$
67,103
$
68,988
$
42,015
$
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(1)
(2) Gains or losses were included in net realized gains (losses).
(3)
Sales for the 2021 period primarily relates to the Company’s deconsolidation of Somers.
Financial Instruments Disclosed, But Not Carried, At Fair
Value
The Company uses various financial instruments in the
normal course of its business. The carrying values of cash,
accrued investment income, receivable for securities sold,
certain other assets, payable for securities purchased and
certain other liabilities approximated their fair values at
December 31, 2021, 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, 2021, the Company’s senior notes were
carried at their cost, net of debt issuance costs, of $2.7 billion
and had a fair value of $3.3 billion. 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. The fair values of the senior notes were obtained
from a third party pricing service and are based on observable
market inputs. As such, the fair value of the senior notes is
classified within Level 2.
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:
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—
—
(16,494)
—
—
(5)
—
—
—
—
—
7,609
—
(461)
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
the Company measures the fair value of these assets using the
techniques discussed above in “—Fair Value Measurements
on a Recurring Basis.”
Goodwill and Intangible Assets. The Company tests goodwill
and intangible assets annually 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
In addition,
the Company purchases
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.
The following table summarizes information on the fair
values and notional values of the Company’s derivative
instruments:
Estimated Fair Value
Asset
Derivatives
Liability
Derivatives
Notional
Value (1)
December 31, 2021
Futures contracts (2)
$
34,999 $
(9,808) $ 2,826,564
Foreign currency forward
contracts (2)
TBAs
Other (2)
Total
December 31, 2020
7,734
11,227
73,161
(11,390)
—
915,962
11,227
(33,026)
3,736,773
$
127,121 $
(54,224)
Futures contracts (2)
$
11,046 $
(4,496) $ 3,099,796
Foreign currency forward
contracts (2)
TBAs
Other (2)
Total
52,716
—
(6,202)
1,656,729
—
—
113,621
(98,007)
5,763,919
$
177,383 $
(108,705)
(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.’
The Company did not hold any derivatives which were
designated as hedging instruments at December 31, 2021 or
2020.
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, 2021, $122.3 million and $53.9 million,
respectively, of asset derivatives and liability derivatives
were subject to a master netting agreement compared to
$138.8 million and $93.0 million,
respectively, at
December 31, 2020. The remaining derivatives included in
the table above were not subject to a master netting
agreement.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
The following table provides the carrying amount and
balance sheet caption in which the assets and liabilities of
Somers were reported:
Derivatives not designated
as hedging instruments
Net realized gains (losses):
Year Ended December 31,
2021
2020
2019
Assets
December 31,
2020
Investments accounted for using the fair value option (1)
$
1,790,385
Futures contracts
$
(15,262) $ 114,987 $ 114,123
Foreign currency forward
contracts
TBAs
Other
Total
(39,755)
(233)
22,860
49,974
1,129
13,585
(9,499)
463
14,654
$
(32,390) $ 179,675 $ 119,741
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
12. Variable Interest Entity and Noncontrolling Interests
Somers Holdings Ltd.
In March 2014, the Company invested $100.0 million and
acquired 2,500,000 common shares of Somers. Somers was
considered a VIE and the Company concluded that it was the
primary beneficiary of Somers, through June 30, 2021. As
such, the results of Somers were included in the Company’s
consolidated financial statements as of and for the periods
ended June 30, 2021.
is owned 40% by
In the 2020 fourth quarter, Arch Capital, Somers and
Greysbridge, a wholly-owned subsidiary of Arch Capital,
entered into an Agreement and Plan of Merger (as amended,
the “Merger Agreement”). The merger and the related
Greysbridge equity financing closed on July 1, 2021.
Effective July 1, 2021, Somers is wholly owned by
Greysbridge, and Greysbridge
the
Company, 30% by certain investment funds managed by
Kelso and 30% by certain investment funds managed by
Warburg. Based on the governing documents of Greysbridge,
the Company concluded that, while it retains significant
influence over Somers, Somers no longer constitutes a
variable interest entity. Accordingly, effective July 1, 2021,
the Company no longer consolidates the results of Somers in
its consolidated
footnotes.
Beginning in the 2021 third quarter, the Company classifies
its investment as ‘investments in operating affiliates’ on the
Company’s balance sheets and is accounted for under the
equity method.
statements and
financial
655,249
52,410
211,451
14,679
224,377
286,590
122,339
53,705
37,423
7,650
75,801
Ceded unearned premiums
Deferred acquisition costs, net
Receivable for securities sold
Goodwill and intangible assets
Other assets
Total assets of consolidated VIE
$
3,532,059
Liabilities
Reserves for losses and loss adjustment expenses
$
1,519,583
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
Total liabilities of consolidated VIE
$
2,538,317
Redeemable noncontrolling interests
$
52,398
(1) Included in “other investments” on the Company’s balance sheet.
The following table summarizes Somers’ cash flow from
operating, investing and financing activities.
Year Ended December 31,
2020
2019
2021
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
46,991
96,325
(2,042)
181,736
258,589
(335,776)
239,284
(140,620)
(61,433)
Non-redeemable noncontrolling interests
in
the shareholders’ equity section of
Through June 30, 2021, the Company accounted for the
portion of Somers’ common equity attributable to third party
investors
its
consolidated balance sheets. The non-controlling ownership
in Somers common shares was approximately 87% at
December 31, 2020. The portion of Somers’ income or loss
attributable to third party investors was recorded in the
consolidated statements of income in ‘net (income) loss
attributable to noncontrolling interests.’
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth activity in the non-redeemable
noncontrolling interests:
The following table sets forth activity in the redeemable
noncontrolling interests:
December 31,
2021
2020
$ 823,007 $ 762,777
(918,874)
—
Balance, beginning of year
Impact of deconsolidation of Somers
2021
December 31,
2020
$ 58,548 $ 55,404 $ 206,292
—
(48,919)
2019
—
Balance, beginning of year
Impact of deconsolidation of Somers
Additional paid in capital attributable to
noncontrolling interests
22,113
1,334
Repurchases attributable to non-redeemable
noncontrolling interests
—
Amounts attributable to noncontrolling interests
78,314
(2,867)
53,076
Other amounts attributable to noncontrolling
interests
Other comprehensive (income) loss attributable
to noncontrolling interests
Balance, end of year
—
(375)
(4,560)
9,062
— $ 823,007
$
Redeemable noncontrolling interests
Such
guidance.
accounting
Through June 30, 2021,
the Company accounted for
redeemable noncontrolling interests in the mezzanine section
of its consolidated balance sheets in accordance with
redeemable
applicable
noncontrolling interests primarily related to the Somers
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 Somers Preference Shares were issued at a
the
discounted amount of $24.50 per share. Because
redemption features are not solely within the control of
Somers,
the redeemable
noncontrolling interests in the Somers Preference Shares in
the mezzanine section of its consolidated balance sheets.
the Company accounted for
On August 1, 2019, Somers redeemed 6,919,998 of its
9,065,200 issued and outstanding preference shares (“Somers
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 Somers Preference Shares.
Preferred dividends on the Somers Preference Shares,
including the accretion of the discount and issuance costs,
was $2.1 million for 2021, compared to $4.4 million for 2020
and $17.8 million for 2019.
Redemption of noncontrolling
interests
Accretion of preference share
issuance costs
Other
Balance, end of year
—
—
(157,709)
244
93
—
(396)
6,577
3,051
9,233 $ 58,548 $ 55,404
$
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,
2020
2021
2019
Amounts attributable to non-
redeemable noncontrolling interests
Amounts attributable to redeemable
noncontrolling interests
Net (income) loss attributable to
noncontrolling interests
$ (78,314) $ (53,076) $ (40,072)
(4,299)
(7,114)
(16,909)
$ (82,613) $ (60,190) $ (56,981)
Bellemeade Re
The Company has entered into aggregate excess of loss
mortgage reinsurance agreements with various special
purpose reinsurance companies domiciled in Bermuda (the
“Bellemeade Agreements”). At the time the Bellemeade
Agreements were entered into, the applicability of the
accounting guidance that addresses VIEs was evaluated. As a
result of the evaluation of the Bellemeade Agreements, the
Company concluded that these entities are VIEs. However,
given that the ceding insurers do not have the unilateral
power to direct those activities that are significant to their
economic performance, the Company does not consolidate
such entities in its consolidated financial statements.
the
table presents
total assets of
spread between
The following
the
Bellemeade entities, as well as the Company’s maximum
exposure to loss associated with these VIEs, calculated as the
the
maximum historical observable
benchmark index for each respective transaction and short
term invested trust asset yields. The benchmark index for
agreements effective prior to 2021 is based on one-month
LIBOR, while the 2021 agreements benchmark index is
based on the Secured Overnight Financing Rate (“SOFR”).
SOFR is a measure of the cost of borrowing cash overnight,
collateralized by U.S. Treasury securities, and is based on
repurchase
directly observable U.S. Treasury-backed
transactions.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dec 31, 2021
Dec 31, 2020
Maximum Exposure to Loss
Maximum Exposure to Loss
Bellemeade Entities (Issue Date)
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)
Bellemeade 2020-2 Ltd. (Sep-20) (1)
Bellemeade 2020-3 Ltd. (Nov-20) (2)
Bellemeade 2020-4 Ltd. (Dec-20) (3)
Bellemeade 2021-1 Ltd. (Mar-21) (4)
Bellemeade 2021-2 Ltd. (Jun-21) (5)
Bellemeade 2021-3 Ltd. (Sep-21) (6)
Total
Total VIE
Assets
On-Balance
Sheet
(Asset)
Liability
Off-Balance
Sheet
Total
Total VIE
Assets
On-Balance
Sheet
(Asset)
Liability
Off-Balance
Sheet
Total
$ 108,368 $
181,136
—
302,563
181,324
398,316
409,859
411,954
—
217,766
348,818
176,826
568,986
522,807
507,873
$ 4,336,596 $
(159) $
(528)
—
(1,018)
(380)
(515)
(584)
(462)
—
(177)
(128)
(50)
(303)
281
(411)
(4,434) $
424 $
1,268
—
2,496
5,807
3,998
3,190
4,759
—
1,984
5,793
1,630
3,283
4,124
3,446
42,202 $
265
740
—
1,478
5,427
3,483
2,606
4,297
—
1,807
5,665
1,580
2,980
4,405
3,035
37,768
$ 145,573 $
250,095
108,395
302,563
219,256
398,316
528,084
468,737
275,068
423,420
418,158
321,393
—
—
—
$ 3,859,058 $
(245) $
(903)
(138)
(1,320)
(1,361)
(730)
(861)
(890)
(178)
(556)
(631)
(156)
—
—
—
(7,969) $
844 $
2,245
280
3,262
8,461
5,201
5,079
6,676
1,012
6,839
9,605
6,816
—
—
—
56,320 $
599
1,342
142
1,942
7,100
4,471
4,218
5,786
834
6,283
8,974
6,660
—
—
—
48,351
(1) At December 31, 2021, $1 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
(2) At December 31, 2021, $16 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
(3) At December 31, 2021, $9 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
(4) At December 31, 2021, $61 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
(5) At December 31, 2021, $93 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
(6) At December 31, 2021, $131 million of coverage from a separate panel of reinsurers is remaining (not reflected in this table).
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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, 2021
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, 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
Unrealized
Appreciation on
Available-For-Sale
Investments
Foreign Currency
Translation
Adjustments
Total
$
$
$
$
$
$
501,295 $
(371,741)
(116,068)
(487,809)
13,486 $
258,486 $
668,996
(426,187)
242,809
501,295 $
(114,178) $
491,605
(118,941)
372,664
258,486 $
(12,400) $
(65,686)
—
(65,686)
(78,086) $
(46,395) $
33,995
—
33,995
(12,400) $
(64,542) $
18,147
—
18,147
(46,395) $
488,895
(437,427)
(116,068)
(553,495)
(64,600)
212,091
702,991
(426,187)
276,804
488,895
(178,720)
509,752
(118,941)
390,811
212,091
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,
2021
2020
2019
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
$
157,095 $
478,659 $
131,043
(2,099)
(3,597)
—
154,996
(38,928)
116,068 $
(533)
474,529
(48,342)
426,187 $
—
(3,165)
127,878
(8,937)
118,941
$
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the related tax effects allocated to each component of other comprehensive income (loss):
Year Ended December 31, 2021
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, 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)
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
(406,774) $
(19,845) $
154,996
(64,423)
38,928
59
(626,193) $
(58,714) $
(386,929)
116,068
(64,482)
(567,479)
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
$
$
$
$
$
$
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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:
Numerator:
Net income
Amounts attributable to noncontrolling interests
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
2021
Year Ended December 31,
2020
2019
$
2,239,462 $
(82,613)
2,156,849
(48,343)
(15,101)
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
$
2,093,405 $
1,363,909 $
1,594,707
Denominator:
Weighted average common shares outstanding
Effect of dilutive common share equivalents:
Nonvested restricted shares
Stock options (1)
Weighted average common shares and common share equivalents outstanding – diluted
Earnings per common share:
Basic
Diluted
391,748,715
403,062,179
401,802,815
1,996,524
6,600,697
400,345,936
1,682,309
5,514,967
410,259,455
1,673,770
8,132,893
411,609,478
$
$
5.34 $
5.23 $
3.38 $
3.32 $
3.97
3.87
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the
average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the
proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For 2021, 2020 and 2019, the
number of stock options excluded were 2,398,608, 2,249,821 and 1,302,017, 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
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
in which
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Kingdom, Ireland, Canada, Switzerland, Australia and
Denmark.
The components of income taxes attributable to operations
were as follows:
Year Ended December 31,
2020
2019
2021
Current expense (benefit):
United States
Non-U.S.
Deferred expense (benefit):
United States
Non-U.S.
Income tax expense
$ 284,274 $ 181,571 $ 139,407
4,954
144,361
11,259
295,533
16,091
197,662
(123,261)
(43,690)
(166,951)
11,849
(400)
11,449
$ 128,582 $ 111,838 $ 155,810
(89,170)
3,346
(85,824)
The Company’s income or loss before income taxes was
earned in the following jurisdictions:
Year Ended December 31,
2020
2019
2021
Income (Loss) Before Income Taxes:
Bermuda
United States
Other
Total
$ 1,518,616 $ 1,114,117 $ 1,122,952
701,480
24,678
$ 2,368,042 $ 1,577,549 $ 1,849,110
643,239
206,187
409,893
53,539
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 2021
applicable statutory tax rates by jurisdiction were as follows:
Bermuda (0.0%), United States (21.0%), United Kingdom
(19.0%),
(22.0%), Canada
(12.5%), Denmark
(26.5%), Gibraltar (12.5%), Australia (30.0%), Hong Kong
(16.5%) and the Netherlands (25.0%).
Ireland
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,
2020
2019
2021
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:
$ 158,269 $ 111,947 $ 149,799
Tax-exempt investment income
(23,572)
(1,824)
(3,091)
Meals and entertainment
379
547
1,134
State taxes, net of U.S. federal tax
benefit
Foreign branch taxes
Prior year adjustment
Foreign exchange gains & losses
Changes in applicable tax rate
Dividend withholding taxes
20,978
1,998
(1,432)
1,190
447
12,211
5,027
2,094
3,983
(1,736)
—
7,105
Change in valuation allowance
(40,425)
13,190
Contingent consideration
—
9
3,314
1,231
632
436
—
6,510
1,628
190
Share based compensation
(5,339)
(2,533)
(6,592)
Intercompany loan write-off
Other
—
(22,083)
3,878
(3,888)
—
619
Income tax expense (benefit)
$ 128,582 $ 111,838 $ 155,810
The effect of a change in tax laws or rates on deferred tax
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.
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Significant components of the Company’s deferred income
tax assets and liabilities were as follows:
At December 31, 2021, the Company’s net operating loss
carryforwards and tax credits were as follows:
December 31,
2021
2020
Year Ended December 31,
2021
Expiration
$ 87,960 $ 67,142
United Kingdom
$
259,235 No expiration
Operating Loss Carryforwards
Deferred income tax assets:
Net operating loss
Uncrystallized losses
Discounting of net loss reserves
Net unearned premium reserve
Compensation liabilities
Foreign tax credit carryforward
Interest expense
Goodwill and intangible assets
Bad debt reserves
Depreciation and amortization
Lease liability
Net unrealized foreign exchange gains
Other, net
—
72,001
75,483
28,062
20,058
755
—
10,252
115,041
2,926
74,247
66,368
27,351
19,160
622
14,450
10,842
—
21,453
23,604
166
—
165
2,318
Deferred tax assets before valuation allowance
431,231
309,195
Valuation allowance
(43,953)
(88,255)
Deferred tax assets net of valuation allowance
387,278
220,940
Deferred income tax liabilities:
Depreciation and amortization
Deposit accounting liability
Goodwill and intangibles
Lloyds year of account deferral
Contingency reserve
Deferred policy acquisition costs
Investment related
Net unrealized appreciation of investments
Right-of-use asset
Other, net
Total deferred tax liabilities
Net deferred income tax assets
—
(1,578)
(70,549)
(12,514)
(49,486)
(25,612)
(7,492)
(8,377)
(495)
(1,751)
—
—
(64,593)
(42,045)
(9,571)
(66,681)
(17,406)
(19,239)
(218)
(843)
(193,232)
(205,218)
$ 194,046 $ 15,722
The Company provides a valuation allowance to reduce the
net value of certain deferred tax assets to an amount which
management expects to more likely than not be realized. As
of December 31, 2021, the Company’s valuation allowance
was $44.0 million, compared
to $88.3 million at
December 31, 2020. The valuation allowance at December
31, 2021, was primarily attributable to valuation allowances
on
the Company’s U.K., Canadian and Hong Kong
operations and certain other deferred tax assets relating to
loss carryforwards that have a limited use.
Ireland
Australia
Hong Kong
United States (1)
Tax Credits
9,032 No expiration
39,981 No expiration
23,203 No expiration
29,508 2029 - 2038
U.K. foreign tax credits
20,058 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 $7.6 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 $31.6
million at December 31, 2021, compared to $88.1 million at
December 31, 2020.
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
such earnings were remitted. Distributions from the U.K. or
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Ireland would not be subject to withholding tax and no
deferred income tax liability would need to be accrued.
16. Transactions with Related Parties
The Company recognizes interest and penalties relating to
unrecognized tax benefits in the provision for income taxes.
As of December 31, 2021, 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,
2021
2020
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, its subsidiaries and branches file income tax
returns in various federal, state and local 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
2015-2021
2020-2021
2017-2021
2017-2021
2018-2021
2017-2021
2017-2021
As of December 31, 2021, the Company’s current income tax
payable (included in “Other liabilities”) was $14.8 million.
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 2021 first quarter, as part of the Company’s acquisition
of Barbican, the Company entered into an agreement with
Premia Managing Agency Limited for the reinsurance to
close of Syndicate 1955’s 2018 underwriting year of account
into Premia Syndicate 1884’s 2021 underwriting year of
account. The reinsurance to close 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 was transferred
to Syndicate 1884, with an effective date of January 1, 2021.
The Company had no reinsurance recoverable on unpaid and
paid losses or funds held liability at December 31, 2021,
compared to $199.8 million and $149.6 million, respectively,
at December 31, 2020.
transactions with Somers. For 2021,
In July 2021, following consummation of the Merger
Agreement and the related Greysbridge equity financing,
pursuant to which Somers is wholly owned by Greysbridge,
and Greysbridge is owned 40% by the Company, 30% by
certain funds managed by Kelso and 30% by certain funds
managed by Warburg, the Company entered into certain
reinsurance
the
such
Company ceded premiums written
transactions of $453.9 million (which includes reinsurance
transactions in force as well as those entered into in
conjunction with the Merger Agreement). In addition,
Somers paid certain acquisition costs and administrative fees
to the Company. At December 31, 2021, the Company
recorded a reinsurance recoverable on unpaid and paid losses
from Somers of $902.8 million and a reinsurance balance
payable to Somers of $258.4 million. See note 12, “Variable
Interest Entity and Noncontrolling Interests.”
related
to
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The Company has a put/call option that was entered into in
connection with the Greysbridge equity financing, whereby
beginning January 1, 2024 the Company will have a call right
(but not the obligation) and Warburg and Kelso will each
have a put right (but not the obligation) to buy/sell one third
of their initial shares annually at the tangible book value per
share of Greysbridge for the most recently ended fiscal
quarter.
As of December 31, 2021, the Company owns $35.0 million
in aggregate principal amount of Somers 6.5% senior notes,
due July 2, 2029 and approximately 6.6% of Somers’
preference shares.
17. Leases
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 11 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)
Weighted average discount rate
Weighted average remaining lease
term
December 31,
2021
31,691
32,094
22,686
106,836
126,711
$
$
$
$
$
2020
31,826
30,365
12,060
115,911
136,015
$
$
$
$
$
3.9 %
3.9 %
5.9 years
5.8 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, 2021:
Years Ending December 31,
2022
2023
2024
2025
2026
2027 and thereafter
Total undiscounted lease liability
Less: present value adjustment
Operating lease liability
$
31,682
25,288
22,102
16,253
13,430
34,173
142,928
(16,217)
126,711
All of these leases are for the rental of office space, with
expiration terms that range from 2022 to 2033. Rental
expense was approximately $31.7 million, $31.8 million and
$30.5 million for 2021, 2020 and 2019, respectively.
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
loss adjustment expenses
premiums, paid
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 full amount of
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
the claim. The Company
the policyholder for
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the Company would be
policyholder,
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 records a related liability in “Collateral held for
insured obligations.”
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:
Employment and Other Arrangements
At December 31, 2021, 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, 2021
and 2020 were as follows:
Broker
Marsh & McLennan Companies
and its subsidiaries
Aon Corporation and its
subsidiaries
Year Ended December 31,
2021
2020
2019
18.3 %
13.3 %
9.6 %
12.2 %
12.0 %
12.2 %
2034 notes (1)
2043 notes (2)
2026 notes (3)
2046 notes (4)
2050 notes (5)
Somers 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
2021
297,488
495,063
497,633
445,490
988,720
2020
297,367
494,944
497,211
445,402
988,500
137,689
$ 2,750,000 $ 2,724,394 $ 2,861,113
No other broker and no one insured or reinsured accounted
for more than 10% of gross premiums written for 2021, 2020
and 2019.
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, 2021 other than investments issued or
guaranteed by the United States government or its agencies.
Investment Commitments
The Company’s
investment commitments, which are
primarily related to agreements entered into by the Company
to invest in funds and separately managed accounts when
called upon, were approximately $3.0 billion and $2.1 billion
at December 31, 2021 and 2020, 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 $114.1 million and
$73.0 million at December 31, 2021 and 2020, respectively.
(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 (“2050 notes”).
(6) Senior notes of Somers issued on July 2, 2019 and due July 2, 2029
(“Somers Senior Notes”), reflecting the elimination of amounts owned by
Arch-U.S. Effective July 1, 2021, the Company no longer consolidates
Somers in its financials. See note 12.
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.
The 2043 notes are unsecured and unsubordinated obligations
of Arch-U.S. and Arch Capital, respectively, and rank
the other unsecured and
equally 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
ratably with
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redeem the 2043 notes at any time and from time to time, in
whole or in part, at a “make-whole” redemption price.
ratably with
The 2026 notes are unsecured and unsubordinated obligations
of Arch Finance and Arch Capital, respectively, and rank
the other unsecured and
equally 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.
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 on June 30 and December 30 of each year.
Arch Capital may redeem the 2050 notes at any time and
from time to time, in whole or in part, at a “make-whole”
redemption price.
Interest payments on the Somers Senior Notes due on each
January 2 and July 2, commencing January 2, 2020. The
Company purchased $35.0 million in aggregate principal
amount of the Somers Senior Notes. Effective July 1, 2021,
the Company no longer consolidates the results of Somers in
its consolidated financial statements and footnotes. See note
12, “Variable Interest Entity and Noncontrolling Interests.”
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, 2021.
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 $240.4 million of letters of
credit outstanding and remaining capacity of $9.6 million at
December 31, 2021. In addition, certain of Arch Capital’s
subsidiaries had outstanding secured and unsecured letters of
credit of $26.0 million and $290.0 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, 2021,
these letters of credit were secured by investments with a fair
value of $348.4 million.
The Company’s outstanding revolving credit agreement
borrowings were as follows:
Arch Capital
Somers
Total
Year Ended December 31,
2021
2020
$
$
— $
— $
—
155,687
155,687
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan Bank Membership
Certain subsidiaries of the Company are members of Federal
Home Loan Banks (“FHLBs”). Members may borrow from
the FHLBs at competitive rates subject to certain conditions.
Conditions include maintaining sufficient collateral deposits
for funding and a requirement to hold stock in the FHLBs
related to both membership and outstanding advances. At
December 31, 2021 and 2020,
the Company had
$80.0 million of advances outstanding under the FHLB
program, included in ‘other liabilities’ on the Company’s
balance sheet, secured by investments with a fair value of
$80.2 million.
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
$ 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
31,677
—
—
—
318,459
350,136
(82,955)
(82,955)
—
(7,650)
—
(7,650)
(1,441)
(212)
(5,758)
(7,411)
$ 344,865 $ 71,357 $ 528,761 $ 944,983
$ 342,842 $ 70,246 $ 1,102,298 $ 1,515,386
—
—
(571,839)
(571,839)
2,023
1,111
(1,698)
1,436
$ 344,865 $ 71,357 $ 528,761 $ 944,983
Net balance at
Dec. 31, 2019
Acquisitions
Amortization
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2020
Acquisitions (1)
Amortization
Impact of
deconsolidation of
Somers (2)
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2021
Gross balance at
Dec. 31, 2021
Accumulated
amortization
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2021
(1) Certain amounts for the Company’s 2021 acquisitions are considered
provisional.
(2) See note 12.
The following table presents the components of goodwill and
intangible assets:
Gross
Balance
Accumulated
Amortization
Foreign
Currency
Translation
Adjustment
and Other
Net
Balance
Dec. 31, 2021
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
Dec. 31, 2020
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
$ 451,505 $
(409,592) $
339 $ 42,252
52,674
(48,838)
56
3,892
602,518
342,842
48,331
21,915
(9,533)
5,134
(120,302)
(2,207)
480,009
—
—
—
2,023
344,865
—
48,331
1,111
23,026
9,435
(2,542)
—
114
(98)
2,706
$ 1,515,386 $
(571,839) $
1,436 $ 944,983
$ 451,505 $
(381,349) $
284 $ 70,440
52,674
(44,347)
60
8,387
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
The estimated remaining amortization expense for the
Company’s intangible assets with finite lives is as follows:
2022
2023
2024
2025
2026
2027 and thereafter
Total
$
$
109,144
99,620
79,410
44,523
35,252
160,812
528,761
The estimated remaining useful lives of these assets range
from one to fifteen years at December 31, 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
21. Shareholders’ Equity
Authorized and Issued
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.
Common Shares
The following table presents a roll-forward of changes in
Arch Capital’s issued and outstanding Common Shares:
Year Ended December 31,
2020
2019
2021
Common Shares:
Shares issued and
outstanding, beginning
of year
Shares issued (1)
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
579,000,841
2,669,229
574,617,195
2,646,164
570,737,283
2,835,994
1,619,780
1,737,482
1,043,918
583,289,850
579,000,841
574,617,195
(204,365,956)
(172,280,199)
(168,997,994)
378,923,894
406,720,642
405,619,201
(1)
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.
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, 2021, $1.2 billion of
share repurchases were available under
the program.
Repurchases under the program may be effected from time to
time in open market or privately negotiated transactions
through December 31, 2022. 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.
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,
2021, Arch Capital held 204.4 million shares for an aggregate
cost of $3.8 billion in treasury, at cost.
The Company’s repurchases under the share repurchase
program were as follows:
Year Ended December 31,
2020
2019
2021
Aggregate cost of shares
repurchased
$ 1,234,294 $
83,472 $
2,871
Shares repurchased
31,486,830
2,850,102
110,598
Average price per share
repurchased
$
39.20 $
29.29 $
25.96
Since the inception of the share repurchase program through
December 31, 2021, Arch Capital has
repurchased
approximately 420.7 million common shares for an aggregate
purchase price of $5.3 billion.
Series G Preferred Shares
In June 2021, Arch Capital completed a $500 million
underwritten public offering of 20.0 million depositary shares
(the “Depositary Shares”), each of which represents a
1/1,000th interest in a share of its 4.55% Non-Cumulative
Preferred Shares, Series G, $0.01 par value and $25,000
to $25
liquidation preference per share
liquidation preference per Depositary Share) (the “Series G
Preferred Shares”). Each 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 G Preferred Shares represented
thereby (including any dividend, liquidation, redemption and
voting rights).
(equivalent
Holders of Series G Preferred Shares will be entitled to
receive dividend payments only when, as and if declared by
the Company’s 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 4.55%. Dividends on the Series G 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 G
Preferred Shares. The Company may not declare or pay a
dividend on the Series G Preferred Shares under certain
circumstances, including if the Company is or, after giving
effect to such payment, would be in breach of applicable
individual or group solvency and liquidity requirements or
applicable individual or group enhanced capital requirements
("ECR"). The Series G Preferred Shares may not be
redeemed at any time if the ECR would be breached
immediately before or after giving effect to such redemption,
unless the Company replaces the capital represented by
preference shares to be redeemed with capital having equal or
better capital treatment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except in specified circumstances relating to certain tax or
corporate events, the Series G Preferred Shares are not
redeemable prior to June 11, 2026. On and after that date, the
Series G 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 G 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 Depositary Shares will be redeemed if and to the extent
the related Series G Preferred Shares are redeemed by the
Company. Neither the Depositary Shares nor the Series G
Preferred Shares have a stated maturity, nor will they be
subject to any sinking fund or mandatory redemption. The
Series G Preferred Shares are not convertible into any other
securities. The Series G Preferred Shares do not have voting
rights, except under limited circumstances. The net proceeds
from the Series G Preferred Share offerings were used to
redeem the Company’s outstanding 5.25% Series E Non-
Cumulative Preferred Shares.
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%.
Dividends on
the Series F 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 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
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
the
Preferred Share offerings were used
Company’s outstanding 6.75% Series C Non-Cumulative
Preferred Shares.
redeem
to
Series E Preferred Shares
In September, 2021, Arch Capital redeemed all outstanding
5.25% Series E 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
reward achievement of
individual contributions and
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, 2021, 9,909,950 shares are available for future
issuance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2021
Number of
Options /
SARs
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding,
beginning of
year
17,839,333 $
Granted
1,243,984 $
Exercised
(1,931,320) $
23.32
35.90
15.57
Forfeited or
expired
Outstanding,
end of year
Exercisable,
end of year
(68,837) $
35.39
17,083,160 $
25.06
4.41
$ 331,214
14,730,147 $
23.20
3.78
$ 312,966
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 2021, the Company received proceeds of $10.1
million from the exercise of stock options and recognized a
tax benefit of $5.4 million from the exercise of stock options
and SARs.
Year Ended December 31,
2020
2019
2021
Weighted average grant date
fair value
Aggregate intrinsic value of
Options/SARs exercised
$
$
9.22
47,074
$
$
8.14
59,723
$
$
7.90
51,350
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 2021 is presented below:
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, 2021,
606,942 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, 2021, 320,272 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
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, 2021, 1,608,354 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-
life
Scholes option valuation model. The expected
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,
2020
2019
2021
— %
24.2 %
1.0 %
6.0 years
— %
16.6 %
1.2 %
6.0 years
— %
18.1 %
2.5 %
6.0 years
A summary of stock option and SAR activity under the
Company’s Long Term Incentive and Share Award Plans
during 2021 is presented below:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected volatility
Risk free interest rate
Year Ended December 31,
2020
2019
2021
37.5 %
0.3 %
18.1 %
1.1 %
17.1 %
2.5 %
Performance
Shares
Performance
Units
Unvested Shares:
Unvested balance, beginning of year
1,851,382
Granted
Performance adjustment (1) (2)
Vested
Unvested balance, end of year
674,406
(39,510)
(624,518)
1,861,760
Weighted Average Grant Date
Fair Value:
Unvested balance, beginning of year $
Granted
Performance adjustment (1) (2)
Vested
Unvested balance, end of year
$
$
$
34.42 $
37.38 $
24.78
24.78 $
38.93 $
32,065
10,698
11,447
(24,440)
29,770
33.48
37.38
24.71
24.71
38.71
(1)
(2)
The performance adjustment represents the difference between the
number of performance shares granted and earned, which vested
following the end of the performance period. The performance shares
were granted at the maximum level of achievement.
The performance adjustment represents the change in PSUs, which
vested following the end of the performance period. The performance
units were granted at the target level of achievement.
The following table presents the weighted average grant date
fair values of performance awards granted.
Year Ended December 31,
2020
2019
2021
Performance awards
685,104
557,204
696,360
Weighted average grant date fair
value
$
37.38 $
44.17 $
36.05
The issuance of share-based awards and amortization thereon
has no effect on the Company’s consolidated shareholders’
equity.
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
Restricted
Common
Shares
Restricted
Unit
Awards
1,635,845
1,085,811
(549,892)
(100,927)
2,070,837
1,121,719
175,962
(555,870)
(41,945)
699,866
$
$
$
$
$
36.34 $
36.14 $
35.94 $
36.28 $
36.35 $
31.43
35.94
30.46
32.23
33.29
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,
2020
2019
2021
Restricted shares and restricted
unit awards granted
Weighted average grant date fair
value
Aggregate fair value of vested
restricted share and unit awards
1,261,773
1,535,330
1,195,741
$
36.12 $
37.55 $
32.89
$
65,477 $
39,703 $
46,262
The aggregate intrinsic value of restricted units outstanding at
December 31, 2021 was $31.1 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
three-year
target and maximum goals over
threshold,
performance periods. Final payouts depend on the level of
achievement along with each employees continued service
through the vest date, and can vary between 0% and 200%.
The grant date fair value of the performance awards is
measured using a Monte Carlo simulation model, which
incorporated the assumptions summarized in the table below.
Expected volatility
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.
is based on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Expense
25. Statutory Information
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,
2020
2019
2021
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
$
$
$
$
12,316 $
46,817
23,696
3,751
86,580 $
11,744 $
41,284
14,729
2,135
69,892 $
12,866
38,988
8,949
3,045
63,848
10,927 $
39,349
21,920
3,471
75,667 $
10,388 $
34,599
13,380
1,978
60,345 $
11,450
32,999
8,295
2,758
55,502
December 31, 2021
Stock
Options and
SARs
Restricted
Common
Shares and
Units
Performance
Common
Shares and
Units
$
8,233 $
45,936 $
7,635
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 2021, 2020 and 2019, the
Company expensed $60.4 million, $52.0 million and $44.8
million, respectively, related to these retirement plans.
24. Legal Proceedings
The Company, in common with the insurance industry in
general, is subject to litigation and arbitration in the normal
course of its business. As of December 31, 2021, 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.
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,
2021 and 2020:
Actual capital and surplus (1):
Bermuda
Ireland
United States
United Kingdom
Canada
Australia
Required capital and surplus:
Bermuda
Ireland
United States
United Kingdom
Canada
Australia
December 31,
2021
2020
$ 17,528,510 $ 17,390,943
883,337
4,904,840
967,440
64,286
64,507
958,200
5,600,652
902,002
70,063
283,693
$ 5,661,301 $ 5,234,121
701,161
1,644,324
601,662
37,441
19,370
794,933
1,717,646
563,164
42,513
214,022
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.
0.91
1.23
0.52
(1)
Such amounts include ownership interests in affiliated insurance and
reinsurance subsidiaries.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory net income (loss) for the Company’s principal
operating subsidiaries for 2021, 2020 and 2019 was as
follows:
Year Ended December 31,
2020
2019
2021
$ 2,370,746 $ 1,579,889 $ 1,801,486
25,191
345,790
35,286
6,985
11,874
18,397
143,271
4,078
(1,049)
(8,601)
26,367
481,188
(17,423)
(1,023)
(6,199)
Statutory net income
(loss):
Bermuda
Ireland
United States
United Kingdom
Canada
Australia
Bermuda
the Company’s Bermuda
Under
the Bermuda Insurance Act 1978 and related
regulations, each as amended (the “Insurance Act”), Arch Re
Bermuda,
reinsurance and
insurance subsidiary, is registered as a Class 4 insurer and
long-term insurer and is required to maintain minimum
statutory capital and surplus equal to the greater of a
the enhanced capital
minimum solvency margin and
requirement (“ECR”) as determined by
the Bermuda
Monetary Authority (“BMA”). The ECR is calculated based
on the Bermuda Solvency Capital Requirement model, a risk-
based model that takes into account the risk characteristics of
different
business.
the
At December 31, 2021 and 2020, the actual and required
capital and surplus were based on the economic balance sheet
requirements.
company’s
aspects
of
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 2022 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
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, 2021 and 2020, 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 $217.5 million of
dividends during 2022 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.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 AMIC
and Arch Mortgage Guaranty Company, the North Carolina
Department of Insurance (“NC DOI”) for UGRIC, 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 $194.1
million of ordinary dividends in 2022, 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 requirements under
PMIERs, including the minimum 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.
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.
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.), 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, 2021 and
2020, 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 and letters of credit
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
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1982 regarding the operation of the Lloyd’s market. With
respect to managing agents and corporate members, Lloyd’s
prescribes
to
management and control, solvency and other requirements
and monitors managing agents’ compliance with such
standards.
certain minimum
standards
relating
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,
insurance
requires
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
adequate margin of assets over
in Canada,
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
Australia
The Australian Prudential Regulation Authority (“APRA”) is
an independent statutory authority responsible for prudential
supervision of institutions across banking, insurance and
superannuation and promotes financial stability in Australia.
Arch Indemnity has been authorized to conduct monoline
lenders’ mortgage insurance business in Australia since June
2002 and was acquired by Arch Capital on August 30, 2021.
Arch LMI Pty Ltd. (“Arch LMI”) was authorized by APRA
in January 2019 to conduct monoline lenders’ mortgage
insurance
regulatory
requirements that are applicable to Arch LMI and Arch
Indemnity as general as an insurance providers 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. At December 31, 2021 and 2020, these
requirements were met.
in Australia. Major
business
through
in Australia
Arch Capital also conducts property and casualty insurance
business
the Company’s Lloyd’s
platform. This insurance business is managed by and
distributed through local coverholders and is subject to
Lloyd’s Supervision. In addition, the business is subject to
local Australian prudential regulatory oversight by APRA,
and additional separate financial services market conduct
regulation by the Australian Securities and Investments
Commission.
26. Subsequent Events
Bellemeade Re 2022-1 Ltd.
In January 2022, the Company announced that it has obtained
over $315 million of indemnity reinsurance on a pool
representing approximately $6.3 billion of mortgages from
Bellemeade Re 2022-1 Ltd., a special purpose reinsurer. The
coverage was
approximately
in direct
$283.5 million
reinsurance. This transaction largely covers a portfolio of
policies issued from July through November 2021.
obtained
in bonds and $33 million
issuing
by
Share Repurchases
From January 1 to February 25, 2022, the Company
repurchased 890,180 common shares for an aggregate
purchase price of $41.5 million. At February 25, 2022
approximately $1.14 billion of repurchases were available
under the share repurchase program.
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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, 2021, 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
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, 2021. 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, 2021, our internal control over financial
reporting was effective. The effectiveness of our internal
control over financial reporting as of December 31, 2021 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,
2021 that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.
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, 2021. 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
and
our
nominating committee are posted on our website located at
www.archgroup.com.
compensation
committee,
committee
audit
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, 2021, 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, 2021, which Proxy Statement is incorporated
by reference.
The following information is as of December 31, 2021:
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)
17,812,796
—
17,812,796
$
$
25.06
—
25.06
12,445,518
—
12,445,518 (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 17,083,160 and restricted stock and performance units outstanding of 729,636. 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, 2021 was 4.4 years.
Includes 1,608,354 common shares remaining available for future issuance under our Employee Share Purchase Plan and 10,837,164 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, 3,310,797 common shares, or 26.6%
of the 12,445,518 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, 2021, 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, 2021, 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, 2021 and 2020, and for the years ended December 31, 2021, 2020 and 2019
III. Supplementary Insurance Information
For the years ended December 31, 2021, 2020 and 2019
IV. Reinsurance
For the years ended December 31, 2021, 2020 and 2019
VI. Supplementary Information for Property and Casualty Insurance Underwriters
For the years ended December 31, 2021, 2020 and 2019
Page No.
175
178
179
180
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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3. Exhibits
Filed
Herewith
X
X
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
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
10.2.3
10.3.1
10.3.2
10.3.3
10.3.4
10.3.5
10.4.1
10.4.2
10.4.3
10.4.4
Exhibit Description
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 F Non-Cumulative Preferred Shares
Certificate of Designations of Series G Non-Cumulative Preferred Shares
Specimen Common Share Certificate
Specimen Series F Non-Cumulative Preferred Share Certificate
Specimen Series G 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 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
Deposit Agreement, dated June 11, 2021, 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 August 17, 2017
Form of Depositary Receipt, dated June 11, 2021
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
Form
S-4
10-Q
10-K
8-K
8-K
10-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
8-K
Incorporated by Reference
Original
Number
3.1
3
3.3
4.1
4.1
4.1
4.2
4.2
4.1
Date Filed
September 8, 2000
August 5, 2016
February 28, 2011
August 17, 2017
June 11, 2021
April 2, 2001
August 17, 2017
June 11, 2021
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
August 17, 2017
June 11, 2021
August 17, 2017
June 11, 2021
December 9, 2016
December 9, 2016
Third Amended and Restated ACGL Incentive Compensation Plan†
First Amendment to Third Amended and Restated ACGL Incentive Compensation
Plan†
10-Q
10-Q
10.7
10.1
August 5, 2016
May 5, 2017
Second 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, Nicolas Papadopoulo, Maamoun Rajeh and Louis
T. Petrillo†
Form of Restricted Share Agreement, dated as of May 13, 2016, between ACGL
and each of Marc Grandisson, 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, Nicolas Papadopoulo, Maamoun Rajeh and Louis T.
Petrillo†
DEF 14A
DEF 14A
DEF 14A
DEF 14A
DEF 14A
April 3, 2007
March 27, 2012
March 26, 2015
March 28, 2018
March 23, 2016
10-Q
10.2
August 7, 2015
10-Q
10.2
August 5, 2016
10-Q
10-Q
10.3
10.4
August 4, 2017
August 4, 2017
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Table of Contents
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
10.7.14
10.8.1
10.8.2
10.8.3
10.10
10.11
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†
Form of Non-Qualified Stock Option Agreement, dated as of May 13, 2016,
between ACGL and each of Marc Grandisson, 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, Nicolas Papadopoulo, Maamoun
Rajeh and Louis T. Petrillo†
10-K
10.4.13
February 28, 2018
10-Q
10-Q
10-Q
10-Q
10-Q
10.3
10.6
10.5
10.3
10.3
August 8, 2018
August 8, 2018
August 8, 2018
August 7, 2015
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 and Louis T. Petrillo†
Form of Share Appreciation Right Agreement, dated as of May 6, 2009, between
ACGL and each of Marc Grandisson and John D. Vollaro†
Form of Share Appreciation Right Agreement, dated as of May 5, 2010, between
ACGL and each of Marc Grandisson 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 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 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, 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, 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, Maamoun Rajeh and Louis T. Petrillo†
Share Appreciation Right Agreement, dated as of July 1, 2014, between ACGL and
Maamoun Rajeh†
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 September 19, 2017 between ACGL and
Maamoun Rajeh†
Employment Agreement, dated as of September 19, 2017 between ACGL and
Nicholas Papadopoulo†
10-Q
10-Q
10-Q
10-K
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
November 8, 2010
November 8, 2011
10-Q
10.12
November 8, 2011
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
8-K
10-Q
10-Q
10.1
10.2
10.3
10.4
10.3
10.2
10.3
November 3, 2017
November 3, 2017
November 9, 2012
November 3, 2017
August 9, 2013
November 8, 2013
August 8, 2014
10.15
November 3, 2017
10.2
10.1
10.1
10.1
May 8, 2015
October 28, 2008
May 8, 2015
May 9, 2018
10-Q
10.26
November 3, 2017
10-Q
10.27
November 3, 2017
ARCH CAPITAL
171
2021 FORM 10-K
Table of Contents
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
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 †
Employment Agreement dated as of May 7, 2021 between Arch Capital Group Ltd.
and Christine Todd †
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-Q
10-K
8-K
10.16
February 28, 2020
10.1
August 5, 2021
10.24
10.1
March 2, 2009
December 18, 2019
First Amendment to Third Amended and Restated Credit Agreement, dated as of
August 12, 2020 by and among Arch Capital Group Ltd., the other Loan Parties
party hereto, the Lenders party hereto, and Bank of America, N.A., as
Administrative Agent.
10-Q
10.1
November 4, 2021
10.20
The LIBOR Transition Amendment to the Third Amended and Restated Credit
Agreement, dated as of September 29, 2021.
10-Q
10.2
November 4, 2021
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, 2021 formatted in Inline XBRL: (i) Consolidated
Balance Sheets at December 31, 2021 and 2020; (ii) Consolidated Statements of
Income for the years ended December 31, 2021, 2020 and 2019; (iii) Consolidated
Statements of Comprehensive Income for the years ended December 31, 2021, 2020
and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the
years ended December 31, 2021, 2020 and 2019; (v) Consolidated Statements of Cash
Flows for the years ended December 31, 2021, 2020 and 2019; 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
ARCH CAPITAL
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2021 FORM 10-K
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 25, 2022
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 25, 2022
Executive Vice President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Treasurer
February 25, 2022
*
John M. Pasquesi
Chairman of the Board
*
John L. Bunce, Jr.
Director
*
Eric W. Doppstadt
Director
*
Francis Ebong
Director
*
Laurie S. Goodman
Director
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
ARCH CAPITAL
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2021 FORM 10-K
Table of Contents
Name
*
Moira Kilcoyne
Director
*
Eileen Mallesch
Director
*
Louis J. Paglia
Director
*
Brian S. Posner
Director
*
Eugene S. Sunshine
Director
*
John D. Vollaro
Director
*
Thomas R. Watjen
Director
Title
Date
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
___________________
*
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
ARCH CAPITAL
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2021 FORM 10-K
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
Investment in operating affiliates
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: 583,289,850 and 579,000,841)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 204,365,956 and 172,280,199)
Total shareholders' equity
Total liabilities and shareholders' equity
December 31,
2021
2020
$
2,038 $
16,317
172
18,932
14,822,024
14,377,529
6,877
11
9,604
7,731
—
10,659
$
14,856,871 $
14,415,023
$
1,286,208 $
1,285,867
—
24,767
—
23,270
1,310,975
1,309,137
830,000
648
2,085,075
14,455,868
(64,600)
780,000
643
1,977,794
12,362,463
488,895
(3,761,095)
(2,503,909)
$
$
13,545,896 $
13,105,886
14,856,871 $
14,415,023
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)
Year Ended
December 31,
2021
2020
2019
Revenues
Net investment income
Net realized gains (losses)
Total revenues
Expenses
Corporate expenses
Interest expense
Net foreign exchange (gains) losses
Total expenses
Income (loss) before income taxes and income (loss) from operating affiliates
Income (loss) from operating affiliates
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
$
1,524 $
53 $
—
1,524
(2,110)
(2,057)
71,818
58,741
7
65,566
40,445
3
130,566
106,014
(129,042)
(108,071)
(590)
(437)
(129,632)
(108,508)
212
—
212
62,701
22,154
1
84,856
(84,644)
(762)
(85,406)
1,721,725
1,636,319
1,514,029
1,405,521
2,286,481
2,156,849
(48,343)
(15,101)
(41,612)
(41,612)
—
—
Net income available to Arch common shareholders
$
2,093,405 $
1,363,909 $
1,594,707
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
Net Cash Used For Investing Activities
Financing Activities:
Purchases of common shares under share repurchase program
Proceeds from common shares issued, net
Proceeds from issuance of preferred shares, 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,
2021
2020
2019
$
1,727,529 $
124,751 $
52,487
(1,866)
(130)
(487,161)
(988,975)
(783)
(15)
(489,810)
(989,120)
(1,234,294)
6,418
485,821
(450,000)
—
(48,280)
(1,240,335)
(83,472)
1,876
—
—
988,393
(41,612)
865,185
(2,616)
18,960
816
18,144
$
16,344 $
18,960 $
61
(2,121)
(162)
(2,222)
(2,871)
6,203
—
—
—
(41,612)
(38,280)
11,985
6,159
18,144
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
December 31, 2021
Insurance
Reinsurance
Mortgage
Other
$378,265
424,390
99,186
$9,810,622
6,878,721
1,067,813
$2,937,664
2,263,264
811,014
Total
$901,841
$17,757,156
$6,011,942
$3,626,468
2,840,443
1,283,419
331,968
$8,082,298
December 31, 2020
Insurance
Reinsurance
Mortgage
Other
Total
December 31, 2019
Insurance
Reinsurance
Mortgage
Other
Total
$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
$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
NM $2,344,365
1,924,719
NM
56,677
NM
259,042
NM
NM $4,584,803
NM $2,092,453
1,628,320
NM
528,344
NM
NM
440,482
NM $4,689,599
NM $1,615,475
1,011,329
NM
53,513
NM
NM
453,135
NM $3,133,452
$606,265
536,754
97,418
62,741
$1,303,178
$418,483
354,048
134,240
98,071
$1,004,842
$558,906
212,810
194,010
32,869
$998,595
$4,148,193
3,254,374
1,261,068
354,702
$9,018,337
$489,153
168,011
162,202
55,810
$875,176
$3,162,907
2,457,370
1,279,850
537,589
$7,437,716
$361,614
239,032
134,319
105,980
$840,945
$454,770
141,484
153,092
51,651
$800,997
$2,641,726
1,602,723
1,261,756
532,862
$6,039,067
(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. 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
178
2021 FORM 10-K
Table of Contents
Year Ended December 31, 2021
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
Year Ended December 31, 2020
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
Year Ended December 31, 2019
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
$
$
$
$
$
$
5,833,873 $
408,520
1,213,333
251,106
7,706,832 $
(1,719,541) $
(1,839,556)
(246,757)
(102,763)
(3,734,150) $
33,861 $
4,685,410
294,492
206,359
5,045,655 $
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 $
4,148,193
3,254,374
1,261,068
354,702
9,018,337
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
0.8 %
144.0 %
23.4 %
58.2 %
55.9 %
0.9 %
128.9 %
22.0 %
61.7 %
47.5 %
1.1 %
130.1 %
19.2 %
78.0 %
40.7 %
(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.
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Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(U.S. dollars in thousands)
Column A Column B
Column C Column D Column E Column F Column G
Column H
Column I
Column J Column K
SCHEDULE VI
Reserves for
Losses and
Loss
Adjustment
Expenses
Discount, if
any,
deducted
in Column
C
Net Losses and Loss
Adjustment Expenses
Incurred Related to
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income
(a)
Current
Year
(b)
Prior
Years
Amortization
of Deferred
Acquisition
Costs
Net Paid
Losses and
Loss
Adjustment
Expenses
Net
Premiums
Written
Deferred
Acquisition
Costs
$ 901,841 $ 17,757,156 $
790,708
633,400
16,513,929
13,891,842
55,575 $ 6,011,942 $ 8,082,298 $ 389,118 $ 4,940,987 $ (356,184) $
(161,452)
23,326
(163,585)
22,012
4,838,965
4,339,549
4,851,051
3,297,037
6,991,935
5,786,498
519,608
627,738
1,303,178 $ 2,826,551 $ 9,018,337
7,437,716
2,661,117
1,004,842
6,039,067
2,383,255
840,945
Affiliation
with
Registrant
Consolidated
Subsidiaries
2021
2020
2019
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
ARCH CAPITAL
180
2021 FORM 10-K
ARCH CAPITAL GROUP LTD.
DIRECTORS
John M. Pasquesi 3,4,5,6
Chair of Board
Managing Member of Otter Capital LLC
OFFICERS
Marc Grandisson 3
Chief Executive Officer
Director
John L. Bunce, Jr. 2,3,4,5
Managing Director and Founder of Greyhawk Capital
Management, LLC and Managing Director and Founder
of Steel Box, LLC
Eric W. Doppstadt 2,4,5
Vice President and Chief Investment Officer
of the Ford Foundation
Jennifer Centrone
Chief Human Resources Officer
David E. Gansberg
Chief Executive Officer, Mortgage Group
Chris Hovey
Chief Operations Officer
Francis Ebong 4,6
Managing Director, Program Management at X
François Morin
Chief Financial Officer and Treasurer
Laurie S. Goodman 1,5,6
Institute Fellow at the Urban Institute and Founder of its
Housing Finance Policy Center
Nicolas Papadopoulo
President and Chief Underwriting Officer
Chief Executive Officer, Insurance Group
Moira Kilcoyne 4,5,6
Former Managing Director, Co-Chief Information Officer
of Morgan Stanley
Louis T. Petrillo
General Counsel
Eileen Mallesch 1,6
Former SVP & CFO of Nationwide Property and Casualty
Segment, Nationwide Mutual Insurance Company
Maamoun Rajeh
Chief Executive Officer, Reinsurance Group
Jay Rajendra
Chief Strategy and Innovation Officer
Louis J. Paglia 2,5,6
Founder of Oakstone Capital LLC and Former Executive
Vice President of UIL Holdings Corporation
Christine Todd
Chief Investment Officer
Brian S. Posner 1,5,6
President of Point Rider Group LLC
Eugene S. Sunshine 1,2,5
Former Senior Vice President for Business and Finance
at Northwestern University
John D. Vollaro 4,6
Senior Advisor
Former Executive Vice President, Chief Financial Officer
and Treasurer
Thomas R. Watjen 1,2,4
Former President and Chief Executive Officer
of Unum Group
SHAREHOLDER INFORMATION
CORPORATE ADDRESS
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
T: 441 278 9250
MARKET INFORMATION
The common shares of Arch Capital Group Ltd. are
listed on the NASDAQ Global Select Market under the
symbol ACGL.
1 Audit Committee
2 Compensation Committee
3 Executive Committee
4 Finance, Investment and Risk Committee
5 Nominating and Governance Committee
6 Underwriting Oversight Committee
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
2 0 2 1 A N N U A L R E P O R T
I
A
R
C
H
C
A
P
T
A
L
G
R
O
U
P
L
T
D
.
2
0
2
1
A
N
N
U
A
L
R
E
P
O
R
T
©2022 Arch Capital Group Ltd. All Rights Reserved.
ARCH CAPITAL GROUP LTD.
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