Arch Capital Group Ltd.
2023 ANNUAL REPORT
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archgroup.com
©2024 Arch Capital Group Ltd. All rights reserved. 00365.
FINANCIAL HIGHLIGHTS
GROSS PREMIUMS WRITTEN
NET LOSS RESERVES
$18.4B
$16.1B
TOTAL ASSETS
TOTAL CAPITALIZATION
$58.9B
$21.1B
(Amounts in U.S. $ million, except percentages and per share data)
Book value per common share at year end
Net income available to common shareholders
Per share
Net income return on average common equity
Gross premiums written
Underwriting income*
After-tax operating income*
Per share
Operating return on average common equity*
Growth in Book Value per Common Share†
$50.00
$45.00
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
2023
$46.94
$4,403
$11.62
29.7%
2022
$32.62
$1,436
$3.80
11.6%
$18,403
$15,327
$2,612
$3,201
$8.45
21.6%
$1,796
$1,840
$4.87
14.8%
Change
43.9%
206.6%
205.8%
20.1%
45.4%
74.0%
73.5%
15.3%BVPS Growth
Rate
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
* We use non-GAAP financial measures in this report. The first mention of each non-GAAP financial measure is referenced by an asterisk (*). See Additional Information for a reconciliation to the most
comparable GAAP financial measures.
† Annualized growth rate from December 31, 2001 to December 31, 2023. Excludes the effects of stock options, restricted and performance stock units outstanding.
ARCH CAPITAL GROUP LTD.
DIRECTORS
John M. Pasquesi 3,4,6
Chair of the Board
Managing Member of Otter Capital LLC
John L. Bunce, Jr. 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
Francis Ebong 1,2,5
Managing Director of Turtle Capital, LLC
Laurie S. Goodman 1,5,6
Institute Fellow at the Urban Institute and Founder of its Housing
Finance Policy Center
Moira Kilcoyne 1,2,5
Former Managing Director, Co-Chief Information Officer
of Morgan Stanley
Eileen Mallesch 1,6
Former SVP & CFO of Nationwide Property and Casualty Segment,
Nationwide Mutual Insurance Company
Louis J. Paglia 2,6
Founder of Oakstone Capital LLC and Former Executive Vice
President of UIL Holdings Corporation
Brian S. Posner 2,4
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 and former Executive Vice President, Chief Financial
Officer and Treasurer, Arch Capital Group Ltd.
OFFICERS
Marc Grandisson 3
Chief Executive Officer
Director
Jennifer Centrone
Chief Human Resources Officer
David E. Gansberg
Chief Executive Officer, Mortgage Group
Chris Hovey
Chief Operations Officer
François Morin
Chief Financial Officer and Treasurer
Nicolas Papadopoulo
President and Chief Underwriting Officer
Chief Executive Officer, Insurance Group
Louis T. Petrillo
General Counsel
Maamoun Rajeh
Chief Executive Officer, Reinsurance Group
Jay Rajendra
Chief Strategy and Innovation Officer
Christine Todd
Chief Investment Officer
1 Audit Committee
2 Compensation and Human Capital Committee
3 Executive Committee
4 Finance, Investment and Risk Committee
5 Nominating and Governance Committee
6 Underwriting Oversight Committee
SHAREHOLDER INFORMATION
CORPORATE ADDRESS
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
T: 441 278 9250
MARKET INFORMATION
The common shares of Arch Capital Group Ltd. are listed on the
NASDAQ Global Select Market under the symbol ACGL.
TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
SHAREHOLDER INQUIRIES
François Morin
Chief Financial Officer and Treasurer
T: 441 278 9250
©2024 Arch Capital Group Ltd. All rights reserved.
©2024 Arch Capital Group Ltd. All rights reserved.
TO OUR SHAREHOLDERS
2023 was an exceptional year of growth and
success at Arch. For the second consecutive
year, we surpassed previous milestones in
premium growth and underwriting income
while further establishing our leadership
position in the specialty insurance sector. Our
shareholders were rewarded with an 18.3%
share price increase and a net income return on
average common equity of 29.7%.
MARC GRANDISSON
CEO, ARCH CAPITAL GROUP LTD.
Arch Capital Group Ltd. 2023 Annual Report | 1
UNDERWRITING
INCOME ($M)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
CHANGE
101%
CHANGE
249%
CHANGE
-15%
2022
2023
2022
2023
2022
2023
Insurance
Reinsurance
Mortgage
Arch’s 2023 results underscore a consistent vision and reflect the
We believe there’s a direct line between our recent success and our
continuous investments we have made in our platform and our
unique business strategy. We operate in a consistent and intentional
people. Our Insurance and Reinsurance teams leveraged their global
way. We underwrite specialty lines, adhere to a cycle management
underwriting reach to lean into improved property and casualty (P&C)
philosophy to navigate market cycles and dynamically allocate capital
market conditions — writing over $17.0 billion of gross premiums
to the opportunities with the greatest risk-adjusted returns. That,
and $12.4 billion of net premiums, both significant increases from
combined with a focus on hiring intelligent, inquisitive people, equals
records set in 2022. Outside of the P&C businesses, our consistently
a recipe for long-term success.
profitable Mortgage segment delivered over $1.0 billion of
underwriting income for the second consecutive year. Finally, our
Having the people, platform and discipline to adhere to our
investment portfolio, fueled by premium growth and strong cash
flows, grew to over $34.6 billion.
A GLOBAL
PRESENCE
principles helps fuel our growth, limit volatility and position us
—
resulting in an attractive
to continue our current trajectory
shareholder value proposition.
Denmark
United
Kingdom
Ireland
Spain
Canada
United States
Bermuda
Gibraltar
Switzerland
6,400+
Employees Worldwide
Corporate
Insurance
Mortgage
Reinsurance
Global Services
2 | Arch Capital Group Ltd. 2023 Annual Report
United Arab Emirates
France
Philippines
Australia
NET PREMIUMS
WRITTEN ($M)
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
CHANGE
17%
CHANGE
33%
CHANGE
-7%
2022
2023
$0
Insurance
2022
2023
Reinsurance
2022
2023
Mortgage
Underwriting Results
At Arch, underwriting compensation is aligned with shareholder
results, meaning the profitability of the business is what ultimately
drives underwriting decisions. This is key to our success. Therefore,
whether we are operating in a hard or soft market, we maintain a
principled underwriting approach focused on pricing adequacy
and risk-adjusted returns. Our focus on underwriting profitability is
reflected in the $2.6 billion* of underwriting income generated across
our segments, a 45% increase from 2022.
Along with our focus on underwriting returns, we take a long-term view
of risk that dictates a prudent approach to reserving. At Arch, we protect
shareholder capital by conservatively setting our reserves based on
a comprehensive view of historical losses and actuarial models and
then let the reserves age until there is enough data to more precisely
determine the ultimate loss. For us, the adage holds true: Recognize
bad news quickly and good news over time. Fortunately, for Arch and
our shareholders, we have good news to report.
Segment Performance
Arch is a diversified enterprise. That enables us to manage the
insurance cycle by dynamically allocating capital
across and
within our business segments
to the opportunities with the
—
—
greatest expected returns. Since the emergence of the current hard
market cycle, we have increasingly deployed capital into our P&C
segments, which offer tremendous growth opportunities combined
Philippines
with solid risk-adjusted returns.
Australia
INSURANCE
The Insurance group wrote $5.9 billion of net premium in 2023, a 17%
increase from 2022, while delivering $450 million of underwriting
income — more than double the $224 million produced in 2022.
* We use non-GAAP financial measures in this report. The first mention of each non-GAAP
financial measure is referenced by an asterisk (*). See Additional Information for a
reconciliation to the most comparable GAAP financial measures.
Premium growth in 2023 came from a diverse mix of products including
Property, Energy, Marine and Aviation, Construction and National
Accounts, and Programs. I’m also pleased to note the increasing
market leadership and influence of the Insurance team, which received
a significant number of accolades last year including, importantly,
several awards recognizing our commitment to broker partners.
REINSURANCE
For the second consecutive year, our Reinsurance segment grew
the most of our three underwriting segments. Net premiums written
(NPW) were $6.6 billion in 2023, a 33% increase from 2022.
Underwriting income increased to $1.1 billion, an impressive 249%
jump from 2022 and evidence of our ability to rapidly increase our
capacity to meet client demands around the world. Growth in our
Reinsurance book was broad-based, reflecting improved market
conditions, the expertise and leadership of our talented team and a
reduction in capacity from our competition.
MORTGAGE
The Mortgage segment remained a global leader in acquiring,
managing and syndicating mortgage credit risk and has become a
reliable “earnings engine” for our shareholders. In 2023, the segment
generated $1.1 billion of underwriting income while writing
$1.1 billion of NPW, an excellent performance despite a housing market
with lower new originations amid tight supply. Persistency of coverage
remained strong as higher mortgage rates reduced the incentive for
most homeowners to sell their homes or refinance their mortgages.
The credit quality of homebuyers with loans we insure remains
very strong, and the discipline of the overall mortgage market is
reassuring. Our focus on credit quality and profitability over volume
helps ensure a well-constructed portfolio that can deliver profitable
results under different economic scenarios.
Arch Capital Group Ltd. 2023 Annual Report | 3
Denmark
United
Kingdom
Ireland
Spain
Canada
United States
Bermuda
Gibraltar
Switzerland
United Arab Emirates
France
Corporate
Insurance
Mortgage
Reinsurance
Global Services
Investment Results and Cash Flow
Fueled by the extraordinary premium growth in our P&C segments,
investable assets, or “the float,” increased to $34.6 billion at the end of
2023, a 23% increase from the $28.1 billion at the end of 2022. Net
investment income exceeded $1.0 billion for the first time in our history,
a 106% increase from 2022 on a per-share basis as higher investment
yields continue to earn into our results.
We maintain a cautious approach toward duration and credit risk. At
the end of 2023, approximately 76% of the portfolio was invested in
fixed maturity and short-term securities with an average credit quality
of “AA-/Aa3,” and our overall portfolio had an average effective duration
of 2.91 years.
Capital Management
We take pride in our reputation as an effective allocator of capital, and
we carefully consider all opportunities when deploying the capital
entrusted to us. In 2023, we strategically deployed capital into our P&C
segments to fund growth we believe will generate excellent returns.
We maintain a strong balance sheet and a prudent approach to
reserving that allows us to support our client obligations and provides
us with the financial flexibility to seize compelling market opportunities
that arise. The ratio of debt and preferred shares to total capital was
16.9% at the end of 2023, indicating substantial liquidity.
Arch’s People
Our people are our competitive advantage. The knowledge, hard work,
innovation and dedication to client needs of more than 6,400 Arch
employees help sustain Arch’s high performance. As our company
continues to grow, we maintain a focus on building strength and talent
density across our teams. By enabling our employees to lead with
purpose and engage in thoughtful collaboration, Arch cultivates a
workplace where individuals can connect, grow and build a fulfilling
and rewarding career.
In 2023, we completed our biennial all-employee survey, which
gathered critical feedback from the people who know us best. I’m
pleased to report our employee engagement score was 88% (10 points
above the industry average), up four points from our first all-employee
survey in 2019.
16.8%
U.S. Gov’t
33.3%
Corporates
INVESTMENTS
BY TYPE
17.9%
Equity Method
Funds & Other
3.4%
Equity
Securities
8.7%
Cash &
Short-term
6.0%
Non-U.S. Gov’t
6.5%
Asset Backed Securities
0.7%
Municipal
3.5%
CMBS1
3.2%
MBS2
1
2
CMBS = Commercial mortgage-backed securities.
MBS = Mortgage-backed securities.
FIXED MATURITIES
BY RATING
0.1%
Under B
1.6%
B
1.9%
Not Rated
2.9%
BB
26.8%
U.S. Gov’t and
Gov’t Agencies3
20.9%
BBB
19.1%
A
17.8%
AAA
8.9%
AA
3
Includes U.S. government-sponsored agency MBS and agency CMBS.
4 | Arch Capital Group Ltd. 2023 Annual Report
4 | Arch Capital Group Ltd. 2023 Annual Report
I’m very proud of these results. In an industry where talent is a true
differentiator, having an engaged and challenged workforce is critical
Outlook
Even after 22 years at Arch, I’m continually amazed by what we can
to maintaining our edge.
accomplish together.
2023 EMPLOYEE
ENGAGEMENT SURVEY
92%
86%
93%
84%
92%
80%
I am proud to work
I am proud to work
for Arch.
for my company.
Senior leadership is committed
Senior leadership is committed
to providing high quality
to providing high-quality
products and services to
products and services to
external customers.
external customers.
I am extremely
I am extremely
satisfied with Arch
satisfied with my
as a place to work.
company as a place
to work.
Arch 2023 % Favorable
Arch
WSA F&I Average
WSA Finance &
Insurance Average
Our 2023 anonymous employee survey was conducted by Workforce Science
Associates (WSA). Survey results provided represent the percentages of those
who responded.
The last few years have seen us grow into a market leader as we strive
to be the first choice for clients, shareholders, employees and our
communities. Our progress has been impressive. Of course, as anyone
knows, the hardest part of becoming a leader is remaining a leader.
Building upon this success is our charge for 2024 and beyond.
Our ability to act swiftly at the outset of the hard market established
Arch as a compelling partner. While we’ve been working to maximize
today’s opportunity, we’re also focused on the future. Over the past
several years we’ve made meaningful enhancements to our platform,
including entering new lines, expanding into new geographies and
making investments into new underwriting teams, technology and data
analytics — all with an eye on creating additional shareholder value.
Collaborative leadership, incessant curiosity and a willingness to
challenge one another are crucial aspects of our culture and part of what
allows us to maintain the discipline and institutional knowledge needed
to navigate market cycles to deliver consistent and profitable results.
I want to thank Arch employees for their work in 2023 and their
passion to help our clients, employees, investors and communities
achieve their greatest potential. I also want to thank our distributors,
clients and other partners for choosing to do business with Arch. And,
finally, thank you to our shareholders for your continued confidence
and support.
Marc Grandisson
CEO
Arch Capital Group Ltd.
Arch Capital Group Ltd. 2023 Annual Report | 5
KEY RATIOS
Loss Ratio
2022
2023
57.3% 61.0%
Underwriting Expense Ratio
34.4% 34.0%
Combined Ratio
91.7% 95.0%
“
The way that Arch Insurance has been able to fully capitalize on the hard
market environment — across geographies and business lines — is a
testament to the capabilities of our team. 2023 was one of our best years yet,
and we are certainly well-positioned as we head into 2024 and beyond.
”
6 | Arch Capital Group Ltd. 2023 Annual Report
NICOLAS PAPADOPOULO
PRESIDENT AND CHIEF UNDERWRITING OFFICER, ARCH CAPITAL GROUP LTD. AND CEO, ARCH WORLDWIDE INSURANCE GROUP
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
The Insurance segment continues to benefit from moving swiftly and decisively to focus on growth in the early days of the current hard market.
In 2023, Arch Insurance built on momentum from prior years and wrote $5.9 billion of net premium, a 17% increase from 2022, while also
delivering $450 million of underwriting income — more than double the 2022 result. Growth was widespread in both the Admitted and Excess
and Surplus markets, with the most notable gains in the areas of Property, Energy, Marine and Aviation, Construction and National Accounts,
and Programs. During the year, Arch Insurance launched several growth-focused initiatives, including the proactive cyber insurance solution,
Arch CyPro; built out a Contingency/Accident and Health book in London; and expanded operations into France and Spain.
2023 HIGHLIGHTS
INSURANCE NET PREMIUMS WRITTEN
Wrote $7.9 billion of gross premium, a 14% increase from 2022.
Delivered a 91.7% combined ratio and 89.6%* combined ratio
excluding catastrophic activity and prior year development,
both improvements over 2022 that reflected the strong
underwriting quality of the Arch Insurance book.
Arch UK Regional Division awarded Commercial Lines Insurer
of the Year at the 2023 Insurance Times Awards.
Launched Arch CyPro, a solution-first approach to cyber
insurance combining proactive strategies and tailored policies
to meet the needs of individual clients.
Arch Insurance P&C Programs Team named 5-Star Carrier by
Insurance Business America for the third straight year.
4.0%Warranty & Lenders
Solutions
23.9%Professional Lines
9.2%
Excess & Surplus Casualty
10.7%
Construction &
National Accounts
9.2%Other
9.5%
Travel, Accident &
Health
2023 TOTAL
$5.9B
12.7%Programs
20.8%Property, Energy,
Marine & Aviation
$7,000
CALENDAR YEAR NET PREMIUMS WRITTEN BY LINE ($M)
$6,000
$6,000
$5,000
$5,000
$4,000
$4,000
$3,000
$3,000
$2,000
$2,000
$1,000
$1,000
$0
$0
2014
2014
2015
2015
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
2022
2022
2023
2023
Property, Energy, Marine & Aviation
Professional Lines
Programs
Construction & National Accounts
Excess & Surplus Casualty
Travel, Accident & Health
Warranty & Lenders Solutions
Other
Arch Capital Group Ltd. 2023 Annual Report | 7
Other
Warranty and lenders solu(cid:31)ons
Travel, accident and health
Excess and surplus casualty
Construc(cid:31)on and na(cid:31)onal
accounts
Programs
Professional Lines
Property, energy, marine and
avia(cid:31)on
KEY RATIOS
Loss Ratio
2022
2023
55.3% 64.9%
Underwriting Expense Ratio
26.1% 27.3%
Combined Ratio
81.4% 92.2%
“
Through the creativity, speed of execution and solutions-oriented
focus of our team, Arch Re was able to lean into the hard market and
further establish our position as a reinsurance market leader.
”
8 | Arch Capital Group Ltd. 2023 Annual Report
MAAMOUN RAJEH
CHAIRMAN AND CEO, ARCH WORLDWIDE REINSURANCE GROUP
Increasingly, clients and brokers around the world are turning to Arch Re as their first contact when they need a solution to a complex problem.
In 2023, Arch Re fully leveraged its platform and people to deliver outstanding performance — resulting in record top- and bottom-line results
for the segment. Growth in the reinsurance book was broad-based, reflecting improved market conditions in Property and Other Specialty
lines, as Arch Re delivered capacity and value to its clients and brokers. Additionally, Arch Re continued to build its Insurance-Linked Securities
capabilities as it seeks to provide clients with a diversified pool of capital that leverages Arch Re’s strong underwriting capabilities.
2023 HIGHLIGHTS
REINSURANCE NET PREMIUMS WRITTEN
Wrote $9.1 billion of gross premium and $6.6 billion of
net premium in 2023, a 31% and 33% increase from
2022, respectively.
Generated $1.1 billion of underwriting income, a 249%
increase from 2022 and a record for the Reinsurance
segment.
Delivered an 81.4% combined ratio and 77.4%
combined ratio excluding catastrophic activity and prior
year development — both significant improvements over
2022 that reinforced the strong underwriting quality of
the Arch Re book.
Welcomed 68 new colleagues to the global Reinsurance
team that has grown to more than 500 employees.
3.8%
Marine &
Aviation
1.8%
Other
13.2%
Property
Catastrophe
36.8%
Other Specialty
15.3%
Casualty
2023 TOTAL
$6.6B
CALENDAR YEAR NET PREMIUMS WRITTEN BY LINE ($M)
29.1%
Property excluding
Property Catastrophe
$7,000
$7,000
$6,000
$6,000
$5,000
$5,000
$4,000
$4,000
$3,000
$3,000
$2,000
$2,000
$1,000
$1,000
$0
$0
2014
2014
2015
2015
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
2022
2022
2023
2023
Casualty
Property excluding Property Catastrophe
Property Catastrophe
Other Specialty
Marine & Aviation
Other
Arch Capital Group Ltd. 2023 Annual Report | 9
KEY RATIOS
Loss Ratio
2023
-8.9%
Underwriting Expense Ratio
18.2%
Combined Ratio
9.3%
2022
-28.0%
20.3%
-7.7%
“
In a challenging year for the entire mortgage industry, Arch MI’s
status as an industry leader helped us deliver excellent results. We
continue to innovate and diversify our platform and offerings to
ensure we stay at the forefront of the mortgage credit risk space.
”
10 | Arch Capital Group Ltd. 2023 Annual Report
DAVID GANSBERG
CEO, ARCH GLOBAL MORTGAGE GROUP
Although high mortgage interest rates hampered new mortgage originations globally, Arch MI leveraged the strength of its $509.3 billion
insurance in-force portfolio to deliver $1.1 billion of underwriting income. The high persistency and excellent credit quality of the portfolio enables
the Mortgage segment to focus its efforts on the best relative returns and to consistently serve as an earnings engine for Arch. With operations in
the U.S., Australia, Europe and Bermuda, Arch MI is well positioned to navigate evolving housing market conditions around the world.
2023 HIGHLIGHTS
Finished 2023 with a 9.3% combined ratio as the segment continued to benefit
from the release of loss reserves originally established in prior accident periods.
Arch MI U.S. had a year-end 2023 delinquency rate of 1.74%, reflecting continued
improvement from 2022.
Helped over 132,000 borrowers in the U.S. purchase or refinance a home in 2023.
Arch MI U.S., headquartered in Greensboro, North Carolina, was named a finalist
for the Triad Business Journal’s “Best Places to Work” for the fifth consecutive year.
Announced its intent to acquire RMIC Companies, Inc. and its subsidiaries that
comprise the run-off mortgage insurance business of Old Republic International
Corporation. Once complete, RMIC’s portfolio will be integrated into Arch MI’s
existing U.S. primary mortgage portfolio.
CALENDAR YEAR NET PREMIUMS WRITTEN BY LINE ($M)
ARCH GLOBAL MORTGAGE GROUP
Risk in Force
$ 89.2BILLION
Insurance in Force $509.3
BILLION
Before reinsurance and risk-sharing operations.
As of Dec. 31, 2023
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2018
2019
2020
2021
2022
2023
U.S. Primary
Mortgage Insurance
U.S. Credit Risk Transfer (CRT)
and Other1
International Mortgage
Insurance/Reinsurance2
1
2
Includes all CRT transactions, which are predominantly with the government-sponsored enterprises and other U.S. reinsurance transactions.
International mortgage insurance and reinsurance with risk primarily located in Australia and, to a lesser extent, Europe and Asia.
Arch Capital Group Ltd. 2023 Annual Report | 11
GOAL FOR 2030
Reduce Scope 1 and Scope 2
greenhouse gas emissions by 42%.
We continue to make progress integrating our core Environmental,
Social and Governance (ESG) principles across our operations. Our
actions have resulted in meaningful outcomes for our business,
investments, shareholders, customers, employees and communities
— building a foundation to help drive Arch’s long-term success.
12 | Arch Capital Group Ltd. 2023 Annual Report
We remain committed to transparency and sharing our ESG performance through our Sustainability Report, Sustainability Accounting
Environmental, Social
and Governance ESG
Standards Board (SASB) Report and Task Force on Climate-related Financial Disclosures (TCFD) Report. Our ESG strategy encompasses five
impact areas that support and drive our ESG initiatives:
BUSINESS
OPERATIONS
INVESTMENTS
PEOPLE
COMMUNITIES
We offer services and insurance
coverages that support our
clients through major loss and
improve their resiliency; we
integrate ESG factors into our
underwriting to reduce risk and
capture opportunities for
stakeholder benefit.
We actively manage ESG
risks and embed compliance,
transparency, cybersecurity
and resilience across all areas
of our operations, protecting
our people and customers who
entrust us with their personal
information and
business interests.
We believe incorporating
certain nonfinancial ESG
factors into investment
selection and risk
management can potentially
enhance long-term
investment returns.
We are committed to
investing in the personal and
professional success of our
employees and creating
long-term sustainable growth
for our organization.
Striving to make a meaningful
impact by investing in our
communities is ingrained in
Arch’s core Values, woven
into the fabric of our
corporate culture.
Our Business
Our specialized insurance coverages and services protect our clients, allow
them to rebuild after major losses and help families build wealth through
homeownership. Through our businesses, we:
Employ underwriting initiatives to improve resiliency and transition to a
lower carbon economy.
Take a strategic approach to enterprise risk management, including
integrating climate risk.
Offer products and customer-oriented solutions that help build safer,
stronger and more inclusive communities.
Our Operations
We are taking steps to source sustainable products and services and reduce
our carbon footprint around the globe. Across our enterprise:
We are committed to embedding environmental sustainability into our
workplaces’ design, function and maintenance to increase energy efficiency.
144 vendors acknowledged our Supplier Code of Conduct where we ask
vendors to align with our Values, ethics and ESG standards.
Our Investing
We believe integrating ESG factors into investment analysis may contribute
to improved returns, reduces risk over the long term and aligns with our
stakeholders’ best interests. We recognize the importance, relevance and
significance of assessing ESG topics in the sustainability performance of
the entities in which we invest while aiming to deliver total return for Arch.
Investments as of Dec. 31, 2023, include:
$919 million, 3% of assets under management (AUM), are in investments
with an ESG focus.
$10.3 billion, 30% of AUM, are with asset owners or managers that are
signatories of the United Nations Principles for Responsible Investment.
Our People
At Arch, our people are our business. Arch enhances the employee experience
by advancing our diversity and inclusion (D&I) efforts, sustaining a work
environment where everyone can thrive, and providing employees with resources
and opportunities for professional development. Some highlights include:
26% of employees participate in our employee-led networks.
We increased our inclusive benefit offerings to attract and retain talent
including a new military leave benefit and a progressive salary-based
premium framework for medical plans for U.S.-based employees resulting
in more than 65% of employees benefitting from decreased premiums for
the same coverage.
92% of Arch employees who participated in our biennial all-employee
—
above the industry average and
survey were proud to work for Arch
consistent with prior surveys.
Our Communities
We are dedicated to making a difference in the communities where we live and
work through philanthropic and volunteer efforts. Last year:
Arch donated $7 million to charitable organizations and has donated a
total of $22 million since 2020.
The Arch Group Foundation awarded grants of over $1 million to more
than 30 nonprofits aligned with Arch’s giving priorities — accessible safe
housing; academic and career success; environmental resilience; and
healthy, thriving societies.
Through our matching gift program, employees donated more than
$2 million to organizations that aligned with their interests. Arch provided
nearly $3 million in matching gifts, more than doubling the power of our
employees’ generosity.
Employees donated over 12,000 hours of volunteer time off in 2023.
Arch Capital Group Ltd. 2023 Annual Report | 13
Additional Information
This document includes the use of certain non-GAAP financial measures as defined in Regulation G. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Comment on Non-GAAP Financial Measures” on pages 67–69 of the Company’s Annual Report on Form 10-K, filed with the SEC on Feb. 23, 2024 (the “2023
Annual Report”), which accompanies this letter. Throughout this document, 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. We believe that these non-GAAP financial measures, which
may be defined differently by other companies, are important for an understanding of our overall results of operations and financial condition. However, they should not be viewed
as a substitute for measures determined in accordance with GAAP.
After-tax operating income available to Arch common shareholders is defined as net income available to Arch common shareholders, excluding net realized gains or losses
(which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds
accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, and income taxes (which for the 2023 fourth quarter includes a one-time
deferred tax benefit related to the enactment of Bermuda’s new corporate income tax).
Operating return on average common equity represents after-tax operating income available to Arch common shareholders divided by average common shareholders’ equity
during the period. Management uses operating return on average common equity as a key measure of the return generated to our common shareholders.
The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income (loss) available to Arch common shareholders to after-tax
operating income (loss) available to Arch common shareholders.
(in millions)
Net income available to Arch common shareholders (a)
Net realized (gains) losses
Equity in net (income) loss of investment funds accounted for using the equity method
Net foreign exchange (gains) losses
Transaction costs and other
Income tax expense (benefit)
After-tax operating income available to Arch common shareholders (b)
Beginning common shareholders' equity
Ending common shareholders' equity
Average common shareholders' equity (c)
Net income return on average common equity (a)/(c)
Operating return on average common equity (b)/(c)
Year Ended Dec. 31,
2023
$4,403
165
(278)
62
6
(1,157)
$3,201
$12,080
17,523
$14,802
29.7%
21.6%
2022
$1,436
663
(115)
(102)
-
(42)
$1,840
$12,716
12,080
$12,398
11.6%
14.8%
14 | Arch Capital Group Ltd. 2023 Annual Report
Underwriting income represents the pre-tax profitability of our underwriting operations and includes net premiums earned plus other underwriting income, less losses and
loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly
attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in the corporate segment. While these measures are
presented in note 4, “Segment Information,” on pages 114-120 to the consolidated financial statements in our 2023 Annual Report, they are considered non-GAAP financial
measures when presented elsewhere on a consolidated basis.
Combined ratio excluding catastrophic activity and prior year development for the insurance and reinsurance segments are non-GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown in the
table below. The Company’s management utilizes the adjusted combined ratios excluding current accident year catastrophic events and favorable or adverse development in prior
year loss reserves in its analysis of the underwriting performance of each of its underwriting segments.
Underwriting ratios:
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
Combined ratio excluding catastrophic activity and prior year development
2023
Insurance
2023
Reinsurance
57.3%
19.4%
15.0%
91.7%
2.7%
-0.6%
89.6%
55.3%
21.2%
4.9%
81.4%
6.3%
-2.3%
77.4%
Arch Capital Group Ltd. 2023 Annual Report | 15
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16 | Arch Capital Group Ltd. 2023 Annual Report
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, 2023
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
Nasdaq
Nasdaq
Stock Market
Stock Market
Stock Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
No ☑
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 ☐
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. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 $26.9 billion.
As of February 16, 2024, there were 374,151,215 of the registrant’s common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III and Part IV incorporate by reference our definitive proxy statement for the 2024 annual meeting of shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2023.
ARCH CAPITAL GROUP LTD.
TABLE OF CONTENTS
Item
Page
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1C. CYBERSECURITY
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
40
60
60
61
61
61
62
63
64
95
96
171
171
172
172
172
172
173
173
173
174
185
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, deferred income tax assets, 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, geopolitical political unrest and other regional and global hostilities or other unforecasted and
unpredictable events;
ARCH CAPITAL
1
2023 FORM 10-K
•
•
•
•
•
•
•
•
•
•
•
availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;
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;
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;
an incident, disruption in operations or other cyber event caused by cyber attacks, the use of artificial intelligence
technologies or other technology on our systems or those of 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 legislation that affects Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or
changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the implementation of
the Organization for Economic Cooperation and Development (“OECD”) Pillar I and Pillar II initiatives and the enactment
of Bermuda corporate income tax; 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
2023 FORM 10-K
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. All amounts are in millions, except per 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 is a publicly listed Bermuda exempted company
with approximately $21.1 billion in capital at December 31,
2023 and is part of the S&P 500 index. Arch provides
insurance on a
insurance,
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 2023, we wrote $13.5 billion of net premiums and
reported net income available to Arch common shareholders
of $4.4 billion. Book value per share was $46.94 at
December 31, 2023, compared to $32.62 per share at
December 31, 2022.
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 grew with the 2018 acquisition of McNeil
& Company, Inc. (“McNeil”), a U.S. nationwide leader in
specialized risk management and program administration.
See “Operations—Insurance Operations” for further details
on our insurance operations.
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 European reinsurance operations
commenced in 2006 in Zurich, Switzerland followed by 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
reinsurance company
Ireland-based
Re Europe”), our
headquartered in Ireland with offices in Switzerland and the
U.K. The acquisition of Barbican in 2019 also contributed to
our reinsurance operations. In 2021, Arch Re Bermuda
completed the acquisition of Somerset Bridge Group Limited,
Southern Rock Holdings Limited and affiliates (“Somerset
Group”). The acquisition included Somerset’s Group’s motor
insurance managing general agent, distribution capabilities
ARCH CAPITAL
3
2023 FORM 10-K
through direct and aggregator channels, affiliated insurer and
integrated claims operation. See “Operations—
fully
Reinsurance Operations”
further details on our
reinsurance operations.
for
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 which 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
and
along with mortgage
reinsurance on a global basis. The majority of 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”). In December 2022, we converted Arch LMI
into a services company for our Australian LMI operations
and the company relinquished its APRA authorization. See
“Operations—Mortgage Operations” for further details on
our mortgage operations.
insurance
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
in which we participate.
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
to Greysbridge Holdings Ltd.
Merger Agreement
(“Warburg”).
In 2017, we
(“Greysbridge”). The merger and the related Greysbridge
equity financing closed on 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
acquired
Pincus LLC
approximately 25% of Premia Holdings Ltd. Premia
Holdings Ltd. is the parent of Premia Reinsurance Ltd., a
multi-line Bermuda reinsurance company (together with
Premia Holdings Ltd., “Premia”). In 2021, a 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, 2024. Since the inception of the share
repurchase program in February 2007 through December 31,
2023, Arch Capital has repurchased 433.6 million common
shares for an aggregate purchase price of $5.9 billion. At
December 31, 2023, the total remaining authorization under
the share repurchase program was $1.0 billion. The timing
and amount of the repurchase transactions under this program
will depend on a variety of factors, including 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. During the 2023 fiscal
year, we did not repurchase any shares 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
Condition
of
Operations.”
of Operations—Results
and Results
Insurance Operations
Our insurance operations are conducted in Bermuda, the U.S,
the U.K., Europe, Canada, and Australia. Our insurance
operations in Bermuda are conducted through Arch Insurance
(Bermuda), a division of Arch Re Bermuda, and Alternative
Re Limited.
ARCH CAPITAL
4
2023 FORM 10-K
are Arch
Insurance Company
In the U.S., our insurance group’s principal insurance
(“Arch
subsidiaries
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 44 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
(“CBI”) to expand its authorized classes of business as part
of our plan to address the U.K.’s departure from the
European Union (“Brexit”). At the end of 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.
From 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 Italy, France,
Spain and the U.K.
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” and,
together with Arch Syndicate 2012, our “Lloyd’s
Syndicates”). Arch Managing Agency Limited (“AMAL”) is
the managing agent of our Lloyd’s Syndicates. These
operations 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.
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. In December 2023, we signed
an agreement for the sale of Castel Underwriting Agencies
Limited, a managing general agency in the U.K. that we
acquired as part of the Barbican acquisition. The sale is
expected to close in the first half of 2024, subject to
regulatory approvals and other closing conditions.
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 grow
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.
insurance group has five regional offices, and the
executive
is primarily
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.
in charge of each region
• Maintain a disciplined underwriting philosophy. Our
insurance group’s underwriting philosophy is to generate
an underwriting profit through prudent risk selection and
proper pricing. Our insurance group believes that the key
to this approach is adherence to uniform underwriting
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standards across all types of business. Our insurance
the
group’s senior management closely monitors
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. We believe our ability to handle
claims expeditiously and satisfactorily is a key to our
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. We work with select
international, national and regional retail and wholesale
brokers and leading managing general agencies and
program administrators, including McNeil, to distribute
our insurance products. The Arch U.K. regional division
has a retail distribution network in the U.K.
•
Grow strategic partnerships or acquire strategic
businesses in stable and niche areas. Our insurance
group aims to build more integrated long-term alignment
with strategic partners offering superior access to niche
opportunities, quality scalable businesses, or lines with
reliable defensive qualities. We may grow existing
partnerships or look to acquire businesses which further
this strategy.
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.
insurance
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
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.
Our insurance group may enter into contingent commission
arrangements with some brokers that provide 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. It is the
practice for the brokers and producers to make the client
aware of any contingent commission arrangements that may
be in place with us. 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
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
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analysis
financial
reinsurance recoverables and collateral with unauthorized
includes ongoing
reinsurers. The
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.
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.”
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.
In December 2022, Arch Group Reinsurance Ltd. (“AGRL”)
was registered as a Class 3A general business insurer
carrying on affiliated reinsurance business pursuant to the
Insurance Act of 1978 of Bermuda. AGRL, a wholly-owned
subsidiary of Arch-U.S., was established to provide internal
quota share reinsurance covering certain U.S. lines of
business. AGRL is a U.S. taxpayer through a section 953(d)
voluntary election under the Internal Revenue Code of 1986,
as amended.
Strategy. Our reinsurance group’s strategy is to capitalize on
our
financial capacity, experienced management and
operational flexibility to offer multiple products through our
operations. The reinsurance group’s operating principles are
to:
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
insurance group’s claims departments work with
our
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
dual-licensed as a Class 4 general business insurer and Class
C long-term insurer and is headquartered in Hamilton,
Bermuda. 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 has also been approved in certain U.S. states as a
“reciprocal jurisdiction reinsurer,” which allows ceding
for
companies
reinsurance ceded to such reinsurers and still take credit for
that reinsurance. Arch Re U.S. is licensed or is an accredited
or otherwise approved reinsurer in 50 states, the District of
Columbia and Puerto Rico, the provinces of Ontario and
Quebec in Canada with its principal U.S. offices in
Morristown, New Jersey. Treaty and facultative operations in
Canada are conducted through the Canadian branch of Arch
Re U.S. (“Arch Re Canada”). Arch Re U.S. is also an
facultative
admitted
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.
in Guam. Our property
requirements
eliminate
collateral
insurer
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
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
a proportional
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2023 FORM 10-K
assessments
and miscellaneous
business being reinsured (including commissions, premium
administrative
taxes,
expenses) and may also include a profit factor. Non-
proportional (or excess of loss) reinsurance indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified
amount, which is called a “retention.” Non-proportional
business is written in layers and a reinsurer or group of
reinsurers accepts a band of coverage up to a specified
amount. The total coverage purchased by the cedent is
referred to as a “program.” Any liability exceeding the upper
limit of the program reverts to the cedent.
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,
in a
reinsurance group’s
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
companies for
their
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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2023 FORM 10-K
Mortgage Operations
Our mortgage operations include mortgage insurance and
reinsurance in the U.S. and internationally, 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 on
both a proportional and non-proportional basis globally;
mortgage insurance and reinsurance in the EEA and U.K.
primarily through Arch Insurance (EU), and in Australia
through Arch Indemnity; and participation in various GSE
credit risk-sharing products primarily through Arch Re
Bermuda.
the U.S. mortgage
In 2014, we entered
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. In November 2023, we signed an agreement to
acquire RMIC Companies, Inc. and its subsidiaries that
together comprise the run-off mortgage insurance business of
Old Republic International Corporation. The sale is expected
to close in the first half of 2024, subject to regulatory
approvals and other closing conditions.
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,
requirements
subject
(“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
insurance. In December 2022, we
lenders’ mortgage
converted Arch LMI to a services company for our
Australian lenders mortgage insurance operations and the
company relinquished its APRA authorization. Arch LMI
and Arch Indemnity are headquartered in Sydney, Australia.
Following the conversion of Arch LMI, Arch Indemnity is
the primary provider of 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
management to offer mortgage insurance, reinsurance and
other risk-sharing products in the U.S. and around the world.
Our mortgage group’s operating principles and goals are to:
•
group
Capitalize on profitable underwriting opportunities. Our
mortgage
experienced
management, analytics and underwriting teams are
positioned
identify and evaluate business with
attractive risk/reward characteristics.
believes
that
its
to
• Maintain a disciplined credit risk philosophy. Our
mortgage group’s credit risk philosophy is to generate
underwriting profit
through disciplined credit risk
analysis and proper pricing. Our mortgage group
believes that the key to this approach is maintaining
discipline across all phases of the applicable housing and
mortgage lending cycles.
•
its
Provide superior and innovative mortgage products and
services. Our mortgage group believes that it can
leverage
financial capacity, experience across
insurance product lines and the mortgage finance
industry, and its analytics and technology to provide
innovative products and superior service. The mortgage
group believes that its delivery of tailored products that
meet the specific, evolving needs of its customers will be
a key to the group’s success.
• Maintain our position as a leading provider of U.S.
mortgage 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.
•
Diversify revenues by capitalizing on international
opportunities. With the acquisition of Arch Indemnity in
Australia in 2021, and continued growth insuring and
reinsuring European banks, we believe diversifying
revenues on a global basis is a key operating principle.
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
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2023 FORM 10-K
originated by mortgage lenders and sold to the GSEs.
Each GSE’s Congressional charter generally prohibits it
from purchasing a mortgage where the principal balance
of the mortgage is in excess of 80% of the value of the
property securing the mortgage unless the excess portion
of the mortgage is protected against default by lender
recourse, participation or by a qualified insurer. As a
result, such “high loan-to-value mortgages” purchased
by Fannie Mae or Freddie Mac generally are insured
with private mortgage insurance.
•
•
Mortgage insurance protects the insured lender, investor
or GSE against loss in the event of a borrower’s default.
If a borrower defaults on mortgage payments, private
mortgage insurance reduces, and may eliminate, losses to
the insured. Private mortgage insurance may also
facilitate the sale of mortgage loans in the secondary
mortgage market because of the credit enhancement it
provides. Our primary U.S. mortgage insurance policies
predominantly cover individual loans and are effective at
the time the loan is originated. We also may enter into
insurance transactions with lenders and investors, under
which we insure a portfolio of loans at or after
origination. Although not currently a significant product,
we may offer mortgage insurance on a “pool” basis in
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.
to
identify
insurance
countries where we
• Mortgage insurance and reinsurance in Europe and
other
profitable
underwriting opportunities. Since 2011, Arch Insurance
(EU) has offered mortgage insurance to 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
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 and through structured transactions to cover
one or more portfolios of previously originated
residential loans. Increasingly, Arch Insurance (EU) and
Arch Re Bermuda are providing protection to European
banks on structured capital relief
transactions. In
Australia, Arch Indemnity provides lenders’ mortgage
insurance on a flow basis to cover new originations and
offers coverage through structured transactions to cover
one or more portfolios of previously originated
residential loans.
Reinsurance. Arch Re Bermuda provides quota share
and excess of loss reinsurance covering U.S. and
international mortgages.
insurance
traditional mortgage
Other credit risk-sharing products. In addition to
and
providing
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)
Ltd. (“Arch CRS”). 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;
home price trends and expected future home price
movements which vary by geography;
projections of future loss frequency and severity; and
adequacy of premium rates.
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2023 FORM 10-K
Sales and Distribution. In the U.S., we employ a sales force
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 in the U.S.
(including branches and affiliates) accounted for 7.3% and
7.1% of our gross premiums written for the years ending
December 31, 2023 and 2022, respectively. No other
customer accounted for greater than 2.9% and 2.8% of the
gross premiums written for the years ending December 31,
2023 and 2022, respectively. The percentage of gross
premiums written on our top 10 customers was 24.6% and
23.6% as of December 31, 2023 and 2022, respectively. In
Europe, Bermuda and Australia, our products and services
are distributed on a direct basis and through brokers. Each
country represents a unique set of opportunities and
challenges that require knowledge of market conditions and
client needs to develop effective solutions.
Risk Management. Exposure to mortgage risk is monitored
globally and managed through underwriting guidelines,
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.
Exposure to climate risk has also been incorporated into the
risk management framework of our mortgage group to
monitor and manage our exposure to potential (i) losses
related to the direct physical impact of extreme weather
conditions or events in certain transactions; and/or (ii)
adverse economic or housing market conditions caused by
the physical impact of extreme weather conditions or events
on a region or the financial impact of transitioning to a zero
or low carbon economy on a region. Generally, mortgage
insurance policies exclude direct physical losses resulting
from physical damages, such as damaged caused by extreme
weather events, though we do have some exposure to
physical damage in certain GSE credit risk transfer (“CRT”)
transactions. Additionally, we actively monitor developments
in the housing market, financial regulation and public policy
in the geographies where our mortgage group operates to
facilitate implementation of laws, regulations and policies
which support sustainable environmental behavior and
mitigate the effects of climate change. 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.”
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 include payment deferral or forbearance,
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.
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
ARCH CAPITAL
11
2023 FORM 10-K
•
paying 100% of the loss amount in exchange for the
insured’s conveyance to us of good and marketable title
to the property, with us then selling the property for our
own account.
While we select the claim settlement option that best
mitigates the amount of our claim payment, in the U.S. we
generally pay the coverage percentage multiplied by the loss
amount.
Other Operations
In 2014, we and HPS Investment Partners, LLC (formerly
Highbridge Principal Strategies, LLC) (“HPS”) sponsored the
formation of 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. Somers’ own
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
to
assigned
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
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 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 has appointed two directors to serve on the
seven person board of directors of Premia.
in each case pursuant
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.
Climate Change Considerations
We are taking steps to address the effects of climate change
and facilitate the transition toward decarbonization in all our
identify business
underwriting segments. We seek
opportunities associated with environmentally friendly trends
and incentivize responsible environmental behaviors. We
have adopted a
thermal coal policy and provide
environmentally sustainable insurance solutions in certain
product lines.
to
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 continuously working to offer a
meaningful and inclusive employee experience, we not only
seek to help people perform at their best among colleagues
who care, but also aim to support our strategy of delivering
specialty products and innovative solutions to our customers
in each of our business segments. As of February 16, 2024,
we had just over 6,400 employees globally, compared to
around 5,800 last year, which directly speaks to our ability to
sustain our strong and unique culture as we grow, which is a
key enabler to top talent retention. We have approximately
3,600 employees in North America (U.S., Canada and
Bermuda), 1,700 employees in Europe and the U.K. and
1,200 employees in the Philippines, Australia and the rest of
the world.
to
leverage all
Our People and Culture. An important part of our culture is
sustaining an
inclusive, diverse workforce. By better
reflecting the demographics in the markets in which we
operate while also actively seeking to instill norms for
inclusive behavior, we aim
the best
contributions and thinking across our Company. To that end,
we are committed to further integrating diversity and
inclusion principles
to
“embedding”
talent processes, e.g.,
into our
promotion reviews, over 700 employees (mostly managers)
have attended our intensive, six-week Fostering Inclusive
Leadership program. Importantly, this program requires
participants to complete a business-related project as well as
attend group discussions, where participants focus on how to
apply inclusive techniques into the work experience. Finally,
in 2023 our six employee networks provided a forum for over
1,300 employees to share ideas, build community and
in our operations. In addition
inclusion
ARCH CAPITAL
12
2023 FORM 10-K
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
to seek a Mortgage Bankers Association
opportunity
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 $7.1 billion at December 31,
2023. 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.
belonging, provide leadership opportunities for members and
contribute meaningfully to business outcomes. Importantly,
our networks include significant ally representation, which
underscores the inclusive behavior of our people.
Talent Acquisition, Development, Rewards and Retention.
Our employees are integral to the company, 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. In 2023, we
launched a new talent acquisition model that modernizes our
approach to the talent market and maximizes our ability to
find and hire top talent across multiple talent pools and
proactively source pipelines of key talent. In addition, the
new model has streamlined this process across our Company
by using a common platform that we can easily scale as we
grow.
and
We provide career growth opportunities
through a
combination of on-the-job training and experience, 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
comprehensive benefits packages,
including an employee share purchase plan, parental leave,
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 approximately $5
million to this program, including $0.9 million in 2023. We
also match eligible contributions to qualified charitable
organizations and employees are offered two paid volunteer
time-off days per calendar year with an eligible non-profit
organization. Our Arch Achieve program has recognized
over 500 employees for excellence since its inception in
2009, and each recipient is awarded a cash bonus to
recognize their accomplishments.
In 2023, our senior leadership team met in person to discuss
our strategy and vision for the future, foster continuous
learning and a growth mindset for leaders and provide a
forum for global executives to network across the Company.
To ease the impact on those most affected by inflation,
effective in 2023, Arch introduced a salary-based premium
structure for medical plans for U.S. based employees to help
keep health care costs equitable and affordable. More than
65% of employees had reductions in medical premiums for
the same plan and coverage tier.
We also encourage employees to continue their educational
and professional development through tuition reimbursement
ARCH CAPITAL
13
2023 FORM 10-K
INVESTMENTS
COMPETITION
At December 31, 2023, total investable assets held by Arch
were $34.6 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 grow and, in the future, may expand into areas that 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
capital
forms of
capitalization and risk profile. A.M. Best Company (“A.M.
Best”), Fitch Ratings (“Fitch”), Moody’s Investors Service
(“Moody’s”) and Standard & Poor’s (“S&P”) are ratings
agencies which have assigned financial strength and/or issuer
ratings to Arch Capital and/or one or more of its subsidiaries.
adequacy, management,
earnings,
The ratings issued on our companies by these agencies are
announced publicly and are available directly from the
agencies. Our website www.archgroup.com
(Investor
Relations-Credit Ratings) contains information about our
is not
ratings, but such
incorporated by reference into this report.
information on our website
The worldwide insurance markets are highly competitive. We
compete with major U.S. and non-U.S.
insurers and
reinsurers, some of which have greater financial, marketing
and management resources and longer-term relationships
with insureds and brokers than us. We compete primarily on
the basis of overall financial strength, ratings assigned by
independent rating agencies, geographic scope of business,
strength of client relationships, premiums charged, contract
terms and conditions, products and services offered, speed of
claims payment, reputation, employee experience, and
qualifications and local presence. See “Risk Factors—Risks
Relating to Our Industry, Business and Operations—“We
operate in a highly competitive environment, and we may not
be able to compete successfully in our industry.”
insurance and
reinsurance
In our property casualty
businesses, we compete with insurers and reinsurers that
provide specialty property and casualty lines of insurance,
including, but not limited to 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 Group Limited, Everest 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.
In our mortgage business, we compete with insurers and
reinsurers that provide mortgage insurance, including the U.S
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
Federal Housing
is
government
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 CAPITAL
14
2023 FORM 10-K
In addition, Arch MI U.S. and other private mortgage
insurers increasingly compete with multi-line reinsurers and
capital markets alternatives to private mortgage insurance.
their respective mortgage CRT
The GSEs continued
programs,
front and back-end
the use of
transactions with multi-line reinsurers, with approximately 25
unique (re)insurers that regularly participate in transactions in
addition to funded credit investors. These transactions
continue to create opportunities for multi-line property
casualty reinsurance groups and capital markets participants.
including
In our non-U.S. mortgage insurance businesses, we compete
with insurance subsidiaries of Helia Group Ltd. and QBE
Insurance Group, Ltd.
in Europe, our
competitors on structured capital relief transactions include
approximately 5-10 highly rated multi-line (re)insurers in
addition to over 30 funded credit investors.
in Australia;
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, group and operational risks. Risk appetite
and exposure limits are set by our executive management
team, reviewed with the Board and its committees and
routinely discussed with business unit management. These
limits are articulated in our risk appetite statement, which
details risk appetite, tolerances and limits for each major risk
category, and are integrated into our operating guidelines.
Exposures are aggregated and monitored periodically by our
corporate risk management team. The reporting, review and
approval of risk management information is integrated into
our annual planning process, capital modeling and allocation,
and reinsurance purchasing strategy. Such information is
reviewed at
reinsurance
insurance business
underwriting meetings and board level committees.
reviews,
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 risk including market and liquidity risks; group
risk including strategic, governance, rating agency and
capital market risk; credit risk; and operational risk including
regulatory,
risk) and
outsourcing risks. We view environmental, social and
governance (“ESG”) related risks not as standalone risks but
as an integral part of our enterprise-wide risk management
strategy. Consequently, evaluations of
these risks are
embedded throughout our risk management framework.
(reputational
relations
investor
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.
Arch Capital’s Chief Risk Officer (“CRO”) assists these
committees in the identification and assessment of all key
risks. The CRO is responsible for maintaining Arch Capital’s
risk register and continually reviewing and challenging risk
assessments, including the impact of emerging risks and
significant business developments. Any new high-level risks
or changes in inherent or residual designations are brought to
the Board’s or the relevant committee’s attention.
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 Board and relevant committees. The
remaining risks are managed and monitored at a process level
by the risk owners and/or the CRO. Risk owners have
ultimate responsibility for the day-to-day management of
each designated risk, reporting to the CRO on the satisfactory
management and control of the risk and timely escalation of
significant issues that may arise in relation to that risk. The
CRO is responsible for overseeing the monitoring of all risks
across the business and for communicating to the relevant
risk owners if she becomes aware of issues, or potential and
actual breaches of risk appetite, relevant to the assigned risks.
A key element of these monitoring activities is the 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 Board and
relevant committees 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 matters reviewed at the committee meetings are
presented for discussion by the Board. The CRO is
responsible for immediately escalating any significant risk
matters to executive management, the respective Board
Committee and/or the Board for approval of the required
remediation. As part of our corporate governance, the Board
ARCH CAPITAL
15
2023 FORM 10-K
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.
REGULATION
General
Integration. We believe
that an
Implementation and
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
framework within our decision making
management
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
capital
system of governance,
management,
product
development. The results of the ORSA also contribute to
various elements of our strategic decision-making including
how best to optimize capital management, establish the most
appropriate premium levels and decide 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.
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 main Bermuda insurance operating subsidiary,
Arch Re Bermuda, is a Class 4 general business insurer and a
Class C long-term insurer and is subject to the Insurance Act
1978 of Bermuda and related regulations, as amended
(“Insurance Act”). Among other matters, the Insurance Act
imposes 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
ARCH CAPITAL
16
2023 FORM 10-K
required
to maintain
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 that is
established by reference to either the Class C BSCR model or
an approved internal capital model.
Arch Re Bermuda is prohibited from declaring or paying any
dividends during any financial year if it is in breach of its
general business or long-term business enhanced capital
requirements, minimum solvency margins or its general
business minimum liquidity ratio or if the declaration or
payment of such dividends would cause such a breach. If it
has failed to meet its minimum solvency margins or
minimum liquidity ratio on the last day of any financial year,
Arch Re Bermuda will be prohibited, without the approval of
the BMA, from declaring or paying any dividends during the
next financial year. In addition, Arch Re Bermuda is
prohibited from declaring or paying in any financial year
dividends of more than 25% of its total statutory capital and
surplus (as shown on its previous financial year’s statutory
balance sheet) unless it files (at least seven days before
payment of such dividends) with the BMA an affidavit
stating that it will continue to meet the required margins.
Without the approval of the BMA, Arch Re Bermuda is
prohibited from reducing by 15% or more its total statutory
capital as set out in its previous year’s financial statements
and any application for such approval must include an
affidavit stating that it will continue to meet the required
margins. 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
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
(v) coordinating any
and
enforcement action that may need to be taken against our
Group or any Group members; and (vi) planning and
coordinating meetings of colleges of supervisors in order to
facilitate the carrying out of these functions. As Designated
Insurer, Arch Re Bermuda is required to facilitate compliance
by our Group with the group insurance solvency and
supervision rules.
in emergency
situations
On an annual basis, the Group is required to file Group
statutory financial statements, a Group statutory financial
return, a Group capital and solvency return, audited Group
financial statements, a Group Solvency Self-Assessment
(“GSSA”), and a financial condition report with the BMA.
The GSSA is designed to document our perspective on the
capital resources necessary to achieve our business strategies
and remain solvent, and to provide the BMA with insights on
and
risk management, governance procedures
our
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
ARCH CAPITAL
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2023 FORM 10-K
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.
the
insurance,
following activities: banking,
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
management, financing,
leasing, headquarters, shipping,
distribution and service center, intellectual property and
holding entities. Under the ES Act, if a company is engaged
in one or more “relevant activities”, it is required to maintain
a substantial economic presence in Bermuda and to comply
with the economic substance requirements set forth in the ES
Act. A company will comply with those economic substance
requirements if it: (a) is managed and directed in Bermuda;
(b) undertakes “core income generating activities” (as may be
prescribed under the ES Act) in Bermuda in respect of the
relevant activity; (c) maintains adequate physical presence in
Bermuda; (d) has adequate full time employees in Bermuda
with suitable qualifications; and (e) incurs adequate operating
expenditure in Bermuda in relation to the relevant activity
undertaken by it.
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
they comply with
the
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 BMA recognized that cyber incidents can cause
significant financial losses and/or reputational impacts across
the insurance industry and implemented the Cyber Risk
Management Code of Conduct in October 2020. All Bermuda
insurers, insurance managers and intermediaries registered
under the Insurance Act are required to comply 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. This requires Arch Re Bermuda to develop a
cyber risk policy, which is to be delivered pursuant to an
operational cyber risk management program and appoint an
appropriately qualified member of staff or outsourced
resource to the role of Chief Information Security Officer.
The role of the Chief Information Security Officer is to
deliver the operational cyber risk management program.
It is expected that the cyber risk policy will be approved by
the Arch Re Bermuda board of directors at least annually.
The BMA will assess Arch Re Bermuda’s compliance with
in a
the Cyber Risk Management Code of Conduct
proportionate manner relative to the nature, scale and
complexity of its business. Failure to comply with the
requirements of the Cyber Risk Management Code of
Conduct will be taken into account by the BMA in
determining whether Arch Re Bermuda is conducting its
business in a sound and prudent manner as prescribed by the
Insurance Act and may result in the BMA exercising its
powers of intervention and investigation.
Notification of Cyber Reporting Events. Every Bermuda
insurer is required to notify the BMA forthwith on it coming
to the knowledge of the insurer, or where the insurer has
reason to believe that a Cyber Reporting Event has occurred.
Within fourteen (14) days of such notification, the insurer
must also furnish the BMA with a written report setting out
all of the particulars of the Cyber Reporting Event that are
available to it. A Cyber Reporting Event includes any act that
results in the unauthorized access to, disruption, or misuse of
electronic systems or information stored on such systems of
an insurer, including breach of security leading to the loss or
unlawful destruction or unauthorized disclosure of or access
to such systems or information where there is a likelihood of
an adverse impact to policyholders, clients or the insurer’s
insurance business, or an event that has occurred for which
notice is required to be provided to a regulatory body or
government agency.
Personal Information Protection Act 2016. Bermuda’s
principal data protection and privacy legislation is the
Personal Information Protection Act 2016 (“PIPA”). At
present, the majority of the operative provisions of PIPA,
which include detailed requirements around conditions for
use and consent to use of personal information, specific
obligations on organizations that use personal information,
overseas data transfer assessment obligations and access,
rectification and erasure rights for individuals, are not yet in
force in Bermuda. In June 2023, the Bermuda Government
and the Office of the Privacy Commissioner for Bermuda
announced that the remaining operative provisions of PIPA
will become fully implemented on January 1, 2025.
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2023 FORM 10-K
information
in Bermuda where
PIPA (once in force) applies to every organization (which
includes any individual, entity or public authority) that uses
personal
that personal
information is used by automated or other means which form,
or are intended to form, part of a structured filing system. For
the purposes of PIPA, “personal information” means any
information about an identified or identifiable individual
(meaning a natural person), and “use” or “using” are very
broadly defined and effectively
include possessing or
carrying out any operation on personal information. Many of
our Bermuda subsidiaries which use and hold personal
information will be in scope and must comply with the
provisions of PIPA.
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.
Corporate Income Tax Act 2023 (the “Bermuda CIT Act”).
On December 27, 2023, Bermuda enacted the Bermuda CIT
Act. Entities subject to tax under the Bermuda CIT Act are
the Bermuda constituent entities of multi-national groups. A
multi-national group is defined under the Bermuda CIT Act
as a group with entities in more than one jurisdiction with
consolidated revenues of at least €750 million for two of the
four previous fiscal years. If Bermuda constituent entities of a
multi-national group are subject to tax under the Bermuda
CIT Act, such tax is charged at a rate of 15% of the net
income of such constituent entities (as determined in
accordance with the Bermuda CIT Act, including after
adjusting for any relevant foreign tax credits applicable to the
Bermuda constituent entities). Although the commencement
date of the Bermuda CIT Act is January 1, 2024, no tax is
chargeable under the Bermuda CIT Act until tax years
starting on or after January 1, 2025. All Arch Bermuda
operations are subject to the requirements of the Bermuda
CIT Act.
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.
insurance and/or reinsurance subsidiaries domiciled
in
Delaware, North Carolina, Missouri, Wisconsin, Kansas and
the District of Columbia and we may acquire insurers
domiciled in other states in the future. State insurance
to protect
regulation
state
policyholders
regulatory authorities have broad regulatory powers over
such matters as licenses, standards of solvency, premium
rates, policy forms, marketing practices, claims practices,
investments, methods of accounting, form and content of
financial statements, certain aspects of governance, ERM,
amounts we are required to hold as reserves for future
payments, minimum capital and surplus requirements, annual
and other report filings and transactions among affiliates. Our
investors. Generally,
is designed
supervision
rather
than
and
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
that person has filed an
reinsurance company unless
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.
The National Association of Insurance Commissioners
(“NAIC”) Insurance Holding Company System Model Act
that, when
and Model Regulation
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
includes provisions
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2023 FORM 10-K
person or its insurance holding company system is exempt
from the filing requirement. Arch’s U.S. lead state regulator,
the Missouri Department of Commerce & Insurance, adopted
the model group capital calculation provisions in 2021. The
group capital calculation is designed to assist state insurance
regulators in understanding the financial condition of non-
insurance entities that are part of an insurance holding
company system and
insurance
the degree
companies are supporting those non-insurance entities.
to which
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.
insurer ordinarily will enter
A U.S. primary
into a
reinsurance agreement only if it is able to obtain credit for the
reinsurance ceded on its U.S. statutory-basis financial
statements. As a result of the requirements relating to the
provision of credit for reinsurance, Arch Re U.S., Arch Re
Bermuda and AGRL are indirectly subject to certain
regulatory requirements imposed by U.S. jurisdictions in
which ceding companies are domiciled. 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.
U.S. primary insurers also may receive credit for reinsurance
ceded to unauthorized reinsurers without collateral or with
less than 100% collateral under revisions to the NAIC Credit
for Reinsurance Model Law (#785) and the Credit for
Reinsurance Model Regulation (#786) (collectively, the
“NAIC Model Law and Regulation”). All U.S. states, the
District of Columbia and Puerto Rico have adopted revisions
to the NAIC 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 23, 2024,
Arch Re Bermuda is approved as a “certified reinsurer” for
the 2024 calendar year in 44 states with applications pending
in 8 additional states and territories. In addition, 2019
amendments to the NAIC Model Law and Regulation
eliminate reinsurance collateral requirements for reinsurers
that (1) have their head office or are domiciled in EU
Member States, the U.K., NAIC accredited U.S. jurisdictions
and other jurisdictions deemed “reciprocal jurisdictions” by
the NAIC (although individual states may approve or reject
the designation of such other jurisdictions as a “reciprocal
jurisdiction”), and (2) have been approved as a “reciprocal
jurisdiction reinsurer.” The NAIC list of approved reciprocal
jurisdictions includes Bermuda, Japan and Switzerland. All
U.S. states, the District of Columbia and Puerto Rico have
adopted the 2019 amendments to the NAIC Model Law and
Regulation. As of January 23, 2024, Arch Re Bermuda is
approved as a “reciprocal jurisdiction reinsurer” for the 2024
calendar year in 44 states with applications pending in 8
additional states and territories. In addition, AGRL received
approval as a “reciprocal jurisdiction reinsurer” from its lead
state of Missouri in November 2023, which is effective for
the 2023 calendar year. AGRL intends to seek renewal of its
“reciprocal jurisdiction reinsurer” status from Missouri in
2024 and will potentially seek approval from additional
states.
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
and
incident
that public companies
Cybersecurity and Privacy. In July 2023, the SEC adopted
new cybersecurity disclosure rules (“SEC Cybersecurity
Rules”) mandating
risk
cybersecurity
management disclosure for public companies such as Arch.
The SEC Cybersecurity Rules became effective in December
report a
2023 and mandate
cybersecurity incident on a Form 8-K within four days after
they determine that the incident is material. Additional
disclosure by registrants in the Form 10-K annual report
should describe their processes for assessing, identifying and
managing material risks from cybersecurity threats, the
material impacts of cybersecurity threats and previous
cybersecurity incidents. See Item 1C, “Cybersecurity” for
further information about our disclosures.
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2023 FORM 10-K
In March 2022, the U.S. government passed the Cyber
Incident Reporting for Critical Infrastructure Act of 2022,
which will require companies deemed to be part of U.S.
critical infrastructure to report any substantial cybersecurity
incidents or ransom payments to the federal government
within 72 and 24 hours, respectively. The Cybersecurity &
Infrastructure Security Agency considers financial services,
which
insurance companies, as a critical
infrastructure sector. The implementing regulations are not
expected for another one-to-two years.
includes
In September 2022, the Federal Insurance Office (“FIO”)
within the Department of Treasury requested public comment
on potential federal insurance responses to catastrophic cyber
incidents affecting critical infrastructure. In July 2023, the
Biden Administration published a National Cybersecurity
Strategy Implementation Plan that includes as a strategic
objective the exploration of a federal cyber insurance
backstop and identified FIO as the responsible agency for
assessing the need for and possible structures of a federal
insurance response. In November 2023, the FIO announced
initiatives to further study the development of a federal
insurance backstop for catastrophic cyber events.
The NAIC adopted an Insurance Data Security Model Law in
2017 that requires 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 overseeing the
data security practices of third party service providers and
meeting expanded breach notification requirements. This
model law has been adopted in states in which our U.S.
subsidiaries are licensed and operate. In addition, certain state
insurance regulators are developing or have developed
regulations that may impose regulatory requirements relating
to cybersecurity on insurance and reinsurance companies
(potentially including insurance and reinsurance companies
that are not domiciled, but are licensed, in the relevant state).
Many regulators, including the Federal Trade Commission
(“FTC”), the New York Department of Financial Services
(“NYDFS”), and the U.S. Department of the Treasury’s
Office of Foreign Assets Control (“OFAC”), have issued new
guidance on managing cybersecurity risks (or amended
existing
regulatory
requirements.
that expand existing
regulations)
Privacy legislation and regulation has also become an issue
of increasing focus in many states. The California Consumer
Privacy Act of 2018 (“CCPA”), which went into effect
January 1, 2020 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, the California Privacy Rights Act of
2020 (“CPRA”) which became fully effective on January 1,
regulations
(“CPPA”). CPPA
2023, applies to some of our data collecting and processing
activities, and it provides for additional consumer privacy
rights, and additional regulatory obligations over certain data.
It also created a new privacy focused California regulatory
agency with enforcement authority, the California Privacy
that
Protection Agency
implement the CPRA became effective on March 29, 2023
and, as delayed by a state court decision, are expected to
become enforceable in February 2024. Rulemaking is also
underway on regulations mandated by the CPRA governing
cybersecurity audits, risk assessments, and automated
decision-making, but additional regulations have yet to be
proposed. The CPPA draft rules govern consumer notice,
access, and opt-out rights with respect to automated decision-
making. Under the draft rules, businesses would also have to
make significant disclosures about their implementation of
automated decision-making. At the CPPA December board
meeting, the board requested the CPPA staff to further
evaluate the draft regulations, particularly its impact within
the workplace and in the employment context.
A range of new cybersecurity and privacy laws are also under
consideration in other states, as well as by the federal
government. Several states, including Colorado, Connecticut,
Utah, and Virginia adopted new comprehensive data privacy
legislation that went into effect in 2023. Additional states,
including Delaware, Florida, Iowa, Montana, New Jersey,
Oregon, Tennessee, and Texas, adopted new data privacy
legislation that will go into effect over the next two years
(with a new Indiana data privacy law to take effect in 2026).
While these state laws provide consumer privacy rights and
protections like those in the CCPA and CPRA, they exempt
entities subject to the Gramm-Leach-Bliley Act from their
requirements.
insurers,
Artificial Intelligence. The increased use of automated
processes by
including algorithms, artificial
intelligence (generative and predictive) (“AI”) and predictive
models that make use of large datasets and data analytics, has
led to additional regulatory attention to insurer practices
including in relation to risk selection, pricing and claims, as
well as governance and oversight of AI and predictive
models.
technologies used
In late 2023, the NAIC adopted a model bulletin entitled
“Use of Artificial Intelligence Systems by Insurers” that sets
forth state insurance regulators’ expectations on how insurers
the use of advanced analytical and
should govern
computational
to make or support
decisions impacting consumers. Such expectations include
implementation of a written program for the responsible use
of AI systems that make or support decisions related to
regulated insurance practices, which program should be
designed to mitigate certain risks. As of February 1, 2024,
only one state has adopted the bulletin, but we expect it to be
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2023 FORM 10-K
adopted in states in which our U.S. subsidiaries are licensed
and operate.
In addition, state agencies, departments and insurance
regulators, including the California Department of Insurance,
California Privacy Protection Agency, Connecticut Insurance
Department, New York Department of Consumer and Work
Protection and NYDFS, have adopted, proposed or released
for comment laws, regulations and guidance that may impose
regulatory requirements relating to the use of AI and
automated decision-making on insurance and reinsurance
companies. Such requirements include (or may include) risk
management processes and controls, governance frameworks,
vendor oversight and outcomes testing that may hinder or
delay the implementation of new technologies available to
other businesses.
In addition to insurance specific AI regulation there are many
general AI proposals and frameworks. For example,
President Biden’s Executive Order 14110 on Safe, Secure,
and Trustworthy Development and Use of Artificial
Intelligence,
issued on October 30, 2023 establishes
extensive new standards for AI safety and security.
Globally, many new AI laws are being proposed, the most
significant of which may be in the EU. See “Regulation—
Europe” for further details on our insurance operations.
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,
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
requirement decreases. The mildest
risk-based capital
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 adopted a revised Mortgage
Guaranty Insurance Model Act in 2023. It is uncertain when
or if it will be adopted in any jurisdiction.
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
to
in New York
insurers authorized
the
integrate
their governance
into
risks
consideration of climate
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. New York and other states also require licensed
insurers with countrywide premium written of at least $100
million to annually provide disclosure of their assessment
and management of climate related risks.
In November 2023, the FIO published a request to proceed
with a climate-related data call that would collect five years
of homeowners’ insurance underwriting data to evaluate the
relationship between underwriting trends and weather-related
events. Separately, in December 2023, the NAIC outlined
plans for its own substantially similar climate-related data.
The FIO and NAIC climate-related information gathering
could culminate in recommendations for new federal or state
legislation.
Other Federal Regulation. Although state regulation is 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 FIO, which is not a federal regulator or supervisor of
insurance, but monitors the insurance industry for systemic
risk, administers the Terrorism Risk Insurance Program
(“TRIP”), consults with the states regarding insurance
matters, develops federal policy on aspects of international
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2023 FORM 10-K
insurance matters, and is authorized to assist the U.S.
in negotiating “covered
Secretary of
agreements” between the U.S. and foreign governments that
address insurance prudential measures.
the Treasury
In addition to provisions of Dodd-Frank pertaining to
underwriting mortgages and a consumer’s ability to repay,
certain other federal laws also directly or indirectly impact
mortgage insurers, including the Real Estate Settlement
Procedures Act of 1974, the Homeowners Protection Act of
1998, the Equal Credit Opportunity Act, the Fair Housing
Act, the Truth In Lending Act, the Fair Credit Reporting Act
of 1970, and the Fair Debt Collection Practices Act. Among
other things, these laws and their implementing regulations
prohibit payments for referrals of settlement service business,
require fairness and non-discrimination in granting or
facilitating the granting of credit, govern the circumstances
under which companies may obtain and use consumer credit
information, define the manner in which companies may
pursue collection activities, and require disclosures of the
cost of credit and provide for other consumer protections.
GSE Eligible Mortgage Insurer Requirements. GSEs impose
requirements on private mortgage insurers so that they may
be eligible to insure loans sold to the GSEs, known as the
Private Mortgage
Insurer 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 to meet or exceed
“minimum required assets” as of each quarter end. Minimum
required assets are calculated from PMIERs tables with
several risk dimensions including origination year, original
loan-to-value, original credit score of performing loans, and
the delinquency status of non-performing loans.
Russian Sanctions. The U.S. first imposed sanctions on the
Russian Federation following its annexation of Crimea in
2014. Since February 2022, the U.S. has imposed additional
sanctions on Russia in response to the Russian invasion of
Ukraine and the ongoing hostilities. Given the evolving
situation, we are closely monitoring developments and the
sanctions imposed, to ensure our business remains in
compliance with any applicable sanctions measures imposed.
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
the
underwrite
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 distribution 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. regulators 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”).
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2023 FORM 10-K
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. Following the
implementation of the Financial Services and Markets Act
2023 (“FSMA 2023”), the PRA and the FCA have a new
secondary
international
competitiveness of the U.K. economy and its medium to
relevant
long-term growth, subject
international standards.
to aligning with
objective
facilitate
the
to
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
market,
to
underwriting and claims operations of Lloyd’s participants.
The Council of Lloyd’s has discretionary powers to regulate
corporate members’ underwriting at Lloyd’s. 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
prudential requirements, 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 5% of the
corresponding member’s premium income limit for the
relevant year of account.
Principles for doing business at Lloyd’s (the “Principles”)
replaced the Lloyd’s Minimum Standards (the previous
regime which set out the Lloyd’s regulatory requirements for
Lloyd’s managing agents) and became effective from the
third quarter of 2022. The Principles set out the fundamental
responsibilities expected of all managing agents, including
AMAL, and is the basis against which Lloyd’s will review
and categorize all syndicates and managing agents in terms of
their capacity and performance. While offering greater
flexibility, the principles-based oversight requires greater
reliance on AMAL to interpret and apply the rules.
Financial Resources. The European solvency framework and
prudential regime for insurers and reinsurers, the Solvency II
Directive 2009/138/EC (“Solvency II”), took effect in full on
January 1, 2016. See “European Union—Insurance and
Reinsurance Regulatory Regime” below for additional
details.
Arch Insurance (U.K.), and the corporate members of Arch
Syndicate 2012 and Arch Syndicate 1955 are currently
required to meet economic risk-based solvency requirements
imposed under Solvency II. Solvency II, together with
European Commission “delegated acts” and guidance issued
by the European Insurance and Occupational Pensions
Authority (“EIOPA”) sets out classification and eligibility
requirements, including the features which capital must
display in order to qualify as regulatory capital.
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,
transposed all applicable direct EU
as amended, has
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.
In November 2022, HM Treasury set out
government’s final reform package on the Solvency II
framework in the U.K., in response to an earlier consultation
paper from April 2022. Significant changes to be introduced
by these reforms included the reduction in risk margin by
30% for non-life insurers and the proposal to remove branch
capital requirements. This will benefit branches of foreign
insurers based in the U.K. immediately upon implementation,
as well as reduce barriers for foreign insurers wishing to
establish a U.K. branch in the future. The U.K. government
has also decided to introduce a new mobilization scheme for
in a
insurers which would create an optional stage
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2023 FORM 10-K
prospective insurer’s entry to the market, including adjusted
entry requirements such as a lower capital floor, lower
expectations for key personnel and governance structures,
and exemptions from certain reporting requirements.
FSMA 2023 provides a framework for the revocation of
retained EU law in financial services and its replacement
with corresponding regulators’ rules (in the case of Solvency
II, mainly in the PRA’s Rulebook). Since the Transition
Period, Solvency II has been subject to a major review in its
application in the U.K., corresponding with a parallel review
in the EU (known as the 2020 review).
The Insurance and Reinsurance Undertakings (Prudential
into force on
Requirements) Regulations 2023 came
December 31, 2023 and modified the current risk margin
calculation. The PRA has also issued two consultations
covering the Solvency II reform proposals for insurers. It is
expected that the reforms forming part of what will then be
known as “Solvency U.K.”, will be in place by the end of
2024.
implementation of
the U.K.
these
The
government and potential divergence between the U.K. and
the EU may have an impact on whether the U.K. is granted
Solvency II equivalence status by the EU in any of the three
areas to which equivalence applies.
reforms by
under
Financial Services Compensation Scheme. The Financial
Services Compensation Scheme (“FSCS”) is a scheme
established
eligible
policyholders of insurance companies who may become
insolvent. The FSCS is funded by the levies that it has the
power to impose on all insurers. Arch Insurance (U.K.) could
be required to pay levies to the FSCS.
compensate
FSMA
to
Restrictions on Acquisition of Control. Under FSMA, the
prior consent of the PRA or FCA, as applicable, is required,
before any person can become a controller or increase its
including Arch
control over any regulated company,
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.
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
they have “profits available
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.) or
AMAL, for example.
European Union Considerations. During the Transition
Period, there was no change in passporting rights for
financial institutions in the U.K. Under our Brexit plan, since
January 2020 nearly all of the EEA insurance business of
Arch Insurance (U.K.) has been conducted by Arch Insurance
(EU). As part of our Brexit planning, and in advance of the
Transition Period expiring, a transfer of the EEA legacy
business
from Arch
Insurance (U.K.) to Arch Insurance (EU) was completed
under Part VII of the U.K. Financial Services and Market Act
2000 at the end of December 2020 (“Part VII Transfer”).
reinsurance)
(excluding
inwards
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”). Lloyd’s continued to engage in discussions with
the Belgium Financial Services Markets Authority (“Belgium
FSMA”) and the National Bank of Belgium regarding the
Lloyd’s Brussels operating model and
the activities
performed for it by managing agents and the question of
whether it is possible that they could be construed as
constituent
the Insurance
Distribution Directive (Directive (EU) 2016/97) (“IDD”),
which would therefore require them to be authorized within
the EEA.
insurance distribution under
Economic relations between the U.K. and the EU are now
governed by a Trade and Cooperation Agreement (the
“TCA”). Following a report published by the European
Affairs Committee in June 2022, which found that the TCA
is limited in scope and silent as to EU equivalence in
decisions over financial services, a Memorandum of
Understanding (“MoU”) on regulatory cooperation between
the U.K. and the EU was signed in June 2023. However, the
MoU does not impose binding substantive commitments nor
is there any mention of taking forward the commitment in the
Political Declaration accompanying the TCA regarding
mutual equivalence. As a result, under the provisions of the
institutions (including our Irish
TCA, EEA financial
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 into the U.K., 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.
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2023 FORM 10-K
The ability of U.K. firms (including, Arch Insurance (U.K.)
and AMAL) to continue doing business in the EEA similarly
depends on applicable EEA state local law and regulation.
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. See “Risk Factors—Risks Relating to Our Industry,
Business and Operations—New legislation or regulations
relating to the U.K.’s withdrawal from the EU could
adversely affect us.”
ESG Considerations. The U.K. government has a long-term
ambition to “green” the financial system and align it with the
U.K.’s 2050 “Net Zero” target (i.e.,100% greenhouse gas
emissions reduction) under the Climate Change Act 2008. As
part of those efforts, on January 17, 2022, the U.K. passed
mandatory climate related financial disclosure requirements
under the Companies (Strategic Report) (Climate-related
Financial Disclosure) Regulations 2022. The regulations
apply to large companies (including some of our U.K.
entities) for financial years starting on or after April 6, 2022.
The regulations generally align risk disclosures with the
the Taskforce on Climate-related
recommendations of
Financial Disclosures (“TCFD”).
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.
Further to the Roadmap, the FCA issued its final Policy
Statement on its sustainability disclosure requirements and
the investment labels regime. The FCA is, among other
things, introducing a general ‘anti-greenwashing’ rule to
clarify that sustainability-related claims must be clear, fair
and not misleading. The general ‘anti-greenwashing’ rule
comes into force on May 31, 2024 and the FCA is also
consulting on new guidance on the expectations for FCA-
authorized firms subject to the general ‘anti-greenwashing
rule’ which will take effect at the same time.
In October 2023, the Green Technical Advisory Group
("GTAG") published its final advice to the U.K. government
on the development of the U.K. Green Taxonomy. Whilst not
binding, the GTAG advice gives a likely indication as to
what the U.K. Green Taxonomy may look like and how it
might differ from the EU Sustainable Finance Taxonomy
Regulation (“EU Taxonomy”). The GTAG final report
outlines sustainable governance arrangements for the U.K.
Green Taxonomy and sets out various options for achieving
this. The recommended “least regrets” option involves the
U.K. government establishing an advisory body to facilitate
implementation and development. If the GTAG advice is
adopted, the U.K. Green Taxonomy should align with the EU
Taxonomy except where doing so impact the simplicity or
usability of the activity classification system or increases the
risk of greenwashing.
On December 14, 2022, the U.K. government said it would
delay secondary legislation under the taxonomy regulations
(originally anticipated by the end of 2022). Instead, the U.K.
will restate EU law around the taxonomy and take additional
time to decide the U.K.’s approach. In addition, Lloyd’s has
that managing agents must create an ESG
mandated
framework and strategy, which was to be considered in the
2023 business planning cycle. Lloyd’s has also imposed ESG
focused outcomes by way of the Principles with a particular
focus on culture, investment and underwriting profitability.
See “Lloyd’s Supervision” above for additional details.
Russian Sanctions. Since the Russian invasion of Ukraine in
February 2022, the U.K. government has instituted a new
sanctions regime targeting Russia. The sanctions imposed
include prohibitions on providing
services
(including insurance and reinsurance) to persons connected
with Russia in relation to certain restricted goods and
services, and the freezing of assets owned or controlled by
designated persons. The U.K., U.S. and EU often consult
with each other with respect to their respective sanctions
programs.
financial
the GDPR and
Privacy and Cybersecurity. The U.K. has implemented the
European General Data Protection Regulation (“EU GDPR”)
as the U.K. GDPR which sits alongside the U.K. Data
Protection Act 2018 (the “U.K. GDPR”). The U.K. GDPR
has direct effect where an entity is established in the U.K. (as
applicable) and has extra-territorial effect where an entity
established outside of the U.K. processes personal data in
relation to the offering of goods or services to individuals in
the EEA and/or the U.K. or the monitoring of their behavior.
The U.K. GDPR
imposes obligations on controllers,
including, among others: (i) accountability and transparency
requirements, requiring controllers to demonstrate and record
compliance with
to provide detailed
information to individuals regarding the processing of their
personal data; (ii) requirements to process personal data
lawfully including specific requirements for obtaining valid
consent where consent is the legal basis for processing; (iii)
obligations to consider data protection when any new
products or services are developed and designed (e.g., to
limit the amount of personal data processed); (iv) obligations
to comply with individuals’ data protection rights including a
right: (a) of access to, erasure of, or rectification of personal
data, (b) to restriction of processing or to withdraw consent to
processing, (c) to object to processing or to ask for a copy of
personal data to be provided to a third party, and (d) not to be
subject to solely automated decision-making; and (v) an
obligation to report personal data breaches to: (i) the data
protection supervisory authority without undue delay (and no
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2023 FORM 10-K
later than 72 hours) after becoming aware of the personal
data breach, unless the personal data breach is unlikely to
result in a risk to the data subjects’ rights and freedoms; and
(ii) affected individuals, where the personal data breach is
likely to result in a high risk to their rights and freedoms.
Processors are required to notify the controller without undue
delay after becoming aware of a personal data breach.
The U.K. GDPR also imposes similar international data
transfer restrictions to the EU (see below) on transfers of
personal data from the U.K. to jurisdictions that the U.K.
government does not consider adequate, including the U.S.
The U.K. government has published its own form of the EU
Standard Contractual Clauses (“SCCs”), known as the
International Data Transfer Agreement and an International
Data Transfer Addendum to the new EU SCCs. Further, on
September 21, 2023, the U.K. Government established a
U.K.-U.S. data bridge or adequacy decision, through the U.K.
extension to the EU-U.S. Data Privacy Framework (“DPF”).
Effective as of October 12, 2023, U.S. organizations which
self-certify to the DPF can now transfer personal data from
the U.K. to the U.S. without using SCCs.
The U.K. Information Commissioner’s Office (“ICO”) has
the power under the GDPR to (amongst other things) impose
fines for serious breaches of up to the higher of 4% of the
organization’s annual worldwide turnover or £17.5 million.
Individuals also have a right to compensation, as a result of
an organization’s breach of the U.K. GDPR which has
affected them, for financial or non-financial losses (e.g.,
distress).
Cybersecurity requirements are laid down in the U.K. GDPR,
which requires controllers and processors to implement
appropriate
to
safeguard personal data to a level of security appropriate to
the data protection risk.
technical and organizational measures
The U.K. GDPR does not provide for a specific set of
cybersecurity requirements or measures to be implemented,
but rather requires a controller or processor to implement
appropriate cyber and data security measures in accordance
with the then-current risk, the state of the art, the costs of
implementation and the nature, scope, context and purposes
of the processing. The U.K. GDPR however does explicitly
require that controllers notify personal data breaches under
certain circumstances.
Artificial Intelligence. The U.K. has adopted a “soft law”
approach to AI regulation meaning it has not adopted formal
legislation to regulate AI but has adopted soft law guidelines
in the form of a White Paper published on March 29, 2023.
The U.K. intends to develop a sector-specific, principle
centered approach to AI regulation, with the relevant sectors
being responsible for enforcement.
Ireland
General. The CBI 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 CBI 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 CBI as a
non-life insurer in December 2011. As part of our Brexit
plan, Arch Insurance (EU) received approval from the CBI to
expand the nature of its business in 2019 and commenced
writing expanded insurance lines in the EEA in 2020 with the
Part VII Transfer completed at the end of December 2020.
Arch Underwriters Europe was registered by the CBI as an
insurance and reinsurance intermediary in July 2014. Arch
Re Europe, Arch Insurance (EU) and Arch Underwriters
Europe are subject to the supervision of the CBI and must
comply with Irish insurance acts and regulations as well as
with directions and guidance issued by the CBI.
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.
The CBI operates a risk-based supervision framework,
entitled PRISM, in respect to its regulation of Irish regulated
entities. Under PRISM, the CBI applies an impact rating to
each entity it regulates, ranging from Low to High, based on
the nature, scale and complexity of its business. The level of
supervision applied by the CBI is commensurate with the
impact rating applied under PRISM with higher rated entities
subject to more focused supervision engagement from the
CBI on a more frequent basis.
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 CBI 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
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2023 FORM 10-K
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 CBI 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, the CBI issued
guidance in April 2020, based on guidance issued by EIOPA,
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, the CBI 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 CBI 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 CBI in Ireland, a Member State of the EU, those
authorizations are recognized throughout the EEA. Subject
only to certain notification and application requirements,
(EU) and Arch
Arch Re Europe, Arch
Underwriters Europe can provide services, or establish a
branch, in any other Member State of the EEA. Although, in
doing so, they may be subject to the laws of such Member
States with respect to the conduct of business in such
Member State, company law registrations and other matters,
they will remain subject
to financial and operational
supervision by the CBI only. Arch Insurance (EU) has
branches in Italy and 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—New legislation or regulations
relating to 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 CBI's
agenda for a number of years. In November 2021, the CBI
issued its expectations in respect of climate and broader ESG
issues
(including
(re)insurers). The CBI'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 CBI has indicated that its expectations will be applied in
a proportionate manner. In August 2022, the CBI published a
Consultation Paper setting out its proposed guidance on
climate change risk for the (re)insurance sector. The finalized
guidance was published by the CBI in March 2023 and
clarifies the CBI’s expectations on how (re)insurers should
address climate change risks in their business and to assist
(re)insurers develop their governance and risk management
frameworks to do this. 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. Arch continues to consider the impact of this
guidance on its Irish entities. See also “European Union –
ESG Considerations.”
into effect
Irish Individual Accountability Framework Act 2023. The
Central Bank (Individual Accountability Framework) Act
2023 (the “IAF Act”) was signed into law in March 2023
with the relevant provisions and obligations under the IAF
Act coming into effect on a phased basis. The majority of
provisions came
in December 2023, with
remaining provisions coming into effect on July 1, 2024 and
July 1, 2025. The IAF Act implements substantive changes to
the fitness and probity regime maintained by the CBI in
Ireland and imposes certain additional obligations and
liability for senior executives in Irish regulated financial
service entities, including (re)insurance companies. Arch has
considered the impact of the IAF Act on its business and has
catered for this accordingly. See Item 1, “Business—
Regulation, European Union – ESG Considerations.”
Third Country Governance Arrangements. In September
2023, in response to a supervisory statement issued by
EIOPA in February 2023 on the use of third country
governance arrangements
(such as branches) by EU
authorized (re)insurers, the CBI published its formal views
on the use of third country governance arrangements. The
CBI’s key expectations are that (i) third country branches
should primarily serve the market in which they are
established, with their sole objective to not simply support an
Irish based (re)insurer and (ii) third country governance
arrangements should not undermine the substance of Irish
based (re)insurers. The CBI instructed Irish (re)insurers to
review their current business models in light of EIOPA’s
supervisory statement and the CBI’s own expectations. Arch
reviewed, and continues to consider, the impact of this
supervisory statement on its Irish and European operations.
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2023 FORM 10-K
European Union
the development of the IRRD and its potential impact on our
operations.
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 whether the Solvency II
regime remains fit for purpose. In its opinion, EIOPA
confirms that the overall Solvency II framework is working
well from a prudential perspective, suggesting that 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 reached provisional agreement on
the Solvency II amendments in December 2023, with formal
approval expected in 2024.
a number of
cover
areas
the
In addition to the above Solvency II reform proposals, the
European Commission continues to promote the development
of
Insurance Recovery and Resolution Directive
(“IRRD”). The proposal aims to harmonize national laws on
recovery and resolution of (re)insurance undertakings. In
December 2023, the European Parliament and Council
reached provisional agreement on the IRRD. Currently, it is
anticipated that the IRRD will enter into force during the
course of 2024. It should be noted that the CBI has already
introduced certain insurance recovery requirements under
Irish law that apply to Arch’s Irish operations, including the
preparation of recovery plans. We will continue to monitor
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
their
the TCA, U.K. financial
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 MoU between the U.K.
and the EU. However, the text of the MoU does not impose
any binding substantive commitments nor is there any
mention of taking forward the commitment in the Political
Declaration accompanying
the TCA regarding mutual
equivalence.
issued
its finalized
In early February 2023, EIOPA
Supervisory Statement on
the use by EU-authorized
(re)insurers of governance arrangements (such as branches)
in third countries to perform functions or activities in respect
of EU policyholders and risks. Arch is assessing the impact
of the Supervisory Statement on its EU operations. See “Risk
Factors—Risks Relating to Our Industry, Business and
Operations—New legislation or regulations relating to 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 CBI, are able to establish
branches and provide reinsurance services and, in respect of
Arch Insurance (EU), insurance services in all EEA states.
This is subject to certain regulatory notifications and there
being no objection from the CBI and the Member States
concerned.
Solvency II does not prohibit EEA insurers from obtaining
reinsurance from reinsurers licensed outside the EEA, such as
Arch Re Bermuda. As such, and subject to the specific rules
in each Member State, Arch Re Bermuda may do business
from Bermuda with insurers in EEA Member States, but it
may not directly operate its reinsurance business within the
EEA. Article 172 of Solvency II provides that reinsurance
contracts concluded by insurance undertakings in the EEA
with reinsurers having their head office in a country whose
solvency regime has been determined to be equivalent to
Solvency II shall be treated in the same manner as
reinsurance contracts with undertakings
the EEA
authorized under Solvency II. From January 1, 2016,
Bermuda was deemed by the European Commission to be
equivalent for Solvency II purposes. Solvency II also
includes specific measures providing for the supervision of
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
in
ARCH CAPITAL
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2023 FORM 10-K
supervision, where this results in more efficient supervision
of the group and does not impair EEA supervisors in respect
of their individual responsibilities.
The IDD was published in February 2016. EEA Member
States were required to transpose the IDD by October 1,
2018. The IDD replaces the existing Insurance Mediation
Directive. The IDD applies to all distributors of insurance
and reinsurance products (including insurers and reinsurers
selling directly to 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
include more specific conditions regarding
reinsurance
knowledge and continuing professional development for
those involved in distribution of (re)insurance products. The
IDD continues the pre-existing ability of 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
CBI, is able, subject to regulatory notifications and there
being no objection from the CBI, to establish branches and
provide services in all EEA states.
Privacy and Cybersecurity. The EU GDPR came into effect
on May 25, 2018. The EU GDPR governs the collection, use,
disclosure, transfer or other processing of personal data. 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 EU GDPR
contains a number of requirements regarding the processing
of personal data about individuals, including mandatory
security breach reporting, new and strengthened individual
rights,
for
compliance with the GDPR principles (including fairness and
transparency), maintenance of data processing activity
records and the implementation of “privacy by design,”
including
the completion of mandatory Data
Protection Impact Assessments in connection with higher risk
data processing activities.
evidenced data
accountability
controller
through
to
jurisdictions which
In addition, the EU GDPR increases scrutiny of transfers of
the European
personal data
Commission does not recognize as having “adequate” data
protection laws. In particular, on July 16, 2020, the Court of
Justice of the EU (Court of Justice) in Schrems II invalidated
the European Union-United States (EU-U.S.) Privacy Shield
on the grounds that the EU-U.S. Privacy Shield failed to offer
adequate protections to EU personal information transferred
to the U.S. While the Court of Justice upheld the use of other
data transfer mechanisms, such as the Standard Contractual
Clauses (“EU SCCs”), the decision has led to some
uncertainty regarding the use of such mechanisms for data
transfers to the U.S., and the Court of Justice made clear that
reliance on EU SCCs alone may not necessarily be sufficient
in all circumstances. The European Data Protection Board
issued additional guidance regarding international transfers
which may require us to implement additional safeguards to
further enhance the security of data transferred out of the
EEA. The European Commission published new versions of
the EU SCCs in June 2021, which place onerous obligations
on the parties. On October 7, 2022, the U.S. President
introduced an Executive Order to facilitate a new Trans-
Atlantic Data Privacy Framework to act as a successor to the
invalidated EU-U.S. Privacy Shield. On July 10, 2023, the
European Commission adopted an adequacy decision relating
to the transfer of personal data from the EU to the U.S. which
takes place under the DPF. The DPF is the successor to the
EU-U.S. Privacy Shield and allows companies
that
participate in the DPF to transfer personal data freely to the
U.S. without the need for alternative data protection transfer
mechanisms (such as SCCs or binding corporate rules).
The EU GDPR imposes substantial fines for breaches and
violations (up to the greater of €20 million or 4% of global
turnover). The EU GDPR allows data subjects and consumer
associations to lodge complaints with supervisory authorities,
seek judicial remedies and obtain compensation for damages
resulting from violations of the EU GDPR.
Cybersecurity and information security are an area of
increasing focus for the EU. The Digital Operational
Resilience Act (“DORA”) entered into force in January 2023.
The core aim of DORA is to prevent and mitigate cyber
threats and sets uniform requirements for the security of
network and information systems of financial sector entities
(including (re)insurers) as well as critical third parties which
provide ICT (information and communication technology)-
related services, such as cloud platforms or data analytics
services. In scope entities will be required to comply with the
obligations set out under DORA from January 2025.
In addition to the above, EIOPA continues to publish detailed
guidelines, recommendations and expectations relating to
cyber matters and how these should be managed and
considered by the (re)insurance sector.
Artificial Intelligence. On December 9, 2023, the EU
Parliament and Council reached provisional agreement on the
text of the Artificial Intelligence Act (the “EU AI Act”). The
EU AI Act aims to regulate AI and will apply directly, on a
phased basis, in all EU Member States. In February 2024,
representatives of the governments of EU Member States
signed off on the final text of the EU AI Act. A vote in the
European Parliament on the adoption of the EU AI Act is
expected in April 2024.
The EU AI Act will introduce a categorization system for AI
risks with the level of protection linked to the level of risk
posed by the relevant AI. Based on the final text, certain AI
applications utilized by (re)insurers will fall within the scope
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2023 FORM 10-K
In February 2022, the European Commission adopted a
proposal for the Corporate Sustainability Due Diligence
Directive (“CSDD”). Provisional agreement was reached
between the European Parliament and Council in December
2023 however the text of the agreed CSDD has not yet been
officially published. Formal approval of the CSDD is
expected to be provided in early 2024. While the main focus
of the CSDD is on conducting due diligence on human rights
and environmental impacts within a company and across its
there are also additional sustainability
value chain,
requirements for certain in-scope entities. It is anticipated
that certain obligations under the CSDD will apply to
financial services entities (including (re)insurers) however it
is expected
that financial services entities (including
(re)insurers) will be temporarily excluded from the obligation
to conduct due diligence on their customers.We will closely
monitor the continued development of the CSDD and its
potential impact on Arch’s European operations.
In tandem with all of the above, EIOPA continues to engage
with stakeholders in the (re)insurance sector and publish
detailed guidelines,
recommendations and expectations
relating to ESG matters and how these should be managed
and considered by the (re)insurance sector.
Russian Sanctions. Since February 2022, the EU has imposed
significant sanctions on the Russian Federation in response to
its invasion of Ukraine. These sanctions are similar to those
imposed by the U.K. and U.S. Given the evolving situation,
we are closely monitoring developments and the sanctions
imposed,
in
compliance with any sanctions measures imposed.
to ensure our European entities remain
statement outlining
Inflation. The EU has adopted a range of measures to combat
unprecedented levels of inflation, with EIOPA issuing a
expectations of
supervisory
(re)insurers on inflation-related issues in December 2022. We
are monitoring ongoing developments and considering the
impact of EU and EIOPA guidance on inflation on its
business.
its
Third Country Governance Arrangements. In February 2023,
EIOPA published a supervisory statement on the use by EU
authorized (re)insurers of governance arrangements (such as
branches) in third countries to perform functions or activities
in respect of EU policyholders and risks. See also “Ireland –
Third Country Governance Arrangements.”
of the EU AI Act and will be subject to regulation. Arch
continues to monitor development of the EU AI Act and its
potential impact on Arch’s operations.
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 IDD,
were published. The EC Regulations focus on the integration
of sustainability
including product
into key activities
oversight and governance, risk management and suitability
assessment procedures. The EC Regulations apply from
August 2022.
The Corporate Sustainability Reporting Directive (“CSRD”),
which replaces
the Non-Financial Reporting Directive
(“NFRD”), was published in the Official Journal of the EU
on November 16, 2022 and entered into effect on January 5,
2023. Certain of our European subsidiaries are subject to
NFRD. The CSRD expands the scope of sustainability
reporting obligations to any European listed company or any
company (including (re)insurers) meeting certain criteria.
Companies which are already subject to NFRD must start
reporting relevant information for financial years starting on
or after January 1, 2024 beginning in 2025. Reporting
obligations for other companies fulfilling certain criteria will
commence in 2026 for financial years starting on or after
January 1, 2025. In addition, the reporting standards under
the CSRD, which provides in-scope companies with the
technical detail on the information that will need to be
disclosed and reported, were adopted by the European
Commission in July 2023. Certain of our European entities
will fall within the scope of certain reporting obligations
under the CSRD.
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 required under the NFRD and
the CSRD.
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2023 FORM 10-K
Switzerland
In December 2008, Arch Re Europe opened Arch Re Europe
Swiss Branch as a branch office. As Arch Re Europe is
domiciled outside of Switzerland and its activities are limited
to reinsurance, the Arch Re Europe Swiss Branch in
Switzerland is not required to be licensed by the Swiss
insurance regulatory authorities.
In August 2014, Arch Underwriters Europe opened a branch
office in Zurich (“Arch Underwriters Europe Swiss Branch”)
to render reinsurance advisory services to certain group
companies. Arch Underwriters Europe Swiss Branch is
registered with the commercial register of the Canton of
Zurich. Since its activities are limited to advisory services for
reinsurance matters, the Arch Underwriters Europe Swiss
Branch is not required to be licensed by the Swiss insurance
regulatory authorities.
Australia
APRA is an independent statutory authority responsible for
prudential supervision of
institutions across banking,
insurance and superannuation and promotes financial stability
in Australia. Arch 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, which was formerly authorized by
APRA in January 2019 to conduct monoline lenders’
mortgage insurance business in Australia, relinquished its
APRA authorization in December 2022 and has been
converted to a services company for our Australian lenders
mortgage
regulatory
requirements that are applicable to Arch Indemnity as a
general insurance provider in Australia include requirements
on minimum capital levels, remuneration practices, and
compliance with corporate governance standards, including
the risk management strategy for our Australian mortgage
insurance business.
operations. Major
insurance
In addition to its APRA authorization, Arch Indemnity has
been licensed by the Australian Securities and Investments
Commission (“ASIC”) since March 2011 to engage in credit
activities in Australia. Arch LMI has been licensed by ASIC
since October 2023 as a Financial Services Licensee in
Australia.
in Australia
through Lloyd’s. This
Our group also conducts property and casualty insurance
insurance
business
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 ASIC.
In addition, there are other Australian legislation and
regulations applicable to the financial services sector that our
group operates in, such as:
information and
• privacy legislation on the collection, use and storage of
personal
information of
individuals and a mandatory data breach notification
regime, which are overseen by the Office of the Australian
Information Commissioner;
sensitive
• cyber security obligations imposed by APRA and ASIC as
part of their respective licensing regimes for insurers, and
also on larger insurers in Australia under Australian
security of critical infrastructure legislation;
• modern slavery legislation which imposes a statutory
in
larger companies operating
reporting regime for
Australia; and
• anti-money laundering and counter-terrorism financing
legislation, which is administered by the Australian
Transaction Reports and Analysis Centre.
In Australia, businesses which develop and use AI are subject
to various Australian laws relating to privacy, corporations
and anti-discrimination which apply across all sectors of the
economy. There are also financial services sector specific
laws in Australia administered by APRA and ASIC which
impact the development and deployment of AI in the sector
in which our group operates, although such existing laws are
technology-neutral.
The Australian Government has been undertaking
consultation on “Safe and Responsible AI” regulation in
Australia since June 2023. In January 2024, the Australian
Government published
the
consultation, which indicates that:
Interim Response
its
to
• the Australian Government considers that Australia’s
existing laws and current regulatory framework do not
sufficiently address the risks presented by AI (particularly
in “high-risk” applications and frontier models);
• the Australian Government will seek to regulate AI (rather
than relying solely on voluntary standards) by adopting a
risk-based regulatory approach to implement additional
guardrails for AI in “high-risk” settings;
• the Australian Government is currently undertaking work
to strengthen existing laws in areas that will help to address
known harms with AI, including proposed privacy law
reform.
The Australian Government’s final regulatory response to AI
is subject to further consultation with industry before either
amending existing laws or implementing new laws to
regulate AI in Australia.
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2023 FORM 10-K
Hong Kong
The insurance industry is regulated by Hong Kong Insurance
Authority (“HKIA”), whose principal function is to regulate
and supervise the insurance industry for the promotion of the
general stability of the insurance industry and for the
protection of existing and potential policyholders. Arch MI
Asia Limited (“Arch MI Asia”) is not writing new business
but 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.
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 White & Case
LLP, New York, New York (the advice of such firms does
not
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 depending on the holder’s
particular tax situation. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could be
retroactive and could affect the tax consequences to us or to
holders of our shares.
include
Taxation of Arch Capital
Bermuda. Under current Bermuda law, Arch Capital does not
pay any tax on income or profits, and is not subject to
payment of any tax on 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. However, on December 27,
2023, the Government of Bermuda enacted the Bermuda CIT
Act, which will become effective for tax years beginning on
or after January 1, 2025. Given the potential for the new
corporate income tax regime in Bermuda to supersede the
Minister of Finance’s assurance, the Company is likely to
become subject to taxes in Bermuda before March 31 ,2035.
See Item 1A,“Risk Factors — Risks Relating to Taxation”
for additional
information. We pay annual Bermuda
government fees, and our Bermuda insurance and reinsurance
subsidiary pays annual insurance license fees. In addition, all
entities employing individuals in Bermuda are required to
pay a payroll tax and other sundry taxes payable, directly or
indirectly, to the Bermuda government.
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 a tax
treaty. Such income tax, if imposed, would be based on
effectively connected
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.
income computed
“Treaty”), Arch Capital's Bermuda
Under the income tax treaty between Bermuda and the U.S.
(the
insurance
subsidiaries will be subject to U.S. income tax on any
insurance premium income that is effectively connected with
ARCH CAPITAL
33
2023 FORM 10-K
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 subsidiary’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 and October 2020.
reinsurance
premiums).
United Kingdom. Our U.K. subsidiaries are companies that
are incorporated and have their central management and
control in the U.K. and are therefore resident in the U.K. for
corporation tax purposes. As a result, they are subject to U.K.
corporation tax on their respective profits. The U.K. branches
of Arch Re Europe and Arch Insurance (EU) are subject to
U.K. corporation tax on the profits (both income profits and
chargeable gains) attributable to each branch. The blended
rate of U.K. corporation tax for the 2023 financial year is
approximately 23.5% on profits (the rate increased from 19%
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 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
is 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 19.65% 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%.
ARCH CAPITAL
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2023 FORM 10-K
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%.
OECD’s Pillar II.
Under Pillar II, a global minimum tax at the rate of 15%
would be imposed on certain in-scope entities. Under the
European Union’s minimum tax directive, unanimously
agreed by the member states in 2022, each member state is
required to adopt domestic legislation implementing the
minimum tax rules effective for periods beginning on or after
December 31, 2023, with the “under-taxed profit rule” to take
effect for periods beginning on or after December 31, 2024.
Legislatures in multiple countries outside of the European
Union have also drafted legislation to implement the OECD’s
minimum tax proposal.
laws
in different manners,
Given the OECD's continued release of guidance regarding
Pillar II, that only certain jurisdictions have currently enacted
laws to give effect to Pillar II, and that jurisdictions may
interpret such
the overall
implementation of Pillar II remains uncertain and subject to
change, possibly on a retroactive basis. Although certain
jurisdictions in which we and our affiliates do business have
enacted an “under-taxed profit rule”, such rule is only
expected to take effect for taxable periods beginning on or
after December 31, 2024. The adoption of the tax laws
described above (in particular, the adoption of an “under-
taxed profit rule” by certain countries in which we and our
affiliates do business) are expected to result in an increase to
our effective tax rate and aggregate tax liability. See Item 1A,
“Risk Factors – Risk Relating to Taxation” for additional
information.
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
institutions,
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 (except as to matters
explicitly discussed therein) does not describe the U.S.
federal income tax consequences that may be relevant to
certain types of shareholders, such as banks, insurance
companies, and other
regulated
financial
investment companies, real estate investment trusts, financial
asset securitization investment trusts, brokers, dealers or
traders in securities, entities or arrangements classified as
partnerships or pass-through entities for U.S. federal income
tax purposes or holders of equity interests therein, tax exempt
entities, “individual retirement accounts” or “Roth IRAs”,
expatriates and former citizens or long-term residents of the
United States, persons whose functional currency for U.S.
federal income tax purposes is not the U.S. dollar, persons
that own, directly, indirectly or constructively, ten percent
(10%) or more of the total voting power or value of all of our
outstanding shares, persons owning our common shares or
preferred shares in connection with a trade or business
conducted outside the United States, 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 our
common shares or preferred shares as part of a hedging or
conversion transaction or as part of a straddle or wash sale,
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,
and persons subject to the alternative minimum tax. 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. There can be no assurance the U.S. Internal
Revenue Service (“IRS”) or a court will not take a contrary
position
tax
consequences of the purchase, ownership and disposition of
our common shares and preferred shares. 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.
that discussed below
regarding
the
to
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2023 FORM 10-K
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 partnership holding
or considering an investment in our common shares or
preferred shares or a partner therein, 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 company
(“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, U.S holders of common
shares and preferred shares generally will recognize capital
gain or loss, if any, for U.S. federal income tax purposes on
the sale, exchange or other taxable disposition of common
shares or preferred shares, as applicable in an amount equal
to the difference between the amount realized on the sale,
exchange or other taxable disposition and the U.S holder’s
adjusted tax basis in the shares. Such gain or loss generally
will be long term capital gain or loss if the U.S. holder’s
holding period for the shares exceeds one year. Long-term
capital gains of certain non-corporate U.S. holders (including
individuals) are generally eligible for reduced rates of
taxation. The deductibility of capital losses is subject to
limitations.
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
ARCH CAPITAL
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2023 FORM 10-K
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.
less
than 80% of
In order to meet the substantially disproportionate test, the
percentage of our issued and outstanding voting shares
actually and constructively owned by the U.S. holder
immediately following the redemption of our shares must,
the
among other requirements, be
percentage of our issued and outstanding voting shares
actually and constructively owned by the U.S. holder
immediately before the redemption. There will be a complete
termination of a U.S. holder’s interest if either (i) all of our
shares actually and constructively owned by the U.S. holder
are redeemed or (ii) all of our shares actually owned by the
U.S. holder are redeemed and the U.S. holder is eligible to
waive, and effectively waives in accordance with specific
rules, the attribution of shares owned by certain family
members and the U.S. holder does not constructively own
any other of our shares. The redemption of our shares will
not be essentially equivalent to a dividend if such redemption
results in a “meaningful reduction” of the U.S. holder’s
proportionate interest in us. Whether the redemption will
result
in a U.S. holder’s
proportionate interest in us will depend on the particular facts
and circumstances. However, the IRS has indicated in a
published ruling
the
proportionate interest of a small minority shareholder in a
publicly held corporation who exercises no control over
corporate affairs may constitute such a “meaningful
reduction.” 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.
that even a small reduction
in a meaningful reduction
in
If none of the foregoing tests are satisfied, then the
redemption of any of our shares will be treated as a
distribution and the tax effects will be as described under “—
United States—Taxation of Dividends” above. After the
application of those rules, any remaining tax basis of the U.S.
holder in the redeemed shares will be added to the U.S.
holder’s adjusted tax basis in its remaining shares, or,
possibly, in other shares constructively owned by it. A U.S.
holder should consult with its own tax advisors as to the tax
consequences of a redemption of ours shares.
of our shares, and such holders are urged to consult with their
own tax advisors with respect to their reporting requirements.
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. A 10% U.S. Shareholder means any U.S. Person
who was considered to own, actually or constructively, 10%
or more of the total combined voting power or total
combined value of our shares or those of our non-U.S.
subsidiaries (as applicable). As a result of a change in law 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.
U.S. holders who actually or constructively own five percent
or more of our shares (by vote or value) may be subject to
special reporting requirements with respect to a redemption
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
ARCH CAPITAL
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2023 FORM 10-K
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”).
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
(although there can be no assurance that this is or will
continue be
the case). However, 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 intercompany
insurance income (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 proposed Treasury Regulations.
Section 953(c)(7) of the Code generally provides that Section
1248 of the Code (which generally would require a U.S.
holder to treat certain gains attributable to the sale, exchange
or disposition of common shares or preferred shares as a
dividend) will apply to the sale or exchange by a U.S.
shareholder of shares in a foreign corporation that is
characterized as a CFC under the RPII rules if the foreign
corporation would be taxed as an insurance company if it
were a 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 imposed at the highest applicable rate under
the Code for the applicable tax year. 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
ARCH CAPITAL
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2023 FORM 10-K
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 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 any year in which Arch Capital is not a PFIC, the
shareholder would not be subject to the QEF inclusion
regime described in the preceding paragraph for such
taxable year.
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, 2023, and we currently are not
expecting to become a PFIC for any subsequent taxable year.
However, due to the complexity and uncertainty of the PFIC
rules and the limited guidance interpreting them, there can be
no assurance that we have not been a PFIC to date or that we
will not become a PFIC at some time in the future. In
addition, our U.S. counsel expresses no opinion with respect
to our PFIC status for our current or future taxable years.
the
On December 4, 2020, the IRS issued certain final Treasury
Regulations (the “2020 final PFIC insurance regulations”)
insurance
regarding
regulations”)
and revised proposed Treasury Regulations (the “2020
the
proposed PFIC
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 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.
Backup Withholding and Information Reporting. Payments of
dividends and sales proceeds from a sale, exchange or other
taxable disposition (including redemption) of our common
shares or preferred shares that are made within the United
States, by a U.S. payor or through certain U.S.-related
financial intermediaries to a U.S. holder generally are subject
to information reporting, unless the U.S. holder is a
corporation or other exempt recipient, and if required,
demonstrates that fact. In addition, such payments may be
subject to backup withholding, unless (1) the U.S. holder is a
corporation or other exempt recipient or (2) the U.S. holder
provides a correct taxpayer identification number and
certifies that it is not subject to backup withholding in the
manner required. Backup withholding is not an additional
tax. The amount of any backup withholding from a payment
to a U.S. holder will generally be allowed as a credit against
the U.S. holder’s U.S. federal income tax liability or may
entitle the U.S. holder to a refund, provided that the required
information is timely furnished to the IRS.
Foreign Financial Asset Reporting. Certain U.S. persons are
required to report information relating to interests in
“specified foreign financial assets”, including shares issued
by a non-U.S. corporation, for any year in which the
aggregate value of all specified foreign financial assets
exceeds certain thresholds, subject to certain exceptions
(including an exception for shares held in a custodial account
maintained with a U.S. financial institution). Penalties may
be imposed for a failure to disclose such information. U.S.
holders are urged to consult their tax advisers regarding the
effect, if any, of these additional reporting requirements on
their ownership and disposition of our common shares or
preferred shares.
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 (subject to certain exceptions that may
apply if we were determined to be engaged in a trade or
business in the United States and 25% or more of our gross
ARCH CAPITAL
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2023 FORM 10-K
income were to be effectively connected to such U.S. trade or
business).
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
recognized 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 or preferred 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 applicable 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
carefully consider
the other
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.
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.
• The effects of inflation and global recessionary conditions
impact the insurance and reinsurance industry in ways
which may negatively impact our business, financial
condition and results of operations.
• 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 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.
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2023 FORM 10-K
• 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 that could prompt us to shift our risk
selection and business strategy in ways which may
adversely impact our results of operations.
result
in
• The Russian invasion of Ukraine and the resulting
imposition of sanctions by the U.S., U.K. and EU on
Russia and Russia-related businesses created global
instability.
• 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.
shareholders,
• As we continue to incorporate climate change and other
ESG factors in our business strategy, we cannot be certain
that
influential
environmental and social-focused 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.
and other
investors
• We could face unanticipated
increased
geopolitical tensions, hostilities, war, terrorism, cyber
attacks and general political instability, and these or other
unanticipated losses could have a material adverse effect
on our financial condition and results of operations.
losses from
• 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 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, as
well as vulnerabilities relating to new technologies, such as
generative AI, may impact us or our business partners and
service providers, causing a disruption in service and
operations which could materially and 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,
• Changes in criteria used by rating agencies which may
result in a downgrade in our ratings, our inability to obtain
a rating or a change in capital allocation or requirements
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 our business strategy successfully,
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.
• We are exposed to credit risk in certain of our business
operations.
• 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.
• New legislation or regulations relating to the U.K.’s
withdrawal from the EU could adversely affect us.
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.
• Disruption to the financial markets and weak economic
conditions resulting from situations such as post pandemic
inflation and geopolitical conflict may
imbalances,
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2023 FORM 10-K
adversely and materially impact our investments, financial
condition and results of operation.
• Foreign currency exchange rate fluctuation may adversely
affect our financial results.
• 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.
• 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.
Risks Relating to Our Mortgage Operations
• The ultimate performance of our mortgage insurance
portfolios remains uncertain.
• 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.
• Changes to the role of the GSEs in the U.S. housing market
or to GSE eligibility requirements for mortgage insurers or
to the GSEs’ use of CRT 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 Regulator Capital Framework 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 continuing implementation of the Tax Cuts Act may
have a material and adverse impact on our operations and
financial condition.
• Proposed Treasury Regulations issued on January 24,
2022, 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 our earnings
attributable to certain intercompany reinsurance income
(whether or not such income is distributed).
• Legislation enacted in Bermuda as to Economic Substance
may affect our operations.
• We expect to become subject to increased taxation in
Bermuda as a result of the recently adopted Bermuda CIT
Act, and may become subject to increased taxation in other
countries as a result of the implementation 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
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. We
also compete on the basis of product offerings and other
factors, such as our approach to ESG and our use of
technologies, and customers may be drawn
to our
competitors based on these factors. Any failure by us to
effectively compete could adversely affect our financial
condition and results of operations.
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The insurance and reinsurance industry is highly cyclical,
and we may at times experience periods characterized by
excess underwriting capacity and unfavorable premium
rates.
fluctuations
results due
in operating
insurers and reinsurers have experienced
Historically,
to
significant
competition,
frequency of occurrence or severity of
catastrophic events, levels of capacity, general economic
conditions, inflation, changes in equity, debt and other
investment markets, changes in legislation, case law and
prevailing concepts of liability and other factors. Demand for
reinsurance is influenced significantly by the underwriting
results of primary insurers and prevailing general economic
conditions. The supply of insurance and reinsurance is related
to prevailing prices and levels of surplus capacity that, in
turn, may fluctuate in response to changes in rates of return
being realized in the insurance and reinsurance industry on
both underwriting and investment sides. As a result, the
insurance and reinsurance business historically has been a
cyclical industry characterized by periods of intense price
competition due to excessive underwriting capacity as well as
periods when shortages of capacity permitted favorable
premium levels and changes in terms and conditions. Until
recently, the supply of insurance and reinsurance had
increased over the past several years, and may again in the
future, either as a result of capital provided by new entrants
or by the commitment of additional capital by existing
insurers or reinsurers. Continued increases in the supply of
insurance and reinsurance may have consequences for us,
including fewer contracts written, lower premium rates,
increased expenses for customer acquisition and retention,
and less favorable policy terms and conditions.
The effects of inflation and global recessionary conditions
impact the insurance and reinsurance industry in ways which
may negatively impact our business, financial condition and
results of operations.
While general economic inflation has eased in recent
quarters, higher inflationary conditions may continue to
remain in place. The potential also exists, after a catastrophe
loss or pandemic events like COVID-19, or geopolitical
tensions and hostilities for the development of inflationary
pressures in a local or regional economy. This may have a
material effect on the adequacy of our reserves for losses and
loss adjustment expenses, especially in longer-tailed lines of
business. In addition, governmental actions in response to
inflationary pressures, such as increasing interest rates, may
have a material impact on the market value of our investment
portfolio. While we consider the anticipated effects of
inflation in our pricing models, reserving processes and
exposure management across all lines of business and types
of loss including natural catastrophe events, the actual effects
of inflation on our results cannot be accurately known until
claims are settled. In addition, there are different types of
inflation relevant to certain lines of business, the impact of
which is difficult to accurately assess at this time. For
example, in our mortgage business, the failure of general
wages to keep pace with economic inflation, or increases in
unemployment due to prolonged recessionary conditions,
could prevent borrowers from being able to afford their
mortgage payments and thereby increase the frequency of
claims beyond our modeled results. Global recessionary
conditions, including inflation, the slow recovery of certain
sectors from the pandemic, predicted slow growth rates
across key markets and other factors, will impact the
insurance and reinsurance industry. There is great uncertainty
around how severe and how long a recession will last on a
global and local basis. While our risk management and
business strategy take recessionary conditions into account,
we cannot accurately predict the full impact of a recession on
our results of business operations.
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
various events,
including hurricanes, floods, wildfires,
tsunamis, windstorms, earthquakes, hailstorms, tornadoes,
explosions, severe winter weather, fires, droughts and other
natural disasters. The frequency and severity of natural
catastrophe 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 have varied materially from estimates due
to the inherent uncertainties in making such determinations
resulting from several factors,
the potential
inaccuracies and inadequacies in the data provided by clients,
brokers and ceding companies, the modeling techniques and
the application of such techniques, the contingent nature of
business interruption exposures, the effects of any resultant
demand surge on claims activity and attendant coverage
issues. 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. All of
the catastrophe modeling tools that we use or rely on to
evaluate our catastrophe exposures are therefore based on
significant assumptions and judgments and are subject to
including
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2023 FORM 10-K
error and misestimation. As a result, our estimated exposures
could be materially different than our actual results.
transition that these companies make towards addressing
climate risk in their own businesses.
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, wildfires and
droughts 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 and increasing catastrophic events could
increase property damage to residential real estate secured by
mortgages owned by the GSEs, and by extension could
increase losses to CRT investors. Increasing catastrophic
events could increase the cost of homeowners insurance and
could negatively impact mortgagees’ ability to meet their
monthly housing payment obligations, and by extension
could increase the frequency of claims. Additionally, climate
change may make modeled outcomes less certain or produce
new, non-modeled risks. Catastrophic events could result in
increased
and other
counterparties we transact business with, declines in the
value of investments we hold and significant disruptions to
our physical infrastructure, systems and operations. Climate
change-related risks may also specifically adversely impact
the value of the securities that we hold.
reinsurers
exposure
credit
to
income,
Changes in security asset prices may impact the value of our
real estate and commercial mortgage
fixed
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
We attempt to manage our exposure to these risks relating to
climate change through the use of underwriting controls,
proprietary and third party risk models, and the purchase of
third party reinsurance. Underwriting controls can include
more
restrictive underwriting criteria such as higher
premiums and deductibles, reduction in limits offered or
losses retained, and more specifically excluded policy risks.
Our exposure in connection with a catastrophic event is
determined by market capacity, pricing conditions, regulatory
capital requirements, our perceptions of underlying risk 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.
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.
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.
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We are subject to ongoing legal and policy actions around
climate change which may result in additional requirements
which could prompt us to shift our risk selection and business
strategy 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 or policies 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
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 or that they
will not result in a material adverse effect on our results of
operations, financial condition or share price.
The Russian invasion of Ukraine and the resulting imposition
of sanctions by the U.S., U.K. and EU on Russia and Russia-
related businesses created global instability.
inflationary pressures,
The Russian invasion of Ukraine and ongoing hostilities have
created a high level of uncertainty as well as disruption in
certain sectors of the global economy. It is impossible to
predict whether Russia will expand hostilities to other
countries in Europe or elsewhere. A further prolonged war
may also create uncertainty in the global economy in the
form of oil shortages,
loss of
confidence and general increase in risks worldwide. In
response to this aggression, the governments of the U.S.,
U.K., EU and other countries implemented several sanctions
programs relating to, among other things, the import and
transportation of Russian oil and gas and other goods
originating in Russia. Sanctions imposed also target entities,
individuals and financial institutions which support Russia’s
military and defense systems. Certain lines of business we
write have been impacted by the sanctions, such as the
marine and energy lines of business, although the extent of
the impact will depend on the outcome of the war in Ukraine
and the nature of future sanctions packages.
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., EU and
Australia 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.
Climate change on a global and regional level may impact
businesses on a temporary or permanent basis, resulting in
shifting needs for our products and services in ways we
cannot predict. More stringent regulations and other
requirements imposed on our policyholders may negatively
impact their ability to conduct business. As a result of these
factors, 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 and other ESG
factors in our business strategy, we cannot be certain that
shareholders, investors and other influential environmental
and social-focused 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. ESG also includes social factors, such as
how we manage our suppliers, the way we interact with our
employees and communities and our diversity and inclusion
efforts. Our leadership and Board are actively engaged in
understanding
landscape and
the ever-changing ESG
assessing our business operations to ensure that our business
strategy reflects our values. We believe 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 shareholders or investors do not agree with, or
are not satisfied with, our business strategy and approach to
climate change or social concerns and decide to sell or not
purchase our equity or debt instruments or to publicize their
issues will meet
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2023 FORM 10-K
dissatisfaction. In addition, we cannot predict how legal
challenges to diversity and inclusion recruitment programs
may impact our efforts in this area.
Underwriting risks and reserving for losses are based on
probabilities and related modeling, which are subject to
inherent uncertainties.
face unanticipated
tensions, hostilities,war,
increased
We could
terrorism, cyber
geopolitical
attacks, and general political instability, and these or other
unanticipated losses could have a material adverse effect on
our financial condition and results of operations.
losses
from
are
risks
pandemic. These
We have substantial exposure to unexpected, large losses
resulting from future man-made catastrophic events, such as
acts of war, regional hostilities, acts of terrorism, political
instability, social unrest and pandemics similar to the
inherently
COVID-19
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
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 2023 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.
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.
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2023 FORM 10-K
As of December 31, 2023, our consolidated reserves for
unpaid losses and loss adjustment expenses, net of unpaid
losses and loss adjustment expenses recoverable, were
approximately $16.1 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
industry
and have also considered available historical
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, 2023.
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
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
could result
that substantially exceed our
expectations, or the protections set forth in our policies could
be voided, which, in either case, could have a material
in claims
judgment,
involving
to
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.
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
reinsurance
management program.
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, including but not
limited to recessionary conditions, inflation, declining home
prices or the impact of climate change could also have a
to manage our risk
material
aggregations
reinsurance or capital markets
transactions. The availability and cost of excess of loss
reinsurance sold into the capital markets is subject to investor
appetite and market conditions when compared to the terms
and yield opportunities of other similar
investment
opportunities. As a result of these factors, we may not be able
to successfully mitigate risk
through reinsurance and
retrocessional arrangements.
impact on our ability
through
Further, we are subject to credit risk with respect to our
reinsurance and retrocessions because the ceding of risk to
reinsurers and retrocessionaires does not relieve us of our
liability to the clients or companies we insure or reinsure. We
monitor the financial condition of our reinsurers and attempt
to place coverages only with carriers we view as substantial
and financially sound. An inability of our reinsurers or
retrocessionaires to meet their obligations to us could have a
material adverse effect on our financial condition and results
of operations. Our losses for a given event or occurrence may
increase if our reinsurers or retrocessionaires dispute or fail
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2023 FORM 10-K
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
Emerging claim and coverage issues 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.
While we had exposure to a number of lines of business, such
as trade credit, travel, workers compensation and property
where business interruption coverage under a pandemic such
as COVID-19 was at issue, the number of claims in this area
has decreased greatly in 2022. and into 2023. We continue to
monitor the impact of COVID-19 on our claims process in
the U.S and U.K. in particular, although we do not expect the
impact to be significant.
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
reporting systems; establishing satisfactory
operational
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
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2023 FORM 10-K
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 and our pace of
adoption of new technologies, such as AI, may not be
adequate to meet the demands of our customers or impact
negatively our ability to compete with our peers.
We are dependent on our information technology systems to
information
conduct our business. Specifically, our
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 manners in which
we intend or possess all of the functionality required by
customers currently or in the future.
resources
Our customers, require that we conduct our business in a
secure manner, electronically via
the Internet or via
electronic data transmission. We must continually invest
in establishing and maintaining
significant
electronic connectivity with customers. In order to integrate
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. Inflation and
to support our
supply chain
informational technology systems or those of our vendors
pose risks which are beyond our control and may be difficult
to manage. 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. We continuously evaluate the security and
adequacy of our information technology systems in order to
ensure
the most appropriate
technologies. With new technologies, such as AI, emerging at
a rapid pace, there is no assurance that we will be able to
evaluate and integrate new technologies or update our
existing systems.
that we are utilizing
for components
integrations
in our
issues
Technology failures and cyber attacks, including, but not
limited to, ransomware, exploitation in software or code with
malicious intent, state-sponsored cyber attacks, as well as
vulnerabilities relating
technologies, such as
to new
generative AI, may impact us or our business partners and
service providers, causing a disruption in service and
operations which could materially and negatively impact our
business and/or expose us to litigation.
We rely on information technology systems to securely
process, transmit, store and protect the confidential and
electronic information, financial data and proprietary models
that are critical to our business. Furthermore, a significant
portion of the communications between our employees and
our business partners and service providers depends on
information technology and electronic information exchange.
Like all companies, our information technology systems and
the systems of third parties we do business with are
vulnerable to data breaches, interruptions or failures due to
events that may be beyond our control, including, but not
limited to, natural disasters, power outages, theft, terrorist
attacks, computer viruses, hackers, employee or vendor error
or misconduct, malicious actors, errors in usage or deepfake
or social engineering or schemes, phishing attacks, other
external hazards and general technology failures. Security
breaches by third parties could expose us to the loss or
misuse of our information, financial losses, reputational
damage and potential liability and litigation. In addition,
cyber incidents and other disruptions that impact the
availability, reliability, speed, accuracy or other proper
functioning of these systems could have a significant
negative impact on our operations and results. While we and
third parties with which we do business have experienced
cybersecurity incidents, to date, the Company does not
believe that any previous cybersecurity incidents have
materially affected the Company.
The sophistication of cybersecurity threats, including through
the use of AI, continues to increase, and the controls and
preventative actions that we take to reduce the risk of
cybersecurity incidents and protect these systems, including
the regular testing of our cybersecurity incident response
plan, may be insufficient. Although our use of generative AI
in business tools is limited and we continue to evaluate how
to integrate this new technology into our business operations,
recent developments in AI, including generative AI, may
accelerate or exacerbate potential
to
technological developments, and we cannot predict how such
risks may
impact our strategy, productivity, market
competition and growth.
related
risks
We rely on certain third party technology service providers
and other service providers, notably major cloud providers,
Software-as-a-Service (or SaaS) solutions, and on-premise
software, including proprietary and open source solutions.
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2023 FORM 10-K
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, supply chain issues or the effectiveness of our
control system, which could result in our inability to conduct
business operations, monetary and reputational damage or
harm to our competitive position. There is no assurance that
we will not be materially adversely affected by, or that the
security measures we take will shield us from, data breaches
or cyber attacks on us or on the third parties we rely on for
critical business functions. See Item 1C, “Cybersecurity” for
additional information.
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.
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 collect, process and store 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. We are subject to
many laws and regulations relating to the adequacy of
cybersecurity programs and business resiliency, including
industry specific requirements under federal and state law,
the new SEC Cybersecurity Rules, and comprehensive
privacy or security laws in the EU, U.K. and some U.S. states
like New York and California. A cybersecurity 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, penalties, or litigation any of which
could adversely affect our business.
Changes in criteria used by rating agencies which may result
in a downgrade in our ratings, our inability to obtain a
rating or a change in capital application or requirements 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
in
requirements employed
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.
Changes in in the criteria used by rating agencies may impact
our capital position, our capital requirements and the
treatment of certain items on our balance sheet. 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
their models and/or
other
discontinue credit and debt instruments or other structures
deployed for maintenance of certain rating levels. We may
need to raise additional funds through equity or debt
investments. Any equity or debt
financings or other
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 through such financings or
through our investment strategy, 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
in Item 1. For further
issuer ratings, see “Ratings”
information on our letter of credit facilities, see the Letter of
Credit
section of
“Contractual Obligations and Commercial Commitments” in
Item 7.
and Revolving Credit Facilities
Our ability to execute our business strategy successfully,
continue to grow and innovate and offer our employees a
the
dynamic and supportive workplace depends on
recruitment, retention and promotion of talented, agile,
diverse and resilient employees at all
levels of our
organization.
The success of our business depends on attracting and
retaining a capable and talented workforce. Following the
COVID-19 pandemic, we have adopted a hybrid work model
in most of our offices with employees returning to the office
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2023 FORM 10-K
for part of the work week. 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
the past few years, we have also
implemented and expanded our learning programs, career
leveling and employee networks, all of which we believe will
help us retain talent.
levels. Over
a
cohesive
In 2023, we launched our talent acquisitions shared services
team for our North American entities. This structure enables
us to better deploy internal and external candidates across the
candidate
organization while providing
experience. As the model matures and scales, we expect to
see improvements in time to hire metrics. 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, we may not be able to complete
successfully for talented executives and employees, which
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.”
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 sanctions regimes may
be initiated, or existing sanctions expanded, at any time,
which can immediately impact our business activities. Since
the Russian invasion of Ukraine in February 2022, there have
been several sanctions packages imposed by the U.S., U.K.
and EU which impact our business. The sanctions are
complex, numerous and nuanced, requiring close review and
assessment as they pertain to our business. 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 addition, we may interpret a complex sanction
in a way which may differ from a regulator. In these cases,
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.
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2023 FORM 10-K
New legislation or regulations relating to 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. We have
implemented changes in our operations to accommodate
Brexit; however, we remain subject to new proposals such as
third country governance guidance provided by EIOPA in
2023, and regulations which may negatively impact U.K.
underwriting activities
risks and
policyholders.
respect of EU
in
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, resulting
from inflation, global recessionary pressures, geopolitical
conflict, liquidity conditions among other factors, can
increase uncertainty and heighten volatility in the credit and
equity markets. These developments may result in realized
and unrealized losses on our investment portfolio that could
have a material adverse effect on our results of operations,
financial position and our businesses, and may also limit our
access to capital required to operate our business. In addition,
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. 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 weak economic
conditions resulting from situations such as post pandemic
imbalances, inflation and geopolitical conflict 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 geopolitical conflict,
elevated financing rates, housing market declines or other
macro-and micro-economic conditions could adversely affect
the valuation of securities in our investment portfolio. Credit
deterioration spread widening and/or equity market volatility
could result in temporary or permanent impairment. Elevated
levels of inflation could drive higher U.S. and global interest
rates, negatively impacting asset prices, particularly in fixed
income and financial flexibility of operating businesses. In
addition, a lack of pricing transparency, decreased market
liquidity,
foreign
the strengthening or weakening of
currencies against the U.S. Dollar, individually or in tandem,
could have a material adverse effect on our results through
realized losses, impairments and changes in unrealized
positions in our investment portfolio. Furthermore, issuers of
the investments we hold under the equity method of
accounting report their financial information to us one month
to three months following the end of the reporting period.
Accordingly, the adverse impact of any disruptions in global
financial markets on equity method income from these
investments would likely not be reflected in our current
quarter results and would instead be reported in the
subsequent quarter.
Our operating results depend in part on the performance of
our investment portfolio. A significant portion of cash and
invested assets held by Arch consists of fixed maturities
(70.1% as of December 31, 2023). Although our current
investment guidelines and approach emphasize 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
calibrating the liquidity of 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.
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2023 FORM 10-K
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 available-for-sale 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.
The determination of the amount of current expected 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, as 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 our mortgage
portfolios remains uncertain.
insurance
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 unless
there are other characteristics to mitigate the risk. The mix of
higher-risk loans, including affordable housing loans which
often have higher-risk characteristics, could increase losses
and harm our financial performance. The geographic mix of
our insured loan portfolio could also increase losses and harm
our financial performance.
Mortgage insurance premiums are set at the time coverage is
procured, based in part on the expected duration of the
coverage. We cannot cancel mortgage insurance coverage or
adjust renewal premiums during the life of the policy. Thus,
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. Further,
in the U.S., to the extent that the insured cancels coverage as
a result of prior home price appreciation, the duration of
coverage will be shorter, and we will receive less premium.
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. A decrease in the amount of premium received or
an increase in the number or size of claims, compared to what
we anticipate, could adversely affect our 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
of our control,
in
unemployment and home prices affordability. 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. Monthly interest rate changes in Australia or the
increasing cost of homeowners insurance in the U.S. could
make a borrower’s monthly housing-related payment
obligations increase and could increase the frequency of
claims. Deteriorating economic conditions, potentially due to
levels of
prolonged recessionary conditions
unemployment and inflation, could adversely affect the
performance of our mortgage insurance portfolio and could
increasing
ARCH CAPITAL
53
2023 FORM 10-K
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. Increases to mortgage interest
rates have materially increased financing costs, and as a
result may decrease the number of qualified borrowers and
the volume of low down payment mortgage originations.
The private mortgage
insurers’ principal government
competitor is the Federal Housing Administration (“FHA”).
On February 22, 2023, the FHA reduced its annual mortgage
insurance premium rates by 30bps for most single family
mortgages endorsed on or after March 20, 2023. This takes
the annual premium from 0.85% down to 0.55% for most
FHA borrowers. This change, and any future changes to the
FHA program may, negatively impact the amount of
mortgage insurance we write in the U.S.
The Federal Housing Finance Agency
(“FHFA”) as
conservator of the GSEs continues to evaluate loan level
price adjustments (“LLPAs”) and guarantees fees assessed by
the GSEs when purchasing loans. During 2022 and 2023, the
FHFA implemented a series of changes to update the GSEs’
single-family guarantee fee pricing framework to increase
support for creditworthy borrowers limited by income or by
wealth, while also increasing pricing to other categories of
loans (such as high balance mortgages and mortgages on
second homes) to foster capital accumulation. On May 15,
2023, FHFA issued a Request for Input (“RFI”) on the
process used for implementing guarantee fee pricing changes,
and on the goals and priorities that FHFA, as both
conservator and regulator, should pursue in its oversight of
the pricing framework. These, and future actions taken as a
result of the RFI could cause a decline in the volume of low-
down payment home mortgage purchases by the GSEs, could
decrease demand for mortgage insurance, and could decrease
our U.S. new insurance written and reduce mortgage
insurance revenues.
On June 8, 2022, the FHFA announced the GSEs release of
Fannie Mae's and Freddie Mac's Equitable Housing Finance
Plans for 2022-2024. These plans are designed to foster
housing finance markets that provide equitable access to
affordable and sustainable housing, including through the use
of special purpose credit programs (“SPCPs”). SPCPs are
lending programs designed to expand access to credit among
disadvantaged borrowers. The Consumer Finance Protection
Bureau, the Department of Housing and Urban Development,
and other federal agencies have issued guidance encouraging
the use of SPCPs and providing assurances that properly
structured SPCPs are permissible under federal law. New
practices or programs
the GSEs’
Equitable Housing Plans, may impact the underwriting and
servicing standards on mortgages purchased by the GSEs and
could
the presence of multiple higher-risk
characteristics in our insured loan portfolio. Further, the legal
landscape applicable to SPCPs remains untested and loans
originated under these programs could be subject to increased
risk of private litigation or enforcement actions under state
and federal law.
implemented under
increase
Changes to the role of the GSEs in the U.S. housing market
or to GSE eligibility requirements for mortgage insurers or
to the GSEs’ use of CRT 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
to be eligible for purchase or guarantee by the GSEs. Any
changes to the charters or statutory authorities of the GSEs
would require congressional action to implement. 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.
In January 2021, the U.S. Department of Treasury (the
“Treasury Department”) and FHFA announced an agreement
to amend the preferred stock purchase agreements between
the Treasury Department and the GSEs, originally entered
into in September 2008, in order to, among other things,
codify several existing FHFA conservatorship practices for
the GSEs and outline a plan for the Treasury Department, in
consultation with FHFA, to develop a proposal for continued
GSE reform. If any GSE reform is adopted, whether through
legislation or administrative action, it could impact the
current role of private mortgage
insurance as credit
enhancement, including its reduction or elimination. Passage
and timing of any comprehensive GSE reform or incremental
change (legislative or administrative) is uncertain, making the
actual impact on the mortgage insurance industry difficult to
predict. Furthermore, the FHFA and/or the GSEs could chose
to reduce the amount of CRT protection purchased on their
loan portfolios, which could reduce the CRT investment
ARCH CAPITAL
54
2023 FORM 10-K
opportunities available for reinsurers. Future legislative,
administrative or changes to business practices related to the
use or requirement for credit enhancement could have a
material adverse impact on the Company.
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 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, 2023. 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 Regulator Capital Framework 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 III Endgame.”
The Basel Committee expects the new rules to be fully
implemented by January 2027.
On July 27, 2023, the Federal banking agencies released a
proposed rule to implement the Basel III Endgame in the
United States. The proposal would eliminate the capital relief
currently afforded mortgage loans protected by private
mortgage insurance. Instead, the capital treatment would be
based on the mortgage’s loan to value ratio without
consideration of mortgage insurance. The comment period
for this proposal closed on January 16, 2024. If the U.S.
regulators decide to adopt the proposed Basel III Endgame
approach to mortgage assets, the capital treatment of
mortgages held in portfolio will increase and the capital relief
benefits of mortgage insurance would be eliminated, which
could adversely affect the volume of mortgages originated by
banks subject to the rule and the demand for mortgage
insurance.
On December 17, 2020, the FHFA published a new
Enterprise Regulatory Capital Framework
(“ERCF”)
Enterprise Capital Rule for Fannie Mae and Freddie Mac that
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. Changes were made to the ERCF in 2022 to
incentive CRT transactions, and in 2023 to address capital
requirements for derivatives; market risk; multifamily loans;
and exposures of an Enterprise to the other Enterprise.
insurer
including
the mortgage
insurance, provided
the GSEs’ determination of
The ERCF includes higher risk-capital charges for residential
mortgages and continues to take into account the benefits of
is
mortgage
compliant with the PMIERs. The amount of capital relief
afforded for mortgage insurers depends on a number of
factors,
the
creditworthiness of the mortgage insurer, which could affect
the competitive position of the individual mortgage insurance
providers. The higher risk-capital charges for residential
mortgages could be 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.
In addition, higher capital standards could impact the
guarantee fees charged to acquire loans. In January 2023,
after the Enterprises had fully transitioned to the new ERCF
capital regime, FHFA announced new pricing matrices
redesigned and recalibrated to align the fee structure more
closely with the risk factors utilized in the capital framework.
Future changes to the ERCF, or the guarantee fees charged to
acquire loans, could adversely impact credit for credit risk
transfer, the capital relief afforded mortgage insurance or the
volume of loans purchased by the Enterprises and the
demand for mortgage insurance.
ARCH CAPITAL
55
2023 FORM 10-K
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
securities
these
provisions; provided, however, the super majority vote will
not apply to any transaction approved by the Board.
to a 15% Holder; or amendment of
The provisions described above may have the effect of
making more difficult or discouraging unsolicited takeover
bids from third parties. To the extent that these effects occur,
shareholders could be deprived of opportunities to realize
takeover premiums for their shares and the market price of
their shares could be depressed. In addition, these provisions
could also result
incumbent
management.
the entrenchment of
in
There are regulatory limitations on the ownership and
transfer of our common shares.
The jurisdictions where we operate have laws and regulations
that require regulatory approval of a change in control of an
insurer or an insurer's holding company. Where such laws
apply to us, there can be no effective change in our control
unless the person seeking to acquire control has filed a
statement with the regulators and obtained prior approval for
the proposed change. Certain regulators may at any time, by
written notice, object to a person holding shares in an insurer
or an insurer's holding company if it appears to the regulator
that the person is not or is no longer fit and proper to be such
a holder. The regulator may require the shareholder to reduce
its holding in the insurer or an insurer's holding company and
direct, among other things, that such shareholder’s voting
rights attaching to the shares in an insurer or an insurer's
holding company shall not be exercisable.
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, 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, 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 the 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 the 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
ARCH CAPITAL
56
2023 FORM 10-K
Arch Capital is a holding company and is dependent on
its operating
dividends and other distributions
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
redemption amounts or
any payments of dividends,
liquidation amounts with respect to our preferred shares and
common shares, and to fund the share repurchase program.
The ability of our regulated insurance and reinsurance
subsidiaries to pay dividends or make distributions is subject
to legislative constraints and dependent on their ability to
meet applicable regulatory standards. In addition, the ability
of our
to pay
insurance and reinsurance subsidiaries
dividends to Arch Capital and to intermediate parent
companies owned by Arch Capital could be constrained by
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, social, 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 the Board (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 the Board (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.
indebtedness, where principal and
Additionally, unlike
interest would customarily be payable on specified due dates,
in the case of preferred shares, (1) dividends are payable only
if declared by the Board (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.
ARCH CAPITAL
57
2023 FORM 10-K
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 the Board
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 expect to become subject to increased taxation in
Bermuda as a result of the recently adopted Bermuda CIT
Act, and may become subject to increased taxation in other
countries as a result of the implementation 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
these standards,
Legislation
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
from
“unregulated elements of the financial services sector”
remain in scope but only where revenue exceeds €20 billion.
local customer markets. However, profits
Pillar II addresses the remaining BEPS risk of profit shifting
to certain in-scope entities in low tax jurisdictions by
introducing a global minimum tax (15%), which would
operate through a denial of a deduction or imposition of
source-based taxation (including withholding tax) on certain
payments. In calculating whether the effective tax rate of an
in-scope entity meets the minimum tax rate, certain deferred
income tax assets and liabilities reflected or disclosed in the
financial accounts of an in-scope entity are taken into
account. 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
followed by the release of detailed commentary in March
2022. The OECD has released additional administrative
guidance on the global minimum tax in February, July and
December of 2023. Under the European Union’s minimum
tax directive, unanimously agreed by the member states in
2022, each member state is required to adopt domestic
legislation implementing the minimum tax rules effective for
periods beginning on or after December 31, 2023, with the
“under-taxed profit rule” to take effect for periods beginning
on or after December 31, 2024. Legislatures in multiple
countries outside of the European Union have also drafted
and/or enacted
the OECD’s
to
minimum tax proposal. Given the OECD's continued release
of guidance regarding Pillar II, that only certain jurisdictions
have currently enacted laws to give effect to Pillar II, and that
jurisdictions may interpret such laws in different manners,
the overall implementation of Pillar II remains uncertain and
subject to change, possibly on a retroactive basis.
implement
legislation
ARCH CAPITAL
58
2023 FORM 10-K
On August 8, 2023, the Bermuda Ministry of Finance
published its first Public Consultation announcing the
proposed implementation of a new corporate income tax
regime applicable to Bermuda businesses that are part of
Multinational Enterprise Groups with annual revenue of €750
million or more. A Second Public Consultation was
published on October 5, 2023 confirming, inter alia, a
statutory corporate tax rate of 15% and a Third Public
Consultation was published on November 15, 2023. The
Bermuda CIT Act was enacted on December 27, 2023 and is
to be effective for tax years beginning on or after January 1,
2025. The Bermuda Government announced in its Second
Public Consultation that any new Bermuda corporate income
tax regime would supersede existing Tax Assurance
Certificates held by entities within the scope of the new
Bermuda corporate income tax (such as those issued to us,
referred to above under “—Taxation of Arch Capital.
Bermuda.”). Given the potential for the new Bermuda
corporate income tax to supersede existing Tax Assurance
Certificates, it is likely that Arch will be subject to Bermuda
tax for tax years beginning on or after January 1, 2025.
The adoption of the tax laws described above (in particular,
the adoption of an “under-taxed profit rule” by certain
countries in which we and our affiliates do business and the
expected implementation of a corporate income tax regime in
Bermuda) are expected to result in an increase to our
effective tax rate and aggregate tax liability, which may
adversely affect our financial position and results of
operations, and is expected to increase the complexity and
cost of our worldwide tax compliance. Although certain
jurisdictions in which we and our affiliates do business have
enacted an “under-taxed profit rule”, such rule is only
expected to take effect for taxable periods beginning on or
after December 31, 2024. Such tax laws may not be enacted
or the form of such tax laws could change on a prospective or
retroactive basis. The impact of any such changes is
unknown, but such changes could have an adverse effect on
our effective tax rate and aggregate tax liability and could
increase the complexity and costs associated with our tax
compliance worldwide.
ARCH CAPITAL
59
2023 FORM 10-K
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk management and strategy
We prioritize the management of cybersecurity risk and the
protection of information across our enterprise by embedding
data protection and cybersecurity risk management in our
operations. Our processes for assessing, identifying, and
managing material risks from cybersecurity threats have been
integrated into our overall risk management system and
processes. For example, to identify and assess risks from
cybersecurity
threats, our enterprise risk management
program considers cybersecurity as part of the Company’s
risk assessment process, and our risk management framework
to monitor key risks such as
requires risk owners
cybersecurity on a continuous basis. See Item 1, “Business—
Enterprise Risk Management” for additional information.
As a foundation of our approach to cybersecurity risk, we
have implemented processes at several levels across our
enterprise to help assess, identify and manage cybersecurity
risks. Our privacy and information security policies and
standards govern our business lines and subsidiaries and
encompass incident response, access control, and vendor
management, among others. In order to develop these
policies and procedures, we monitor the privacy and
cybersecurity laws, regulations and guidance applicable to us
in the regions where we do business. See Item 1, “Business—
Regulation—Cybersecurity and Privacy” for additional
details.
We annually undergo an external evaluation by a third party
cybersecurity firm with a specialty in penetration testing. Our
vendor management group performs information security risk
assessments on our third party service providers with respect
to their ability to protect data from unauthorized access, and
on a risk weighted basis, we perform re-assessments
routinely. The Company also requires these vendors to
adhere to privacy and cybersecurity measures and has a third
party service provider monitoring program in place that
reviews changes to the security posture of certain higher risk
third party service providers. In addition, the Company
negotiates appropriately protective
legal
agreements with these providers.
terms
its
in
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Computer viruses, hackers,
employee or vendor error or misconduct, and other external
hazards could expose our information systems and those of
our vendors to security breaches, cybersecurity incidents or
other disruptions, any of which could materially and
adversely affect our ability to conduct our business. While we
and third parties with which we do business have experienced
cybersecurity incidents, to date, the Company does not
believe that any previous cybersecurity incidents have
materially affected the Company.
The sophistication of cybersecurity threats, including through
the use of AI, continues to increase, and the controls and
preventative actions that we take to reduce the risk of
cybersecurity incidents and protect our systems, including the
regular testing of our cybersecurity incident response plan,
may be insufficient. In addition, new technology that could
result in greater operational efficiency such as AI may further
expose our information systems to the risk of cybersecurity
incidents. See Item 1A, “Risk Factors—Risk Relating to Our
Industry, Business & Operations—Technology failures and
cyber attacks, including, but not limited to, ransomware,
exploitation in software or code with malicious intent, state-
sponsored cyber attacks, as well as vulnerabilities relating to
new technologies, such as generative AI, may impact us or
our business partners and service providers, causing a
disruption in service and operations which could materially
and negatively impact our business and/or expose us to
litigation.”
Governance
levels,
risk at several
As part of our overall risk management approach, we
recognize the importance of identifying and managing
including Board
cybersecurity
oversight, executive commitment and employee training. Our
Audit Committee, comprised of independent directors from
our Board, oversees the Board’s responsibilities relating to
the operational (including information technology (“IT”)
risks, business continuity and data security) risk affairs of the
Company. Our Audit Committee is informed of such risks
through quarterly reports from our Chief Information Officer
(“CIO”) and Chief Operations Officer (“COO”), with input
from our Chief Information Security Officer (“CISO”).
Our cybersecurity and IT executives include our CIO, who
has 33 years of experience in Information Technology,
ARCH CAPITAL
60
2023 FORM 10-K
including 20 years in the financial services space. His
responsibilities as the CIO include information security
oversight, and board reporting. Our CISO, has 18 years of
experience
in Information Security. The CISO holds
certifications from leading security associations. The CISO,
reporting to the CIO, oversees the implementation and
compliance of our
information security standards and
mitigation of related risks. We also have three management
level committees and a team that supports our processes to
assess and manage cybersecurity risk.
• The Privacy and Security Committee (“P&S Committee”),
co-chaired by the CISO and our Deputy General Counsel,
brings together Information Security, legal, compliance,
human resources and other function leads. The P&S
Committee provides a forum for these cross-functional
members of management to: consider new laws and
regulations relating to privacy and security; consider
to cybersecurity and data
emerging
protection; approve, review and update policies and
standards as appropriate; and promote cross-functional
collaboration to manage cybersecurity and privacy risks
across the enterprise.
relating
risks
• The Operational Risk Committee (“ORC”), comprised of
senior IT, operations, risk, legal and compliance leaders
across business segments, manages risks from matters
related to business continuity including risks posed by
cybersecurity threats, and implements controls to mitigate
such operational risks. Among other processes, the ORC
reviews the Company’s programs and processes related to
business operations and resiliency, including crisis incident
management and cyber risk response, third party risk,
vendor management, facilities, unplanned downtime,
ITEM 2. PROPERTIES
business disruption, business continuity and disaster
recovery. Key information reviewed by the ORC, including
as it relates to cybersecurity, are included in the COO’s
quarterly report to the Audit Committee.
• The Crisis Incident Management Team (“CIMT”), which
includes senior executives across the Company, is alerted
as appropriate to cybersecurity incidents, natural disasters
and business outages. Each quarter, the CIMT exercises its
communication plan to confirm that its members can be
alerted quickly in the event of an actual crisis and meet as a
team to discuss the event and response options.
• The IT Steering Committee (“IT Committee”, which
includes our CIO, CISO, COO and members of executive
initiatives while considering
leadership, oversees IT
cybersecurity risk mitigation with respect
these
initiatives.
to
The P&S Committee, ORC, CIMT and IT Committee are
comprised of executives with reporting lines to the CIO and/
or the COO.
At the employee level, we maintain an experienced IT
security team tasked with ongoing reviews of our technology
systems, implementation of our privacy and cybersecurity
program and support for the CIO and CISO in carrying out
their reporting, security and mitigation functions. We also
hold employee training on privacy and cybersecurity, records
and information management, conduct regular phishing tests
and generally seek to promote awareness of cybersecurity
risk through communication and education of our employee
population.
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 2024.
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, 2023, 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.
ARCH CAPITAL
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2023 FORM 10-K
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
HOLDERS
As of February 16, 2024, and based on information provided to us by our transfer agent and proxy solicitor, there were 1,200
holders of record of our common shares (Nasdaq: ACGL) and approximately 360,100 beneficial holders of our common shares.
The following table summarizes our purchases of common shares for the 2023 fourth quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
Issuer Purchases of Common Shares
Period
10/1/2023-10/31/2023
11/1/2023-11/30/2023
12/1/2023-12/31/2023
Total
Total Number of Shares
Purchased (1)
Average Price Paid per
Share
56,056
134,250
11,201
201,507
$
$
$
$
82.70
85.28
74.71
83.97
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
($000’s) (2)
—
—
—
—
$
$
$
$
1,000,000
1,000,000
1,000,000
1,000,000
(1) This column represents (in whole shares) open market share repurchases, including an aggregate of 56,056, 134,250 and 11,201 shares
repurchased by Arch Capital during October, November and December, respectively, other than through publicly announced plans or
programs. We repurchased these shares from employees in order to facilitate the payment of withholding taxes on restricted shares
granted and the exercise of stock appreciation rights, in each case at their fair 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) This column represents the remaining approximate dollar amount available at the end of each applicable period under Arch Capital’s
$1.0 billion share repurchase authorization, authorized by the Board of Directors of ACGL on December 19, 2022. Repurchases may be
effected from time to time in open market or privately negotiated transactions through December 31, 2024.
ARCH CAPITAL
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2023 FORM 10-K
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, 2023 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
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
$100.00
$160.52
$134.99
$166.35
$234.96
$277.96
$100.00
$131.49
$155.68
$200.37
$164.08
$207.21
$100.00
$125.87
$134.63
$160.58
$190.89
$211.53
(1)
(2)
(3)
Stock price appreciation plus dividends.
The above graph assumes that the value of the investment was $100 on December 31, 2018.
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
63
2023 FORM 10-K
Arch Capital Group Ltd.S&P 500 IndexS&P 500 Property & Casualty Insurance Index12/31/1812/31/1912/31/2012/31/2112/31/2212/31/23$0.00$100.00$200.00$300.00
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,
2023 and 2022. Comparisons between 2022 and 2021 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, 2022 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. All amounts are in millions, except per share amounts, unless otherwise noted.
Overview
Current Outlook
Financial Measures
Comments on Non-GAAP Measures
Results of Operations
Insurance Segment
Reinsurance Segment
Mortgage Segment
Corporate Segment
Summary of Critical Accounting Estimates
Financial Condition
Liquidity
Capital Resources
Contractual Obligations and Commitments
Ratings
Catastrophic Events and Severe Economic Events
Market Sensitive Instruments and Risk Management
Page No.
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65
66
67
69
69
71
72
73
75
83
85
87
90
91
91
93
ARCH CAPITAL
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2023 FORM 10-K
OVERVIEW
CURRENT OUTLOOK
Arch Capital Group Ltd. (“Arch Capital” and, together with
its subsidiaries, “we” or “us”) is a publicly listed Bermuda
exempted company with approximately $21.1 billion in
capital at December 31, 2023 and is part of the S&P 500
index. Through operations in Bermuda, the United States,
United Kingdom, Europe, Canada and Australia, 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, experienced management team and strong capital
base enable us to establish a strong presence in the markets
where we operate.
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, narrow terms and conditions, and
strong underwriting profits for insurers. A “hard” market
typically attracts new capital and new entrants to the market
and is eventually followed by a “soft” market, which has
characteristics of low premium rates, relaxed underwriting
standards, broader
lower
underwriting profits for insurers. 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.
terms and conditions, and
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 are subject to similar
cycles to property casualty except that they have historically
been more dependent on macroeconomic conditions.
As we conclude another record year and head into 2024, our
objective remains the same, to deliver long term value for our
shareholders. With our commitment to underwriting acumen,
prudent reserving and cycle-focused capital allocation, we
were able to deliver another profitable year. Our full year
financial performance was excellent, with an annualized net
income and operating returns on average common equity of
29.7% and 21.6%, respectively. See “Comment on Non-
GAAP Financial Measures.”
We continue to execute our cycle management strategy by
actively allocating capital to the segments with the best risk
adjusted returns. Growth was strong all year in our property
and casualty segments which wrote over $17 billion of gross
premium written and over $12.4 billion of net premium
written, and, while most current growth opportunities are in
the property and casualty sector, it is important to recognize
the steady and quality underwriting performance of our
mortgage group. Although mortgage market conditions
meant fewer opportunities for top line growth, the mortgage
segment continued to generate significant profits totaling
nearly $1.1 billion of underwriting income for the year.
At Arch, our primary focus has always been on rate
adequacy, regardless of market conditions. Our underwriting
culture dictates that we include a meaningful margin of safety
in our pricing, especially in softer conditions and take a
longer term view of inflation and rates. As underwriting
opportunities arise, our reinsurance segment is able to react
quickly and significantly when markets pivot. In the
reinsurance property market, our overall exposure to property
catastrophe risk remains well below our self imposed
threshold (see “Catastrophic and Severe Economic Events”)
and, because of our diversified portfolio and broad set of
opportunities, we retain the flexibility to pursue the most
attractive returns across lines and geographies. The hard
market conditions remained elevated in several lines during
the January 1, 2024 renewal cycle.
In our insurance segment, we continue to take advantage of
favorable global market conditions with net premiums
written up 17% in 2023. Although pricing has declined in
some lines, such as large public directors and officers liability
insurance, the markets in which our insurance segment
operates generally continue to provide adequate returns. In
2023, the most notable gains came in property, marine,
construction and national accounts.
ARCH CAPITAL
65
2023 FORM 10-K
Inflation continues to be a focus for our industry. We
proactively analyze available data and we incorporate
emerging trends into our pricing and reserving. We believe
that
in future
investment returns and prudent reserving, allows us to
maximize the capabilities of our diversified platform.
this discipline, coupled with
increases
Our mortgage segment continues to deliver a steady level of
earnings for our shareholders. Higher persistency of our in
force U.S. primary mortgage insurance portfolio helped
offset the significant industry wide reduction in mortgage
originations in 2023. The credit profile of our U.S. primary
mortgage insurance portfolio remains excellent and the
overall mortgage market continues to be disciplined and
return focused. We continue to see meaningful opportunities
for the mortgage segment outside of the U.S. and our
strategic decision to diversify our mortgage operations is
yielding positive results.
FINANCIAL MEASURES
Management uses the following three key financial indicators
in evaluating our performance and measuring the overall
growth in value generated for Arch Capital’s common
shareholders:
Book Value per Share
is
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 $46.94 at December 31, 2023, a 43.9%
increase from $32.62 at December 31, 2022. The increase in
book value per share in 2023 reflected strong underwriting
and investment results and also reflected the establishment of
a net deferred income tax asset of $1.18 billion, or $3.16 per
share, related to the enactment of Bermuda’s new corporate
income tax.
Operating Return on Average Common Equity
Operating return on average common equity (“Operating
ROAE”) represents annualized after-tax operating income
available to Arch common shareholders divided by average
common shareholders’ equity available to Arch during the
to Arch
period. After-tax operating
common shareholders, a “non-GAAP measure” as defined in
the SEC rules, represents net income available to Arch
common shareholders, excluding net realized gains or losses
income available
(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, net foreign exchange
loss on
gains or
losses,
taxes.
redemption of preferred
Management uses Operating ROAE as a key measure of the
return generated
to Arch common shareholders. See
“Comment on Non-GAAP Financial Measures.”
transaction costs and other,
shares and
income
Our annualized net income return on average common equity
was 29.7% for 2023, compared to 11.6% for 2022. Our
Operating ROAE was 21.6% for 2023, compared to 14.8%
for 2022, with the higher return in 2023 primarily resulting
from improved underwriting results and growth in net
investment income.
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 or losses and the
change in unrealized gains or 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. See “Comment on Non-GAAP
Financial Measures.”
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:
Arch
Portfolio (1)
Benchmark
Return
Year Ended December 31, 2023
Year Ended December 31, 2022
7.57 %
-6.45 %
8.28 %
-9.60 %
(1) Our investment expenses were approximately 0.26% and 0.28%,
respectively, of average invested assets in 2023 and 2022.
Total return for 2023 reflected strong returns in fixed income,
equity and alternative strategies. Actual performance trailed
the benchmark return for the year, largely due to the portfolio
being underweight risk assets compared to the benchmark.
We continue to maintain a relatively short duration on our
portfolio of 2.91 years at December 31, 2023.
ARCH CAPITAL
66
2023 FORM 10-K
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, 2023, the benchmark
return index had an average credit quality of “A1” by
Moody’s, an estimated duration of 2.64 years.
index should not be
The benchmark return index included weightings to the
following indices:
ICE BofA 1-10 Year U.S. Corporate Index
Yield on 3-5 Year U.S. Treasury Index plus 6%
ICE BofA 1-10 Year U.S. Treasury Index
ICE BofA U.S. High Yield Constrained Index
ICE BofA 1-5 Year U.K. Gilt Index
JPM CLOIE Investment Grade
ICE BofA German Government 1-5 Year Index
ICE BofA German Government 5-7 Year Index
S&P 500 Total Return Index
ICE BofA 0-3 Month U.S. Treasury Index
ICE BofA U.S. ABS & CMBS Index
ICE BofA 1-5 Year Australia Government Index
ICE BofA U.S. Mortgage Backed Securities Index
ICE BofA 1-5 Year Canada Government Index
ICE BofA 15+ Year Canada Government Index
ICE BofA 1-5 Year Japan Government Index
Total
%
28.50
16.50
15.75
8.00
5.50
4.50
2.80
1.20
4.00
3.00
3.00
2.50
1.50
2.70
0.30
0.25
100.00 %
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 (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, net foreign exchange
gains or losses, transaction costs and other, net of income
taxes (which for the 2023 fourth quarter includes a one-time
deferred income tax benefit related to the enactment of
Bermuda’s new corporate income tax), 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.
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 these items are independent
of the insurance underwriting process and result, in large
part, from general economic and financial market conditions.
Furthermore, certain users of our financial information
believe that, for many companies, the timing of the
realization of
largely
opportunistic. In addition, changes in the 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.
investment gains or
losses
is
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 investments 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.
severance,
Transaction costs and other include advisory, financing,
legal,
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.
ARCH CAPITAL
67
2023 FORM 10-K
In the 2023 fourth quarter, the Company established a net
deferred income tax asset, resulting in a benefit of $1.18
billion, consistent with the transition provisions specified in
the Bermuda CIT Act. Due to the non-recurring nature of this
one-time item, the Company believes that excluding this item
from after-tax operating income or loss available to common
shareholders provides the user with a better evaluation of the
Company’s ongoing business performance.
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 that follow us and the
insurance industry as a whole generally exclude these items
from their analyses for the same reasons.
to our
includes
information
the presentation of
Our segment
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
the
subtotal of underwriting
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
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. See note 12,
“Variable Interest Entities and Noncontrolling Interests” and
note 4, “Segment Information,” to our consolidated financial
statements for additional information on Somers.
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 or losses
(excluding changes in the allowance for credit losses on non-
investment related financial assets) and the change in
unrealized gains or losses generated by Arch’s investment
portfolio. Total return is calculated on a pre-tax basis and
before investment expenses, 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
ARCH CAPITAL
68
2023 FORM 10-K
total return on investments as a key measure of the return
generated to Arch common shareholders on the capital held
in the business, and compares the return generated by our
investment portfolio against benchmark returns which we
measured our portfolio against during the periods.
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. See “Comment on
Non-GAAP Financial Measures.”
Year Ended December 31,
2023
2022
Net income available to Arch common
shareholders
$
4,403 $
1,436
Net realized (gains) losses (1)
165
663
Equity in net (income) loss of investments
accounted for using the equity method
Net foreign exchange (gains) losses
Transaction costs and other
Income tax expense (benefit) (2)
After-tax operating income available to Arch
common shareholders
Beginning common shareholders’ equity
Ending common shareholders’ equity
(278)
62
6
(1,157)
(115)
(102)
—
(42)
$
$
3,201 $
1,840
12,080 $
12,716
17,523
12,080
Average common shareholders’ equity
$
14,802 $
12,398
Annualized net income return on average
common equity %
Annualized operating return on average
common equity %
29.7
21.6
11.6
14.8
(1) Net realized gains or losses include realized and unrealized changes in
the fair value of equity securities and assets accounted for using the fair
value option, realized and unrealized gains and losses on derivative
instruments and changes in the allowance for credit losses on financial
assets.
(2) Income tax 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. The
2023 results were impacted by the establishment of a net deferred income tax
asset of $1.18 billion, or $3.10 per share, related to the enactment of
Bermuda’s new corporate income tax.
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, the Chief Financial Officer and Treasurer of
Arch Capital and the President and Chief Underwriting
Officer of Arch Capital. The chief operating decision makers
do not assess performance, measure return on equity or make
resource allocation decisions on a line of business basis.
Management measures segment performance for our three
underwriting segments based on underwriting income or loss.
We do not manage our assets by underwriting segment, with
the exception of goodwill and
intangible assets and
accordingly, investment income is not allocated to each
underwriting segment.
segments using
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:
$
Gross premiums written
Premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
$
Year Ended December 31,
2022
6,931
(1,910)
5,021
(461)
4,560
2023
7,911
(2,049)
5,862
(416)
5,446
% Change
14.1
16.7
19.4
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income
(3,122)
(1,055)
(819)
450
$
(2,784)
(887)
(665)
224
$
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
57.3 %
19.4 %
15.0 %
91.7 %
61.0 %
19.4 %
14.6 %
95.0 %
(3.7)
—
0.4
(3.3)
100.9
% Point
Change
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.
ARCH CAPITAL
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2023 FORM 10-K
Net Premiums Written.
Losses and Loss Adjustment Expenses.
The following tables set forth our insurance segment’s net
premiums written by major line of business:
The table below shows the components of the insurance
segment’s loss ratio:
2023
Amount
Professional lines
$
1,401
Property, energy,
marine and aviation
Programs
Construction and
national accounts
Travel, accident and
health
Excess and surplus
casualty
Warranty and lenders
solutions
Other
Year Ended December 31,
%
23.9
20.8
12.7
1,219
742
628
10.7
559
540
235
538
9.5
9.2
4.0
9.2
2022
Amount
$
1,502
878
611
470
484
461
139
476
%
29.9
17.5
12.2
9.4
9.6
9.2
2.8
9.5
Total
$
5,862
100.0
$
5,021
100.0
Net premiums written by the insurance segment were 16.7%
higher in 2023 than in 2022. The increase in net premiums
written reflected growth in most lines of business, primarily
due to rate increases, new business opportunities and growth
in existing accounts.
Net Premiums Earned.
The following tables set forth our insurance segment’s net
premiums earned by major line of business:
Current year
Prior period reserve development
Loss ratio
Current Year Loss Ratio.
Year Ended December 31,
2023
2022
58.1 %
(0.8) %
57.3 %
61.6 %
(0.6) %
61.0 %
The insurance segment’s current year loss ratio was 3.5
points lower in 2023 than in 2022. The 2023 loss ratio
included 2.7 points of current year catastrophic event activity,
spread across series of global events, compared to 5.2 points
in 2022, primarily related to Hurricane Ian and a series of
global events. The balance of the change in the 2023 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 insurance segment’s net favorable development was $42
million, or 0.8 points, for 2023, compared to $25 million, or
0.6 points, for 2022. 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.
Year Ended December 31,
Underwriting Expenses.
The insurance segment’s underwriting expense ratio was
34.4% in 2023, compared to 34.0% in 2022, with the increase
primarily related to higher incentive compensation costs.
2022
Amount
$
1,314
772
590
432
492
393
128
439
%
26.1
19.5
12.1
10.3
10.2
8.9
3.4
9.5
%
28.8
16.9
12.9
9.5
10.8
8.6
2.8
9.6
1,064
658
561
557
486
185
516
2023
Amount
Professional lines
$
1,419
Property, energy,
marine and aviation
Programs
Construction and
national accounts
Travel, accident and
health
Excess and surplus
casualty
Warranty and lenders
solutions
Other
Total
$
5,446
100.0
$
4,560
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
19.4% higher in 2023 than in 2022, reflecting changes in net
premiums written over the previous five quarters.
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2023 FORM 10-K
Reinsurance Segment
Net Premiums Earned.
The following tables set forth our reinsurance segment’s
underwriting results:
$
Gross premiums written
Premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
% Change
31.2
$
Year Ended December 31,
2022
6,948
(2,024)
4,924
(965)
3,959
2023
9,113
(2,559)
6,554
(718)
5,836
Other underwriting income
(loss)
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income
17
5
(3,227)
(1,240)
(288)
1,098
$
(2,568)
(813)
(268)
315
$
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
55.3 %
21.2 %
4.9 %
81.4 %
64.9 %
20.5 %
6.8 %
92.2 %
248.6
% Point
Change
(9.6)
0.7
(1.9)
(10.8)
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.
Net Premiums Written.
The following tables set forth our reinsurance segment’s net
premiums written by major line of business:
Year Ended December 31,
2023
Amount
Other specialty
$
2,412
Property excluding
property catastrophe
Casualty
Property catastrophe
Marine and aviation
Other
Total
$
1,910
1,002
865
250
115
6,554
%
36.8
29.1
15.3
13.2
3.8
1.8
100.0
2022
Amount
$
1,983
1,276
973
416
167
109
4,924
$
%
40.3
25.9
19.8
8.4
3.4
2.2
100.0
Net premiums written by the reinsurance segment were
33.1% higher in 2023 than in 2022. The growth in net
premiums written reflected increases in all lines of business,
primarily due to new business, rate increases and growth in
existing accounts.
The following tables set forth our reinsurance segment’s net
premiums earned by major line of business:
33.1
47.4
Other specialty
Property excluding
property catastrophe
Casualty
Property catastrophe
Marine and aviation
Other
Total
Year Ended December 31,
2023
Amount
$
2,097
1,645
1,005
742
229
118
5,836
$
%
35.9
28.2
17.2
12.7
3.9
2.0
100.0
2022
Amount
$
1,378
1,090
855
367
159
110
3,959
$
%
34.8
27.5
21.6
9.3
4.0
2.8
100.0
Net premiums earned in 2023 were 47.4% higher than in
2022, 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 2023 was $17 million,
compared to $5 million in 2022.
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,
2023
2022
57.9 %
(2.6) %
55.3 %
69.7 %
(4.8) %
64.9 %
The reinsurance segment’s current year loss ratio was 11.8
points lower in 2023 than in 2022. The 2023 loss ratio
included 6.8 points for current year catastrophic event
activity spread across a series of global events, compared to
13.9 points in 2022, primarily related to Hurricane Ian and a
series of global events. The balance of the change in the 2023
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
$152 million, or 2.6 points, for 2023, compared to $190
million, or 4.8 points, for 2022, See note 5, “Reserve for
Losses and Loss Adjustment Expenses,” to our consolidated
financial statements in Item 8 for information about the
reinsurance segment’s prior year reserve development.
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2023 FORM 10-K
Underwriting Expenses.
The underwriting expense ratio for the reinsurance segment
was 26.1% in 2023, compared to 27.3% in 2022, with the
decrease primarily due to growth in net premiums earned.
The 2022 ratio also reflected a lower level of contingent
commissions on ceded business, primarily due to Hurricane
Ian.
The persistency rate of the U.S. primary portfolio of
mortgage loans was 83.6% at December 31, 2023 compared
to 79.5% at December 31, 2022, 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.
Mortgage Segment
Net Premiums Earned.
The following tables set forth our mortgage segment’s
underwriting results.
The following table sets forth our mortgage segment’s net
premiums earned by underwriting unit:
Year Ended December 31,
2022
1,455
(322)
1,133
2023
1,387
(335)
1,052
$
% Change
(4.7)
(7.1)
(0.2)
(15.4)
% Point
Change
19.1
(2.1)
—
17.0
106
1,158
14
103
(17)
(194)
1,064
27
1,160
8
324
(40)
(195)
1,257
$
(8.9) %
1.4 %
16.8 %
9.3 %
(28.0) %
3.5 %
16.8 %
(7.7) %
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
Net Premiums Written.
The following table sets forth our mortgage segment’s net
premiums written by underwriting unit:
U.S. primary mortgage insurance
U.S. credit risk transfer (CRT) and other
International mortgage insurance/reinsurance
Total
Year Ended December 31,
2023
2022
$
737 $
220
95
769
196
168
$
1,052 $
1,133
Net premiums written for 2023 were 7.1% lower than in
2022. The reduction in net premiums written primarily
reflected lower levels of mortgage originations in the
Australian market and a decrease in U.S. primary mortgage
insurance business, which was partially offset by a higher
volume of credit risk transfer transactions. Premiums ceded
for 2023 reflected $17 million of one-time payments related
to the termination of eight Bellemeade agreements.
Year Ended December 31,
2023
2022
U.S. primary mortgage insurance
U.S. credit risk transfer (CRT) and other
International mortgage insurance/reinsurance
Total
$
759 $
220
179
$
1,158 $
804
196
160
1,160
Net premiums earned for 2023 were 0.2% lower than in
2022. The 2023 results were impacted by the termination of
the Bellemeade agreements noted above.
Other Underwriting Income.
Other underwriting income, which is primarily related to
GSE risk-sharing
transactions services and our whole
mortgage loan purchase and sell program, was $14 million
for 2023, compared to $8 million for 2022.
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,
2023
2022
20.8 %
(29.7) %
(8.9) %
19.8 %
(47.8) %
(28.0) %
Unlike property and casualty business for which we estimate
ultimate losses on premiums earned, losses on U.S. primary
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
ARCH CAPITAL
72
2023 FORM 10-K
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 2023 or
2022.
Current Year Loss Ratio.
The mortgage segment’s current year loss ratio was 1.0 point
higher in 2023 compared to 2022. The higher current year
loss ratio for 2023 reflected an increase in new delinquencies.
The percentage of loans in default on U.S. primary mortgage
insurance decreased from 1.77% at December 31, 2022 to
1.74% at December 31, 2023.
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
$344 million, or 29.7 points, for 2023, compared to $554
million, or 47.8 points, for 2022. 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 18.2% for 2023, compared to 20.3% for 2022, with the
decrease primarily due
level of profit
commissions on ceded U.S. primary mortgage insurance
business in 2023.
to a higher
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 items (which
for 2023 reflects the establishment of a net deferred income
tax asset related to the enactment of Bermuda’s new
corporate income tax), income from operating affiliates and
items related to our non-cumulative preferred shares.
Net Investment Income.
The components of net investment income were derived from
the following sources:
Year Ended December 31,
2023
2022
Fixed maturities
Short-term investments
Equity securities
Other (1)
Gross investment income
Investment expenses (2)
$
917 $
68
22
93
1,100
(77)
Net investment income
$
1,023 $
469
29
22
47
567
(71)
496
(1)
(2)
Includes
investment funds and other items.
interest
income on operating cash, distributions from
Investment expenses were approximately 0.26% of average invested
assets for 2023, compared to 0.28% for 2022.
The pre-tax investment income yield was 3.53% for 2023,
compared to 1.99% for 2022. The growth in net investment
income for 2023 compared to 2022 primarily reflected higher
yields available in the financial markets. Net cash flow from
operating activities contributed $5.7 billion in 2023, which
increased our invested asset base and contributed to the
growth in net investment income. 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 or Losses.
We recorded net realized losses of $165 million for 2023,
compared to net realized losses of $663 million for 2022.
Currently, our portfolio is actively managed to maximize
total return within certain guidelines. The effect of financial
market movements on the investment portfolio will directly
impact net realized gains or losses as the portfolio is
rebalanced. Net realized gains or losses from the sale of fixed
maturities primarily results from our decisions to reduce
credit exposure, to change duration targets, to rebalance our
portfolios or due to relative value determinations.
ARCH CAPITAL
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2023 FORM 10-K
Interest Expense.
Interest expense was $133 million for 2023, compared to
$131 million for 2022. Interest expense primarily reflects
amounts related to our outstanding senior notes.
Net Foreign Exchange Gains or Losses.
Net foreign exchange losses for 2023 were $60 million,
compared to net foreign exchange gains for 2022 of $102
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 a benefit of 24.5% for 2023, compared to an
expense of 5.1% for 2022. The 2023 provision reflected the
establishment of a net deferred income tax asset of $1.18
billion related to the enactment of Bermuda’s new corporate
income tax. 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 2023
and 2022.
Income (Loss) from Operating Affiliates.
We recorded $184 million of net income from our operating
affiliates in the 2023 period, compared to income of $75
million in the 2022 period and primarily reflects amounts
related to the Company’s investment in Somers Group
Holdings Ltd. and Coface SA. See note 9, “Investment
Information—Investments in Operating Affiliates,” to our
consolidated financial statements for additional information.
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.
the equity method
We recorded $278 million of equity in net income related to
investments accounted for using the equity method for 2023,
compared to $115 million for 2022. Investments accounted
totaled $4.6 billion at
for using
to $3.8 billion at
December 31, 2023, compared
December 31, 2022. 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 or Losses
Other income for the 2023 period was $27 million, compared
to a loss of $27 million for the 2022 period. Amounts in both
periods primarily reflect changes in the cash surrender value
of our investment in corporate-owned life insurance.
Corporate Expenses.
Corporate expenses were $96 million for 2023, compared to
$95 million for 2022. 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 $6 million for 2023,
compared to nil for 2022. The 2023 expenses were primarily
related to acquisition activity.
Amortization of Intangible Assets.
Amortization of intangible assets for 2023 was $95 million,
compared to $106 million for 2022. Amounts in 2023 and
to amortization of finite-lived
2022 primarily related
intangible assets. See note 2, “Acquisitions."
ARCH CAPITAL
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2023 FORM 10-K
SUMMARY OF CRITICAL ACCOUNTING
ESTIMATES
At December 31, 2023 and 2022, our Loss Reserves, net of
unpaid losses and loss adjustment expenses recoverable, by
type and by operating segment were as follows:
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.
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.
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
Total:
Case reserves
Additional case reserves
IBNR reserves
Total net reserves
December 31,
2023
2022
$
2,730 $
5,626
8,356
2,447
484
4,260
7,191
323
192
515
2,398
4,934
7,332
1,903
481
3,403
5,787
447
186
633
5,500
484
10,078
16,062 $
4,748
481
8,523
13,752
$
At December 31, 2023 and 2022, 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
Construction and national accounts
Excess and surplus casualty
Programs
Property, energy, marine and aviation
Travel, accident and health
Warranty and lenders solutions
Other
Total net reserves
December 31,
2023
2022
2,451 $
1,693
975
929
836
144
65
1,263
8,356 $
2,070
1,558
786
843
764
139
47
1,125
7,332
$
$
At December 31, 2023 and 2022, the reinsurance segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
Casualty
Other specialty
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
Total net reserves
December 31,
2023
2022
$
$
2,725 $
2,125
1,243
585
359
154
7,191 $
2,342
1,476
993
536
292
148
5,787
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2023 FORM 10-K
At December 31, 2023 and 2022, the mortgage segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
December 31,
2023
2022
U.S. primary mortgage insurance (1)
U.S. credit risk transfer (CRT) and other
International mortgage insurance/
reinsurance
Total net reserves
$
$
324 $
100
91
515 $
415
109
109
633
(1) At December 31, 2023, 29.5% of total net reserves represent policy
years 2013 and prior and the remainder from later policy years. At
December 31, 2022, 36.1% of total net reserves represent policy years
2013 and prior and the remainder from later policy years.
Potential Variability in Loss Reserves
The following tables 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, 2023 by
underwriting segment and reserving lines. See note 6, “Short
Duration Contracts,” to our consolidated financial statements
in Item 8 for a description of the lines of business included in
each reserving line.
The scenarios shown in the tables summarize the effect of (i)
changes to the expected loss ratio selections used at
December 31, 2023, 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, 2023, 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
Increase (decrease) in Loss Reserves:
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
47 $
247
431
269
6
6
6
67
124
211
119
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
Increase (decrease) in Loss Reserves:
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
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
$
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
Lower
Expected Loss
Ratios
Faster Loss
Development
Patterns
(5) points
(3) months
(10)
(10)
(10)
$
(46) $
(250)
(420)
(213)
(6)
(6)
(6)
(63)
(91)
(166)
(85)
Higher
Expected Loss
Ratios
Slower Loss
Development
Patterns
10 points
6 months
5
5
5
5
5
230 $
176
51
40
17
8
3
3
3
3
3
262
124
126
65
31
7
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2023 FORM 10-K
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
$
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
Lower
Expected Loss
Ratios
Faster Loss
Development
Patterns
(10) points
(6) months
(5)
(5)
(5)
(5)
(5)
(230) $
(176)
(51)
(40)
(17)
(8)
(3)
(3)
(3)
(3)
(3)
(201)
(174)
(125)
(40)
(32)
(6)
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, 2023 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, 2023 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 29% of the unpaid principal balance at
December 31, 2023), we estimated that our loss reserves
would change by approximately $17 million at December 31,
2023. For every one percentage point change in our primary
net default
to be
approximately 27% at December 31, 2023), we estimated a
$18 million change in our loss reserves at December 31,
2023.
to claim rate (which we estimate
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, 2023, our recorded Loss Reserves by
underwriting segment, net of unpaid
loss
adjustment expenses recoverable, and the results of the
simulation were as follows:
losses and
Insurance
Segment
Reinsurance
Segment
Mortgage
Segment
Total
$8,356
$7,191
$515
$16,062
$9,826
$8,782
$616
$18,815
$6,918
$5,732
$420
$13,429
Loss
Reserves (1)
Simulation
results:
90th
percentile (2)
10th
percentile (3)
(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 $2.8 billion, or
$7.27 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
$2.6 billion, or $6.95 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
liabilities. It
trend
is difficult
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
illnesses and other
to provide meaningful
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2023 FORM 10-K
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, 2023. 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, 2023 and
2022:
December 31,
2023
2022
Amount
%
Amount
%
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, 2023:
IIF
RIF
Delinquency
Amount
%
Amount
%
Rate (1)
Policy year:
2013 and prior $ 10,859
2,442
2014
4,691
2015
7,525
2016
7,600
2017
8,512
2018
15,767
2019
51,349
2020
76,667
2021
63,899
2022
41,453
2023
$ 290,764
Total
2,738
3.7 $
649
0.8
1,244
1.6
2,025
2.6
2,023
2.6
2,207
2.9
4,074
5.4
13,357
17.7
19,812
26.4
16,755
22.0
14.3
10,643
100.0 $ 75,527
3.6
0.9
1.6
2.7
2.7
2.9
5.4
17.7
26.2
22.2
14.1
100.0
6.55 %
2.89 %
1.98 %
2.50 %
3.13 %
4.04 %
2.40 %
1.17 %
1.12 %
0.89 %
0.26 %
1.74 %
Insurance In Force (IIF) (1):
(1) Represents the ending percentage of loans in default.
$ 290,764
57.1 $ 295,651
57.6
149,098
29.3
145,087
28.3
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, 2022:
U.S. primary mortgage
insurance
U.S. credit risk transfer
(CRT) and other
International mortgage
insurance/reinsurance
Total
Risk In Force (RIF) (2):
U.S. primary mortgage
insurance
U.S. credit risk transfer
(CRT) and other
International mortgage
insurance/reinsurance
Total
69,473
$ 509,335
13.6
72,315
100.0 $ 513,053
14.1
100.0
$
75,527
84.6 $
75,806
84.8
6,156
6.9
6,245
7.0
7,562
89,245
8.5
100.0 $
7,369
89,420
8.2
100.0
$
(1) Represents the aggregate dollar amount of each insured mortgage
loan’s current principal balance. Such amounts are shown before
external reinsurance.
(2) The aggregate dollar amount of each insured mortgage loan’s current
principal balance multiplied by the insurance coverage percentage
specified in the policy for insurance policies issued and after contract
limits and/or loss ratio caps for risk-sharing or reinsurance transactions.
Such amounts are shown before external reinsurance.
IIF
RIF
Delinquency
Amount
%
Amount
%
Rate (1)
Policy year:
2013 and prior $ 12,931
3,696
2014
6,236
2015
10,225
2016
9,508
2017
10,260
2018
19,096
2019
65,141
2020
89,621
2021
4.4 $
1.3
2.1
3.5
3.2
3.5
6.5
22.0
30.3
3,222
1,012
1,680
2,744
2,521
2,625
4,840
16,414
22,740
2022
Total
68,937
$ 295,651
23.3
18,008
100.0 $ 75,806
4.3
1.3
2.2
3.6
3.3
3.5
6.4
21.7
30.0
23.8
100.0
(1) Represents the ending percentage of loans in default.
7.07 %
2.61 %
2.08 %
2.66 %
3.06 %
4.11 %
2.36 %
1.20 %
0.95 %
0.20 %
1.77 %
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2023 FORM 10-K
The following tables provide supplemental disclosures on
risk in force for our U.S. primary mortgage insurance
business at December 31, 2023 and 2022:
The following table provides supplemental disclosures for
our U.S. primary mortgage insurance business related to
insured
the years ended
loss metrics for
loans and
December 31, 2023 and 2022:
December 31,
2023
2022
Amount
%
Amount
%
Credit quality (FICO):
>=740
680-739
620-679
<620
Total
$ 46,796
24,990
3,497
244
$ 75,527
62.0 $ 46,812
24,945
33.1
3,772
4.6
277
0.3
100.0 $ 75,806
61.8
32.9
5.0
0.4
100.0
Weighted average FICO
score
748
750
Loan-to-Value (LTV):
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
Total
$
7,067
44,669
20,490
3,301
$ 75,527
9.4 $
7,289
43,681
20,851
3,985
100.0 $ 75,806
59.1
27.1
4.4
9.6
57.6
27.5
5.3
100.0
Weighted average LTV
93.0 %
92.8 %
Total RIF, net of
external reinsurance
$ 58,146
$ 57,151
December 31,
2023
2022
Amount
%
Amount
%
$
$
6,162
5,972
3,248
3,081
3,069
3,007
2,986
2,858
2,773
2,578
39,793
75,527
8.2 $
7.9
4.3
4.1
4.1
4.0
4.0
3.8
3.7
3.4
52.7
100.0 $
6,341
6,151
3,160
3,169
3,003
3,268
3,081
2,809
2,618
2,656
39,550
75,806
8.4
8.1
4.2
4.2
4.0
4.3
4.1
3.7
3.5
3.5
52.2
100.0
Total RIF by State:
California
Texas
North Carolina
Georgia
Minnesota
Florida
Illinois
Massachusetts
Michigan
Virginia
Others
Total
(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)
Year Ended December 31,
2023
2022
20,567
39,496
(39,704)
(902)
19,457
27,645
36,396
(42,789)
(685)
20,567
Ending number of policies in force (1)
1,117,480
1,160,219
Delinquency rate (1)
1.74 %
1.77 %
Losses:
Number of claims paid
Total paid claims
Average per claim
Severity (2)
Average reserve per default (in
thousands) (1)
902
26,903
29.8
70.8 %
$
$
685
21,412
31.3
73.2 %
17.7
$
21.1
$
$
$
(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 7.3 to
1 at December 31, 2023, compared to 7.2 to 1 at
December 31, 2022.
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 above in “—Loss
Reserves.” In particular, reinsurance recoverables may be
affected by deemed inuring reinsurance, industry losses
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2023 FORM 10-K
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 agreements, our
insurance or reinsurance operations would be liable for such
defaulted amounts.
The availability and cost of reinsurance and retrocessional
protection is subject to market conditions, which are beyond
our control. Although we believe that our insurance and
reinsurance operations have been successful in obtaining
adequate reinsurance and retrocessional protection, it is not
certain that they will be able to continue to obtain adequate
protection at cost effective levels. As a result of such market
conditions and other factors, our insurance, reinsurance and
mortgage operations may not be able to successfully mitigate
risk through reinsurance and retrocessional arrangements and
may lead to increased volatility in our results of operations in
future periods. See Item 1A, “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 26.8% of gross premiums
written for 2023, compared to 27.7% for 2022. 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 Item 1A, “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
interest entities
the unilateral power to direct those activities that are
significant to its economic performance. See note 12,
“Variable Interest Entity and Noncontrolling Interests,” to
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,
similar business and available
information.
Unearned premium reserves represent
the portion of
premiums written that relates to the unexpired terms of in-
force insurance policies.
industry
Reinsurance premiums written include amounts reported by
brokers and ceding companies, supplemented by our own
estimates of premiums where reports have not been received.
The determination of premium estimates requires a review of
our experience with the ceding companies, familiarity with
each market, the timing of the reported information, an
analysis and understanding of the characteristics of each line
of business, and management’s judgment of the impact of
various factors, including premium or loss trends, on the
volume of business written and ceded to us. On an ongoing
basis, our underwriters review the amounts reported by these
third parties for reasonableness based on their experience and
knowledge of the subject class of business, taking into
account our historical experience with the brokers or ceding
companies. In addition, reinsurance contracts under which we
assume business generally contain specific provisions which
allow us to perform audits of the ceding company to ensure
compliance with the terms and conditions of the contract,
including accurate and timely reporting of information. Based
on a review of all available information, management
establishes premium estimates where reports have not been
received. Premium estimates are updated when new
is received and differences between such
information
estimates and actual amounts are recorded in the period in
which estimates are changed or the actual amounts are
determined. 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,
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2023 FORM 10-K
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
terms.
are
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, 2023:
Other specialty
Property excluding
property catastrophe
Casualty
Marine and aviation
Property catastrophe
Other
Total
Gross
Amount
December 31, 2023
Acquisition
Expenses
Net
Amount
$
1,510 $
(450) $
1,060
626
463
213
14
65
(205)
(146)
(44)
(1)
(5)
421
317
169
13
60
$
2,891 $
(851) $
2,040
Premium estimates are reviewed by management at least
quarterly. Such review includes a comparison of actual
reported premiums to expected ultimate premiums along with
a review of the aging and collection of premium estimates.
Based on management’s review, the appropriateness of the
premium estimates is evaluated, and any adjustment to these
estimates is recorded in the period in which it becomes
known. Adjustments to premium estimates could be material
and such adjustments could directly and significantly impact
earnings favorably or unfavorably in the period they are
determined because the estimated premium may be fully or
substantially earned.
A significant portion of amounts included as premiums
receivable, which represent estimated premiums written, net
of commissions, are not currently due based on the terms of
the underlying contracts. Based on currently available
information, we report premiums receivable net of an
allowance for expected credit loss. We monitor credit risk
associated with premiums receivable through our ongoing
review of amounts outstanding, aging of the receivable,
historical data and counterparty financial strength measures.
Reinsurance premiums assumed, irrespective of the class of
business, are generally earned on a pro rata basis over the
terms of the underlying policies or reinsurance contracts.
Contracts and policies written on a “losses occurring” basis
cover claims that may occur during the term of the contract
or policy, which is typically 12 months. Accordingly, the
premium is earned evenly over the term. Contracts which are
written on a “risks attaching” basis cover claims which attach
to the underlying insurance policies written during the terms
of such contracts. Premiums earned on such contracts usually
extend beyond the original term of the reinsurance contract,
typically resulting in recognition of premiums earned over a
24-month period.
Certain of our reinsurance contracts include provisions that
adjust premiums or acquisition expenses based upon the
experience under the contracts. Premiums written and earned,
as well as related acquisition expenses, are recorded based
upon the projected experience under such contracts.
Retroactive reinsurance reimburses a ceding company for
liabilities incurred as a result of past insurable events covered
by the underlying policies reinsured. In certain instances,
reinsurance contracts cover losses both on a prospective basis
and on a retroactive basis and, accordingly, we bifurcate the
prospective and retrospective elements of these reinsurance
contracts and accounts for each element separately where
practical. Underwriting income generated in connection with
retroactive reinsurance contracts is deferred and amortized
into income over the settlement period while losses are
charged to income immediately. Subsequent changes in
estimated amount or timing of cash flows under such
retroactive reinsurance contracts are accounted for by
adjusting the previously deferred amount to the balance that
would have existed had the revised estimate been available at
transaction, with a
the
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
ARCH CAPITAL
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2023 FORM 10-K
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
insurance and reinsurance contracts, deferred
casualty
acquisition costs are amortized over the period in which the
related premiums are earned. Consistent with mortgage
insurance industry accounting practice, amortization of
acquisition costs related to the mortgage insurance contracts
for each underwriting year’s book of business is recorded in
proportion to estimated gross profits. Estimated gross profits
are comprised of earned premiums and losses and loss
adjustment expenses. For each underwriting year, we
estimate the rate of amortization to reflect actual experience
and any changes to persistency or loss development.
Acquisition expenses and other expenses related to our
underwriting operations that vary with, and are directly
related to, the successful acquisition or renewal of business
are deferred and amortized based on the type of contract. Our
insurance and reinsurance operations capitalize incremental
direct external costs that result from acquiring a contract but
do not capitalize salaries, benefits and other
internal
underwriting costs. For our mortgage insurance operations,
which include a substantial direct sales force, both external
and certain internal direct costs are deferred and amortized.
Deferred acquisition costs are carried at their estimated
realizable value and take into account anticipated losses and
loss adjustment expenses, based on historical and current
experience, and anticipated investment income.
A premium deficiency occurs if the sum of anticipated losses
and loss adjustment expenses, unamortized acquisition costs
and maintenance costs and anticipated investment income
exceed unearned premiums. A premium deficiency reserve
(“PDR”) is recorded by charging any unamortized acquisition
costs to expense to the extent required in order to eliminate
the deficiency.
the premium deficiency exceeds
unamortized acquisition costs then a liability is accrued for
the excess deficiency.
If
interest
income. Evaluating
To assess the need for a PDR on our mortgage exposures, we
develop loss projections based on modeled loan defaults
related to our current policies in force. This projection is
based on recent trends in default experience, severity and
rates of defaulted loans moving to claim, as well as recent
trends in the rate at which loans are prepaid, and incorporates
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.
No premium deficiency charges were recorded by us during
2023 or 2022.
Net Deferred Income Tax Assets Measurement
On December 27, 2023 the Bermuda government enacted tax
legislation referred to as the Corporate Income Tax Act 2023
(“Bermuda CIT Act”). The Bermuda CIT Act establishes a
15% corporate income tax, for in-scope businesses, for fiscal
years beginning on or after January 1, 2025. The enacted
legislation includes a provision referred to as the Economic
Transition Adjustment, which requires Bermuda Constituent
entities to establish tax basis in their assets and liabilities,
excluding goodwill, based on fair value as of September 30,
2023. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date.
Using fair value to establish tax basis in the assets and
liabilities of our Bermuda entities results in deductible and
taxable temporary differences which are reflected as deferred
income tax assets and liabilities, respectively, in our financial
statements. The enactment of Bermuda CIT Act resulted in
the establishment of a $1.18 billion net deferred income tax
asset. Such amount is included in “Other assets” on the
Company’s balance sheet.
The most significant deferred income tax assets recognized
relate to the fair value adjustments for identifiable intangible
assets. We estimated the fair value of the identifiable
intangible assets of our Bermuda entities using discounted
cash flow (“DCF”) models. The significant assumptions
utilized in the DCF models included the future revenue and
profits expected to be generated by the identifiable intangible
assets and the discount rates. See note 15, “Income Taxes” to
our consolidated financial statements
in Item 8 for
disclosures concerning our Company’s deferred income tax
asset.
ARCH CAPITAL
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2023 FORM 10-K
Fair Value Measurements
We review our securities measured at fair value and discuss
the proper classification of such investments with investment
advisors and others. See note 10, “Fair Value,” to our
consolidated financial statements in Item 8 for a summary of
our financial assets and liabilities measured at fair value at
December 31, 2023 by valuation hierarchy.
Reclassifications
We have reclassified the presentation of certain prior year
information to conform to the current presentation. Such
reclassifications had no effect on our net
income,
shareholders’ equity or cash flows.
Significant Accounting Pronouncements
For all other significant accounting policies see note 3,
“Significant Accounting Policies” and note 3(t), “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
At December 31, 2023, total investable assets held by Arch
were $34.6 billion.
Investable Assets Held by Arch
The Finance, Investment and Risk Committee (“FIR
Committee”) of our Board of Directors (the “Board”)
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
investment strategy. Our Chief
currently part of our
Investment Officer administers the investment portfolio,
oversees our investment managers and formulates investment
strategy
the FIR Committee. At
December 31, 2023, approximately $21.9 billion, or 63%, of
in conjunction with
total investable assets held by Arch were internally managed,
compared to $18.8 billion, or 67%, at December 31, 2022.
The following table summarizes the fair value of investable
assets held by Arch:
Average effective duration (in years)
Average S&P/Moody’s credit ratings (1)
December 31,
2023
2.91
AA-/Aa3
2022
2.89
AA-/Aa3
(1) 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”).
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, 2023
U.S. government and gov’t agencies (1)
AAA
AA
A
BBB
BB
B
Lower than B
Not rated
Total
December 31, 2022
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
$
$
$
$
6,493
4,305
2,165
4,629
5,058
698
389
15
484
24,236
5,831
3,617
2,214
3,993
3,324
560
377
12
309
20,237
26.8
17.8
8.9
19.1
20.9
2.9
1.6
0.1
2.0
100.0
28.8
17.9
10.9
19.7
16.4
2.8
1.9
0.1
1.5
100.0
(1)
Includes U.S. government-sponsored agency residential mortgage
backed securities and agency commercial mortgage backed securities.
ARCH CAPITAL
83
2023 FORM 10-K
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
commercial mortgage-backed
securities (“CMBS”) and asset backed securities (“ABS”):
(“RMBS”),
include
Severity of gross
unrealized losses:
December 31, 2023
0-10%
10-20%
20-30%
Greater than 30%
Total
December 31, 2022
0-10%
10-20%
20-30%
Greater than 30%
Total
Estimated
Fair Value
Gross
Unrealized
Losses
% of
Total Gross
Unrealized
Losses
$
$
$
$
10,696 $
2,282
116
26
13,120 $
12,343 $
5,331
692
44
18,410 $
(410)
(367)
(35)
(13)
(825)
(580)
(844)
(199)
(24)
(1,647)
49.7
44.5
4.2
1.6
100.0
35.2
51.2
12.1
1.5
100.0
Agencies
Investment
Grade
Below
Investment
Grade
Total
Dec. 31, 2023
RMBS
CMBS
ABS
Total
Dec. 31, 2022
RMBS
CMBS
ABS
Total
$
$
$
$
658 $
7
—
665 $
645 $
18
—
663 $
445 $
1,126
2,143
3,714 $
134 $
947
1,788
2,869 $
— $
80
107
187 $
16 $
82
141
239 $
1,103
1,213
2,250
4,566
795
1,047
1,929
3,771
The following table summarizes our equity securities, which
include investments in exchange traded funds:
The following table summarizes our top ten exposures to
fixed income corporate issuers by fair value at December 31,
2023, excluding guaranteed amounts and covered bonds:
Bank of America Corporation
JPMorgan Chase & Co.
Morgan Stanley
The Goldman Sachs Group, Inc.
Citigroup Inc.
Wells Fargo & Company
Blue Owl Capital Inc.
Roche Holding AG
Blackstone Inc.
UBS Group AG
Total
Estimated
Fair Value
Credit
Rating (1)
$
$
383
361
338
230
229
171
165
147
138
128
2,290
A-/A1
A-/A1
A-/A1
BBB+/A2
BBB+/A3
BBB+/A1
BBB-/Baa3
AA/Aa2
BBB/Baa3
A/A2
(1)
Average credit ratings as assigned by S&P and Moody’s,
respectively.
Equities (1)
Exchange traded funds
Fixed income (2)
Equity and other (3)
Total
December 31,
2023
2022
$
739 $
570
285
169
$
1,193 $
272
32
874
(1) Primarily in technology, consumer non-cyclical, communications,
financial and industrials at December 31, 2023.
(2) Primarily in corporate at December 31, 2023.
(3) Primarily in large cap stocks, foreign equities, healthcare, technology
and consumer discretionary at December 31, 2023.
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, 2023
and 2022 segregated by level in the fair value hierarchy.
ARCH CAPITAL
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Reinsurance Recoverables
Shareholders’ Equity and Book Value per Share
The following table details our reinsurance recoverables at
December 31, 2023:
Somers Re (2)
Hannover Rück SE
Lloyd’s syndicates (3)
Munich Reinsurance America, Inc.
Swiss Reinsurance America Corporation
Everest Reinsurance Company
Partner Reinsurance Company of the U.S.
Fortitude Reinsurance Company Ltd.
RenaissanceRe Holdings Ltd.
AXA XL
All other -- “A-” or better
All other -- rated carriers
All other -- not rated (4)
Total
A.M. Best
Rating (1)
A-
A+
A
A+
A+
A+
A+
A
A+
A+
% of
Total
18.6
4.7
4.3
3.3
3.1
2.9
2.5
2.4
2.0
2.0
21.0
0.1
33.1
100.0
(1) The financial strength ratings are as of January 5, 2024 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” and
“A-” ratings are designated “Excellent.”
(2) See note 12, “Variable Interest Entity and Noncontrolling Interests”
and note 16, “Transactions with Related Parties.”
(3) The A.M. Best group rating of “A” (Excellent) has been applied to all
Lloyd’s syndicates.
(4) Over 95% 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,
from
in our financial
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
Total shareholders’ equity available to Arch was $18.4
billion at December 31, 2023, compared to $12.9 billion at
December 31, 2022. The 2023 period primarily reflected
strong underwriting and investment returns along with the
establishment of a net deferred income tax asset of $1.18
billion, or $3.16 per share, related to the enactment of
Bermuda’s new corporate income tax.
The following table presents the calculation of book value
per share:
(U.S. dollars in millions, except per share
data)
December 31,
2023
2022
Total shareholders’ equity available to
Arch
Less preferred shareholders’ equity
Common shareholders’ equity available to
Arch
Common shares and common share
equivalents outstanding, net of treasury
shares (1)
$
18,353 $
830
12,910
830
$
17,523 $
12,080
Book value per share
$
46.94 $
373.3
370.3
32.62
(1) Excludes the effects of 12.5 million and 14.4 million stock options and
0.4 million and 0.6 million restricted stock and performance units
outstanding at December 31, 2023 and 2022, respectively.
LIQUIDITY
Liquidity is a measure of our ability to access sufficient cash
flows to meet the short-term and long-term cash requirements
of our business operations.
Arch Capital is a holding company whose assets primarily
consist of the shares in its subsidiaries. Generally, Arch
Capital depends on its available cash resources, liquid
investments and dividends or other distributions from its
subsidiaries to make payments, including the payment of debt
service obligations and operating expenses it may incur and
any dividends or liquidation amounts with respect to our
preferred and common shares.
In 2023, Arch Capital received dividends of $164 million
from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our
Bermuda-based reinsurer and insurer. Arch Re Bermuda can
pay approximately $4.8 billion to Arch Capital in 2024
without providing an affidavit to the Bermuda Monetary
Authority (“BMA”).
received
Our insurance and reinsurance operations provide liquidity in
that premiums are
in advance, sometimes
substantially in advance, of the time losses are paid. The
period of time from the occurrence of a claim through the
settlement of the liability may extend many years into the
include cash flows from
future. Sources of
liquidity
ARCH CAPITAL
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2023 FORM 10-K
operations, financing arrangements or routine sales of
investments.
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, 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, for the next
twelve months, at a minimum.
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, 2023 and 2022, such amounts
approximated $9.9 billion and $8.7 billion, respectively.
Our investments in certain securities, including certain fixed
income and structured securities, investments in funds
ARCH CAPITAL
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2023 FORM 10-K
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 $3.6 billion at December 31, 2023 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
operating, investing and financing activities:
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
Year Ended December 31,
2023
2022
$
5,749 $
(5,468)
(69)
3,816
(3,101)
(706)
Investments
At December 31, 2023, our investable assets were $34.6
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.
See Item 1A “Risk Factors” for a discussion of other risks
relating to our business and investment portfolio.
CAPITAL RESOURCES
Effects of exchange rate changes on foreign
currency cash
Increase (decrease) in cash
$
13
225 $
(50)
(41)
The following table provides an analysis of our capital
structure:
Cash provided by operating activities for the 2023 period was
higher than in the 2022 period. Activity for the 2023 period
primarily reflected a higher level of premiums collected than
in the 2022 period.
Cash used for investing activities for the 2023 period
reflected higher net purchases than in the 2022 period,
primarily reflecting the strong operating cash flows in 2023.
Cash used for financing activities for the 2023 period was
lower than in the 2022 period. Activity for the 2022 period
included $586 million of share repurchases.
Senior notes
Shareholders’ equity available to Arch:
Series F non-cumulative preferred shares
Series G non-cumulative preferred shares
Common shareholders’ equity
Total
Total capital available to Arch
Senior notes to total capital (%)
Revolving credit agreement borrowings to
total capital (%)
Debt to total capital (%)
Preferred to total capital (%)
Debt and preferred to total capital (%)
December 31,
2023
2022
$
2,726 $
2,725
330
500
330
500
17,523
12,080
18,353 $
12,910
21,079 $
15,635
$
$
12.9
—
12.9
3.9
16.9
17.4
—
17.4
5.3
22.7
See note 19, “Debt and Financing Arrangements" and note
21, “Shareholders' Equity”, to our consolidated financial
statements in Item 8 for additional information on capital
structure.
ARCH CAPITAL
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2023 FORM 10-K
Capital Adequacy
We monitor our capital adequacy on a regular basis and will
seek to adjust our capital base (up or down) according to the
needs of our business. The future capital requirements of our
business will depend on many factors, including our ability to
write new business successfully and to establish premium
rates and reserves at levels sufficient to cover losses. Our
ability to underwrite is largely dependent upon the quality of
our claims paying and financial strength ratings as evaluated
by independent rating agencies. In particular, we require (1)
sufficient capital to maintain our financial strength ratings, as
issued by several ratings agencies, at a level considered
necessary by management to enable our key operating
subsidiaries to compete; (2) sufficient capital to enable our
underwriting subsidiaries to meet the capital adequacy tests
performed by statutory agencies in the U.S. and other key
markets; and (3) our non-U.S. operating companies are
required to post letters of credit and other forms of collateral
that are necessary for them to operate as they are “non-
admitted” under U.S. state insurance regulations.
required
to maintain compliance with
In addition, AMIC and UGRIC (together, “Arch MI U.S.”)
are
the GSE
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, 2023 with a PMIER sufficiency ratio of
213%, compared to 236% at December 31, 2022.
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 the Board 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 deems
relevant.
To the extent that our existing capital is insufficient to fund
our future operating requirements or maintain such ratings,
we may need to raise additional funds through financings or
limit our growth. We can provide no assurance that, if
needed, we would be able to obtain additional funds through
financing on satisfactory terms or at all. Any adverse
developments in the financial markets, such as disruptions,
uncertainty or volatility in the capital and credit markets, may
result in realized and unrealized capital losses that could have
a material adverse effect on our results of operations,
financial position and our businesses, and may also limit our
access to capital required to operate our business. In addition
to common share capital, we depend on external sources of
finance to support our underwriting activities, which can be
in the form (or any combination) of debt securities,
preference shares, common equity and bank credit facilities
providing loans and/or letters of credit.
Arch Capital, through its subsidiaries, provides financial
support to certain of its insurance subsidiaries and affiliates,
through certain reinsurance arrangements beneficial to the
ratings of such subsidiaries. Historically, our insurance,
reinsurance and mortgage insurance subsidiaries have entered
into separate reinsurance arrangements with Arch Re
Bermuda covering individual lines of business.
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
Our Board 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, 2023, Arch Capital has
repurchased
approximately 433.6 million common shares for an aggregate
purchase price of $5.9 billion. At December 31, 2023, $1.0
billion of share repurchases were available under the
program. Repurchases under the program may be effected
from time to time in open market or privately negotiated
transactions through December 31, 2024. The timing and
amount of the repurchase transactions under this program
will depend on a variety of factors, including market
conditions, the development of the economy, corporate and
regulatory considerations. We will continue to monitor our
share price and, depending upon results of operations, market
conditions and the development of the economy, as well as
other factors, we will consider share repurchases on an
opportunistic basis.
ARCH CAPITAL
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2023 FORM 10-K
GUARANTOR INFORMATION
The below table provides a description of our senior notes
payable at December 31, 2023:
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 $
1,000
5.144 %
4.011 %
5.031 %
500
500
450
$
2,750 $
298
989
495
498
446
2,726
(1) Fully and unconditionally guaranteed by Arch Capital.
Our senior notes were issued by Arch Capital, Arch Capital
Group (U.S.) Inc. (“Arch-U.S.”) and Arch Capital Finance
LLC (“Arch Finance”). Arch-U.S.
is a wholly-owned
subsidiary of Arch Capital and Arch Finance is a wholly-
owned finance subsidiary of Arch-U.S. Our 2034 senior
notes and 2050 senior notes issued by Arch Capital are
unsecured and unsubordinated obligations of Arch Capital
and ranked equally with all of its existing and future
unsecured and unsubordinated indebtedness. The 2043 senior
notes issued by Arch-U.S. are unsecured and unsubordinated
obligations of Arch-U.S. and Arch Capital and rank equally
and ratably with the other unsecured and unsubordinated
indebtedness of Arch-U.S. and Arch Capital. The 2026 senior
notes and 2046 senior notes issued by Arch Finance are
unsecured and unsubordinated obligations of Arch Finance
and Arch Capital and rank equally and ratably with the other
unsecured and unsubordinated indebtedness of Arch Finance
and Arch Capital.
Arch Capital 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
During 2023 and 2022, we made interest payments of $127
million and $128 million, respectively, related to our senior
notes and other financing arrangements. 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,”
statements in Item 8.
to our consolidated
financial
The following tables present condensed financial information
for Arch Capital
(parent guarantor) and Arch-U.S.
(subsidiary issuer):
December 31, 2023
Arch-
U.S.
Arch
Capital
December 31, 2022
Arch-
U.S.
Arch
Capital
Assets
Total investments
$
17 $
145 $
7 $
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
Year Ended
Revenues
9
4
—
58
5
—
—
56
11
5
2
18
79
10
—
—
30
$
88 $
206 $
43 $
119
1,287
495
1,287
—
38
993
42
—
37
495
991
37
1,325
1,530
1,324
1,523
$
830 $
— $
830 $
—
December 31, 2023
Arch-
U.S.
Arch
Capital
December 31, 2022
Arch-
U.S.
Arch
Capital
Net investment income
$
2 $
4 $
2 $
1
Equity in net income
(loss) of investments
accounted for using the
equity method
Total revenues
Expenses
Corporate expenses
Interest expense
Interest expense
(intercompany)
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
Net income available to
Arch common
shareholders
—
2
93
59
—
—
152
(2)
2
9
26
51
—
86
—
2
86
59
—
—
145
10
11
13
26
22
—
61
(150)
(84)
(143)
(50)
41
(1)
(110)
(40)
19
—
(65)
—
—
(1)
(144)
(40)
10
—
(40)
—
$
(150) $
(65) $
(184) $
(40)
ARCH CAPITAL
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2023 FORM 10-K
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Contractual Obligations
The following table provides an analysis of our contractual commitments at December 31, 2023:
Operating activities
Estimated gross payments for losses and loss adjustment expenses (1)
Contractholder payables (2)
Operating lease obligations
Purchase obligations
Contingent and deferred consideration liabilities
Investing activities
Unfunded investment commitments (3)
Financing activities
Senior notes (including interest payments)
Total contractual obligations and commitments
Payment due by period
Total
2024
2025 and
2026
2027 and
2028
Thereafter
$
22,752 $
1,817
220
148
23
6,523 $
208
34
69
7
7,197 $
363
58
57
8
3,479 $
274
49
22
4
5,553
972
79
—
4
3,587
3,587
—
—
—
5,041
33,588 $
127
10,555 $
$
754
8,437 $
214
4,042 $
3,946
10,554
(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) 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.
(3) 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.
The commitments under the Credit Facility will expire on
August 23, 2028, and all loans then outstanding under the
Credit Facility must be repaid at such time. Letters of credit
issued under the Credit Facility will not have an expiration
date later than August 23, 2029.
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.
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 August 23, 2023, Arch
Capital and certain of its subsidiaries amended the existing
credit agreement (the “Credit Facility”). The Credit Facility,
as amended, consists of a $425 million secured facility for
letters of credit (the “Secured Facility”) and a $500 million
unsecured facility for revolving loans and letters of credit
(the “Unsecured Facility”). At December 31, 2023, the
Secured Facility had $273 million of letters of credit
outstanding and remaining capacity of $152 million, and the
Unsecured Facility had no outstanding revolving loans or
letters of credit, with remaining capacity of $500 million.
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, 2023.
ARCH CAPITAL
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2023 FORM 10-K
RATINGS
CATASTROPHIC EVENTS AND SEVERE
ECONOMIC EVENTS
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
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
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
ARCH CAPITAL
91
2023 FORM 10-K
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, 2024,
our modeled peak zone catastrophe exposure is a windstorm
affecting the Florida Tri-County, with a net probable
maximum pre-tax
loss of $1.6 billion, followed by
windstorms affecting the Northeast U.S., and the Gulf of
Mexico with net probable maximum pre-tax losses of $1.4
billion and $1.3 billion, respectively. As of January 1, 2024,
our modeled peak zone earthquake exposure (San Francisco
area earthquake) represented approximately 54% of our peak
zone catastrophe exposure, and our modeled peak zone
international exposure (German 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, 2024, our modeled
RDS loss was 7.0% 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 Item 1A,
“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
—Ceded Reinsurance” for a discussion of our catastrophe
reinsurance programs.
ARCH CAPITAL
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2023 FORM 10-K
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, 2023. 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, 2023
presents hypothetical losses in cash flows, earnings and fair
values of market sensitive instruments which were held by us
on December 31, 2023 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, short-term investments and certain of our other
investments, equity
funds
securities and
accounted for using the equity method which invest in fixed
income securities (collectively, “Fixed Income Securities”)
and the corresponding change in unrealized appreciation. As
interest rates rise, the fair value of our Fixed Income
Securities falls, and the converse is also true. Based on
historical observations, there is a low probability that all
investment
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, 2023 and 2022:
(U.S. dollars in
billions)
Dec. 31, 2023
Interest Rate Shift in Basis Points
-100
-50
-
+50
+100
Total fair value
$ 33.6
$ 33.1
$
32.7
$ 32.2
$ 31.7
Change from base
3.0 %
1.5 %
(1.4) %
(2.8) %
Change in
unrealized value
Dec. 31, 2022
$ 0.98
$ 0.49
$ (0.46)
$ (0.91)
Total fair value
$ 27.2
$ 26.8
$
26.4
$ 26.0
$ 25.7
Change from base
2.9 %
1.4 %
(1.4) %
(2.7) %
Change in
unrealized value
$ 0.77
$ 0.37
$ (0.37)
$ (0.71)
In addition, we consider
the effect of credit spread
movements on the market value of our Fixed Income
Securities and the corresponding change in unrealized value.
As credit spreads widen, the fair value of our Fixed Income
Securities falls, and the converse is also true. In periods
where the spreads on our Fixed Income Securities are much
higher than their historical average due to short-term market
dislocations, a parallel shift in credit spread levels would
result in a much more pronounced change in unrealized
value.
The following table summarizes the effect that an immediate,
parallel shift in credit spreads in a static interest rate
environment would have had on
the portfolio at
December 31, 2023 and 2022:
(U.S. dollars in
billions)
Dec. 31, 2023
Credit Spread Shift in Percentage
-100
-50
-
+50
+100
Total fair value
$ 33.8
$ 33.2
$
32.7
$ 32.1
$ 31.5
Change from base
3.4 %
1.7 %
(1.7) %
(3.4) %
Change in
unrealized value
Dec. 31, 2022
$ 1.11
$ 0.56
$ (0.56)
$ (1.11)
Total fair value
$ 27.5
$ 26.9
$
26.4
$ 25.9
$ 25.3
Change from base
4.1 %
2.0 %
(2.0) %
(4.1) %
Change in
unrealized value
$ 1.08
$ 0.53
$ (0.53)
$ (1.08)
ARCH CAPITAL
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2023 FORM 10-K
Investment-Related Derivatives. At December 31, 2023, the
notional value of all derivative instruments (excluding
foreign currency forward contracts which are included in the
foreign currency exchange risk analysis below) was $4.2
billion, compared to $6.6 billion at December 31, 2022. If the
underlying exposure of each investment-related derivative
held at December 31, 2023 depreciated by 100 basis points, it
would have resulted in a reduction in net income of
approximately $42 million, and a decrease in book value per
share of $0.11, compared to $66 million and $0.18,
respectively, on
investment-related derivatives held at
December 31, 2022. If the underlying exposure of each
investment-related derivative held at December 31, 2023
appreciated by 100 basis points, it would have resulted in an
increase in net income of approximately $42 million, and an
increase in book value per share of $0.11, compared to $66
million and $0.18, respectively, on
investment-related
derivatives held at December 31, 2022. 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.”
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, 2023, our portfolio’s 95th percentile VaR was
estimated to be 7.8%, compared to an estimated 8.8% at
December 31, 2022. In periods where the volatility of the risk
factors mapped to our portfolio’s exposures is higher due to
market conditions, the resulting VaR is higher than in other
periods.
Equity Securities. At December 31, 2023 and 2022, the fair
value of our investments in equity securities and certain
investments accounted for using the equity method with
underlying equity strategies totaled $1.0 billion and $0.8
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 $101 million and $79 million at
December 31, 2023 and 2022, respectively, and would have
decreased book value per share by approximately $0.27 and
$0.21, respectively. An immediate hypothetical 10% increase
in the value of each position would increase the fair value of
such investments by approximately $101 million and $79
million at December 31, 2023 and 2022, respectively, and
would have increased book value per share by approximately
$0.27 and $0.21, respectively.
ARCH CAPITAL
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2023 FORM 10-K
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 millions, except
per share data)
December 31,
2023
December 31,
2022
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)
$
(300) $
(396)
1,158
1,056
Net exposures denominated in foreign
currencies
$
1,104 $
246
312
972
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
$
$
$
$
(110) $
(0.30) $
(97)
(0.26)
110 $
0.30 $
97
0.26
(1)
(2)
Represents capital contributions held in the foreign currencies of our
operating units.
Represents the net notional value of outstanding foreign currency
forward contracts.
the Company’s exposure
Although the Company generally attempts to match the
currency of its projected liabilities with investments in the
same currencies, from time to time the Company may elect to
over or underweight one or more currencies, which could
increase
to foreign currency
fluctuations and increase the volatility of the Company’s
shareholders’ equity. Historical observations indicate a low
probability that all foreign currency exchange rates would
shift against the U.S. Dollar in the same direction and at the
same time and, accordingly, the actual effect of foreign
currency rate movements may differ materially from the
amounts set forth above. For further discussion on foreign
exchange activity, please refer to “—Results of Operations.”
Effects of Inflation
General economic inflation has increased in recent quarters
and may continue to remain at elevated levels for an extended
period of time. The potential also exists, after a catastrophe
loss or pandemic events like COVID-19, for the development
of inflationary pressures in a local economy. This may have a
material effect on the adequacy of our reserves for losses and
loss adjustment expenses, especially in longer-tailed lines of
business, and on the market value of our investment portfolio
through rising interest rates. The anticipated effects of
inflation are considered in our pricing models, reserving
processes and exposure management, across all lines of
business and types of loss including natural catastrophe
events. The actual effects of inflation on our results cannot be
accurately known until claims are ultimately settled and will
vary by the specific type of inflation affecting each line of
business.
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.
ARCH CAPITAL
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2023 FORM 10-K
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, 2023 and December 31, 2022
Consolidated Statements of Income
For the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows
For the years ended December 31, 2023, 2022 and 2021
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
97
100
101
102
103
104
105
105
105
114
121
123
136
137
139
144
150
151
153
155
155
158
159
159
160
162
163
164
167
167
167
ARCH CAPITAL
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2023 FORM 10-K
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, 2023 and 2022, 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, 2023,
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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2023 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, 2023, 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.
ARCH CAPITAL
97
2023 FORM 10-K
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 matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate 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 matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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, 2023, the Company’s total reserve for losses and
loss adjustment expenses was $22.8 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, (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence
relating to the aforementioned key actuarial methods and key assumptions, and (iii) the audit effort involved the use of
professionals with specialized skill and knowledge.
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.
ARCH CAPITAL
98
2023 FORM 10-K
Measurement of Deferred Tax Assets related to Certain Identifiable Intangible Assets in Bermuda Entities
As described in Note 15 to the consolidated financial statements, as of December 31, 2023, the Company recognized $1.2
billion in net deferred tax assets related to the Bermuda government’s enactment of the Bermuda Corporate Income Tax Act
2023. As disclosed by management, the enacted legislation includes a provision referred to as the Economic Transition
Adjustment, which requires Bermuda entities to establish tax basis in their assets and liabilities, excluding goodwill, based on
fair value as of September 30, 2023. The most significant deferred tax assets recognized relates to identifiable intangible assets.
Management estimated the fair value of the identifiable intangible assets using discounted cash flow models. The significant
assumptions utilized in the discounted cash flow models included the future revenue and profits expected to be generated by the
identifiable intangible assets and the discount rates.
The principal considerations for our determination that performing procedures relating to the measurement of deferred tax
assets related to certain identifiable intangible assets in Bermuda entities is a critical audit matter are (i) the significant judgment
by management when developing the fair value estimate of certain identifiable intangible assets, (ii) a high degree of auditor
judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the
future revenue and profits expected to be generated by the certain identifiable intangible assets and the discount rates, and (iii)
the audit effort involved the use of professionals with specialized skill and knowledge.
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
enactment of the Bermuda Corporate Income Tax Act 2023 including controls over the valuation of certain identifiable
intangible assets related to the enactment of the Bermuda Corporate Income Tax Act 2023. These procedures also included,
among others, (i) testing management’s process for developing the fair value estimate of the certain identifiable intangible
assets, (ii) evaluating the appropriateness of the discounted cash flow models used by management, (iii) testing the
completeness and accuracy of the data used in the models, and (iv) evaluating the reasonableness of the significant assumptions
used by management related to the future revenue and profits expected to be generated by the certain identifiable intangible
assets and the discount rates. Evaluating management’s assumptions related to the future revenue and profits expected to be
generated by the identifiable intangible assets involved evaluating whether the assumptions used were reasonable considering
(i) the consistency with historical revenue and profits generated by the Bermuda entities and (ii) whether the assumptions were
consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to
assist in evaluating (i) the appropriateness of the discounted cash flow models and (ii) the reasonableness of the discount rate
assumptions.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 23, 2024
We have served as the Company’s or its predecessor’s auditor since 1995.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars and shares in millions)
December 31,
2023
2022
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $24,131 and $21,282; net of allowance for credit
losses: $28 and $41)
$
23,553 $
19,683
Short-term investments available for sale, at fair value (amortized cost: $2,064 and $1,333; net of allowance for credit
losses: $0 and $0 )
Equity securities, at fair value
Other investments (portion measured at fair value: $2,488 and $1,644)
Investments accounted for using the equity method
Total investments
Cash
Accrued investment income
Investment in operating affiliates
Premiums receivable (net of allowance for credit losses: $34 and $35)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses:
$21 and $22)
Contractholder receivables (net of allowance for credit losses: $3 and $3)
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
Payable for securities purchased
Other liabilities
Total liabilities
Commitments and Contingencies (refer to Note 18)
Redeemable noncontrolling interests
Shareholders’ Equity
Non-cumulative preferred shares
Common shares ($0.0011 par, shares issued: 591.9 and 588.3)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 218.5 and 217.9)
Total shareholders' equity available to Arch
Total liabilities, noncontrolling interests and shareholders' equity
2,063
1,186
2,488
4,566
33,856
917
236
1,119
4,644
7,064
1,814
2,170
1,531
63
731
4,761
58,906 $
22,752 $
8,808
2,000
1,817
259
2,726
247
1,942
40,551
1,332
860
1,644
3,774
27,293
855
159
965
3,625
6,564
1,731
1,799
1,264
12
804
2,919
47,990
20,032
7,337
1,530
1,734
249
2,725
95
1,367
35,069
$
$
2
11
830
1
2,327
20,295
(676)
(4,424)
$
18,353
58,906 $
830
1
2,211
15,892
(1,646)
(4,378)
12,910
47,990
See Notes to Consolidated Financial Statements
ARCH CAPITAL
100
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars and shares in millions, except per share data)
Year Ended December 31,
2023
2022
2021
Revenues
Net premiums earned
Net investment income
Net realized gains (losses)
Other underwriting income
Equity in net income of investments accounted for using the equity method
Other income (loss)
Total revenues
Expenses
Losses and loss adjustment expenses
Acquisition expenses
Other operating expenses
Corporate expenses
Amortization of intangible assets
Interest expense
Net foreign exchange losses (gains)
Total expenses
Income before income taxes and income (loss) from operating affiliates
Income taxes:
Current tax expense (benefit)
Deferred tax expense (benefit)
Income tax expense (benefit)
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
Weighted average common shares and common share equivalents outstanding
Basic
Diluted
$
$
$
$
$
12,440 $
1,023
(165)
31
278
27
13,634
6,246
2,312
1,301
102
95
133
60
10,249
3,385
288
(1,161)
(873)
184
4,442 $
1
4,443
(40)
—
4,403 $
9,679 $
496
(663)
13
115
(27)
9,613
5,028
1,740
1,128
95
106
131
(102)
8,126
1,487
201
(121)
80
75
1,482 $
(6)
1,476
(40)
—
1,436 $
11.94 $
11.62 $
3.90 $
3.80 $
368.7
378.8
368.6
377.6
8,082
389
380
21
366
10
9,248
4,585
1,303
999
78
82
139
(41)
7,145
2,103
295
(167)
128
264
2,239
(82)
2,157
(48)
(15)
2,094
5.35
5.23
391.7
400.3
See Notes to Consolidated Financial Statements
ARCH CAPITAL
101
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in millions)
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 (loss)
Net (income) loss attributable to noncontrolling interests
Other comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income available to Arch (loss)
$
Year Ended December 31,
2023
2022
2021
$
4,442 $
1,482 $
2,239
547
400
23
5,412
1
—
5,413 $
(1,772)
247
(56)
(99)
(6)
—
(105) $
(386)
(117)
(65)
1,671
(82)
14
1,603
See Notes to Consolidated Financial Statements
ARCH CAPITAL
102
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in millions)
Year Ended December 31,
2023
2022
2021
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 and 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
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
$
830 $
—
—
830
1
2,211
—
—
93
23
2,327
15,892
4,442
1
(40)
—
20,295
830 $
—
—
830
1
2,085
—
—
88
38
2,211
14,456
1,482
(6)
(40)
—
15,892
780
500
(450)
830
1
1,978
(14)
15
86
20
2,085
12,362
2,239
(82)
(48)
(15)
14,456
(1,646)
(65)
489
(1,512)
947
—
(565)
(134)
23
—
(111)
(676)
(4,378)
(46)
(4,424)
13
(1,525)
—
(1,512)
(78)
(56)
—
(134)
(1,646)
(3,761)
(617)
(4,378)
501
(503)
15
13
(12)
(65)
(1)
(78)
(65)
(2,504)
(1,257)
(3,761)
Total shareholders’ equity
$
18,353 $
12,910 $
13,546
See Notes to Consolidated Financial Statements
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
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
Deferred income tax assets, net
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
Purchase of operating affiliate
Impact of the deconsolidation of the variable interest entity
Purchases of fixed assets
Other
Net cash 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
Third party investment in non-redeemable noncontrolling interests
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
Effects of exchange rate changes on foreign currency cash and restricted cash
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
Year Ended December 31,
2023
2022
2021
$
4,442 $
1,482 $
2,239
182
(215)
95
93
2,138
1,028
(981)
(235)
455
(1,161)
(92)
5,749
(18,062)
(456)
(2,171)
14,105
288
768
781
50
(696)
—
—
(52)
(23)
(5,468)
—
—
—
(2)
—
(22)
—
(5)
(40)
(69)
13
651
154
106
88
1,890
1,399
(1,110)
(374)
(36)
(121)
(313)
3,816
(16,390)
(797)
(1,720)
11,844
1,554
1,220
715
(69)
467
—
—
(50)
125
(3,101)
—
—
(586)
6
—
—
—
(86)
(40)
(706)
(50)
225
1,273
1,498 $
267 $
127 $
(41)
1,314
1,273 $
255 $
128 $
$
$
$
(427)
(464)
82
88
1,762
935
(685)
(263)
499
(167)
(174)
3,425
(35,452)
(1,175)
(1,859)
33,577
918
1,766
1,629
(39)
165
(754)
(349)
(41)
(524)
(2,138)
486
(450)
(1,234)
6
16
—
(2)
(4)
(47)
(1,229)
(34)
24
1,290
1,314
286
139
See Notes to Consolidated Financial Statements
ARCH CAPITAL
104
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
reinsurance and mortgage
Arch Capital Group Ltd. (“Arch Capital” or “Arch”) is a
publicly listed Bermuda exempted company which provides
insurance,
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 2021 consolidated financial statements
included
the results of Somers Group Holdings Ltd.
(formerly Watford Holdings Ltd.) and its wholly owned
subsidiaries (“Somers”). 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.
Such reclassifications had no effect on the Company’s net
income, shareholders’equity or cash flows. All amounts are
in millions, except per share amounts, unless otherwise
noted.
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 retained its existing risk in
force and will remain Westpac’s exclusive provider of LMI
on new mortgage originations for a period of 10 years from
the acquisition date. The Company was renamed Arch
Lenders Mortgage Indemnity Limited (“Arch Indemnity”)
and will be 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
agent,
Group’s motor
distribution capabilities
through direct and aggregator
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,
3.
Significant Accounting Policies
(a) Basis of Presentation
Indemnity
(“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
Insurance
Company
Company (“Arch Indemnity Insurance”), Arch Insurance
Canada Ltd. (“Arch Insurance Canada”), Arch Reinsurance
Europe Designated Activity Company (“Arch Re Europe”),
(“AMIC”), Arch
Insurance Company
Arch Mortgage
Mortgage Guaranty Company (“AMG”), United Guaranty
Residential
(“UGRIC”), Arch
Indemnity, Arch
(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”) and 1955 (“Arch Syndicate 1955” and
together with Arch Syndicate 2012, the Company’s “Lloyd’s
Syndicates”). All significant intercompany transactions and
balances have been eliminated in consolidation.
Insurance Company
Insurance
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;
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
•
•
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 income 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
these
their
third parties for reasonableness based on
experience and knowledge of the subject class of business,
taking into account the Company’s historical experience with
the brokers or ceding companies. In addition, reinsurance
contracts under which the Company assumes business
the
generally contain specific provisions which allow
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
the
of contracts
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 brokers and
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.
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
reinsurance. Under
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
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Unearned premiums for the Company’s mortgage operations
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.
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.
include amounts receivable from
Premiums receivable
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
through
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.
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
the expected
anticipated
income. Evaluating
interest
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. No premium
deficiency charges were recorded by the Company during
2023, 2022 or 2021.
(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.
the
Management
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
related expected rate of return. The accretion of the deposit
accounting liability as well as changes to the estimated
ultimate liability and the accretion rate would be reflected as
part of interest expense in the Company’s results of
operations. Any negative accretion in a deposit accounting
liability is shown in other underwriting income in the
Company’s results of operations.
future payment obligations. Periodically
Under some of these contracts, the ceding company retains
the related assets on a funds held basis. Such amounts are
included in “Other assets” on the Company’s balance sheet.
Interest income produced by those assets are recorded as part
of net investment income in the Company's results of
operations.
(d) Retroactive Reinsurance
Retroactive reinsurance reimburses a ceding company for
liabilities incurred as a result of past insurable events covered
by the underlying policies reinsured. In certain instances,
reinsurance contracts cover losses both on a prospective basis
and on a retroactive basis and, accordingly, the Company
bifurcates the prospective and retrospective elements of these
reinsurance contracts and accounts for each element
separately where practical. Underwriting income generated in
connection with retroactive reinsurance contracts is deferred
and amortized into income over the settlement period while
losses are charged to income immediately. Subsequent
changes in estimated amount or timing of cash flows under
such retroactive reinsurance contracts are accounted for by
adjusting the previously deferred amount to the balance that
would have existed had the revised estimate been available at
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
Company’s insurance or reinsurance subsidiaries would be
liable for such defaulted amounts.
the Company's
Reinsurance recoverables are recorded as assets, predicated
on the reinsurers’ ability to meet their obligations under the
reinsurance agreements. In certain instances, the Company
obtains collateral, including letters of credit and trust
accounts to further reduce the credit exposure on its
its
recoverables. The Company
reinsurance
reinsurance recoverables net of an allowance for expected
credit loss. The allowance is based upon the Company’s
ongoing review of amounts outstanding,
the financial
condition of its reinsurers, amounts and form of collateral
obtained and other relevant factors. A ratings based
probability-of-default and loss-given-default methodology is
used to estimate the allowance for expected credit loss. Any
reports
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or 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
indications. Short-term
to broker or underwriter bid
investments comprise securities due to mature within one
year of the date of issue. Short-term investments include
certain cash equivalents which are part of investment
portfolios under the management of external and internal
investment managers.
The Company’s investment portfolio includes certain funds
that, due to their ownership structure, are accounted for by
the Company using the equity method. In applying the equity
method, these investments are initially recorded at cost and
are subsequently adjusted based on
the Company’s
proportionate share of the net income or loss of the funds
(which include changes in the fair value of the underlying
securities in the funds). Such investments are generally
recorded on a one to three month lag based on the availability
of reports from the investment funds. Changes in the carrying
value of such investments are recorded in net income as
“Equity in net income (loss) of investments accounted for
using the equity method.” As such, fluctuations in the
carrying value of the investments accounted for using the
equity method may increase the volatility of the Company’s
reported results of operations.
The Company’s
includes equity
investment portfolio
securities that are accounted for at fair value. Such holdings
primarily include publicly traded common stocks. Dividend
income on equities is reflected in net investment income.
Changes in fair value on equity securities are included in
“Net realized gains (losses)” in the consolidated statement of
income.
The Company elected to carry certain fixed maturity
securities, equity securities, 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.
as
treated
collateralized
The Company invests in reverse repurchase agreements that
are generally
receivables.
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
that most significantly
impact
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 as an
unrealized loss in other comprehensive income while the
allowance for credit loss is charged to net realized gains
(losses) in the consolidated statement of income.
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.
Net investment income includes interest and dividend income
together with amortization of market premiums and discounts
and is net of investment management and custody fees.
Anticipated prepayments and expected maturities are used in
applying the interest method for certain investments such as
mortgage and other asset-backed securities. When actual
prepayments
anticipated
significantly
prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The
net investment in such securities is adjusted to the amount
that would have existed had the new effective yield been
applied since
the security. Such
adjustments, if any, are included in net investment income
when determined.
the acquisition of
differ
from
losses realized on
the sale of
Investment gains or
investments, are
investments, except for certain fund
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
(losses)” 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 2023, 2022, and 2021, 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
losses and
loss adjustment expenses, established by
management based on reports from ceding companies and
claims from insureds, excludes estimates of amounts related
to losses under high deductible policies, and represents the
estimated ultimate cost of events or conditions that have been
reported to or specifically identified by the Company. Such
reserves are supplemented by management’s estimates of
reserves for losses incurred for which reports or claims have
not been received. The Company’s reserves are based on a
combination of reserving methods,
incorporating both
Company and industry loss development patterns. The
Company selects the initial expected loss and loss adjustment
its
expense ratios based on
underwriters and actuaries during the initial pricing of the
business, supplemented by industry data where appropriate.
Such ratios consider, among other things, rate changes and
information derived by
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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.
industry
Consistent with primary mortgage
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
based on estimates, and the ultimate net cost may vary from
such estimates. The methods for making such estimates and
for establishing the resulting liability are reviewed and
updated using the most current information available. Any
resulting adjustments, which may be material, are reflected in
current operations.
(k) Contractholder Receivables and Payables and Collateral
Held for Insured Obligations
the full amount of
the claim. The Company
Certain insurance policies written by the Company’s U.S.
insurance operations feature large deductibles, primarily in its
construction and national accounts line of business. Under
such contracts, the Company is obligated to pay the claimant
for
is
subsequently reimbursed by the policy holder for the
deductible amount. These amounts are included on a gross
basis in the consolidated balance sheet as contractholder
payables and contractholder receivables. In the event that the
Company is unable to collect from the policyholder, the
Company would be liable for such defaulted amounts.
Collateral, primarily in the form of letters of credit, cash and
trusts, is obtained from the policyholder to mitigate the
Company’s credit risk. In the instances where the Company
receives collateral in the form of cash, the Company reflects
it in “Collateral held for insured obligations.”
probability-of-default
Contractholder receivables are reported net of an allowance
for expected credit losses. The allowance is based upon the
Company’s ongoing review of amounts outstanding, changes
in policyholder credit standing, amounts and form of
collateral obtained, and other relevant factors. A ratings
based
loss-given-default
methodology is used to estimate the allowance for expected
credit losses. Any allowance for credit losses is charged to
net realized gains (losses) in the period the receivable is
recorded and revised in subsequent periods to reflect changes
in the Company’s estimate of expected credit losses. See note
7, “Allowance for Expected Credit Losses” for additional
information.
and
(l) Foreign Exchange
Assets and liabilities of foreign operations whose functional
currency is not the U.S. Dollar are translated at the prevailing
exchange rates at each balance sheet date. Revenues and
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
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income 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.
On December 27, 2023 the Bermuda government enacted tax
legislation referred to as the Corporate Income Tax Act 2023
(“Bermuda CIT Act”). The Bermuda CIT Act establishes a
15% corporate income tax, for in-scope businesses, for fiscal
years beginning on or after January 1, 2025. The enacted
legislation includes a provision referred to as the Economic
Transition Adjustment, which requires Bermuda Constituent
entities to establish tax basis in their assets and liabilities,
excluding goodwill, based on fair value as of September 30,
2023. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. See note 15, “Income Taxes” for
additional information regarding Company’s deferred income
tax asset.
(n) Share-Based Payment Arrangements
its
The
criteria.
performance
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
year performance period based on achievement of the
specified
share-based
compensation expense associated with awards that have
graded vesting features and vest based on service conditions
only is calculated on a straight-line basis over the requisite
service period for the entire award. Compensation expense
recognized in connection with performance awards is based
on the achievement of the specified performance and service
conditions. The final measure of compensation expense
recognized over the requisite service period reflects the final
performance outcome. During
recognition period
compensation expense is accrued based on the performance
condition that is probable of achievement. For awards
granted to retirement-eligible employees where no service is
required for the employee to retain the award, the grant date
fair value is immediately recognized as compensation
expense at the grant date because the employee is able to
retain the award without continuing to provide service. For
employees near
retirement eligibility, attribution of
compensation cost is over the period from the grant date to
the retirement eligibility date. These charges had no impact
on the Company’s cash flows or total shareholders’ equity.
See note 22, “Share-Based Compensation” for information
relating to the Company’s share-based payment awards.
the
(o) Guaranty Fund and Other Related Assessments
Liabilities for guaranty fund and other related assessments in
the Company’s insurance and reinsurance operations are
accrued when the Company receives notice that an amount is
payable, or earlier if a reasonable estimate of the assessment
can be made.
(p) Treasury Shares
Treasury shares are common shares purchased by the
Company and not subsequently canceled. These shares are
recorded at cost and result in a reduction of the Company’s
shareholders’ equity in its Consolidated Balance Sheets.
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q) Goodwill and Intangible Assets
(s) Funds Held Arrangements
Goodwill represents the excess of the purchase price of
business combination 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.
Funds held arrangements are agreements with a third party
reinsurance company, where the reinsured retains the related
assets on a funds held basis. Such amounts are included in
“Other assets” on the Company’s balance sheet. Investment
returns produced by those assets are recorded as part of net
investment income and net realized gains (losses) in the
Company's consolidated results of operations. Funds held as
collateral by the Company are included in “Other liabilities”
and changes to the funds held liability are reflected as part of
interest expense in the Company’s consolidated results of
operations.
(t) Recent Accounting Pronouncements
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
and amended in December 2022 with ASU 2022-06,
“Reference Rate Reform (Topic 848)”. This ASU provides
optional expedients and exceptions for applying GAAP to
investments, derivatives, or other transactions that reference
the London Interbank Offered Rate (“LIBOR”) or another
reference rate expected to be discontinued because of
reference rate reform. Along with the optional expedients, the
amendments include a general principle that permits an entity
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. The amendment deferred the
sunset date from December 31, 2022 to December 31, 2024.
As a result, this standard can be adopted no later than
December 31, 2024, with early adoption permitted. Based on
its current analysis, the Company does not expect that the
new guidance will have a material effect on the Company’s
consolidated financial statements.
ASU 2023-07, “Segment Reporting – Improvements to
Reportable Segments Disclosures,” was issued in November
2023. This ASU enhances disclosures of significant segment
expenses by requiring
to disclose significant segment
expenses regularly provided to the chief operating decision
maker (“CODM”), extend certain annual disclosures to
interim periods, and permit more than one measure of
segment profit or loss to be reported under certain conditions.
The amendments are effective for the Company in fiscal
years beginning after December 15, 2023, and interim
periods within fiscal years beginning after December 15,
2024. Early adoption of the amendment is permitted,
including adoption in any interim periods for which financial
statements have not been issued. Based on its current
analysis, the Company does not expect that the new guidance
will have a material effect on the Company’s consolidated
financial statements.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investor
requests
for enhanced
ASU 2023-09, “Improvements to Income Tax Disclosures,”
was issued in December 2023 with the stated purpose of
enhancing the transparency and decision usefulness of
income tax disclosures. The amendments in ASU 2023-09
tax
address
rate
information primarily
reconciliation and income taxes paid information. While
early adoption is permitted, a public entity should apply the
amendments in ASU 2023-09 prospectively to all annual
periods beginning after December 15, 2024. The Company is
currently evaluating the impact of this standard on the
Company’s consolidated financial statements and related
disclosures.
income
the
to
through changes
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 for middle market and large
construction accounts, a comprehensive range of
products for middle market accounts in specialty
industries and casualty solutions for large national
accounts, including loss sensitive primary insurance
programs (large deductible, self-insured retention and
retrospectively rated programs).
Excess and surplus casualty: primary and excess
casualty insurance coverages written primarily on a
non-admitted basis.
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, cyber
insurance, 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 targeting program managers with
unique expertise and niche products offering some
combination
commercial
automobile, property, inland marine, umbrella and
workers’ compensation.
liability,
general
of
Property, energy, marine and aviation: primary and
excess general property insurance coverages, including
catastrophe-exposed property coverage, for commercial
clients. Coverages for marine include hull, cargo, war,
specie and liability. Aviation, stand-alone terrorism and
political risks are also offered. Coverage may be
provided for operational and construction risk.
Travel, accident and health: specialty travel and
accident and related insurance products for individual,
group travelers, travel agents and suppliers, as well as
accident and health, which provides accident, disability
and medical plan insurance coverages for employer
groups, medical plan members, students and other
participant groups.
Warranty and lenders solutions: collateral protection,
debt cancellation and service contract reimbursement
products to banks, credit unions, automotive dealerships
and original equipment manufacturers and other
specialty programs that pertain to automotive lending
and leasing.
insurance
Other: includes alternative market risks (including
excess workers’
captive
programs),
insurance
liability
compensation and employer’s
coverages for qualified self-insured groups, associations
and trusts, and contract, commercial and transactional
surety coverages.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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. Reinsurance agreements are
typically offered on a proportional and/or excess of loss basis
and provide coverage to ceding company clients for specific
underlying written policies. Product lines include:
•
•
•
•
•
among
including,
Casualty: provides coverage on third party liability
exposures
executive
assurance, professional liability, excess and umbrella
liability, excess motor and healthcare business, and
workers’ compensation. Business is assumed primarily
on a treaty basis, with some facultative coverages also
offered.
others,
Marine and aviation: provides coverage for energy,
hull, cargo, specie, liability and transit, and aviation
business, including airline and general aviation risks.
Business written may also include space business,
which includes coverages for satellite assembly, launch
and operation for commercial space programs.
Other specialty: provides coverage for proportional
motor reinsurance, whole account multi-line treaties,
cyber, trade credit and surety, accident and health,
workers’ compensation catastrophe, agriculture and
political risk, among others.
losses,
Property catastrophe: provides protection for most
types of catastrophic
including hurricane,
earthquake, flood, tornado, hail and fire, and for other
perils on a case-by-case basis. Excess of loss coverages
are triggered when aggregate losses and loss adjustment
expense from a single occurrence or aggregation of
losses from a covered peril exceed the retention
specified in the contract.
Property excluding property catastrophe: provides
coverage for personal lines and/or commercial property
exposures and principally covers buildings, structures,
equipment and contents. The primary perils in this
riot,
fire, explosion, collapse,
include
business
vandalism, wind,
tornado, flood and earthquake.
Business is assumed on either a treaty basis or
facultative basis.
The mortgage segment includes the Company’s underwriting
units which offer mortgage insurance and reinsurance
products on a worldwide basis. Underwriting units include:
• U.S. primary mortgage insurance: offers private mortgage
insurance through Arch Mortgage Insurance Company and
United Guaranty Residential Insurance Company (combined
“Arch MI U.S.”), both approved eligible mortgage insurers
by Fannie Mae and Freddie Mac. Arch MI U.S. also
includes AMG, which is not a government sponsored
enterprise (“GSE”) approved entity.
• U.S. credit risk transfer (“CRT”) and other: underwrites
CRT transactions, which are predominantly with GSEs, and
other U.S. reinsurance transactions.
• International mortgage insurance/reinsurance: underwrites
mortgage insurance and reinsurance outside of the U.S.
The corporate segment results include net investment income,
net realized gains or losses (which includes realized and
unrealized changes in the fair value of equity securities and
assets accounted for using the fair value option, realized and
unrealized gains and losses on derivative instruments and
changes in the allowance for credit losses on financial assets),
equity in net income or loss of investment funds accounted
for using the equity method, other income (loss), corporate
expenses,
transaction costs and other, amortization of
intangible assets, interest expense, net foreign exchange gains
or losses, income taxes items, income or loss from operating
affiliates and items related to the Company’s non cumulative
preferred shares.
Through June 30, 2021, the ‘other’ segment included the
results of Somers. In July 2021, the Company 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.”
•
Other: primarily includes life reinsurance business.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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:
Insurance
7,911
(2,049)
5,862
(416)
5,446
—
(3,122)
(1,055)
(819)
450
$
$
$
Reinsurance
9,113
(2,559)
6,554
(718)
5,836
17
(3,227)
(1,240)
(288)
1,098
$
Year Ended December 31, 2023
Mortgage
Sub-Total
Other
Total
$
$
$
1,387
(335)
1,052
106
1,158
14
103
(17)
(194)
1,064
$
18,403
(4,935)
13,468
(1,028)
12,440
31
(6,246)
(2,312)
(1,301)
2,612
1,023
(165)
278
27
(96)
(6)
(95)
(133)
(60)
3,385
873
184
4,442
1
4,443
(40)
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
18,403
(4,935)
13,468
(1,028)
12,440
31
(6,246)
(2,312)
(1,301)
2,612
1,023
(165)
278
27
(96)
(6)
(95)
(133)
(60)
3,385
873
184
4,442
1
4,443
(40)
Gross premiums written (1)
Premiums ceded (1)
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
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
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
57.3 %
19.4 %
15.0 %
91.7 %
55.3 %
21.2 %
4.9 %
81.4 %
-8.9 %
1.4 %
16.8 %
9.3 %
Goodwill and intangible assets
$
224
$
130
$
377
Total investable assets
Total assets
Total liabilities
$
4,403
$
—
$
4,403
50.2 %
18.6 %
10.5 %
79.3 %
731
34,589
58,906
40,551
$
$
$
$
— %
— %
— %
— %
—
—
—
—
$
$
50.2 %
18.6 %
10.5 %
79.3 %
731
34,589
58,906
40,551
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such
transactions for each segment does not agree to the total due to eliminations.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insurance
6,931
(1,910)
5,021
(461)
4,560
—
(2,784)
(887)
(665)
224
$
$
$
Reinsurance
6,948
(2,024)
4,924
(965)
3,959
5
(2,568)
(813)
(268)
315
$
Year Ended December 31, 2022
Mortgage
Sub-Total
Other
Total
$
$
$
1,455
(322)
1,133
27
1,160
8
324
(40)
(195)
1,257
$
15,327
(4,249)
11,078
(1,399)
9,679
13
(5,028)
(1,740)
(1,128)
1,796
496
(663)
115
(27)
(95)
—
(106)
(131)
102
1,487
(80)
75
1,482
(6)
1,476
(40)
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,327
(4,249)
11,078
(1,399)
9,679
13
(5,028)
(1,740)
(1,128)
1,796
496
(663)
115
(27)
(95)
—
(106)
(131)
102
1,487
(80)
75
1,482
(6)
1,476
(40)
Gross premiums written (1)
Premiums ceded (1)
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
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
61.0 %
19.4 %
14.6 %
95.0 %
64.9 %
20.5 %
6.8 %
92.2 %
-28.0 %
3.5 %
16.8 %
-7.7 %
Goodwill and intangible assets
$
229
$
145
$
430
Total investable assets
Total assets
Total liabilities
$
1,436
$
—
$
1,436
51.9 %
18.0 %
11.7 %
81.6 %
804
28,065
47,990
35,069
$
$
$
$
— %
— %
— %
— %
—
—
—
—
$
$
51.9 %
18.0 %
11.7 %
81.6 %
804
28,065
47,990
35,069
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such
transactions for each segment does not agree to the total due to eliminations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Insurance
5,868
(1,719)
4,149
(524)
3,625
—
(2,345)
(606)
(559)
115
$
$
$
Reinsurance
5,094
(1,840)
3,254
(413)
2,841
3
(1,925)
(537)
(214)
168
$
Year Ended December 31, 2021
Mortgage
Sub-Total
Other
Total
$
$
$
1,508
(247)
1,261
22
1,283
18
(57)
(97)
(193)
954
$
12,463
(3,799)
8,664
(915)
7,749
21
(4,327)
(1,240)
(966)
1,237
347
299
366
10
(76)
(1)
(81)
(131)
42
2,012
(128)
264
2,148
(2)
—
2,148
(48)
(15)
$
458
(105)
353
(20)
333
—
(258)
(63)
(33)
(21)
42
81
—
—
—
(1)
(1)
(8)
(1)
91
—
—
91
(2)
(78)
9
—
—
12,752
(3,735)
9,017
(935)
8,082
21
(4,585)
(1,303)
(999)
1,216
389
380
366
10
(76)
(2)
(82)
(139)
41
2,103
(128)
264
2,239
(4)
(78)
2,157
(48)
(15)
Gross premiums written (1)
Premiums ceded (1)
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
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
64.6 %
16.7 %
15.4 %
96.7 %
67.8 %
18.9 %
7.5 %
94.2 %
4.4 %
7.6 %
15.1 %
27.1 %
Goodwill and intangible assets
$
256
$
184
$
505
Total investable assets
Total assets
Total liabilities
$
2,085
$
9
$
2,094
55.8 %
16.0 %
12.5 %
84.3 %
945
27,442
45,101
31,546
$
$
78.0 %
18.9 %
9.9 %
106.8 %
$
$
—
—
—
—
56.7 %
16.1 %
12.4 %
85.2 %
945
27,442
45,101
31,546
$
$
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such
transactions for each segment does not agree to the total due to eliminations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide summary information regarding net premiums earned by major line of business and net premiums
written by underwriting location:
INSURANCE SEGMENT
Net premiums earned (1)
Professional lines
Property, energy, marine and aviation
Programs
Construction and national accounts
Travel, accident and health
Excess and surplus casualty
Warranty and lenders solutions
Other
Total
Net premiums written by underwriting location (1)
United States
Europe
Other
Total
REINSURANCE SEGMENT
Net premiums earned (1)
Other specialty
Property excluding property catastrophe
Casualty
Property catastrophe
Marine and aviation
Other
Total
Net premiums written by underwriting location (1)
United States
Bermuda
Europe and other
Total
MORTGAGE SEGMENT
Net premiums earned
U.S. primary mortgage insurance
U.S. credit risk transfer (CRT) and other
International mortgage insurance/reinsurance
Total
Net premiums written by underwriting location
United States
Other
Total
(1) Segment results include intersegment transactions.
2023
Year Ended December 31,
2022
2021
1,419 $
1,064
658
561
557
486
185
516
5,446 $
3,780 $
1,774
308
5,862 $
1,314 $
772
590
432
492
393
128
439
4,560 $
3,342 $
1,405
274
5,021 $
2023
Year Ended December 31,
2022
2021
2,097 $
1,645
1,005
742
229
118
5,836 $
1,756 $
3,288
1,510
6,554 $
1,378 $
1,090
855
367
159
110
3,959 $
1,247 $
2,561
1,116
4,924 $
2023
Year Ended December 31,
2022
2021
759 $
220
179
804 $
196
160
1,158 $
1,160 $
743 $
309
1,052 $
781 $
352
1,133 $
943
668
507
417
256
318
153
363
3,625
2,812
1,126
211
4,149
819
838
667
280
153
84
2,841
829
1,555
870
3,254
953
181
149
1,283
913
348
1,261
$
$
$
$
$
$
$
$
$
$
$
$
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER SEGMENT
Net premiums earned (1)
Casualty
Other specialty
Property catastrophe
Property excluding property catastrophe
Marine and aviation
Other
Total
Net premiums written by underwriting location (1)
United States
Europe
Bermuda
Total
(1) Segment results include intersegment transactions.
Year Ended December 31,
2022
2021
2023
$
$
$
$
— $
—
—
—
—
—
— $
— $
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
— $
138
118
15
7
—
55
333
63
91
199
353
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Net losses and loss adjustment expense reserves of acquired business (1)
Retroactive reinsurance transactions (2)
Impact of deconsolidation of Somers (3)
2023
Year Ended December 31,
2022
2021
$
20,032 $
17,757 $
6,280
13,752
6,784
(538)
6,246
—
—
—
5,599
12,158
5,797
(769)
5,028
—
—
—
16,514
4,315
12,199
4,940
(355)
4,585
104
(444)
(1,461)
Foreign exchange (gains) losses and other
157
(293)
2
Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year
Prior years
Total net paid losses and loss adjustment expenses
(1,081)
(3,012)
(4,093)
(888)
(2,253)
(3,141)
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
16,062
6,690
22,752 $
13,752
6,280
20,032 $
$
(734)
(2,093)
(2,827)
12,158
5,599
17,757
(1)
(2)
(3)
Represents activity related to the Company’s acquisitions in the 2021 period. See note 2, “Acquisitions.”
See ‘Retroactive Reinsurance Transactions’ section.
See note 12, “Variable Interest Entity and Noncontrolling Interests.”
Development on Prior Year Loss Reserves
Year Ended December 31, 2023
During 2023, the Company recorded estimated net favorable
development on prior year loss reserves of $538 million,
which consisted of net favorable development of $42 million
from
the
reinsurance segment and $344 million from the mortgage
segment.
insurance segment, $152 million from
the
The insurance segment’s net favorable development of $42
million, or 0.8 points of net earned premium, consisted of
$107 million of net favorable development in short and long-
tailed lines partially offset by $65 million of net adverse
development from medium-tailed
lines. Net favorable
development in short-tailed lines reflected $32 million of
favorable development in property (excluding marine),
primarily from the 2022 accident year (i.e., the year in which
a loss occurred), $22 million of favorable development
related to warranty and lenders solutions business, primarily
in
to
lines
long-tailed
from the 2022 accident year, and $15 million of favorable
development related
travel and accident business,
primarily from the 2020 and 2022 accident years. Net
included
favorable development
$28 million of favorable development in executive assurance
business, primarily from the 2019 and 2021 accident years,
and $17 million of favorable development in alternative
markets business, primarily from the 2021 and prior accident
years. Such amounts were partially offset by $6 million of net
adverse development in construction and national accounts,
primarily from the 2020 to 2022 accident years. Net adverse
development in medium-tailed lines reflected $50 million of
liability business,
adverse development
primarily from the 2017 to 2020 accident years, and
$21 million of adverse development in contract binding
business, primarily from 2020 and prior accident years,
partially offset by $12 million of favorable development in
marine business, primarily from the 2020 and 2021 accident
years.
in professional
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reinsurance segment’s net favorable development of
$152 million, or 2.6 points of net earned premium, consisted
of $202 million of net favorable development from short and
medium-tailed lines, partially offset by $50 million of net
adverse development from long-tailed lines. Net favorable
development in short-tailed lines reflected $93 million of
favorable development from property other than property
catastrophe business, primarily from the 2020 to 2022
underwriting years (i.e., all premiums and losses attributable
to contracts having an inception or renewal date within the
given
twelve-month period), $51 million of favorable
development from property catastrophe business, primarily
from the 2019 to 2022 underwriting years, $35 million from
other
the 2021
underwriting year, and $13 million of favorable development
from other lines of business, primarily from the 2020
underwriting year. Net favorable development in medium-
tailed lines reflected $9 million from marine and aviation
business, primarily from 2021 and prior underwriting years.
Net adverse development in long-tailed lines primarily
reflected $46 million from casualty business, primarily from
the 2013 to 2020 underwriting years.
specialty business, primarily
from
The mortgage segment net favorable development was $344
million, or 29.7 points, for the 2023 period, with the largest
contributor being reserve releases associated with the U.S.
first lien portfolio from the 2020 to 2022 accident years. The
Company’s credit risk transfer and international businesses
also contributed to the favorable development.
Year Ended December 31, 2022
During 2022, the Company recorded estimated net favorable
development on prior year loss reserves of $769 million,
which consisted of net favorable development of $25 million
the
from
reinsurance segment and $554 million from the mortgage
segment.
insurance segment, $190 million from
the
lines
in short-tailed
The insurance segment’s net favorable development of
$25 million, or 0.6 points of net earned premium, consisted
of $55 million of net favorable development in short-tailed
lines partially offset by $30 million of net adverse
development from medium-tailed and long-tailed lines. Net
favorable development
reflected
$37 million of favorable development in warranty and
lenders solutions, primarily from the 2021 accident year, and
$15 million of favorable development related to travel and
accident business, primarily from the 2020 and 2021 accident
years. Net adverse development in medium-tailed lines
reflected $25 million of adverse development in professional
liability business, primarily from the 2013 to 2015 and 2018
to 2020 accident years, and $6 million of adverse
development in contract binding business, across most
accident years, partially offset by $13 million of favorable
development in marine business, across most accident years.
lines
long-tail
Net adverse development
reflected
in
$19 million of adverse development related to casualty
business, primarily from the 2020 and 2021 accident years,
and $7 million of adverse development on construction and
national accounts, primarily from the 2017, 2020 and 2021
accident years. This is partially offset by $22 million of
favorable development
including
alternative markets and excess workers’ compensation,
primarily from the 2019 and prior accident years.
in other business,
lines
in short-tailed
The reinsurance segment’s net favorable development of
$190 million, or 4.8 points of net earned premium, consisted
of $196 million of net favorable development from short-
tailed and medium-tailed lines, partially offset by $5 million
of net adverse development from long-tailed lines. Net
favorable development
reflected
$109 million of favorable development from property other
than property catastrophe business, primarily from the 2018
to 2021 underwriting years, $24 million of favorable
development from property catastrophe business, primarily
from the 2018 to 2020 underwriting years, and $35 million
from other specialty business, primarily from the 2016 and
2021 underwriting years. Net favorable development in
medium-tailed lines reflected $28 million in marine and
aviation lines, across most underwriting years. Net adverse
development
reflected
$5 million in casualty, spread across many prior underwriting
years.
lines primarily
long-tailed
in
net
segment
experienced
The mortgage
favorable
development of $554 million, or 47.8 points of net earned
premium, with the majority of reserve releases being on
COVID-related delinquencies associated with the U.S. first
lien portfolio from the 2020 and 2021 accident years. The
Company’s credit risk transfer, international, second lien and
student loan businesses also contributed to the favorable
development.
Year Ended December 31, 2021
the
During 2021, the Company recorded estimated net favorable
development on prior year loss reserves of $355 million,
which consisted of net favorable development of $16 million
the
from
reinsurance segment, $170 million from the mortgage
segment, partially offset by $8 million of adverse
development from the ‘other’ segment (activity prior to the
deconsolidation of Somers).
insurance segment, $179 million from
The insurance segment’s net favorable development of
$16 million, or 0.4 points of net earned premium, consisted
of $110 million of net favorable development in short-tailed
and long-tailed lines mostly offset by $94 million of net
adverse development
lines. Net
favorable development of $82 million in short-tailed lines
reflected $39 million of favorable development from property
from medium-tailed
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(excluding marine), primarily from the 2018 to 2020 accident
years, $27 million of favorable development in warranty and
lenders solutions, primarily from the 2020 accident year, and
$16 million of favorable development on travel and accident,
primarily from the 2016 to 2020 accident years. Net
favorable development of $28 million in long-tailed lines
reflected favorable development in construction, national
accounts and 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 $58 million of adverse development in
contract binding, primarily from the 2013 to 2019 accident
years and $31 million of adverse development in professional
liability, primarily from the 2018 to 2020 accident years.
The reinsurance segment’s net favorable development of
$179 million, or 6.3 points of net earned premium, consisted
of $184 million of net favorable development from short-
tailed and medium-tailed lines, partially offset by $5 million
of net adverse development from long-tailed lines. Net
favorable development of $176 million in short-tailed lines
reflected $123 million from other specialty lines, primarily
from the 2014 to 2019 underwriting years, and $89 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 million
from property
catastrophe, primarily from the 2020 underwriting year.
Adverse development in long-tailed lines reflected an
increase in casualty, primarily from the 2018 underwriting
year.
net
segment
experienced
The mortgage
favorable
development of $170 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.
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, “Transactions with Related Parties”.
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;
warranty and lenders solutions;
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 and
(ii) certain reinsurance business, including casualty clash and
non-traditional
included as
lines. Such amounts are
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
future events will be estimated and recognized at the time the
losses are incurred and could be substantial.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
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
costs are often difficult
isolate or quantify and
to
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
warranty and lenders solutions), 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
ARCH CAPITAL
125
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
including
that historical paid and
and a heavy reliance on analysis of individual catastrophic
events and management judgment. The development of
losses on short-tail business can be unstable, especially for
policies characterized by high severity, low frequency losses.
As time passes, for a given accident year, additional weight is
given to the paid and incurred B-F loss development methods
and eventually to the historical paid and incurred loss
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.
From time to time, the Company enters into loss portfolio
transfer and adverse development cover
reinsurance
agreements accounted for as retroactive reinsurance. These
agreements transfer 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, 2023 included $225 million related to such
reinsurance agreements.
ARCH CAPITAL
126
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information on the insurance segment’s short-duration insurance contracts:
Property, energy, marine and aviation (in millions except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
Year ended December 31,
$
148
$
$
146
112
$
147
110
104
$
136
104
101
281
132
102
105
246
181
$
134
$
135
$
135
$
134
$
98
100
236
186
179
92
96
230
174
179
359
92
92
231
170
165
329
427
91
88
225
170
161
336
429
522
133
89
88
225
172
159
333
423
495
571
Total
$
2,688
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
2
$
2
—
1
5
(1)
9
41
74
275
Cumulative
number of
reported
claims
3,871
4,530
6,171
6,475
5,077
7,018
8,212
8,807
13,274
13,682
$
26
$
$
54
24
$
78
65
25
$
84
76
83
30
$
88
86
98
140
30
98
88
97
196
102
26
$
115
$
122
$
123
$
86
95
212
135
105
56
87
91
216
143
134
194
90
88
87
218
150
139
251
268
100
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
125
86
87
220
154
148
293
343
276
146
1,878
14
824
Third party occurrence business (in millions except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Total of IBNR
liabilities plus
expected
development on
reported claims
49
$
66
77
100
127
154
226
290
513
750
Cumulative
number of
reported
claims
75,679
78,689
78,883
84,687
78,320
86,139
92,279
92,672
92,564
72,833
2014
unaudited
330
$
2015
unaudited
336
$
359
2016
unaudited
339
$
392
390
2017
unaudited
343
$
399
394
417
Year ended December 31,
2018
unaudited
339
$
392
406
418
430
2019
unaudited
344
$
391
399
422
453
456
2020
unaudited
343
$
382
375
412
451
487
607
2021
unaudited
343
$
386
368
407
451
481
616
622
2022
unaudited
345
$
379
363
406
459
471
640
663
688
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
9
$
$
40
11
$
71
45
12
$
113
88
42
13
$
162
139
88
52
17
$
191
182
137
100
64
18
$
211
212
165
135
115
73
24
224
227
195
165
154
122
77
26
Total
$
237
249
215
221
200
173
155
91
24
$
$
$
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2023
344
377
352
405
462
470
632
659
726
877
5,304
257
268
231
247
247
214
235
174
85
32
1,990
287
3,601
ARCH CAPITAL
127
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Third party claims-made business (in millions except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
Year ended December 31,
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
264
$
$
279
259
$
299
277
275
$
279
276
291
270
$
281
260
308
286
273
$
297
255
314
312
314
289
$
291
252
322
308
320
317
383
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
14
$
63
9
$
129
$
52
11
$
173
100
68
9
$
207
126
127
68
12
$
229
174
158
113
68
12
$
243
193
205
143
118
65
17
288
268
327
323
336
317
413
515
249
217
242
196
158
122
87
23
$
302
$
$
326
335
$
318
358
409
$
318
357
431
482
$
317
365
428
501
512
$
313
357
416
491
565
567
$
310
349
410
501
563
612
618
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
108
$
$
197
138
$
234
236
176
$
267
278
305
181
$
281
306
342
342
212
$
292
321
363
381
389
212
$
293
327
379
423
443
386
172
309
347
408
504
565
640
569
635
295
330
385
446
480
487
309
157
Total of IBNR
liabilities plus
expected
development on
reported claims
14
$
13
18
48
44
66
118
254
448
641
Cumulative
number of
reported
claims
14,494
13,932
14,912
15,473
17,098
15,879
15,239
16,323
18,563
20,494
Total of IBNR
liabilities plus
expected
development on
reported claims
4
$
5
7
9
14
21
44
76
157
450
Cumulative
number of
reported
claims
148,702
180,468
192,955
235,539
260,995
252,766
166,357
114,447
143,264
118,241
$
$
296
267
330
317
347
322
423
518
669
287
274
327
338
367
330
446
499
655
811
Total
$
4,334
$
$
260
221
257
233
208
155
152
90
25
Total
266
242
296
258
258
197
215
163
100
64
2,059
77
$
$
311
345
409
513
565
651
515
619
678
310
345
406
516
565
657
517
614
642
817
Total
$
5,389
$
$
296
331
390
472
509
549
359
335
177
Total
297
333
392
480
527
577
406
428
371
254
4,065
24
Multi-line and other specialty (in millions except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2,352
All outstanding liabilities before 2014, net of reinsurance
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
Year ended December 31,
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
1,348
ARCH CAPITAL
128
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by
age, net of reinsurance, as of December 31, 2023:
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
20.5 %
3.5 %
4.1 %
34.0 %
43.7 %
9.4 %
15.5 %
29.3 %
18.1 %
11.5 %
16.5 %
11.3 %
6.0 %
11.4 %
11.1 %
8.2 %
2.2 %
9.9 %
14.3 %
4.5 %
1.0 %
9.8 %
10.1 %
2.9 %
2.6 %
5.6 %
6.3 %
1.1 %
1.9 %
4.6 %
5.2 %
0.4 %
(0.4) %
4.4 %
5.7 %
0.4 %
1.5 %
5.6 %
2.0 %
0.5 %
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,
2023 there were no significant backlogs related to the
processing of assumed reinsurance information at our
reinsurance operations.
ARCH CAPITAL
129
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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.
ARCH CAPITAL
130
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information on the reinsurance segment’s short-duration insurance contracts:
Casualty (in millions)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Total of IBNR
liabilities plus
expected
development on
reported claims
33
$
44
45
53
50
84
163
205
390
568
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
2014
unaudited
215
$
2015
unaudited
220
$
220
2016
unaudited
217
$
219
212
2017
unaudited
230
$
228
224
267
Year ended December 31,
2018
unaudited
227
$
235
247
254
276
2019
unaudited
237
$
239
262
270
289
330
2020
unaudited
237
$
246
269
297
281
341
382
2021
unaudited
234
$
249
268
309
286
367
371
439
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
4
$
$
16
4
$
41
20
6
$
63
47
26
6
$
91
71
52
30
8
$
114
96
87
64
31
16
$
134
120
113
113
106
58
18
145
137
132
137
129
97
50
15
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
$
$
2022
unaudited
234
$
251
272
316
298
379
354
434
547
Total
$
Total
153
152
157
164
155
130
90
53
18
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2023
241
260
281
330
308
400
372
425
527
657
3,801
160
170
172
189
182
219
132
102
61
18
1,405
310
2,706
Property catastrophe (in millions)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Total of IBNR
liabilities plus
expected
development on
reported claims
—
$
—
1
(1)
3
2
17
13
41
76
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
2014
unaudited
44
$
2015
unaudited
30
$
33
2016
unaudited
25
$
18
24
2017
unaudited
22
$
12
17
86
Year ended December 31,
2018
unaudited
20
$
6
13
54
71
2019
unaudited
20
$
4
9
50
49
20
2020
unaudited
19
$
3
7
36
30
10
269
2021
unaudited
19
$
3
6
24
17
9
333
314
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
14
$
$
20
(3)
$
18
(2)
(7)
$
19
2
2
31
$
18
2
2
32
27
$
19
2
3
37
5
4
$
19
2
2
27
16
7
56
19
2
3
14
(13)
11
158
65
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
$
$
$
2022
unaudited
19
$
3
5
21
8
1
337
308
303
Total
$
Total
19
2
3
16
(11)
(14)
207
171
70
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2023
19
3
5
22
5
(7)
326
294
295
267
1,229
19
2
3
17
(9)
(13)
249
222
169
9
668
2
563
ARCH CAPITAL
131
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property excluding property catastrophe (in millions)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
Year ended December 31,
$
142
$
117
214
$
98
$
90
$
88
$
84
$
82
$
80
$
79
$
188
175
184
145
268
188
137
250
224
187
135
237
239
216
176
139
230
235
206
368
173
136
214
212
195
340
545
167
130
206
202
190
320
497
742
79
167
130
202
203
190
320
491
668
835
Total
$
3,285
Total of IBNR
liabilities plus
expected
development on
reported claims
—
$
4
6
7
7
3
15
38
119
414
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
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
23
$
62
75
$
71
$
76
$
78
$
78
$
78
$
78
$
78
$
119
33
149
94
28
160
98
125
30
165
104
156
108
43
159
111
164
152
124
101
159
114
179
167
150
207
136
159
115
182
175
162
243
270
143
All outstanding liabilities before 2014, net of reinsurance
Total
78
160
115
186
177
169
267
364
361
152
2,029
5
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
1,261
Marine and aviation (in millions)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Total of IBNR
liabilities plus
expected
development on
reported claims
—
$
1
3
3
3
9
10
18
59
127
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
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
unaudited
31
$
2015
unaudited
29
$
33
2016
unaudited
27
$
37
27
2017
unaudited
25
$
32
23
29
Year ended December 31,
2018
unaudited
23
$
31
23
26
27
2019
unaudited
23
$
30
19
24
26
48
2020
unaudited
22
$
28
17
21
24
55
83
2021
unaudited
22
$
27
15
20
24
60
76
110
2022
unaudited
19
$
25
12
17
21
61
79
96
126
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
4
$
$
8
—
$
11
13
(7)
$
12
19
(2)
2
$
15
21
—
6
2
$
15
22
3
9
7
11
$
16
22
6
11
11
21
9
16
22
7
12
13
29
26
8
Total
$
Total
17
22
7
12
14
35
42
24
12
$
$
$
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2023
18
24
11
15
21
62
80
81
138
161
611
17
22
7
12
15
43
60
45
37
13
271
17
357
ARCH CAPITAL
132
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other specialty (in millions)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2023
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
Year ended December 31,
Total of IBNR
liabilities plus
expected
development
on reported
claims
Cumulative
number of
reported
claims
1
3
6
15
29
40
61
80
225
817
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
337
$
$
316
280
$
318
278
326
$
312
276
323
398
$
307
273
316
390
416
$
308
273
307
372
409
427
$
304
270
314
372
404
406
593
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$
96
$
186
$
83
$
229
162
108
$
248
197
205
136
$
258
211
242
256
130
$
271
224
261
298
276
121
$
275
236
277
313
315
211
134
$
$
$
298
259
309
370
428
400
524
610
278
239
283
326
336
277
293
152
296
258
306
366
424
395
519
611
953
280
240
289
337
353
303
370
311
182
$
Total
$
Total
All outstanding liabilities before 2014, net of reinsurance
$
295
255
307
363
423
405
539
613
935
1,348
5,483
282
241
293
346
376
325
405
432
464
244
3,408
19
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, 2023:
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
2,094
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
2.8 %
56.0 %
25.0 %
3.0 %
28.6 %
7.7 %
(17.5) %
38.2 %
28.8 %
29.9 %
12.1 %
47.2 %
14.2 %
20.0 %
13.9 %
10.4 %
(41.9) %
6.0 %
13.0 %
5.7 %
11.4 %
(6.2) %
4.4 %
10.6 %
4.5 %
8.5 %
10.9 %
0.2 %
3.4 %
3.9 %
7.8 %
2.4 %
0.7 %
2.2 %
1.7 %
5.3 %
1.1 %
0.1 %
1.0 %
0.9 %
5.2 %
(1.7) %
0.4 %
3.8 %
0.6 %
2.9 %
— %
0.4 %
0.4 %
1.0 %
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
and
payments
arrears. The
actuarial
reviews
in
documentation created in the reserving process are completed
in accordance with generally accepted actuarial standards.
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
ARCH CAPITAL
133
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
precedent, adds further uncertainty
to current reserve
estimates.
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
the 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
in home prices and
unemployment. Claim rates can vary materially by age of
delinquency, depending on the mix of delinquencies and
economic conditions.
include
trends
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 have been 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
loans and claims notices from ceding
of delinquent
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.
ARCH CAPITAL
134
2023 FORM 10-K
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information on the mortgage segment’s short-duration insurance contracts:
U.S. primary mortgage insurance (in millions except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
Year ended December 31,
Accident
year
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
unaudited
2021
unaudited
2022
unaudited
2023
$
316
$
297
$
279
$
266
$
266
$
261
$
223
197
184
198
171
179
195
149
132
132
189
141
107
96
108
263
191
142
108
89
119
420
$
263
$
December 31, 2023
Total of
IBNR
liabilities plus
expected
development
on reported
claims
Cumulative
number of
paid claims
—
—
—
—
—
—
—
—
—
1
6,332
4,588
3,462
2,541
1,763
1,149
492
211
135
9
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
20
129
16
202
92
11
234
151
72
9
247
171
113
48
4
254
180
127
79
31
3
256
183
131
87
50
20
1
191
142
109
88
110
374
144
257
184
132
90
56
29
4
—
$
261
189
137
102
72
63
78
77
173
259
188
136
99
69
51
33
20
55
182
Total
$
1,092
257
185
132
92
59
34
8
2
—
258
186
133
93
60
39
13
5
3
—
790
8
All outstanding liabilities before 2014, net of reinsurance
Total
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
310
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, 2023:
Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
U.S. Primary
5.1 %
29.1 %
24.2 %
10.7 %
4.7 %
1.8 %
0.7 %
0.5 %
0.2 %
0.1 %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
ARCH CAPITAL
135
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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, 2023:
7. Allowance for Expected Credit Losses
Premiums Receivable
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,
2023
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s premium
receivables:
$
824
3,601
2,352
1,348
2,706
563
1,261
357
2,094
310
284
15,700
359
2,025
1,001
246
738
519
239
240
828
33
468
(6)
6,690
132
(66)
296
362
Year Ended December 31, 2023
Balance at beginning of period
Change for provision of expected
credit losses (1)
Balance at end of period
Year Ended December 31, 2022
Balance at beginning of period
Change for provision of expected
credit losses (1)
Balance at end of period
Premium
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
$
$
$
$
3,625 $
4,644 $
2,633 $
3,625 $
35
(1)
34
40
(5)
35
(1) Amounts deemed uncollectible are written-off in operating expenses. For
the 2023 and 2022 periods, amounts written off totaled $3 million and
$11 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
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s reinsurance
recoverables:
Reserve for losses and loss adjustment expenses
$
22,752
(1)
Includes unpaid loss and loss adjustment expenses recoverable of $225
million related to the loss portfolio transfer reinsurance agreements.
Year Ended December 31, 2023
Balance at beginning of period
Change for provision of expected
credit losses
Balance at end of period
Year Ended December 31, 2022
Balance at beginning of period
Change for provision of expected
credit losses
Reinsurance
Recoverables,
Net of
Allowance
Allowance for
Expected
Credit Losses
$
$
$
6,564 $
7,064 $
5,881 $
22
(1)
21
13
9
22
Balance at end of period
6,564 $
ARCH CAPITAL
136
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s reinsurance
recoverables on paid and unpaid losses (not including ceded
unearned premiums) at December 31, 2023 and 2022:
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
December 31,
2023
2022
$
7,064
$
6,564
66.8 %
0.1 %
68.8 %
0.1 %
33.1 %
31.1 %
7.2 %
9.0 %
(1) At December 31, 2023 and 2022 period, over 95% of such amount
funds withheld
were collateralized
trusts,
through
arrangements, letters of credit or other, respectively.
reinsurance
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, 2023
Balance at beginning of period
Change for provision of expected
credit losses
Balance at end of period
Year Ended December 31, 2022
Balance at beginning of period
Change for provision of expected
credit losses
Contractholder
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
$
$
$
1,731 $
1,814 $
1,829 $
3
—
3
3
—
3
Balance at end of period
1,731 $
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 to third parties. 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. In addition, the Company’s
retrocessional
subsidiaries may purchase
reinsurance
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
reinsurance
agreements with various special purpose
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, the
Company’s insurance or reinsurance subsidiaries would be
liable for such defaulted amounts.
The effects of reinsurance on the Company’s written and
earned premiums and losses and loss adjustment expenses
with unaffiliated reinsurers were as follows:
Premiums Written
Direct
Assumed
Ceded
Net
Premiums Earned
Direct
Assumed
Ceded
Net
Losses and Loss
Adjustment Expenses
Direct
Assumed
Ceded
Net
Year Ended December 31,
2022
2021
2023
$
$
$
$
$
$
9,652 $
8,751
(4,935)
13,468 $
8,542 $
6,785
(4,249)
11,078 $
9,131 $
7,890
(4,581)
12,440 $
8,058 $
5,768
(4,147)
9,679 $
4,739 $
3,975
(2,468)
6,246 $
3,991 $
3,558
(2,521)
5,028 $
7,707
5,045
(3,735)
9,017
7,150
4,334
(3,402)
8,082
4,267
2,826
(2,508)
4,585
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.”
The following table summarizes the respective coverages and
retentions at December 31, 2023:
Bellemeade Entities
(Issue Date)
Initial
Coverage at
Issuance
Current
Coverage
2019-1 Ltd. (1)
2019-3 Ltd. (2)
2021-3 Ltd. (3)
2022-1 Ltd. (4)
2022-2 Ltd. (5)
2023-1 Ltd. (6)
Total
342
701
639
317
327
233
2,559 $
$
Remaining
Retention, Net
134
218
134
141
205
185
1,017
71
99
541
282
327
233
1,553 $
(1)
(2)
(3)
(4)
(5)
(6)
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 July 2019, covering in-force policies issued in 2016.
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.
Issued in January 2022, covering in-force policies issued between July
1, 2021 and November 30, 2021. $284 million was directly funded by
Bellemeade Re 2022-1 Ltd. via insurance-linked notes, with an
additional $33 million capacity provided directly to Arch MI U.S. by a
separate panel of reinsurers.
Issued in September 2022, covering in-force policies issued between
November 1, 2021 and June 30, 2022. $201 million was directly
funded by Bellemeade Re 2022-2 Ltd. via insurance-linked notes, with
an additional $126 million capacity provided directly to Arch MI U.S.
by a separate panel of reinsurers.
Issued in October 2023, covering in-force policies issued between
January 1, 2023 and September 30, 2023. $187 million was directly
funded by Bellemeade Re 2023-1 Ltd. via insurance-linked notes, with
an additional $47 million capacity provided directly to Arch MI U.S.
by a separate panel of reinsurers.
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Asset backed securities
Non-U.S. government securities
Commercial mortgage backed securities
Residential mortgage backed securities
Municipal bonds
Total
Short-term investments
Total
December 31, 2022
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Asset backed securities
Non-U.S. government securities
Commercial mortgage backed securities
Residential mortgage backed securities
Municipal bonds
Total
Short-term investments
Total
Estimated
Fair
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for
Expected Credit
Losses
Cost or
Amortized
Cost
$
$
$
$
10,855 $
5,814
2,250
2,062
1,213
1,103
256
23,553
2,063
25,616 $
8,020 $
5,162
1,927
2,313
1,047
795
419
19,683
1,332
21,015 $
157 $
63
11
33
3
7
1
275
1
276 $
55 $
15
1
9
1
5
3
89
1
90 $
(464) $
(86)
(55)
(100)
(34)
(66)
(20)
(825)
(2)
(827) $
(781) $
(343)
(107)
(238)
(58)
(87)
(33)
(1,647)
(2)
(1,649) $
(20) $
—
(5)
(1)
(2)
—
—
(28)
—
(28) $
(30) $
—
(6)
(2)
(3)
—
—
(41)
—
(41) $
11,182
5,837
2,299
2,130
1,246
1,162
275
24,131
2,064
26,195
8,776
5,490
2,039
2,544
1,107
877
449
21,282
1,333
22,615
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross
unrealized loss by length of time the security has been in a continual unrealized loss position:
December 31, 2023
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Non-U.S. government securities
Residential mortgage backed securities
Asset backed securities
Commercial mortgage backed securities
Municipal bonds
Total
Short-term investments
Total
December 31, 2022
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Non-U.S. government securities
Residential mortgage backed securities
Asset backed securities
Commercial mortgage backed securities
Municipal bonds
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
$
$
$
$
1,559 $
1,066
365
221
234
100
20
3,565
302
3,867 $
4,823 $
3,557
1,703
546
1,148
598
364
12,739
237
12,976 $
(45)
(10)
(4)
(3)
(1)
(1)
(1)
(65)
(2)
(67)
(393)
(197)
(154)
(52)
(66)
(35)
(30)
(927)
(2)
(929)
$
$
$
$
4,959 $
941
897
522
1,112
909
215
9,555
—
9,555 $
2,559 $
1,443
542
154
512
445
16
5,671
—
5,671 $
(419)
(76)
(96)
(63)
(54)
(33)
(19)
(760)
—
(760)
(388)
(146)
(84)
(35)
(41)
(23)
(3)
(720)
—
(720)
$
$
$
$
6,518 $
2,007
1,262
743
1,346
1,009
235
13,120
302
13,422 $
7,382 $
5,000
2,245
700
1,660
1,043
380
18,410
237
18,647 $
(464)
(86)
(100)
(66)
(55)
(34)
(20)
(825)
(2)
(827)
(781)
(343)
(238)
(87)
(107)
(58)
(33)
(1,647)
(2)
(1,649)
At December 31, 2023, on a lot level basis, approximately 7,100 security lots out of a total of approximately 15,720 security
lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity
portfolio was $6 million. The Company believes that such securities were temporarily impaired at December 31, 2023. At
December 31, 2022, on a lot level basis, approximately 9,810 security lots out of a total of approximately 12,590 security lots
were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity
portfolio was $7 million.
The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are
management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
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
December 31, 2023
December 31, 2022
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
$
$
480 $
12,924
5,249
334
18,987
1,103
1,213
2,250
23,553 $
499 $
13,101
5,450
374
19,424
1,162
1,246
2,299
24,131 $
511 $
11,016
3,984
403
15,914
795
1,047
1,927
19,683 $
537
11,715
4,527
480
17,259
877
1,107
2,039
21,282
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities, at Fair Value
Other Investments
At December 31, 2023, the Company held $1.2 billion of
equity securities, at fair value, compared to $860 million at
December 31, 2022.
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:
December 31,
2023
2022
Other investments
Fixed maturities
Equity securities
Short-term investments
$
$
1,777
683
7
21
1,043
554
14
33
1,644
Year Ended December 31,
2022
2021
2023
Total other investments
$
2,488
$
$
Fixed maturities
Short-term investments
Equity securities
Term loans
Other (1)
Gross investment income
Investment expenses
Net investment income
$
917 $
68
22
—
93
1,100
(77)
1,023 $
469 $
29
22
—
47
567
(71)
496 $
331
7
42
30
68
478
(89)
389
(1)
Includes
investment funds and other items.
interest
income on operating cash, distributions from
Net Realized Gains (Losses)
The following table summarizes the Company’s other
investments, as detailed in the previous table, by strategy:
Lending
Investment grade fixed income
Term loan investments
Private equity
Credit related funds
Energy
Total
December 31,
2023
2022
427
754
272
182
124
18
1,777 $
406
271
164
123
56
23
1,043
$
Net realized gains (losses) were as follows:
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
Derivative instruments (1)
Other (2)
Year Ended December 31,
2022
2021
2023
$
116 $
81 $
314
(547)
(317)
(157)
18
27
1
—
61
88
3
(1)
59
10
(71)
(21)
(4)
(3)
9
117
13
1
75
123
(267)
(44)
(13)
(75)
(4)
49
(1)
—
(33)
(55)
380
The following table summarizes the Company’s investments
accounted for using the equity method, by strategy:
Credit related funds
Private equity
Real estate
Lending
Infrastructure
Fixed income
Equities
Energy
Total
December 31,
2023
2022
$
$
1,258 $
1,175
666
597
320
277
178
95
4,566 $
1,136
917
535
531
245
130
169
111
3,774
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.
Equity in Net Income (Loss) of Investments Accounted For
Using the Equity Method
Net realized gains (losses)
$
(165) $
(663) $
(1) See note 11, “Derivative Instruments” for information on the
(2)
Company’s derivative instruments.
2021 period reflected $33 million of losses related to the Company’s
deconsolidation of Somers.
The Company recorded equity in net income related to
investments accounted for using the equity method of $278
million for 2023, compared to $115 million for 2022 and
$366 million for 2021. In applying the equity method,
ARCH CAPITAL
141
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
initially
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).
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
December 31,
2023
2022
$
$
91,534 $
108,952
33,901
75,051 $
74,961
88,063
27,553
60,510
Year Ended December 31,
2022
2021
2023
Total revenues
Total expenses
Net income (loss)
$
$
7,766 $
7,174
592 $
12,305 $
5,374
6,931 $
11,786
3,239
8,547
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
requests exceeds a
redemption
aggregate amount of
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 Interests
In the normal course of its activities, the Company invests in
limited partnerships as part of its overall investment strategy.
Such amounts are included in ‘investments accounted for
using the equity method’ and ‘investments accounted for
using the fair value option.’ The Company determined that
these
interests represented variable
interests in the funds. The Company’s maximum exposure to
limited partnership
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.
The following table summarizes investments in limited
partnership interests where the Company has a variable
interest by balance sheet item:
December 31,
2023
2022
Investments accounted for using the equity
method (1)
$
4,566 $
3,774
Investments accounted for using the fair
value option (2)
Total
114
$
4,680 $
130
3,904
(1) Aggregate unfunded commitments were $3.4 billion at December 31,
2023, consistent with $2.6 billion at December 31, 2022.
(2) Aggregate unfunded commitments were $32 million at December 31,
2023, compared to $17 million at December 31, 2022.
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 $75 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, 2023, the Company
owned approximately 29.9% of the issued shares of Coface,
or 30.1% excluding treasury shares, with a carrying value of
$570 million, compared to $563 million at December 31,
2022.
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
is owned 40% by
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded income from operating affiliates of
$184 million for 2023, compared to $75 million for 2022 and
$264 million for 2021.
Warburg. At December 31, 2023 the Company’s carrying
value in Greysbridge was $430 million, compared to
$306 million at December 31, 2022. The Company’s carrying
value in Greysbridge reflected aggregate purchase price of
$279 million along with income (loss) from operating
affiliates, which included a one-time gain of $96 million
recognized from the acquisition. See note 12, “Variable
Interest Entity and Noncontrolling Interests.”
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, 2023
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
Balance at end of period
Year Ended December 31, 2022
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
Balance at end of period
Structured
Securities (1)
Non-U.S.
Government
Securities
Corporate
Bonds
Total
$
$
$
$
9 $
2 $
30 $
2
(3)
(1)
—
—
(1)
5
(7)
(8)
7 $
1 $
20 $
1 $
— $
2 $
14
(4)
(2)
2
—
—
39
(9)
(2)
9 $
2 $
30 $
41
7
(10)
(10)
28
3
55
(13)
(4)
41
(1)
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and
restricted cash within the Consolidated Balance Sheets:
Cash
Restricted cash (included in
‘other assets’)
Cash and restricted cash
$
$
2023
December 31,
2022
2021
917 $
855 $
859
581
1,498 $
418
1,273 $
455
1,314
Restricted Assets
The Company is required to maintain assets on deposit,
which primarily consist of fixed maturities, with various
regulatory authorities to support its underwriting operations.
The Company’s subsidiaries maintain assets in trust accounts
as collateral for transactions with affiliated companies and
also have investments in segregated portfolios primarily to
provide collateral or guarantees for letters of credit to third
parties
The following table details the value of the Company’s
restricted assets:
December 31,
2023
2022
Assets used for collateral or guarantees:
Affiliated transactions
Third party agreements
Deposits with U.S. regulatory authorities
Other (1)
Total restricted assets
$
$
4,854 $
2,869
833
1,376
9,932 $
4,254
2,633
776
1,038
8,701
(1) Primarily includes Funds at Lloyds, deposits with non-U.S. regulatory
authorities and other restricted assets.
ARCH CAPITAL
143
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
The levels in the hierarchy are defined as follows:
Level 1:
Level 2:
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
Level 3:
to
Inputs
the valuation methodology are
unobservable and significant to the fair value
measurement
Following is a description of the valuation methodologies
used for securities measured at fair value, as well as the
general classification of such securities pursuant to the
valuation hierarchy. The Company reviews its securities
measured at fair value and discusses the proper classification
of such investments with investment advisers and others.
to provide
The Company determines the existence of an active market
based on its judgment as to whether transactions for the
financial instrument occur in such market with sufficient
frequency and volume
reliable pricing
information. The independent pricing sources obtain market
quotations and actual transaction prices for securities that
have quoted prices in active markets. The Company uses
quoted values and other data provided by nationally
recognized independent pricing sources as inputs into its
process for determining fair values of its fixed maturity
investments. To validate the techniques or models used by
pricing sources, the Company's review process includes, but
is not limited to: (i) quantitative analysis (e.g., comparing the
quarterly return for each managed portfolio to its target
benchmark, with significant differences
identified and
investigated); (ii) a review of the prices obtained in the
pricing process and the range of resulting fair values; (iii)
initial and ongoing evaluation of methodologies used by
outside parties to calculate fair value; (iv) a comparison of
the fair value estimates to the Company’s knowledge of the
current market; (v) a comparison of the pricing services' fair
values to other pricing services' fair values for the same
investments; and (vi) periodic back-testing, which includes
randomly selecting purchased or sold securities and
comparing the executed prices to the fair value estimates
from the pricing service. A price source hierarchy was
maintained in order to determine which price source would
be used (i.e., a price obtained from a pricing service with
more seniority in the hierarchy will be used over a less senior
one in all cases). The hierarchy prioritizes pricing services
based on availability and reliability and assigns the highest
priority to index providers. Based on the above review, the
Company will challenge any prices for a security or portfolio
which are considered not to be representative of fair value.
In 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 $29.6 billion of
financial assets and liabilities measured at fair value at
December 31, 2023, approximately $14 million, or 0.0%,
were priced using non-binding broker-dealer quotes. Of the
$23.8 billion of financial assets and liabilities measured at
fair value at December 31, 2022, approximately $13 million,
or 0.1%, were priced using non-binding broker-dealer quotes.
in
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:
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. government and government agencies – valuations
provided by independent pricing services, with all prices
provided through index providers and pricing vendors. The
Company determined that all U.S. Treasuries would be
classified as Level 1 securities due to observed levels of
trading activity, the high number of strongly correlated
pricing quotes received on U.S. Treasuries and other factors.
The fair values of U.S. government agency securities are
generally determined using the spread above the risk-free
yield curve. As the yields for the risk-free yield curve and the
spreads for these securities are observable market inputs, the
fair values of U.S. government agency securities are
classified within Level 2.
Corporate bonds – valuations provided by independent
pricing services, substantially all through index providers and
pricing vendors with a small amount through broker-dealers.
The fair values of these securities are generally determined
using the spread above the risk-free yield curve. These
spreads are generally obtained from the new issue market,
secondary trading and from broker-dealers who trade in the
relevant security market. As the significant inputs used in the
pricing process for corporate bonds are observable market
inputs, the fair value of these securities are classified within
Level 2. A small number of securities are included in Level 3
due to 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.
Residential mortgage-backed securities – valuations provided
by independent pricing services, substantially all through
pricing vendors and index providers with a small amount
through broker-dealers. The fair values of these securities are
generally determined through the use of pricing models
(including Option Adjusted Spread) which use spreads to
determine the expected average life of the securities. These
spreads are generally obtained from the new issue market,
secondary trading and from broker-dealers who trade in the
relevant security market. The pricing services also review
prepayment speeds and other indicators, when applicable. As
the significant inputs used in the pricing process for
mortgage-backed securities are observable market inputs, the
fair value of these securities are classified within Level 2.
Municipal bonds – valuations provided by independent
pricing services, with all prices provided through index
providers and pricing vendors. The fair values of these
securities are generally determined using spreads obtained
from broker-dealers who trade in the relevant security
market, trade prices and the new issue market. As the
significant inputs used in the pricing process for municipal
bonds are observable market inputs, the fair value of these
securities are classified within Level 2.
Commercial mortgage-backed
securities – valuations
provided by independent pricing services, substantially all
through index providers and pricing vendors with a small
amount through broker-dealers. The fair values of these
securities are generally determined through the use of pricing
models which use spreads to determine the appropriate
average life of the securities. These spreads are generally
obtained from the new issue market, secondary trading and
from broker-dealers who trade in the relevant security
market. As the significant inputs used in the pricing process
for commercial mortgage-backed securities are observable
market inputs, the fair value of these securities are classified
within Level 2.
Non-U.S. government securities – valuations provided by
independent pricing services, with all prices provided
through index providers and pricing vendors. The fair values
of these securities are generally based on international indices
or valuation models which include daily observed yield
curves, cross-currency basis index spreads and country credit
spreads. As the significant inputs used in the pricing process
for non-U.S. government securities are observable market
inputs, the fair value of these securities are classified within
Level 2.
Asset-backed securities – valuations provided by independent
pricing services, substantially all through index providers and
pricing vendors with a small amount through broker-dealers.
The fair values of these securities are generally determined
through the use of pricing models (including Option Adjusted
Spread) which use spreads to determine the appropriate
average life of the securities. These spreads are generally
obtained from the new issue market, secondary trading and
from broker-dealers who trade in the relevant security
market. As the significant inputs used in the pricing process
for asset-backed securities are observable market inputs, the
fair value of these securities are classified within Level 2. A
small number of securities are included in Level 3 due to a
low level of transparency on the inputs used in the pricing
process.
Equity securities
The Company determined
that exchange-traded equity
securities would be included in Level 1 as their fair values
are based on quoted market prices in active markets. Other
equity securities are included in Level 2 of the valuation
hierarchy. A small number of securities are included in Level
3 due to the lack of an available independent price source for
such securities. As the significant inputs used to price these
securities are unobservable, the fair value of such securities
are classified as Level 3.
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other investments
Residential mortgage loans
The Company’s residential mortgage loans (included in
‘other assets’ in the consolidated balance sheets) include
amounts related to the Company’s whole mortgage loan
purchase and sell program. Fair values of residential
mortgage loans are generally determined based on market
prices. As significant inputs used in pricing process for these
residential mortgage loans are observable market inputs, the
fair value of these securities are classified within Level 2.
Other liabilities
liabilities
consideration
The Company’s other liabilities include contingent and
deferred consideration liabilities related to the Company’s
acquisitions. Contingent
are
remeasured at fair value at each balance sheet date with
changes in fair value recognized in ‘net realized gains
the fair value of contingent
(losses).’ To determine
consideration liabilities, the Company estimates the future
payments using an income approach based on modeled inputs
which include a weighted average cost of capital. Deferred
consideration liabilities are measured at fair value on the
transaction date. The Company determined that contingent
and deferred consideration liabilities would be included
within Level 3.
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 certain short-term
investments are generally determined using the spread above
the risk-free yield curve and are classified within Level 2.
Other short-term investments are included in Level 3 due to
the lack of an available independent price source for such
securities. As the significant inputs used to price these short-
term securities are unobservable, the fair value of such
securities are classified as Level 3.
ARCH CAPITAL
146
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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,
2023:
Assets measured at fair value:
Available for sale securities:
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Asset backed securities
Non-U.S. government securities
Commercial mortgage backed securities
Residential mortgage backed securities
Municipal bonds
Total
Short-term investments
Equity securities, at fair value
Derivative instruments (2)
Residential mortgage loans
Fair value option:
Corporate bonds
Non-U.S. government bonds
Asset backed securities
U.S. government and government agencies
Short-term investments
Equity securities
Other investments
Other investments measured at net asset value (1)
Total
Total assets measured at fair value
Liabilities measured at fair value:
Other liabilities
Derivative instruments (2)
Total liabilities measured at fair value
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
$
$
$
$
10,855 $
5,814
2,250
2,062
1,213
1,103
256
23,553
2,063
1,186
197
2
662
6
2
13
21
7
316
1,461
2,488
— $
5,792
—
—
—
—
—
5,792
1,786
1,151
—
—
—
—
—
13
—
3
—
16
10,708 $
22
2,250
2,062
1,213
1,103
256
17,614
193
30
197
2
662
6
2
—
11
—
210
891
29,489 $
8,745 $
18,927 $
(22) $
(119)
(141) $
— $
—
— $
— $
(119)
(119) $
147
—
—
—
—
—
—
147
84
5
—
—
—
—
—
—
10
4
106
120
356
(22)
—
(22)
(1)
(2)
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.
See note 11, “Derivative Instruments.”
ARCH CAPITAL
147
2023 FORM 10-K
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,
2022:
Assets measured at fair value:
Available for sale securities:
Fixed maturities:
Corporate bonds
U.S. government and government agencies
Asset backed securities
Non-U.S. government securities
Commercial mortgage backed securities
Residential mortgage backed securities
Municipal bonds
Total
Equity securities, at fair value
Short-term investments
Derivative instruments (2)
Residential mortgage loans
Fair value option:
Corporate bonds
Non-U.S. government bonds
Asset backed securities
U.S. government and government agencies
Short-term investments
Equity securities
Other investments
Other investments measured at net asset value (1)
Total
Total assets measured at fair value
Liabilities measured at fair value:
Other liabilities
Derivative instruments (2)
Total liabilities measured at fair value
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
$
$
$
$
$
8,020
5,162
1,927
2,313
1,047
795
419
19,683
860
1,332
149
2
543
4
2
5
33
14
196
847
1,644
—
5,145
—
—
—
—
—
5,145
829
1,198
—
—
—
—
—
5
1
10
—
16
$
$
7,899
17
1,927
2,313
1,047
795
419
14,417
28
134
149
2
543
4
2
—
32
—
163
744
121
—
—
—
—
—
—
121
3
—
—
—
—
—
—
—
—
4
33
37
23,670
$
7,188
$
15,474
$
161
(14) $
(76)
(90) $
—
—
—
$
$
$
—
(76)
(76) $
(14)
—
(14)
(1)
(2)
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.
See note 11, “Derivative Instruments.”
ARCH CAPITAL
148
2023 FORM 10-K
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 2023 and 2022:
Available For Sale
Assets
Fair Value Option
Structured
Securities (1)
Corporate
Bonds
Short-term
Investments
Other
Investments
Short-term
Investments
Equity
Securities
Fair Value
Equity
Securities
Liabilities
Other
Liabilities
Year Ended December 31, 2023
Balance at beginning of year
$
— $
121 $
— $
33 $
— $
4 $
4 $
(14)
Total gains or (losses) (realized/
unrealized)
Included in earnings (2)
Included in other
comprehensive income
Purchases, issuances, sales and
settlements
Purchases
Issuances
Sales
Settlements
Transfers in and/or out of
Level 3
—
—
—
—
—
—
—
1
(1)
111
—
—
(85)
—
—
—
84
—
—
—
—
(5)
—
107
—
(10)
(19)
—
—
—
11
—
—
(1)
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
Balance at end of year
$
— $
147 $
84 $
106 $
10 $
4 $
5 $
(1)
—
—
(9)
—
2
—
(22)
Year Ended December 31, 2022
Balance at beginning of year
$
3 $
— $
— $
28 $
— $
5 $
3 $
(17)
Total gains or (losses) (realized/
unrealized)
Included in earnings (2)
Included in other
comprehensive income
Purchases, issuances, sales and
settlements
Purchases
Issuances
Sales
Settlements
Transfers in and/or out of
Level 3
(1)
—
—
—
(2)
—
—
—
(1)
150
—
(6)
(26)
4
—
—
—
—
—
—
—
(1)
—
12
—
(3)
(3)
—
—
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
—
1
—
—
—
—
Balance at end of year
$
— $
121 $
— $
33 $
— $
4 $
4 $
(1)
(2)
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
Gains or losses were included in net realized gains (losses).
—
1
—
—
—
2
—
(14)
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, 2023, 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, 2023, the Company’s senior notes were
carried at their cost, net of debt issuance costs, of $2.7 billion
and had a fair value of $2.5 billion. At December 31, 2022,
the Company’s senior notes were carried at their cost, net of
debt issuance costs, of $2.7 billion and had a fair value of
$2.4 billion. 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.
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements on a Non-Recurring Basis
The Company measures the fair value of certain assets on a
non-recurring basis, generally quarterly, annually, or when
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. These assets
include investments accounted for using the equity method,
certain other investments, goodwill and intangible assets, and
long-lived assets. The Company uses a variety of techniques
to measure the fair value of these assets when appropriate, as
described below:
Investments accounted for using the equity method. When the
Company determines that the carrying value of these assets
may not be recoverable, the Company records the assets at
fair value with the loss recognized in income. In such cases,
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
foreign currency
routinely utilizes
forward contracts,
futures contracts and other
index
currency options,
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.
is accounted for as a derivative. The Company purchases
TBAs in both long and short positions to enhance investment
performance and as part of its overall investment strategy.
The following table summarizes information on the fair
values and notional values of the Company’s derivative
instruments:
Estimated Fair Value
Asset
Derivatives (1)
Liability
Derivatives (1)
Notional
Value (2)
December 31, 2023
Futures contracts
Foreign currency
forward contracts
Other (3)
Total
December 31, 2022
Futures contracts
Foreign currency
forward contracts
Other (3)
Total
$
$
$
$
139 $
(61) $
3,746
27
31
197 $
(32)
(26)
(119)
1,224
512
51 $
(17) $
3,138
39
59
149 $
(35)
(24)
(76)
1,136
3,592
(1) The fair value of asset derivatives are included in ‘other assets’ and the
fair value of liability derivatives are included in ‘other liabilities.’
(2) Represents the absolute notional value of all outstanding contracts,
consisting of long and short positions.
Includes swaps, options and other derivatives contracts.
(3)
The Company did not hold any derivatives which were
designated as hedging instruments at December 31, 2023 or
2022.
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.
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
At December 31, 2023, $197 million and $119 million,
respectively, of asset derivatives and liability derivatives
were subject to a master netting agreement compared to $147
million and $73 million, respectively, at December 31, 2022.
The remaining derivatives included in the table above were
not subject to a master netting agreement.
ARCH CAPITAL
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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:
Derivatives not designated
as hedging instruments
Net realized gains (losses):
Year Ended December 31,
2023
2022
2021
Futures contracts
$
49 $
(86) $
(16)
Foreign currency forward
contracts
Other
Total
21
(11)
6
5
$
59 $
(75) $
(40)
23
(33)
12. Variable Interest Entity and Noncontrolling Interests
Somers Holdings Ltd.
In March 2014, the Company invested $100 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. 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 is owned 40% by
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 financial statements and footnotes. The
Company classifies
in
operating affiliates’ on the Company’s balance sheets and is
accounted for under the equity method.
investment as ‘investments
its
The following table summarizes Somers’ cash flow from
operating, investing and financing activities.
Year Ended December 31,
2022
2021
2023
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
—
—
—
—
—
—
47
96
(2)
Redeemable noncontrolling interests
The following table sets forth activity in the redeemable
noncontrolling interests:
December 31,
2022
2021
2023
Balance, beginning of year
Impact of deconsolidation of Somers
Other
Balance, end of year
$
$
11 $
—
(9)
2 $
9 $
—
2
11 $
58
(49)
—
9
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,
2022
2023
2021
Amounts attributable to non-
redeemable noncontrolling interests
Amounts attributable to redeemable
noncontrolling interests
Net (income) loss attributable to
noncontrolling interests
$
— $
— $
(78)
1
(6)
(4)
$
1 $
(6) $
(82)
ARCH CAPITAL
151
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bellemeade Re
The Company has entered into aggregate excess of loss
mortgage reinsurance agreements with various special
purpose reinsurance companies domiciled in Bermuda (the
“Bellemeade Agreements”). At the time the Bellemeade
Agreements were entered into, the applicability of the
accounting guidance that addresses VIEs was evaluated. As a
result of the evaluation of the Bellemeade Agreements, the
Company concluded that these entities are VIEs. However,
given that the ceding insurers do not have the unilateral
power to direct those activities that are significant to their
economic performance, the Company does not consolidate
such entities in its consolidated financial statements. The
reinsurance premium paid in regard to the Bellemeade
Agreements is calculated by multiplying the outstanding
reinsurance coverage amount at the beginning of the period
by the coupon rate, which is the SOFR plus a contractual risk
margin, less the actual investment income collected during
the preceding month on the assets included in the underlying
reinsurance trusts. In the event the assets included in the
underlying reinsurance trusts (became severely impaired or
worthless and the special purpose reinsurance companies
were unable to meet their future obligations, the Company’s
mortgage insurance subsidiaries would be liable to fulfill
claim payments to policyholders. The Company’s maximum
exposure to loss associated with these VIEs is determined as
the amount of mortgage insurance claim payments on the
insured policies, net of aggregate reinsurance payments
previously received, up to the full aggregate excess of loss
reinsurance coverage amounts.
December 31, 2023
December 31,
2022
Bellemeade Entities
(Issue Date)
Total VIE
Assets
Coverage
Remaining
from
Reinsurers (1)
Total VIE
Assets
2017-1 Ltd. (Oct-17)
2018-1 Ltd. (Apr-18) (2)
2018-3 Ltd. (Oct-18)
2019-1 Ltd. (Mar-19)
2019-2 Ltd. (Apr-19) (2)
2019-3 Ltd. (Jul-19)
2019-4 Ltd. (Oct-19) (2)
2020-2 Ltd. (Sep-20) (2)
2020-3 Ltd. (Nov-20) (2)
2020-4 Ltd. (Dec-20) (2)
2021-1 Ltd. (Mar-21) (2)
2021-2 Ltd. (Jun-21) (2)
2021-3 Ltd. (Sep-21)
2022-1 Ltd. (Jan-22)
2022-2 Ltd. (Sep-22)
2023-1 Ltd. (Oct-23)
Total
$
$
— $
—
—
71
—
99
—
—
—
—
—
—
429
256
201
186
1,242 $
— $
—
—
—
—
—
—
—
—
—
—
—
112
26
126
47
311 $
37
90
199
108
325
223
266
105
244
98
467
458
490
284
201
3,595
(1) Coverage from a separate panel of reinsurers remaining at December 31, 2023.
(2) Agreements terminated in the 2023 fourth quarter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Other Comprehensive Income (Loss)
The following table presents the changes in each component of AOCI, net of noncontrolling interests:
Year Ended December 31, 2023
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, 2022
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, 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
Unrealized
Appreciation on
Available-For-Sale
Investments
Foreign Currency
Translation
Adjustments
Total
$
$
$
$
$
$
(1,512) $
547
400
947
(565) $
13 $
(1,772)
247
(1,525)
(1,512) $
501 $
(371)
(117)
(488)
13 $
(134) $
23
—
23
(111) $
(78) $
(56)
—
(56)
(134) $
(12) $
(66)
—
(66)
(78) $
(1,646)
570
400
970
(676)
(65)
(1,828)
247
(1,581)
(1,646)
489
(437)
(117)
(554)
(65)
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,
2023
2022
2021
Unrealized appreciation on available-for-sale investments
Net realized gains (losses)
Provision for credit losses
Total before tax
Income tax (expense) benefit
Net of tax
$
$
(431) $
3
(428)
28
(400) $
(235) $
(44)
(279)
32
(247) $
157
(2)
155
(38)
117
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the related tax effects allocated to each component of other comprehensive income (loss):
Year Ended December 31, 2023
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, 2022
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, 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)
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
$
$
$
$
$
$
617
$
70
$
(428)
23
1,068
$
(28)
—
98
$
(2,009) $
(237)
$
(279)
(56)
(32)
—
(1,786) $
(205)
$
(408)
$
155
(65)
(628)
$
(22)
$
38
—
(60)
$
547
(400)
23
970
(1,772)
(247)
(56)
(1,581)
(386)
117
(65)
(568)
ARCH CAPITAL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Earnings Per Common Share
The calculation of basic earnings per common share is computed by dividing income available to Arch common shareholders
by the weighted average number of Common Shares and common share equivalents outstanding. The following table sets forth
the computation of basic and diluted earnings per common share:
Numerator:
Net income
Amounts attributable to noncontrolling interests
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
2023
Year Ended December 31,
2022
2021
$
4,442 $
1
4,443
(40)
—
1,482 $
(6)
1,476
(40)
—
Net income available to Arch common shareholders
$
4,403 $
1,436 $
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
368.7
2.5
7.6
378.8
368.6
2.1
6.9
377.6
$
$
11.94 $
11.62 $
3.90 $
3.80 $
2,239
(82)
2,157
(48)
(15)
2,094
391.7
2.0
6.6
400.3
5.35
5.23
(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 2023, 2022 and 2021, the
number of stock options excluded were 0.5 million, 0.8 million and 2.4 million, 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 assuring 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.
However, on December 27, 2023, the Government of
Bermuda enacted the Bermuda CIT Act, which will become
effective for tax years beginning on or after January 1, 2025.
Given the potential for the new corporate income tax regime
in Bermuda to supersede the Minister of Finance’s assurance,
the Company is likely to become subject to taxes in Bermuda
before March 31, 2035.
The Bermuda CIT Act will apply a 15% corporate income tax
to certain Bermuda constituent entities of multi-national
groups in fiscal years beginning on or after January 1, 2025.
The act includes a provision referred to as the economic
transition adjustment, which is intended to provide a fair and
equitable transition into the tax regime. Pursuant to this
legislation, the Company recorded a $1.18 billion net
deferred income tax asset in the fourth quarter of 2023,
expected to be utilized predominantly over a 10-year period.
The Company expects to incur and pay increased taxes in
Bermuda beginning in 2025.
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., or
because a non-U.S. subsidiary has elected to be treated as a
U.S. taxpayer. 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
their
and
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
its non-U.S. subsidiaries
to conduct
intend
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 that do not elect to
become U.S. taxpayers, 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 in which they
operate. The significant jurisdictions in which Arch Capital’s
subsidiaries and branches are subject to tax are the United
States, United Kingdom, Ireland, Canada, Switzerland,
Australia and Denmark.
The components of income taxes attributable to operations
were as follows:
Year Ended December 31,
2022
2021
2023
Current expense (benefit):
United States
Non-U.S.
$
Deferred expense (benefit):
United States
Non-U.S.
251 $
37
288
195 $
6
201
(20)
(1,141)
(1,161)
(96)
(25)
(121)
Income tax expense (benefit)
$
(873) $
80 $
284
11
295
(123)
(44)
(167)
128
The Company’s income or loss before income taxes was
earned in the following jurisdictions:
Year Ended December 31,
2022
2021
2023
Income (Loss) Before Income Taxes:
Bermuda
United States
Other
Total
$
$
2,099 $
1,239
232
3,570 $
986 $
401
175
1,562 $
1,519
643
206
2,368
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 2023
applicable statutory tax rates by jurisdiction were as follows:
Bermuda (0.0%), United States (21.0%), United Kingdom
(25.0%),
(22.0%), Canada
(12.5%), Denmark
(26.5%), Gibraltar (12.5%), Australia (30.0%), Hong Kong
(16.5%) and the Netherlands (25.8%).
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,
2022
2021
2023
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:
Investment income
State taxes, net of U.S. federal tax
benefit
Dividend withholding taxes
Change in valuation allowance
Base eroding tax
Share based compensation
Tax credits
Change in tax rate
Other
$
300 $
110 $
158
(14)
6
9
4
9
(13)
(3)
(1,179)
8
(13)
11
11
(23)
8
(9)
(10)
(5)
—
(24)
21
12
(40)
—
(5)
—
—
6
Income tax expense (benefit)
$
(873) $
80 $
128
The effect of a change in tax laws or rates on deferred income
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income
tax assets and liabilities were as follows:
At December 31, 2023, the Company’s net operating loss
carryforwards and tax credits were as follows:
December 31,
2023
2022
Year Ended December 31,
2023
Expiration
Deferred income tax assets:
Net operating loss
Discounting of net loss reserves
Net unearned premium reserve
Compensation liabilities
Foreign tax credit carryforward
Goodwill and intangible assets
Bad debt reserves
Depreciation and amortization
Lease liability
Net unrealized decline of investments
Lloyds year of account deferral
Fair value adjustment to senior notes
Other, net
Deferred income tax assets before valuation
allowance
Valuation allowance
$
93 $
219
133
64
16
1,020
16
133
31
89
—
41
13
1,868
(15)
Deferred income tax assets net of valuation allowance 1,853
Deferred income tax liabilities:
Goodwill and intangibles
Lloyds year of account deferral
Contingency reserve
Deferred policy acquisition costs
Investment related
Right-of-use asset
—
(13)
(50)
(144)
(13)
(24)
77
78
97
55
17
—
17
141
27
193
1
—
11
714
(7)
707
(39)
—
(44)
(64)
(9)
(21)
Total deferred income tax liabilities
Net deferred income tax assets
(245)
(177)
$ 1,608 $
530
The Company provides a valuation allowance to reduce the
net value of certain deferred income tax assets to an amount
which management expects to more likely than not be
realized. As of December 31, 2023, the Company’s valuation
allowance was $15 million, compared to $7 million at
December 31, 2022. The valuation
at
December 31, 2023, was primarily attributable to valuation
allowances on the Company’s Australia, Gibraltar and Hong
Kong operations and certain other deferred income tax assets
relating to tax attributes that have a limited use.
allowance
Operating Loss Carryforwards
United Kingdom
$
198 No expiration
Ireland
Australia
Hong Kong
Gibraltar
Cyprus
United States (1)
Tax Credits
U.K. foreign tax credits
U.S. foreign tax credits
24 No expiration
47 No expiration
32 No expiration
24 No expiration
1 No expiration
78 2029 - 2038
10 No expiration
6 2029 - 2033
(1) The Company’s U.S. operations have recorded $78 million of net
operating loss (“NOL”) carryforwards that are subject to annual usage
limitations under Section 382 of the Internal Revenue Code (“the Code”).
The NOL limitations are related to acquisitions of the CMG entities in
January 2014, Ventus Risk Management Inc. in August 2019, and Verifly
Insurance Services, LLC, and Verifly USA Inc. in April 2023. In accordance
with Section 382 of the Code, utilization of the acquired NOLs is limited to
approximately $2 million per year
through December 31, 2027,
approximately $1 million through December 31, 2038, and $0.3 million
thereafter.
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 $42
million at December 31, 2023, compared to $12 million at
December 31, 2022.
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 does not
intend 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Ireland would not be subject to withholding tax and no
deferred income tax liability would need to be accrued.
The Company recognizes interest and penalties relating to
unrecognized tax benefits in the provision for income taxes.
As of December 31, 2023, the Company’s total unrecognized
tax benefits, including interest and penalties, were $2 million.
If recognized, the full amount of the unrecognized tax benefit
would
tax rate. A
the consolidated effective
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
impact
December 31,
2023
2022
Balance at beginning of year
$
2 $
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 $
2
—
—
—
—
2
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
2019-2023
2021-2023
2018-2023
2019-2023
2019-2023
2019-2023
2019-2023
As of December 31, 2023, the Company’s current income tax
recoverable (included in “Other liabilities”) was $20 million.
16. Transactions with Related Parties
In 2017, the Company acquired approximately 25% of
Premia Holdings Ltd. Premia Holdings Ltd. is the parent of
Premia Reinsurance Ltd., a multi-line Bermuda reinsurance
company (together with Premia Holdings Ltd., “Premia”).
Premia’s strategy is to reinsure or acquire companies or
reserve portfolios in the non-life property and casualty
insurance and reinsurance run-off market. Arch Re Bermuda
and certain Arch co-investors invested $100 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 quota share
reinsurance treaty on certain business written by Premia, and
subsidiaries of Arch Capital are providing certain
administrative and support services to Premia, in each case
pursuant to separate multi-year agreements. During 2023, the
Company entered into certain reinsurance transactions with
Premia which generated net premiums written and earned of
$80 million and $81 million, respectively, compared to
$121 million and $120 million of net premiums written and
earned, respectively in 2022. At December 31, 2023, the
Company recorded a funds held asset from Premia of
$158 million, compared to $119 million at December 31,
2022.
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, 2023 and
December 31, 2022.
is owned 40% by
In July 2021, following consummation of the Merger
Agreement and the related Greysbridge equity financing,
pursuant to which Somers became wholly owned by
Greysbridge, and Greysbridge
the
Company, 30% by certain funds managed by Kelso and 30%
by certain funds managed by Warburg. During 2023 and
2022 periods, the Company entered into certain reinsurance
transactions with Somers which reduced the Company’s net
premiums written by $574 million and $519 million,
respectively. In addition, Somers paid certain acquisition
costs and administrative
the Company. At
December 31, 2023, the Company recorded a reinsurance
recoverable on unpaid and paid losses from Somers of
$1.3 billion and a reinsurance balance payable to Somers of
$475 million. At December 31, 2022,
reinsurance
recoverable on unpaid and paid losses from Somers was
$1.2 billion, with a reinsurance balance payable to Somers of
$414 million. See note 12, “Variable Interest Entity and
Noncontrolling Interests.”
fees
to
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2023, the Company owns $35 million in
aggregate principal amount of Somers 6.5% senior notes, due
July 2, 2029.
The following table presents the contractual maturities of the
Company's operating lease liabilities at December 31, 2023:
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 14 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
Sublease income (1)
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 (2)
Operating lease liability (2)
$
$
$
$
$
$
December 31,
2023
2022
33
(2)
31
28
125
156
$
$
$
$
$
$
34
(1)
26
43
123
152
Weighted average discount rate
4.7 %
4.2 %
Weighted average remaining lease
term
7.2 years
6.6 years
(1) The sublease income primarily relates to office property in Raleigh,
North Carolina.
(2) The right-of-use assets are included in ‘other assets’ while the
operating lease liability is included in ‘other liabilities.’
Years Ending December 31,
2024
2025
2026
2027
2028
2029 and thereafter
Total undiscounted lease liability
Less: present value adjustment
Operating lease liability
$
$
$
32
27
26
22
19
60
186
(30)
156
Rental expense was approximately $38 million, $39 million
and $37 million for 2023, 2022 and 2021, 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
premiums, paid
loss adjustment expenses
recoverable net of reinsurance balances payable, investments
and cash and cash equivalent balances. A credit exposure
exists with respect to reinsurance recoverables as they may
become uncollectible. The Company manages its credit risk
in its reinsurance relationships by transacting with reinsurers
that it considers financially sound and, if necessary, the
Company may hold collateral in the form of funds, trust
accounts and/or irrevocable letters of credit. This collateral
can be drawn on for amounts that remain unpaid beyond
specified time periods on an individual reinsurer basis. In
addition, certain insurance policies written by the Company’s
insurance operations feature large deductibles, primarily in its
construction and national accounts lines of business. Under
such contracts, the Company is obligated to pay the claimant
is
for
the 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
liable for such
policyholder,
the claim. The Company
the Company would be
the policyholder for
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023, 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, 2023
and 2022 were as follows:
Broker
Marsh & McLennan Companies
and its subsidiaries
Aon Corporation and its
subsidiaries
Year Ended December 31,
2023
2022
2021
19.0 %
17.3 %
18.3 %
13.9 %
13.8 %
12.2 %
2034 notes (1)
2043 notes (2)
2026 notes (3)
2046 notes (4)
2050 notes (5)
Interest
(Fixed)
7.350 % $
5.144 %
4.011 %
5.031 %
3.635 %
$
Principal
Amount
Carrying Amount at
December 31,
2023
2022
300 $
500
500
450
1,000
2,750 $
298 $
495
498
446
989
2,726 $
298
495
498
445
989
2,725
No other broker and no one insured or reinsured accounted
for more than 10% of gross premiums written for 2023, 2022
and 2021.
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, 2023 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 $3.6 billion and $2.9 billion
at December 31, 2023 and 2022, 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 $148 million and
$150 million at December 31, 2023 and 2022, 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”).
The 2034 notes are Arch Capital’s senior unsecured
obligations and rank equally with all of its existing and future
senior unsecured indebtedness. Interest payments on the 2034
notes are due on May 1st and November 1st of each year.
Arch Capital may redeem the 2034 notes at any time and
from time to time, in whole or in part, at a “make-whole”
redemption price.
ratably with
The 2043 notes are unsecured and unsubordinated obligations
of Arch-U.S. and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch-U.S. and Arch Capital,
respectively. Interest payments on the 2043 notes are due on
May 1st and November 1st of each year. Arch-U.S. may
redeem the 2043 notes at any time and from time to time, in
whole or in part, at a “make-whole” redemption price.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ratably with
The 2026 notes are unsecured and unsubordinated obligations
of Arch Finance and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch Finance and Arch
Capital, respectively. Interest payments on the 2026 notes are
due on June 15th and December 15th of each year. Arch
Finance may redeem the 2026 notes at any time and from
time to time, in whole or in part, at a “make-whole”
redemption price.
ratably with
The 2046 notes are unsecured and unsubordinated obligations
of Arch Finance and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch Finance and Arch
Capital, respectively. Interest payments on the 2046 notes are
due on June 15th and December 15th of each year. Arch
Finance may redeem the 2046 notes at any time and from
time to time, in whole or in part, at a “make-whole”
redemption price.
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.
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 August 23, 2023, Arch
Capital and certain of its subsidiaries amended the existing
credit agreement (the “Credit Facility”). The Credit Facility,
as amended, consists of a $425 million secured facility for
letters of credit (the “Secured Facility”) and a $500 million
unsecured facility for revolving loans and letters of credit
(the “Unsecured Facility”). At December 31, 2023, the
Secured Facility had $273 million of letters of credit
outstanding and remaining capacity of $152 million, and the
Unsecured Facility had no outstanding revolving loans or
letters of credit, with remaining capacity of $500 million.
restrictions
The Credit Facility contains certain
restrictive and
maintenance covenants customary for facilities of this type,
including
indebtedness, minimum
consolidated tangible net worth, maximum leverage 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, 2023.
on
Obligations of each borrower for letters of credit under the
Secured Facility are secured by cash and eligible securities of
such borrower and held in collateral accounts. Commitments
under the Credit Facility may be increased up to, but not
exceeding, an aggregate of $1.5 billion. Arch Capital has a
terms as
loans except
the revolving
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
that any
prepayments may not be re-borrowed. Borrowings of
revolving loans may be made at a variable rate based on
Secured Overnight Financing Rate (“SOFR”). Secured letters
of credit are available for issuance on behalf of certain Arch
Capital subsidiaries. Arch Capital guarantees the obligations
of Arch-U.S. and Arch U.S. MI Holdings Inc., Arch-U.S.
guarantees the obligations of Arch Capital, and Arch Capital
Finance LLC guarantees the obligations of Arch Capital and
Arch-U.S.
The commitments under the Credit Facility will expire on
August 23, 2028, and all loans then outstanding under the
Credit Facility must be repaid at such time. Letters of credit
issued under the Credit Facility will not have an expiration
date later than August 23, 2029.
On September 27, 2023, Arch Re Bermuda a wholly-owned
subsidiary of Arch Capital, entered as the borrower into a
Letter of Credit Facility Agreement with Lloyds Bank
Corporate Markets plc. Such agreement provides for a
$175 million unsecured facility for letters of credit with
commitments expiring on September 27, 2025. At
December 31, 2023, this facility had $114 million of letters
of credit outstanding and remaining capacity of $61 million.
On October 25, 2023, Arch Re Bermuda entered into
Amendment No. 3 and Joinder to a Letter of Credit Facility
Agreement with Lloyds Bank Corporate Markets plc., which
amends the agreement dated as of November 3, 2020, as
amended on October 29, 2021 and as further amended on
October 27, 2022. Such agreement provides
for a
$530 million facility for letters of credit in respect of Tier 2
Funds at Lloyds. As of December 31, 2023, $530 million
face amount of letters of credit had been issued under this
facility. The availability period ends on May 31, 2024.
In addition, certain of Arch Capital’s subsidiaries had
outstanding secured letters of credit through other facilities of
$38 million, which were issued in the normal course of
business (“LOC Facilities”). The principal purpose of the
LOC Facilities is to issue, as required, evergreen standby
letters of credit in favor of primary insurance or reinsurance
counterparties with which certain of Arch Capital’s
subsidiaries has entered into reinsurance arrangements.
When issued, all secured letters of credit are secured by a
portion of the investment portfolio. At December 31, 2023,
these letters of credit were secured by investments with a fair
value of $550 million. The Company had no outstanding
revolving credit agreement borrowings at December 31, 2023
and 2022.
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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, 2023 and 2022, the Company had no advances
outstanding under the FHLB program.
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
$
345 $
71 $
529 $
—
(106)
(30)
393
11
(95)
—
945
8
(106)
(43)
804
11
(95)
(2)
8
—
(11)
342
—
—
(2)
5
—
—
(2)
69
—
—
—
1
7
13
$
345 $
70 $
316 $
731
$
348 $
70 $
1,105 $
1,523
Net balance at
Dec. 31, 2021
Acquisitions (1)
Amortization
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2022
Acquisitions (1)
Amortization
Impairment
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2023
Gross balance at
Dec. 31, 2023
Accumulated
amortization
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2023
$
345 $
70 $
316 $
731
(1)
See note 2, “Acquisitions.”
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, 2023
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
Dec. 31, 2022
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
$
452 $
(441) $
— $
64
594
348
48
22
(10)
5
(54)
(277)
—
—
—
10
(4)
—
(23)
(3)
—
—
—
—
11
10
294
345
48
22
—
1
$
1,523 $
(766) $
(26) $
731
$
452 $
(426) $
(1) $
53
602
351
48
22
(10)
5
(50)
(208)
—
—
—
10
(3)
—
(31)
(9)
—
(1)
—
—
25
3
363
342
48
21
—
2
$
1,523 $
(677) $
(42) $
804
2024
2025
2026
2027
2028
2029 and thereafter
Total
$
$
77
46
34
31
29
99
316
The estimated remaining useful lives of these assets range
from one to thirteen years at December 31, 2023.
—
(3)
—
—
(766)
(766)
(23)
(26)
The estimated remaining amortization expense for the
Company’s intangible assets with finite lives is as follows:
ARCH CAPITAL
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2022
2021
2023
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
588.3
2.8
0.8
583.3
3.5
1.5
579.0
2.7
1.6
591.9
588.3
583.3
(218.5)
(217.9)
(204.4)
373.4
370.4
378.9
(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 (the “Board”) has
authorized the investment in Arch Capital’s common shares
through a share repurchase program. At December 31, 2023,
$1.0 billion of share repurchases were available under the
program. Repurchases under the program may be effected
from time to time in open market or privately negotiated
transactions through December 31, 2024. The timing and
amount of the repurchase transactions under this program
will depend on a variety of factors, including market
conditions and corporate and regulatory considerations.
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,
2023, Arch Capital held 218.5 million shares for an aggregate
cost of $4.4 billion in treasury, at cost.
The Company’s repurchases under the share repurchase
program were as follows:
Year Ended December 31,
2022
2021
2023
Aggregate cost of shares
repurchased
Shares repurchased
Average price per share
repurchased
$
$
— $
586 $
—
12.9
1,234
31.5
— $
45.44 $
39.20
Since the inception of the share repurchase program through
December 31, 2023, Arch Capital has
repurchased
approximately 433.6 million common shares for an aggregate
purchase price of $5.9 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 Board 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.
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
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
the Board 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.
The 2022 Long-Term Incentive and Share Award Plan (“the
2022 Plan”) became effective as of May 4, 2022 following
approval by shareholders of the Company. The 2022 Plan
provides for the issuance of stock options, stock appreciation
rights, restricted shares, restricted share units payable in
common shares or cash, dividend equivalents, performance
shares and performance units and other share-based awards
to Arch Capital’s eligible employees and directors. The
number of common shares reserved for grants under the 2022
Plan, subject to anti-dilution adjustments in the event of
certain changes in Arch Capital’s capital structure, is
9.0 million; provided that no more than 6.0 million common
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares may be issued as incentive stock options under Section
422 of the Code. The 2022 Plan will terminate as to future
awards on February 25, 2032. At December 31, 2023, 7.8
million shares are available for future issuance.
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 34.5 million common shares and
will terminate as to future awards on February 28, 2028. At
December 31, 2023, 5.8 million shares are available for
future issuance.
Upon shareholder approval on May 4, 2023, the Amended
and Restated Arch Capital Group Ltd. 2007 Employee Share
Purchase Plan (the “ESPP”) became effective. The total
common shares that may be purchased under the ESPP was
increased by 3.0 million shares for a total of 12.8 million
shares authorized. The purpose of the ESPP is to give
employees of the Company an opportunity to purchase
common
thereby
encouraging employees to share in the economic growth and
success of the Company. The ESPP is designed to qualify as
an “employee share purchase plan” under Section 423 of the
Internal Revenue Code of 1986, as amended. At
December 31, 2023, 3.6 million shares remain available for
issuance.
through payroll deductions,
shares
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,
2022
2021
2023
— %
25.1 %
4.1 %
6.0 years
— %
24.0 %
2.0 %
6.0 years
— %
24.2 %
1.0 %
6.0 years
A summary of stock option and SAR activity under the
Company’s Long Term Incentive and Share Award Plans
during 2023 is presented below:
Year Ended December 31, 2023
Number of
Options /
SARs
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding,
beginning of
year
Granted
Exercised
Forfeited or
expired
Outstanding,
end of year
Exercisable,
end of year
14,420,901 $
479,760 $
(2,355,729) $
28.17
69.24
20.66
(8,339) $
48.38
12,536,593 $
31.14
4.10
$
541
11,205,102 $
28.68
3.61
$
511
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 2023, the Company received proceeds of $20 million
from the exercise of stock options and recognized a tax
benefit of $9 million from the exercise of stock options and
SARs.
Year Ended December 31,
2022
2021
2023
Weighted average grant date fair
value
Aggregate intrinsic value of Options/
SARs exercised (in millions)
$
$
23.50 $
13.26 $
9.22
116 $
113 $
47
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Common Shares and Restricted Units
Performance Awards
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 2023 is presented below:
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
Number of
Restricted
Common
Shares
Number of
Restricted
Unit
Awards
2,165,554
678,657
517,293
146,534
(1,281,449)
(352,190)
(38,157)
1,524,605
(5,709)
305,928
$
$
$
$
$
40.23 $
69.47 $
38.37 $
49.65 $
54.57 $
37.17
69.20
34.16
55.55
55.63
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,
2022
2021
2023
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
Expected volatility
Risk free interest rate
Year Ended December 31,
2022
2021
2023
30.4 %
4.6 %
38.1 %
1.7 %
37.5 %
0.3 %
Number of
Performance
Shares
Number of
Performance
Units
Unvested Shares:
Unvested balance, beginning of year
1,882,916
Granted
Performance adjustment (1) (2)
Vested
Forfeited
Unvested balance, end of year
550,394
(341,420)
(207,486)
(3,708)
1,880,696
Weighted Average Grant Date
Fair Value:
Unvested balance, beginning of year $
Granted
43.75 $
74.08 $
44.17 $
44.17 $
59.83 $
52.47 $
$
$
$
$
$
39,710
18,182
(2,024)
(6,274)
—
49,594
45.33
74.31
44.17
44.17
—
56.15
Number of restricted shares and
restricted unit awards granted
825,191
1,089,393
1,261,773
Performance adjustment (1) (2)
Weighted average grant date fair value
$ 69.42 $ 47.45 $ 36.12
Vested
Forfeited
Aggregate fair value of vested restricted
share and unit awards (in millions)
$
122 $
51 $
41
Unvested balance, end of year
The aggregate intrinsic value of restricted units outstanding at
December 31, 2023 was $23 million, and the aggregate
intrinsic value of restricted units vested and deferred was
$0.4 million.
(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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the weighted average grant date
fair values of performance awards granted.
23. Retirement Plans
Year Ended December 31,
2022
2021
2023
Number of performance awards
568,576
690,772
685,104
Weighted average grant date fair value $ 74.09 $ 49.91 $ 37.38
Aggregate fair value of vested
performance share and unit awards (in
millions)
14 $
27 $
24
$
For purposes of providing employees with retirement
benefits,
the Company maintains defined contribution
retirement plans. Contributions are based on the participants’
eligible compensation. For 2023, 2022 and 2021, the
Company expensed $77 million, $67 million and $60 million,
respectively, related to these retirement plans.
The aggregate
outstanding at December 31, 2023 was $4 million.
intrinsic value of performance units
24. Legal Proceedings
The issuance of share-based awards and amortization thereon
has no effect on the Company’s consolidated shareholders’
equity.
Share-Based Compensation Expense
The following tables present pre-tax and after-tax share-
based compensation expense recognized as well as the
unrecognized compensation cost associated with unvested
awards and the weighted average period over which it is
expected to be recognized.
Year Ended December 31,
2022
2021
2023
Pre-Tax
Stock options and SARs
Restricted share and unit awards
Performance awards
ESPP
Total
After-Tax
Stock options and SARs
Restricted share and unit awards
Performance awards
ESPP
Total
$
$
$
$
11 $
54
23
4
92 $
10 $
45
21
4
80 $
12 $
50
22
4
88 $
11 $
42
20
4
77 $
12
47
24
4
87
11
39
22
4
76
December 31, 2023
Stock
Options and
SARs
Restricted
Common
Shares and
Units
Performance
Common
Shares and
Units
Unrecognized compensation
cost related to unvested
awards
Weighted average
recognition period (years)
$
7 $
43 $
0.67
0.95
11
0.44
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, 2023, the
Company was not a party to any litigation or arbitration
which is expected by management to have a material adverse
effect on the Company’s results of operations and financial
condition and liquidity.
25. Statutory Information
The Company’s insurance and reinsurance subsidiaries are
subject to insurance and/or reinsurance laws and regulations
in the jurisdictions in which they operate. These regulations
include certain restrictions on the amount of dividends or
other distributions available to shareholders without prior
approval of the insurance regulatory authorities.
The actual and required statutory capital and surplus for the
Company’s principal operating subsidiaries at December 31,
2023 and 2022:
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,
2023
2022
$
24,120 $
1,148
6,897
1,367
83
366
$
7,112 $
942
1,895
1,192
53
179
19,546
968
6,195
1,018
69
285
6,450
815
1,749
543
48
176
(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
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 income
tax assets, goodwill and
intangible assets, unrealized
appreciation or depreciation on debt securities and certain
include
unauthorized
contingency reserves.
recoverables
reinsurance
and
The statutory net income (loss) for the Company’s principal
operating subsidiaries for 2023, 2022 and 2021 was as
follows:
Year Ended December 31,
2022
2021
2023
$
3,519 $
1,730 $
2,371
53
592
72
6
68
(53)
220
57
9
39
25
346
35
7
12
Statutory net income (loss):
Bermuda
Ireland
United States
United Kingdom
Canada
Australia
Bermuda
long-term
insurer and
insurance and
The Company’s Bermuda
reinsurance
subsidiaries are subject to the Bermuda Insurance Act 1978
and related regulations, each as amended (the “Insurance
the Company’s principal
Act”). Arch Re Bermuda,
reinsurance and insurance subsidiary, is registered as a Class
4
insurer while Arch Group
Reinsurance Ltd. (“AGRL”) is registered as a Class 3A
general business insurer and provides affiliated quota share
reinsurance covering certain U.S. business. The Insurance
Act requires that both entities maintain minimum statutory
capital and surplus equal to the greater of a minimum
solvency margin and the enhanced capital 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
aspects of the company’s business. At December 31, 2023
and 2022, the actual and required capital and surplus were
based on the economic balance sheet requirements.
Under the Insurance Act, Arch Re Bermuda and AGRL are
restricted with respect to the payment of dividends. Each
entity 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 $4.8 billion to
Arch Capital during 2024 without providing an affidavit to
the BMA. Dividends or distributions, if any, made by AGRL
would result in an increase in available capital at Arch-U.S.
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 (“CBI”) 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 CBI and must comply
with Irish insurance acts and regulations as well as with
directions and guidance issued by the CBI. Arch Re Europe
and Arch Insurance (EU) are required to maintain a minimum
level of capital. At December 31, 2023 and 2022, 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
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $329 million of
dividends during 2024 subject to the approval of the
Commissioner of the Delaware Department of Insurance.
AMIC and UGRIC are approved as eligible mortgage
insurers by Fannie Mae and Freddie Mac, subject to
(“eligible mortgage
requirements
maintaining certain
insurers”). In April 2015, the GSEs published their original
comprehensive,
the Private
Mortgage Insurer Eligibility Requirements or “PMIERs.”
Revised and restated in September 2018, and clarified
thereafter by the Guidance Letters 2020-1 and 2021-1 issued
by the GSEs in 2020 and 2021, respectively, the PMIERs
apply to the Company’s eligible mortgage insurers, but do
not apply to AMG, which is not GSE-approved.
requirements, known as
The amount of assets required to satisfy the revised financial
requirements of the PMIERs may be affected by many
factors, including macro-economic conditions, the size and
composition of our mortgage insurance portfolio, and the
amount of risk ceded to reinsurers that may be deducted in
our calculation of “minimum required assets.”
The Company’s U.S. mortgage insurance subsidiaries are
subject to regulation by their domiciliary and primary
regulators, the Wisconsin Office of the Commissioner of
Insurance (“Wisconsin OCI”) for AMIC and AMG, 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. Each
company is subject to the statutory requirements of their
domiciliary regulator as to payment of dividends and return
of capital; the GSEs may also impart limitations on the
Company’s eligible mortgage insurers, such as required
minimum assets. Under respective state law, the Company’s
U.S. mortgage subsidiaries can declare a maximum of
approximately $180 million of ordinary dividends in 2024,
however, dividend capacity is limited by the respective
companies unassigned surplus amounts. Such dividends
would increase the 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 require mortgage insurers to maintain a
“minimum policyholder position” calculated in accordance
with their respective regulations. Policyholders' position
consists primarily of statutory policyholders' surplus plus the
contingency loss reserves.
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. 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. regulators 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”).
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, 2023 and
2022, these requirements were met.
As corporate members of Lloyd’s, AMAL (as managing
agent of the Company’s Lloyd’s Syndicates) 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
1982 regarding the operation of the Lloyd’s market. With
ARCH CAPITAL
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2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
and since that date is the primary provider of lenders’
mortgage insurance for the group. Arch Indemnity has also
been licensed by the Australian Securities and Investments
Commission (“ASIC”) since March 2011 to engage in credit
activities in Australia. Arch LMI Pty Ltd. (“Arch LMI”) was
formerly authorized by APRA in January 2019 to conduct
monoline lenders’ mortgage insurance business in Australia;
however, in December 2022, we converted Arch LMI to a
services company for our Australian lenders mortgage
insurance operations and the company relinquished its APRA
authorization. Major
that are
regulatory
applicable to Arch Indemnity in general as an insurance
include
institution
provider and financial
requirements and compliance with minimum capital levels;
risk management strategy; corporate governance standards,
privacy legislation on the collection, use and storage of
personal information; cyber security obligations imposed by
APRA and ASIC; modern slavery legislation; anti-money
laundering and counter-terrorism legislation. At December
31, 2023 and 2022, these requirements were met.
in Australia
requirements
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.
certain minimum
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.
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.
liabilities
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. 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.
ARCH CAPITAL
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2023 FORM 10-K
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 of our
disclosure controls and procedures, as of December 31, 2023,
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,
as of December 31, 2023, the disclosure controls and
procedures were 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
in conditions, or
because of changes
the degree of
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
Our management
is responsible for establishing and
financial
maintaining adequate
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, 2023. 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, 2023, our internal control over financial
reporting was effective. The effectiveness of our internal
control over financial reporting as of December 31, 2023 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,
2023 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ARCH CAPITAL
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2023 FORM 10-K
ITEM 9B. OTHER INFORMATION
During the three months ended December 31, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of
the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading
arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
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 2024, 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, 2023. Copies of our code of
ethics applicable to our chief executive officer, chief
financial officer and principal accounting officer or controller
are available free of charge to investors upon written request
addressed to the attention of Arch Capital’s corporate
secretary, Waterloo House, 100 Pitts Bay Road, Pembroke
HM 08, Bermuda. In addition, our code of ethics and certain
other basic corporate documents, including the charters of
our
and
nominating committee are posted on our website 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, 2023, which
Proxy Statement is incorporated by reference.
ARCH CAPITAL
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2023 FORM 10-K
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, 2023, which Proxy Statement is incorporated
by reference.
The following information is as of December 31, 2023:
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)
12.9
—
12.9
$
$
31.14
—
31.14
17.2
—
17.2 (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 12.5 million and restricted stock and performance units outstanding of 0.4 million. 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, 2023 was 4.1 years.
Includes 3.6 million common shares remaining available for future issuance under our Employee Share Purchase Plan and 13.6 million 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, 9.4 million common shares, or 54.7%
of the 17.2 million 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, 2023, 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, 2023, which Proxy Statement is incorporated by reference.
ARCH CAPITAL
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2023 FORM 10-K
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, 2023 and 2022, and for the years ended December 31, 2023, 2022 and 2021
III. Supplementary Insurance Information
For the years ended December 31, 2023, 2022 and 2021
IV. Reinsurance
For the years ended December 31, 2023, 2022 and 2021
VI. Supplementary Information for Property and Casualty Insurance Underwriters
For the years ended December 31, 2023, 2022 and 2021
Page No.
180
183
184
185
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.
ARCH CAPITAL
174
2023 FORM 10-K
Filed
Herewith
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
3. Exhibits
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
10.2.4
10.3.1
10.3.2
10.3.3
10.3.4
10.3.5
10.3.6
10.4.1
10.4.2
10.4.3
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
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
Third Amended and Restated ACGL Incentive Compensation Plan†
First Amendment to Third Amended and Restated ACGL Incentive Compensation
Plan†
Second Amendment to Third Amended and Restated ACGL Incentive Compensation
Plan†
Third 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†
ACGL 2022 Long Term Incentive and Share Award 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†
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
February 25, 2022
August 5, 2016
May 5, 2017
10-K
10-Q
10-Q
4.8
10.7
10.1
10-K
4.8
February 25, 2022
10-Q
10.1
May 4, 2023
DEF 14A
DEF 14A
DEF 14A
DEF 14A
DEF 14A
8-K
10-Q
10.1
10.2
April 3, 2007
March 27, 2012
March 26, 2015
March 28, 2018
March 23, 2023
May 4, 2022
August 7, 2015
10-Q
10.2
August 5, 2016
Form of Restricted Share Agreement, dated as of May 4, 2017, between ACGL and
each of the Non-Employee Directors of ACGL†
10-Q
10.3
August 4, 2017
ARCH CAPITAL
175
2023 FORM 10-K
10.4.4
10.4.5
10.4.6
10.4.7
10.5
10.6.1
10.6.2
10.6.3
10.6.4
10.6.5
10.6.6
10.6.7
10.7.1
10.7.2
10.7.3
10.7.4
10.8.1
10.8.2
10.8.3
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18.1
10.18.2
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†
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†
Non-Qualified Stock Option Agreement, dated as of September 19, 2017, between
ACGL and Maamoun Rajeh†
Non-Qualified Stock Option Agreement, dated as of September 19, 2017, between
ACGL and Nicolas Papadopoulo†
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, 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
10.4
August 4, 2017
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
10-K
10.5.6
February 28, 2018
10-K
10.5.7
February 28, 2018
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
8-K
10-Q
10-Q
10.4
10.5
10.2
10.3
August 8, 2018
May 9, 2018
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
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†
Employment Agreement, dated as of November 13, 2018, between Arch Capital
Services Inc. and Louis Petrillo†
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
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.
8-K/A
10.1
April 11, 2018
10-K
10.16
February 28, 2019
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
10-Q
10.1
November 4, 2021
ARCH CAPITAL
176
2023 FORM 10-K
10.18.3
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
10.18.4
10.18.5
10.19
10.20
21
23
24
31.1
31.2
32.1
32.2
97.1
101
Second Amendment to Third Amended and Restated Credit Agreement, effective as
of April 7, 2022, by and among Arch Capital Group Ltd., certain of its subsidiaries,
Bank of America, N.A., as Administrative Agent, and the lenders party thereto
8-K
10.1
April 12, 2022
Fourth Amended and Restated Credit Agreement, dated as of August 23, 2023, by
and among Arch Capital Group Ltd., certain of its subsidiaries, Bank of America,
N.A., as Administrative Agent, and the lenders party thereto(1)
Letter of Credit Facility Agreement, dated as of September 27, 2023, by and between
Arch Reinsurance Ltd., as the borrower and Lloyds Bank Corporate Markets plc, as
the L/C Issuer(1)
Amendment No. 3 and Joinder to Letter of Credit Facility Agreement, dated as of
October 25, 2023, by and between Arch Reinsurance Ltd., as the borrower and
Lloyds Bank Corporate Markets plc, as the Administrative Agent and L/C Agent.(1)
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
Policy relating to recovery of erroneously awarded compensation, as required by
Nasdaq listing standards adopted pursuant to 17 CFR 240.10D.
The following financial information from ACGL’s Annual Report on Form 10-K for the
year ended December 31, 2023 formatted in Inline XBRL: (i) Consolidated Balance
Sheets at December 31, 2023 and 2022; (ii) Consolidated Statements of Income for the
years ended December 31, 2023, 2022 and 2021; (iii) Consolidated Statements of
Comprehensive Income for the years ended December 31, 2023, 2022 and 2021; (iv)
Consolidated Statements of Changes in Shareholders’ Equity for the years ended
December 31, 2023, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the
years ended December 31, 2023, 2022 and 2021; and (vi) Notes to Consolidated
Financial Statements
10-Q
10.1
November 9, 2023
8-K
10.1
October 2, 2023
8-K
10.1
October 30, 2023
X
X
X
X
X
X
X
X
X
104
Cove Page Interactive Data File (embedded within the Inline XBRL document)
(1) Certain schedules and exhibits have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of
any of the omitted schedules and exhibits to the SEC upon request.
† Management contract or compensatory plan or arrangement.
ARCH CAPITAL
177
2023 FORM 10-K
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 23, 2024
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 23, 2024
Executive Vice President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Treasurer
February 23, 2024
*
John M. Pasquesi
Chairman of the Board
*
John L. Bunce, Jr.
Director
*
Eric W. Doppstadt
Director
*
Francis Ebong
Director
*
Laurie S. Goodman
Director
February 23, 2024
February 23, 2024
February 23, 2024
February 23, 2024
February 23, 2024
ARCH CAPITAL
178
2023 FORM 10-K
Name
*
Title
Date
Moira Kilcoyne
Director
February 23, 2024
*
Eileen Mallesch
Director
*
Louis J. Paglia
Director
*
Brian S. Posner
Director
*
Eugene S. Sunshine
Director
*
John D. Vollaro
Director
February 23, 2024
February 23, 2024
February 23, 2024
February 23, 2024
February 23, 2024
___________________
*
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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2023 FORM 10-K
SCHEDULE II
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in millions)
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
Other liabilities
Total liabilities
Shareholders' Equity
Non-cumulative preferred shares
Common shares ($0.0011 par, shares issued: 591.9 and 588.3)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 218.5 and 217.9)
Total shareholders' equity
Total liabilities and shareholders' equity
December 31,
2023
2022
$
$
$
17 $
9
7
11
19,590
14,191
4
—
58
5
2
18
19,678 $
14,234
1,287 $
38
1,325
1,287
37
1,324
830
1
2,327
20,295
(676)
(4,424)
$
$
18,353 $
19,678 $
830
1
2,211
15,892
(1,646)
(4,378)
12,910
14,234
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
ARCH CAPITAL
180
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in millions)
Statement of Income
(Parent Company Only)
SCHEDULE II
(continued)
Year Ended
December 31,
2023
2022
2021
Revenues
Net investment income
Total revenues
Expenses
Corporate expenses
Interest expense
Total expenses
Income (loss) before income taxes and income (loss) from operating affiliates
Income tax (expense) benefit
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
$
2 $
2
2 $
2
2
2
72
59
131
(129)
—
(1)
(130)
2,287
2,157
(48)
(15)
2,094
86
59
145
(143)
—
(1)
(144)
1,593
1,449
(40)
—
1,409 $
93
59
152
(150)
41
(1)
(110)
4,553
4,443
(40)
—
Net income available to Arch common shareholders
$
4,403 $
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
ARCH CAPITAL
181
2023 FORM 10-K
SCHEDULE II
(continued)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in millions)
Statement of Cash Flows
(Parent Company Only)
Operating Activities:
Net Cash Provided By Operating Activities
Investing Activities:
Net (purchases) sales of short-term investments
Capital contributed to subsidiaries
Purchase of fixed assets
Other
Net Cash Used For Investing Activities
Financing Activities:
Purchases of common shares under share repurchase program
Proceeds from common shares issued, net
Proceeds from issuance of preferred shares, net
Redemption of preferred shares
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,
2023
2022
2021
$
46 $
621 $
1,728
(8)
—
—
1
(7)
—
(2)
—
—
(40)
(42)
(3)
12
(5)
—
—
(1)
(6)
(2)
(487)
(1)
—
(490)
(586)
(1,234)
6
—
—
(40)
(620)
(5)
17
6
486
(450)
(48)
(1,240)
(2)
19
17
$
9 $
12 $
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
ARCH CAPITAL
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2023 FORM 10-K
SCHEDULE III
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(U.S. dollars in millions)
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
$566
901
64
$12,250
9,924
578
$3,917
4,254
637
$5,446
5,836
1,158
NM
NM
NM
$3,122
3,227
(103)
$1,055
1,240
17
$819
288
194
$5,862
6,554
1,052
December 31, 2023
Insurance
Reinsurance
Mortgage
Other
Total
$1,531
$22,752
$8,808
$12,440
NM
$6,246
$2,312
$1,301
$13,468
December 31, 2022
Insurance
Reinsurance
Mortgage
Other
$301
992
(30)
$11,017
8,306
709
$3,382
3,206
749
$4,560
3,959
1,160
NM
NM
NM
$2,784
2,568
(324)
$887
813
40
$665
268
195
$5,021
4,924
1,133
Total
$1,263
$20,032
$7,337
$9,679
NM
$5,028
$1,740
$1,128
$11,078
December 31, 2021
Insurance
Reinsurance
Mortgage
Other
Total
$378
424
99
$9,811
6,879
1,068
$2,938
2,263
811
$901
$17,758
$6,012
$3,625
2,841
1,283
333
$8,082
NM
NM
NM
NM
NM
$2,345
1,925
57
258
$4,585
$606
537
97
63
$1,303
$559
214
193
33
$999
$4,149
3,254
1,261
353
$9,017
(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
183
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
REINSURANCE
(U.S. dollars in millions)
SCHEDULE IV
Gross Amount
Ceded to Other
Companies (1)
Assumed From
Other Companies
(1)
Net
Amount
Percentage of
Amount
Assumed to Net
$
$
$
$
$
$
7,865 $
626
1,161
9,652 $
6,889 $
397
1,256
8,542 $
5,834 $
409
1,213
251
7,707 $
(2,049) $
(2,559)
(335)
(4,935) $
(1,910) $
(2,024)
(322)
(4,249) $
(1,719) $
(1,840)
(247)
(105)
(3,735) $
46 $
8,487
226
8,751 $
42 $
6,553
199
6,785 $
34 $
4,685
294
206
5,045 $
5,862
6,554
1,052
13,468
5,021
4,924
1,133
11,078
4,149
3,254
1,261
353
9,017
0.8 %
129.5 %
21.5 %
65.0 %
0.8 %
133.1 %
17.6 %
61.2 %
0.8 %
144.0 %
23.3 %
58.4 %
55.9 %
Year Ended December 31, 2023
Premiums Written:
Insurance
Reinsurance
Mortgage
Total
Year Ended December 31, 2022
Premiums Written:
Insurance
Reinsurance
Mortgage
Total
Year Ended December 31, 2021
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums
written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment transactions in the total.
ARCH CAPITAL
184
2023 FORM 10-K
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(U.S. dollars in millions)
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
1,531 $
1,263
901
22,752 $
20,032
17,758
66 $
61
56
8,808 $
7,337
6,012
12,440 $
9,679
8,082
1,023 $
496
389
6,784 $
5,797
4,940
(538) $
(769)
(355)
2,312 $
1,740
1,303
4,093 $
3,141
2,827
13,468
11,078
9,017
Deferred
Acquisition
Costs
Affiliation
with
Registrant
Consolidated
Subsidiaries
2023
2022
2021
$
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
ARCH CAPITAL
185
2023 FORM 10-K
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FINANCIAL HIGHLIGHTS
GROSS PREMIUMS WRITTEN
NET LOSS RESERVES
$18.4B
$16.1B
TOTAL ASSETS
TOTAL CAPITALIZATION
$58.9B
$21.1B
(Amounts in U.S. $ million, except percentages and per share data)
Book value per common share at year end
Net income available to common shareholders
Per share
Net income return on average common equity
Gross premiums written
Underwriting income*
After-tax operating income*
Per share
Operating return on average common equity*
Growth in Book Value per Common Share†
$50.00
$45.00
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
2023
$46.94
$4,403
$11.62
29.7%
2022
$32.62
$1,436
$3.80
11.6%
$18,403
$15,327
$2,612
$3,201
$8.45
21.6%
$1,796
$1,840
$4.87
14.8%
Change
43.9%
206.6%
205.8%
20.1%
45.4%
74.0%
73.5%
15.3%BVPS Growth
Rate
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
* We use non-GAAP financial measures in this report. The first mention of each non-GAAP financial measure is referenced by an asterisk (*). See Additional Information for a reconciliation to the most
comparable GAAP financial measures.
† Annualized growth rate from December 31, 2001 to December 31, 2023. Excludes the effects of stock options, restricted and performance stock units outstanding.
ARCH CAPITAL GROUP LTD.
DIRECTORS
John M. Pasquesi 3,4,6
Chair of the Board
Managing Member of Otter Capital LLC
John L. Bunce, Jr. 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
Francis Ebong 1,2,5
Managing Director of Turtle Capital, LLC
Laurie S. Goodman 1,5,6
Institute Fellow at the Urban Institute and Founder of its Housing
Finance Policy Center
Moira Kilcoyne 1,2,5
Former Managing Director, Co-Chief Information Officer
of Morgan Stanley
Eileen Mallesch 1,6
Former SVP & CFO of Nationwide Property and Casualty Segment,
Nationwide Mutual Insurance Company
Louis J. Paglia 2,6
Founder of Oakstone Capital LLC and Former Executive Vice
President of UIL Holdings Corporation
Brian S. Posner 2,4
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 and former Executive Vice President, Chief Financial
Officer and Treasurer, Arch Capital Group Ltd.
OFFICERS
Marc Grandisson 3
Chief Executive Officer
Director
Jennifer Centrone
Chief Human Resources Officer
David E. Gansberg
Chief Executive Officer, Mortgage Group
Chris Hovey
Chief Operations Officer
François Morin
Chief Financial Officer and Treasurer
Nicolas Papadopoulo
President and Chief Underwriting Officer
Chief Executive Officer, Insurance Group
Louis T. Petrillo
General Counsel
Maamoun Rajeh
Chief Executive Officer, Reinsurance Group
Jay Rajendra
Chief Strategy and Innovation Officer
Christine Todd
Chief Investment Officer
1 Audit Committee
2 Compensation and Human Capital Committee
3 Executive Committee
4 Finance, Investment and Risk Committee
5 Nominating and Governance Committee
6 Underwriting Oversight Committee
SHAREHOLDER INFORMATION
CORPORATE ADDRESS
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
T: 441 278 9250
MARKET INFORMATION
The common shares of Arch Capital Group Ltd. are listed on the
NASDAQ Global Select Market under the symbol ACGL.
TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
SHAREHOLDER INQUIRIES
François Morin
Chief Financial Officer and Treasurer
T: 441 278 9250
©2024 Arch Capital Group Ltd. All rights reserved.
©2024 Arch Capital Group Ltd. All rights reserved.
Arch Capital Group Ltd.
2023 ANNUAL REPORT
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