ARCH CAPITAL GROUP LTD. - FORM 8-K - EX-99.2 - EX 99.2 SUPPLEMENT

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a8-k33120.htm
EX-99.1 - EX 99.1 - ARCH CAPITAL GROUP LTD.	ex-991release33120.htm

EXHIBIT 99.2




	Arch Capital Group Ltd.
	Waterloo House, Ground Floor
	100 Pitts Bay Road
	Pembroke HM 08 Bermuda

Financial Supplement

Financial Information

as of March 31, 2020

The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).

This report is for informational purposes only. It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q. Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.



Contacts
Arch Capital Group Ltd.	Investor Relations
François Morin: (441) 278-9250	Donald Watson: (914) 872-3616; dwatson@archcapservices.com

Arch Capital Group Ltd. and Subsidiaries

Table of Contents



			Page

I.	Financial Highlights		3

II.	Consolidated Financial Statements
	a.	Consolidated Statements of Income	4
	b.	Consolidated Balance Sheets	5
	c.	Consolidated Statements of Changes in Shareholders’ Equity	6
	d.	Consolidated Statements of Cash Flows	7

III.	Segment Information
	a.	Overview	8
	b.	Consolidated Results	10
	c.	Insurance Segment Results	12
	d.	Reinsurance Segment Results	14
	e.	Mortgage Segment Results	16
	f.	Consolidated Results Excluding ‘Other’ Segment	20
	g.	Selected Information on Losses and Loss Adjustment Expenses	21

IV.	Investment Information
	a.	Investable Asset Summary and Investment Portfolio Metrics	22
	b.	Composition of Net Investment Income, Yield and Total Return	23
	c.	Composition of Fixed Maturities	24
	d.	Credit Quality Distribution and Maturity Profile	25
	e.	Analysis of Corporate Exposures	26
	f.	Structured Securities	27

V.	Other
	a.	Comments on Regulation G	28
	b.	Operating Income Reconciliation and Annualized Operating Return on Average Common Equity	29
	c.	Operating Income and Effective Tax Rate Calculations	30
	d.	Capital Structure and Share Repurchase Activity	31



	1

Arch Capital Group Ltd. and Subsidiaries

Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2019 is derived from or agrees to audited financial information. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

In March 2014, the Company invested $100.0 million to acquire common equity and a warrant to purchase additional common equity of Watford Holdings Ltd. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owns approximately 13% of Watford’s outstanding common equity at March 31, 2020. Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, 100% of the results of Watford are included in the Company’s consolidated financial statements. The portion of Watford’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s 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 release are forward-looking statements.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; including pandemics such as COVID-19; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.

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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



	2

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights

The following table presents financial highlights (1):



(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,
	2020			2019			Change
Underwriting results:
Gross premiums written	$	2,698,537		$	1,980,453		36.3	%
Net premiums written	1,950,546			1,379,872			41.4	%
Net premiums earned	1,604,405			1,222,772			31.2	%
Underwriting income (2)	160,060			265,526			(39.7	)%

Loss ratio	62.6		%	49.7		%	12.9
Acquisition expense ratio	14.1		%	13.8		%	0.3
Other operating expense ratio	13.8		%	15.5		%	(1.7	)
Combined ratio	90.5		%	79.0		%	11.5

Net investment income	$	113,028		$	121,249		(6.8	)%
Per diluted share	$	0.27		$	0.30		(10.0	)%

Net income available to Arch common shareholders	$	133,714		$	438,125		(69.5	)%
Per diluted share	$	0.32		$	1.07		(70.1	)%

After-tax operating income available to Arch common shareholders (2)	$	189,756		$	275,897		(31.2	)%
Per diluted share	$	0.46		$	0.67		(31.3	)%

Comprehensive income (loss) available to Arch	$	(46,030	)	$	665,571		(106.9	)%

Net cash provided by operating activities	$	585,956		$	165,411		254.2	%

Weighted average common shares and common share equivalents outstanding — diluted	414,033,570			408,971,029			1.2	%

Financial measures:
Change in book value per common share during period	(1.2		)%	7.4		%	(8.6	)

Annualized return on average common equity	5.0		%	19.5		%	(14.5	)
Annualized operating return on average common equity (2)	7.1		%	12.3		%	(5.2	)

Total return on investments (3)	(0.86		)%	2.70		%	-356 bps


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


(2)	See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.

(3)

Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.



	3

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income



(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Revenues
Net premiums written	$	2,137,246		$	1,455,453		$	1,613,457		$	1,444,898		$	1,525,259
Change in unearned premiums	(392,802		)	60,429			(175,434		)	18,829			(156,393		)
Net premiums earned	1,744,444			1,515,882			1,438,023			1,463,727			1,368,866
Net investment income	145,153			154,263			161,488			155,038			156,949
Net realized gains (losses)	(366,960		)	40,830			61,355			120,757			140,256
Other underwriting income	6,852			6,757			3,326			5,953			8,825
Equity in net income (loss) of investment funds accounted for using the equity method	(4,209		)	27,139			17,130			32,536			46,867
Other income (loss)	8,548			(1,317		)	1,338			1,129			1,083
Total revenues	1,533,828			1,743,554			1,682,660			1,779,140			1,722,846

Expenses
Losses and loss adjustment expenses	(1,115,419		)	(844,922		)	(802,455		)	(767,543		)	(718,532		)
Acquisition expenses	(247,283		)	(221,888		)	(211,120		)	(210,089		)	(197,848		)
Other operating expenses	(234,544		)	(204,408		)	(196,512		)	(198,914		)	(201,163		)
Corporate expenses	(20,796		)	(26,837		)	(17,061		)	(18,251		)	(17,962		)
Amortization of intangible assets	(16,631		)	(21,890		)	(20,003		)	(19,794		)	(20,417		)
Interest expense	(32,555		)	(31,199		)	(31,328		)	(29,280		)	(29,065		)
Net foreign exchange gains (losses)	72,671			(52,306		)	33,124			(4,952		)	3,525
Total expenses	(1,594,557		)	(1,403,450		)	(1,245,355		)	(1,248,823		)	(1,181,462		)

Income (loss) before income taxes	(60,729		)	340,104			437,305			530,317			541,384
Income tax expense	(27,945		)	(27,336		)	(38,116		)	(44,472		)	(45,886		)
Net income (loss)	(88,674		)	312,768			399,189			485,845			495,498
Net (income) loss attributable to noncontrolling interests	232,791			13,616			(6,736		)	(16,891		)	(46,970		)
Net income attributable to Arch	144,117			326,384			392,453			468,954			448,528
Preferred dividends	(10,403		)	(10,403		)	(10,403		)	(10,403		)	(10,403		)
Net income available to Arch common shareholders	$	133,714		$	315,981		$	382,050		$	458,551		$	438,125

Comprehensive income (loss) available to Arch	$	(46,030	)	$	326,760		$	397,340		$	637,458		$	665,571

Net income per common share and common share equivalent
Basic	$	0.33		$	0.78		$	0.95		$	1.14		$	1.09
Diluted	$	0.32		$	0.76		$	0.92		$	1.12		$	1.07

Weighted average common shares and common share equivalents outstanding
Basic	403,892,161			402,941,290			402,564,121			401,482,784			400,184,404
Diluted	414,033,570			414,124,920			413,180,201			410,899,483			408,971,029



	4

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets



(U.S. Dollars in thousands, except share data)	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Assets
Investments:
Fixed maturities available for sale, at fair value	$	16,841,571		$	16,894,526		$	16,470,523		$	15,881,732		$	15,177,312
Short-term investments available for sale, at fair value	944,531			956,546			751,989			821,961			706,214
Collateral received under securities lending, at fair value	182,284			388,376			430,263			450,320			415,056
Equity securities, at fair value	1,181,903			838,925			550,485			670,943			495,895
Investments accounted for using the fair value option	3,310,517			3,663,477			3,838,243			3,721,035			3,969,623
Investments accounted for using the equity method	1,676,055			1,660,396			1,575,832			1,581,972			1,563,779
Total investments	24,136,861			24,402,246			23,617,335			23,127,963			22,327,879
Cash	882,284			726,230			880,099			605,316			633,100
Accrued investment income	118,089			117,937			116,196			119,252			112,935
Securities pledged under securities lending, at fair value	177,442			379,868			420,415			440,510			404,262
Premiums receivable	2,155,204			1,778,717			1,618,186			1,606,040			1,584,682
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	4,303,135			4,346,816			3,168,195			3,171,257			3,099,823
Contractholder receivables	2,140,724			2,119,460			2,094,683			2,102,544			2,087,720
Ceded unearned premiums	1,357,284			1,234,683			1,168,258			1,136,728			1,099,581
Deferred acquisition costs	708,848			633,400			622,028			600,740			597,526
Receivable for securities sold	221,573			24,133			50,615			164,592			334,982
Goodwill and intangible assets	705,450			738,083			624,500			641,010			659,215
Other assets	1,509,232			1,383,788			1,192,093			1,135,718			1,035,332
Total assets	$	38,416,126		$	37,885,361		$	35,572,603		$	34,851,670		$	33,977,037

Liabilities
Reserve for losses and loss adjustment expenses	$	14,309,580		$	13,891,842		$	12,389,384		$	12,230,316		$	12,010,041
Unearned premiums	4,817,191			4,339,549			4,243,372			4,056,860			4,036,119
Reinsurance balances payable	737,597			667,072			601,891			531,990			453,058
Contractholder payables	2,149,762			2,119,460			2,094,683			2,102,544			2,087,720
Collateral held for insured obligations	211,597			206,698			205,449			237,056			232,411
Senior notes	1,871,869			1,871,626			1,871,386			1,733,865			1,733,694
Revolving credit agreement borrowings	500,587			484,287			490,720			491,006			488,612
Securities lending payable	182,274			388,366			430,255			450,312			415,048
Payable for securities purchased	327,359			87,579			176,130			294,109			376,332
Other liabilities	1,392,905			1,513,330			1,007,524			904,438			984,942
Total liabilities	26,500,721			25,569,809			23,510,794			23,032,496			22,817,977

Redeemable noncontrolling interests	55,376			55,404			48,789			206,475			206,383

Shareholders’ equity
Non-cumulative preferred shares	780,000			780,000			780,000			780,000			780,000
Common shares	642			638			638			638			636
Additional paid-in capital	1,921,487			1,889,683			1,864,468			1,847,949			1,819,605
Retained earnings	11,132,268			11,021,006			10,705,025			10,322,975			9,864,424
Accumulated other comprehensive income (loss), net of deferred income tax	21,944			212,091			211,714			206,827			38,323
Common shares held in treasury, at cost	(2,489,097		)	(2,406,047		)	(2,403,749		)	(2,401,037		)	(2,388,392		)
Total shareholders’ equity available to Arch	11,367,244			11,497,371			11,158,096			10,757,352			10,114,596
Non-redeemable noncontrolling interests	492,785			762,777			854,924			855,347			838,081
Total shareholders’ equity	11,860,029			12,260,148			12,013,020			11,612,699			10,952,677
Total liabilities, noncontrolling interests and shareholders’ equity	$	38,416,126		$	37,885,361		$	35,572,603		$	34,851,670		$	33,977,037

Common shares and common share equivalents outstanding, net of treasury shares	405,609,867			405,619,201			405,230,531			404,887,534			403,738,764
Book value per common share (1)	$	26.10		$	26.42		$	25.61		$	24.64		$	23.12


(1)	Excludes the effects of stock options and restricted stock units outstanding.



	5

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Non-cumulative preferred shares
Balance at beginning and end of period	$	780,000		$	780,000		$	780,000		$	780,000		$	780,000

Common shares
Balance at beginning of period	638			638			638			636			634
Common shares issued, net	4			—			—			2			2
Balance at end of period	642			638			638			638			636

Additional paid-in capital
Balance at beginning of period	1,889,683			1,864,468			1,847,949			1,819,605			1,793,781
Amortization of share-based compensation	28,602			12,026			12,937			15,680			25,908
All other	3,202			13,189			3,582			12,664			(84		)
Balance at end of period	1,921,487			1,889,683			1,864,468			1,847,949			1,819,605

Retained earnings
Balance at beginning of period	11,021,006			10,705,025			10,322,975			9,864,424			9,426,299
Cumulative effect of an accounting change (1)	(22,452		)	—			—			—			—
Balance at beginning of period, as adjusted	10,998,554			10,705,025			10,322,975			9,864,424			9,426,299
Net income	(88,674		)	312,768			399,189			485,845			495,498
Amounts attributable to noncontrolling interests	232,791			13,616			(6,736		)	(16,891		)	(46,970		)
Preferred share dividends	(10,403		)	(10,403		)	(10,403		)	(10,403		)	(10,403		)
Balance at end of period	11,132,268			11,021,006			10,705,025			10,322,975			9,864,424

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period	212,091			211,714			206,827			38,323			(178,720		)
Change in unrealized appreciation (decline) in value of available-for-sale investments	(145,337		)	(24,707		)	21,566			164,425			211,380
Change in foreign currency translation adjustments	(44,810		)	25,084			(16,679		)	4,079			5,663
Balance at end of period	21,944			212,091			211,714			206,827			38,323

Common shares held in treasury, at cost
Balance at beginning of period	(2,406,047		)	(2,403,749		)	(2,401,037		)	(2,388,392		)	(2,382,167		)
Shares repurchased for treasury	(83,050		)	(2,298		)	(2,712		)	(12,645		)	(6,225		)
Balance at end of period	(2,489,097		)	(2,406,047		)	(2,403,749		)	(2,401,037		)	(2,388,392		)

Total shareholders’ equity available to Arch	11,367,244			11,497,371			11,158,096			10,757,352			10,114,596
Non-redeemable noncontrolling interests	492,785			762,777			854,924			855,347			838,081
Total shareholders’ equity	$	11,860,029		$	12,260,148		$	12,013,020		$	11,612,699		$	10,952,677

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).”



	6

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Operating Activities
Net income (loss)	$	(88,674	)	$	312,768		$	399,189		$	485,845		$	495,498
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	362,964			(51,435		)	(63,597		)	(118,844		)	(144,091		)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	29,034			24,899			6,808			(15,968		)	(29,752		)
Amortization of intangible assets	16,631			21,890			20,003			19,794			20,417
Share-based compensation	28,549			11,985			12,895			15,646			25,891
Changes in:
Reserve for losses and loss adjustment expenses, net	506,057			112,907			222,678			160,401			(6,005		)
Unearned premiums, net	392,802			(60,429		)	175,434			(18,829		)	156,393
Premiums receivable	(418,457		)	91,013			(26,715		)	(16,913		)	(285,137		)
Deferred acquisition costs	(75,135		)	(8,654		)	(13,816		)	(1,622		)	(23,168		)
Reinsurance balances payable	79,807			(32,770		)	75,487			76,810			62,605
Other items, net	(223,124		)	83,146			22,249			(109,194		)	(37,253		)
Net cash provided by operating activities	610,454			505,320			830,615			477,126			235,398
Investing Activities
Purchases of fixed maturity investments	(11,965,995		)	(6,043,154		)	(7,677,977		)	(8,888,176		)	(7,444,470		)
Purchases of equity securities	(760,683		)	(287,916		)	(92,112		)	(228,129		)	(203,810		)
Purchases of other investments	(228,471		)	(455,620		)	(337,862		)	(352,470		)	(324,593		)
Proceeds from sales of fixed maturity investments	11,723,123			5,888,011			7,075,372			8,555,892			7,076,590
Proceeds from sales of equity securities	266,301			58,688			194,429			81,684			95,017
Proceeds from sales, redemptions and maturities of other investments	216,131			382,042			292,819			318,215			216,483
Proceeds from redemptions and maturities of fixed maturity investments	198,356			248,546			149,770			144,525			100,424
Net settlements of derivative instruments	195,488			(32,441		)	4,722			57,964			29,737
Net (purchases) sales of short-term investments	(11,777		)	(89,245		)	(72,442		)	(91,081		)	292,601
Change in cash collateral related to securities lending	55,001			(69,183		)	(600		)	37,208			(29,618		)
Purchases of fixed assets	(8,470		)	(10,202		)	(11,276		)	(6,936		)	(9,423		)
Other	42,500			(145,533		)	(28,375		)	(80,847		)	(93,731		)
Net cash provided by (used for) investing activities	(278,496		)	(556,007		)	(503,532		)	(452,151		)	(294,793		)
Financing Activities
Purchases of common shares under share repurchase program	(75,486		)	—			—			—			(2,871		)
Proceeds from common shares issued, net	(4,527		)	5,685			1,075			1,344			(1,901		)
Proceeds from borrowings	16,300			—			137,283			3,800			59,000
Repayments of borrowings	—			(21,644		)	—			(1,500		)	(26,038		)
Change in cash collateral related to securities lending	(55,001		)	69,183			600			(37,208		)	29,618
Change in third party investment in non-redeemable noncontrolling interests	(2,867		)	(75,056		)	—			—			—
Change in third party investment in redeemable noncontrolling interests	—			(8		)	(161,874		)	—			—
Dividends paid to redeemable noncontrolling interests	(1,181		)	(1,107		)	(2,414		)	(4,497		)	(4,497		)
Other	(1,331		)	(816		)	(1,678		)	(2,140		)	(1,389		)
Preferred dividends paid	(10,403		)	(10,403		)	(10,403		)	(10,403		)	(10,403		)
Net cash provided by (used for) financing activities	(134,496		)	(34,166		)	(37,411		)	(50,604		)	41,519
Effects of exchange rate changes on foreign currency cash and restricted cash	(30,723		)	26,076			(10,272		)	(1,512		)	3,449
Increase (decrease) in cash and restricted cash	166,739			(58,777		)	279,400			(27,141		)	(14,427		)
Cash and restricted cash, beginning of period	903,698			962,475			683,075			710,216			724,643
Cash and restricted cash, end of period	$	1,070,437		$	903,698		$	962,475		$	683,075		$	710,216

Income taxes paid (received)	$	7,387		$	62,398		$	3,565		$	76,166		$	(32,666	)
Interest paid	$	6,647		$	58,385		$	7,702		$	54,612		$	6,246

Net cash provided by operating activities, excluding the ‘other’ segment	$	585,956		$	443,298		$	769,486		$	431,865		$	165,411



	7

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company’s Insurance, Reinsurance and Mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of Arch Capital and the Chief Financial 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 core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

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

Insurance Segment

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


•	Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).


•	Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.


•	Lenders products: 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.

•

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


•	Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.


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


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

•

Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.



	8

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

Reinsurance Segment

The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:


•	Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.


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


•	Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.

•

Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.

•

Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.


•	Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.

Mortgage Segment

The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

The ‘other’ segment includes the results of Watford. Subsidiaries of the Company act as Watford’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford’s non-investment grade credit portfolios and the Company manages Watford’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s common equity (listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”). Watford has its own management and board of directors that is responsible for its own results and profitability. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.



	9

Arch Capital Group Ltd. and Subsidiaries

Segment Information



(U.S. Dollars in thousands)	Three Months Ended
	March 31, 2020
	Insurance			Reinsurance			Mortgage			Sub-total (Core)			Other			Total
Gross premiums written (1)	$	1,207,645		$	1,122,519		$	368,945		$	2,698,537		$	234,902		$	2,832,830
Premiums ceded	(378,897		)	(325,339		)	(44,327		)	(747,991		)	(48,202		)	(695,584		)
Net premiums written	828,748			797,180			324,618			1,950,546			186,700			2,137,246
Change in unearned premiums	(112,829		)	(253,720		)	20,408			(346,141		)	(46,661		)	(392,802		)
Net premiums earned	715,919			543,460			345,026			1,604,405			140,039			1,744,444
Other underwriting income	—			2,120			4,599			6,719			133			6,852
Losses and loss adjustment expenses	(507,108		)	(430,069		)	(67,566		)	(1,004,743		)	(110,676		)	(1,115,419		)
Acquisition expenses	(107,337		)	(79,606		)	(38,536		)	(225,479		)	(21,804		)	(247,283		)
Other operating expenses	(129,649		)	(45,297		)	(45,896		)	(220,842		)	(13,702		)	(234,544		)
Underwriting income (loss)	$	(28,175	)	$	(9,392	)	$	197,627		160,060			(6,010		)	154,050

Net investment income										113,028			32,125			145,153
Net realized gains (losses)										(72,109		)	(294,851		)	(366,960		)
Equity in net income (loss) of investment funds accounted for using the equity method										(4,209		)	—			(4,209		)
Other income										8,548			—			8,548
Corporate expenses (2)										(18,201		)	—			(18,201		)
Transaction costs and other (2)										(2,595		)	—			(2,595		)
Amortization of intangible assets										(16,631		)	—			(16,631		)
Interest expense										(25,245		)	(7,310		)	(32,555		)
Net foreign exchange gains (losses)										63,307			9,364			72,671
Income (loss) before income taxes										205,953			(266,682		)	(60,729		)
Income tax expense										(27,945		)	—			(27,945		)
Net income (loss)										178,008			(266,682		)	(88,674		)
Dividends attributable to redeemable noncontrolling interests										(57		)	(1,096		)	(1,153		)
Amounts attributable to nonredeemable noncontrolling interests										—			233,944			233,944
Net income (loss) available to Arch										177,951			(33,834		)	144,117
Preferred dividends										(10,403		)	—			(10,403		)
Net income (loss) available to Arch common shareholders										$	167,548		$	(33,834	)	$	133,714

Underwriting Ratios
Loss ratio	70.8		%	79.1		%	19.6		%	62.6		%	79.0		%	63.9		%
Acquisition expense ratio	15.0		%	14.6		%	11.2		%	14.1		%	15.6		%	14.2		%
Other operating expense ratio	18.1		%	8.3		%	13.3		%	13.8		%	9.8		%	13.4		%
Combined ratio	103.9		%	102.0		%	44.1		%	90.5		%	104.4		%	91.5		%

Net premiums written to gross premiums written	68.6		%	71.0		%	88.0		%	72.3		%	79.5		%	75.4		%

Total investable assets										$	22,375,852		$	2,502,588		$	24,878,440
Total assets										35,049,744			3,366,382			38,416,126
Total liabilities										23,740,716			2,760,005			26,500,721


(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.


(2)	Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.



	10

Arch Capital Group Ltd. and Subsidiaries

Segment Information



(U.S. Dollars in thousands)	Three Months Ended
	March 31, 2019
	Insurance			Reinsurance			Mortgage			Sub-total (Core)			Other			Total
Gross premiums written (1)	$	941,954		$	682,855		$	356,050		$	1,980,453		$	186,689		$	2,077,879
Premiums ceded	(320,622		)	(231,567		)	(48,798		)	(600,581		)	(41,302		)	(552,620		)
Net premiums written	621,332			451,288			307,252			1,379,872			145,387			1,525,259
Change in unearned premiums	(67,827		)	(104,923		)	15,650			(157,100		)	707			(156,393		)
Net premiums earned	553,505			346,365			322,902			1,222,772			146,094			1,368,866
Other underwriting income (loss)	—			4,377			3,856			8,233			592			8,825
Losses and loss adjustment expenses	(356,723		)	(239,810		)	(11,149		)	(607,682		)	(110,850		)	(718,532		)
Acquisition expenses	(82,824		)	(54,326		)	(31,672		)	(168,822		)	(29,026		)	(197,848		)
Other operating expenses	(113,396		)	(35,704		)	(39,875		)	(188,975		)	(12,188		)	(201,163		)
Underwriting income (loss)	$	562		$	20,902		$	244,062		265,526			(5,378		)	260,148

Net investment income										121,249			35,700			156,949
Net realized gains (losses)										111,124			29,132			140,256
Equity in net income (loss) of investment funds accounted for using the equity method										46,867			—			46,867
Other income (loss)										1,083			—			1,083
Corporate expenses (2)										(16,772		)	—			(16,772		)
Transaction costs and other (2)										(1,190		)	—			(1,190		)
Amortization of intangible assets										(20,417		)	—			(20,417		)
Interest expense										(23,482		)	(5,583		)	(29,065		)
Net foreign exchange gains (losses)										5,175			(1,650		)	3,525
Income (loss) before income taxes										489,163			52,221			541,384
Income tax expense										(45,886		)	—			(45,886		)
Net income (loss)										443,277			52,221			495,498
Dividends attributable to redeemable noncontrolling interests										—			(4,588		)	(4,588		)
Amounts attributable to nonredeemable noncontrolling interests										—			(42,382		)	(42,382		)
Net income (loss) available to Arch										443,277			5,251			448,528
Preferred dividends										(10,403		)	—			(10,403		)
Net income (loss) available to Arch common shareholders										$	432,874		$	5,251		$	438,125

Underwriting Ratios
Loss ratio	64.4		%	69.2		%	3.5		%	49.7		%	75.9		%	52.5		%
Acquisition expense ratio	15.0		%	15.7		%	9.8		%	13.8		%	19.9		%	14.5		%
Other operating expense ratio	20.5		%	10.3		%	12.3		%	15.5		%	8.3		%	14.7		%
Combined ratio	99.9		%	95.2		%	25.6		%	79.0		%	104.1		%	81.7		%

Net premiums written to gross premiums written	66.0		%	66.1		%	86.3		%	69.7		%	77.9		%	73.4		%

Total investable assets										$	20,055,380		$	2,824,718		$	22,880,098
Total assets										30,424,168			3,552,869			33,977,037
Total liabilities										20,428,083			2,389,894			22,817,977


(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.


(2)	Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.



	11

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Gross premiums written	$	1,207,645		$	1,040,240		$	1,005,874		$	919,925		$	941,954
Premiums ceded	(378,897		)	(351,516		)	(302,034		)	(292,095		)	(320,622		)
Net premiums written	828,748			688,724			703,840			627,830			621,332
Change in unearned premiums	(112,829		)	(42,927		)	(98,504		)	(35,388		)	(67,827		)
Net premiums earned	715,919			645,797			605,336			592,442			553,505
Losses and loss adjustment expenses	(507,108		)	(446,798		)	(422,782		)	(389,172		)	(356,723		)
Acquisition expenses	(107,337		)	(96,437		)	(91,259		)	(91,094		)	(82,824		)
Other operating expenses	(129,649		)	(116,443		)	(115,408		)	(109,523		)	(113,396		)
Underwriting income (loss)	$	(28,175	)	$	(13,881	)	$	(24,113	)	$	2,653		$	562

Underwriting Ratios
Loss ratio	70.8		%	69.2		%	69.8		%	65.7		%	64.4		%
Acquisition expense ratio	15.0		%	14.9		%	15.1		%	15.4		%	15.0		%
Other operating expense ratio	18.1		%	18.0		%	19.1		%	18.5		%	20.5		%
Combined ratio	103.9		%	102.1		%	104.0		%	99.6		%	99.9		%

Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums	6.9		%	0.9		%	4.3		%	0.4		%	0.0		%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments	(0.1		)%	(0.4		)%	(0.6		)%	(0.2		)%	(0.3		)%
Combined ratio excluding catastrophic activity and prior year development (1)	97.1		%	101.6		%	100.3		%	99.4		%	100.2		%

Net premiums written to gross premiums written	68.6		%	66.2		%	70.0		%	68.2		%	66.0		%


(1)	See ‘Comments on Regulation G’ for further discussion.



	12

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment



(U.S. Dollars in thousands)	Three Months Ended
	March 31,				December 31,				September 30,					June 30,				March 31,
	2020				2019				2019					2019				2019
Net premiums written
Professional lines (1)	$	169,118	20.4	%	$	145,841	21.2	%	$	137,569		19.5	%	$	121,679	19.4	%	$	129,234	20.8	%
Property, energy, marine and aviation	127,585		15.4	%	95,849		13.9	%	97,966			13.9	%	103,819		16.5	%	70,486		11.3	%
Travel, accident and health	126,046		15.2	%	65,337		9.5	%	75,192			10.7	%	76,537		12.2	%	88,104		14.2	%
Construction and national accounts	115,999		14.0	%	114,437		16.6	%	98,522			14.0	%	60,888		9.7	%	95,355		15.3	%
Programs	112,532		13.6	%	96,653		14.0	%	120,039			17.1	%	108,671		17.3	%	101,172		16.3	%
Excess and surplus casualty (2)	65,419		7.9	%	61,549		8.9	%	62,843			8.9	%	58,466		9.3	%	45,165		7.3	%
Lenders products	33,292		4.0	%	35,915		5.2	%	31,005			4.4	%	22,373		3.6	%	22,415		3.6	%
Other (3)	78,757		9.5	%	73,143		10.6	%	80,704			11.5	%	75,397		12.0	%	69,401		11.2	%
Total	$	828,748	100.0	%	$	688,724	100.0	%	$	703,840		100.0	%	$	627,830	100.0	%	$	621,332	100.0	%

Underwriting location
United States	$	602,677	72.7	%	$	507,193	73.6	%	$	532,808		75.7	%	$	471,664	75.1	%	$	471,811	75.9	%
Europe	196,042		23.7	%	151,182		22.0	%	145,512			20.7	%	129,869		20.7	%	132,651		21.3	%
Other	30,029		3.6	%	30,349		4.4	%	25,520			3.6	%	26,297		4.2	%	16,870		2.7	%
Total	$	828,748	100.0	%	$	688,724	100.0	%	$	703,840		100.0	%	$	627,830	100.0	%	$	621,332	100.0	%

Net premiums earned
Professional lines (1)	$	151,700	21.2	%	$	133,423	20.7	%	$	135,343		22.4	%	$	115,667	19.5	%	$	114,791	20.7	%
Property, energy, marine and aviation	111,183		15.5	%	90,087		13.9	%	80,246			13.3	%	68,995		11.6	%	59,638		10.8	%
Travel, accident and health	77,375		10.8	%	67,922		10.5	%	81,952			13.5	%	83,636		14.1	%	71,575		12.9	%
Construction and national accounts	99,700		13.9	%	91,489		14.2	%	81,472			13.5	%	76,795		13.0	%	75,931		13.7	%
Programs	108,878		15.2	%	109,498		17.0	%	104,432			17.3	%	102,687		17.3	%	97,486		17.6	%
Excess and surplus casualty (2)	65,097		9.1	%	56,397		8.7	%	53,991			8.9	%	47,858		8.1	%	42,369		7.7	%
Lenders products (4)	25,343		3.5	%	25,001		3.9	%	(5,724		)	(0.9	)%	23,570		4.0	%	23,232		4.2	%
Other (3)	76,643		10.7	%	71,980		11.1	%	73,624			12.2	%	73,234		12.4	%	68,483		12.4	%
Total	$	715,919	100.0	%	$	645,797	100.0	%	$	605,336		100.0	%	$	592,442	100.0	%	$	553,505	100.0	%

(1) Includes professional liability, executive assurance and healthcare business.

(2) Includes casualty and contract binding business.

(3) Includes alternative markets, excess workers’ compensation and surety business.

(4) Reflects a change in earning patterns on certain business in the 2019 third quarter.



	13

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Gross premiums written	$	1,122,519		$	432,249		$	662,572		$	545,547		$	682,855
Premiums ceded	(325,339		)	(93,380		)	(226,096		)	(169,457		)	(231,567		)
Net premiums written	797,180			338,869			436,476			376,090			451,288
Change in unearned premiums	(253,720		)	50,116			(72,621		)	(8,906		)	(104,923		)
Net premiums earned	543,460			388,985			363,855			367,184			346,365
Other underwriting income (loss)	2,120			2,051			(1,208		)	1,224			4,377
Losses and loss adjustment expenses	(430,069		)	(260,182		)	(270,379		)	(240,958		)	(239,810		)
Acquisition expenses	(79,606		)	(65,528		)	(62,393		)	(56,785		)	(54,326		)
Other operating expenses	(45,297		)	(39,287		)	(32,533		)	(33,960		)	(35,704		)
Underwriting income (loss)	$	(9,392	)	$	26,039		$	(2,658	)	$	36,705		$	20,902

Underwriting Ratios
Loss ratio	79.1		%	66.9		%	74.3		%	65.6		%	69.2		%
Acquisition expense ratio	14.6		%	16.8		%	17.1		%	15.5		%	15.7		%
Other operating expense ratio	8.3		%	10.1		%	8.9		%	9.2		%	10.3		%
Combined ratio	102.0		%	93.8		%	100.3		%	90.3		%	95.2		%

Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums	12.7		%	6.4		%	11.5		%	1.2		%	2.3		%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments	(2.0		)%	(4.9		)%	(4.0		)%	(3.1		)%	0.5		%
Combined ratio excluding catastrophic activity and prior year development (1)	91.3		%	92.3		%	92.8		%	92.2		%	92.4		%

Net premiums written to gross premiums written	71.0		%	78.4		%	65.9		%	68.9		%	66.1		%


(1)	See ‘Comments on Regulation G’ for further discussion.



	14

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment



(U.S. Dollars in thousands)	Three Months Ended
	March 31,				December 31,				September 30,				June 30,				March 31,
	2020				2019				2019				2019				2019
Net premiums written
Other Specialty (1)	$	284,952	35.7	%	$	103,254	30.5	%	$	94,072	21.6	%	$	129,174	34.3	%	$	140,477	31.1	%
Casualty (2)	190,880		23.9	%	85,063		25.1	%	178,802		41.0	%	78,025		20.7	%	168,484		37.3	%
Property excluding property catastrophe	158,924		19.9	%	85,859		25.3	%	118,671		27.2	%	96,050		25.5	%	102,740		22.8	%
Property catastrophe	89,092		11.2	%	37,069		10.9	%	23,597		5.4	%	46,594		12.4	%	3,383		0.7	%
Marine and aviation	49,785		6.2	%	11,921		3.5	%	10,181		2.3	%	15,619		4.2	%	15,958		3.5	%
Other (3)	23,547		3.0	%	15,703		4.6	%	11,153		2.6	%	10,628		2.8	%	20,246		4.5	%
Total	$	797,180	100.0	%	$	338,869	100.0	%	$	436,476	100.0	%	$	376,090	100.0	%	$	451,288	100.0	%

Underwriting location
Bermuda	$	333,619	41.8	%	$	116,974	34.5	%	$	190,998	43.8	%	$	159,147	42.3	%	$	111,499	24.7	%
United States	187,466		23.5	%	119,003		35.1	%	145,231		33.3	%	109,296		29.1	%	156,413		34.7	%
Europe and other	276,095		34.6	%	102,892		30.4	%	100,247		23.0	%	107,647		28.6	%	183,376		40.6	%
Total	$	797,180	100.0	%	$	338,869	100.0	%	$	436,476	100.0	%	$	376,090	100.0	%	$	451,288	100.0	%

Net premiums earned
Other Specialty (1)	$	203,385	37.4	%	$	108,074	27.8	%	$	112,349	30.9	%	$	136,573	37.2	%	$	121,521	35.1	%
Casualty (2)	135,071		24.9	%	118,258		30.4	%	116,242		31.9	%	103,164		28.1	%	91,624		26.5	%
Property excluding property catastrophe	112,652		20.7	%	103,212		26.5	%	90,358		24.8	%	85,479		23.3	%	83,792		24.2	%
Property catastrophe	53,000		9.8	%	31,048		8.0	%	22,617		6.2	%	18,537		5.0	%	18,732		5.4	%
Marine and aviation	24,858		4.6	%	12,919		3.3	%	11,798		3.2	%	12,498		3.4	%	11,059		3.2	%
Other (3)	14,494		2.7	%	15,474		4.0	%	10,491		2.9	%	10,933		3.0	%	19,637		5.7	%
Total	$	543,460	100.0	%	$	388,985	100.0	%	$	363,855	100.0	%	$	367,184	100.0	%	$	346,365	100.0	%

(1) Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.

(2) Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.

(3) Includes life, casualty clash and other.



	15

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Gross premiums written	$	368,945		$	370,658		$	375,092		$	364,465		$	356,050
Premiums ceded	(44,327		)	(55,151		)	(57,703		)	(42,857		)	(48,798		)
Net premiums written	324,618			315,507			317,389			321,608			307,252
Change in unearned premiums	20,408			32,148			25,611			31,175			15,650
Net premiums earned	345,026			347,655			343,000			352,783			322,902
Other underwriting income (1)	4,599			4,138			3,955			4,056			3,856
Losses and loss adjustment expenses	(67,566		)	(3,287		)	(13,080		)	(25,997		)	(11,149		)
Acquisition expenses	(38,536		)	(35,597		)	(34,396		)	(32,654		)	(31,672		)
Other operating expenses	(45,896		)	(36,395		)	(37,003		)	(39,819		)	(39,875		)
Underwriting income	$	197,627		$	276,514		$	262,476		$	258,369		$	244,062

Underwriting Ratios
Loss ratio	19.6		%	0.9		%	3.8		%	7.4		%	3.5		%
Acquisition expense ratio	11.2		%	10.2		%	10.0		%	9.3		%	9.8		%
Other operating expense ratio	13.3		%	10.5		%	10.8		%	11.3		%	12.3		%
Combined ratio	44.1		%	21.6		%	24.6		%	28.0		%	25.6		%

Net (favorable) adverse development in prior year loss reserves, net of related adjustments	(1.8		)%	(9.4		)%	(9.6		)%	(6.5		)%	(11.3		)%
Combined ratio excluding prior year development (2)	45.9		%	31.0		%	34.2		%	34.5		%	36.9		%

Net premiums written to gross premiums written	88.0		%	85.1		%	84.6		%	88.2		%	86.3		%

Net premiums written by underwriting location
United States	$	264,108		$	258,512		$	260,202		$	258,774		$	255,380
Other	60,510			56,995			57,187			62,834			51,872
Total	$	324,618		$	315,507		$	317,389		$	321,608		$	307,252
United States %	81.4		%	81.9		%	82.0		%	80.5		%	83.1		%
Other %	18.6		%	18.1		%	18.0		%	19.5		%	16.9		%

(1) Primarily related to income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.

(2) See ‘Comments on Regulation G’ for further discussion.



	16

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment



(U.S. Dollars in millions)	March 31, 2020					December 31, 2019					September 30, 2019					June 30, 2019					March 31, 2019
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance	$	284,203		68.9	%	$	287,150		68.7	%	$	284,496		69.7	%	$	279,297		69.1	%	$	276,699		70.9	%
Mortgage reinsurance	24,335			5.9	%	26,768			6.4	%	25,440			6.2	%	26,286			6.5	%	26,487			6.8	%
Other (2)	103,731			25.2	%	104,346			24.9	%	98,054			24.0	%	98,335			24.3	%	87,190			22.3	%
Total	$	412,269		100.0	%	$	418,264		100.0	%	$	407,990		100.0	%	$	403,918		100.0	%	$	390,376		100.0	%
Risk In Force (RIF) (3)
U.S. primary mortgage insurance	$	72,566		92.0	%	$	73,388		91.9	%	$	72,916		92.0	%	$	71,760		91.8	%	$	71,114		92.2	%
Mortgage reinsurance	1,961			2.5	%	2,129			2.7	%	2,086			2.6	%	2,182			2.8	%	2,204			2.9	%
Other (2)	4,387			5.6	%	4,380			5.5	%	4,216			5.3	%	4,260			5.4	%	3,772			4.9	%
Total	$	78,914		100.0	%	$	79,897		100.0	%	$	79,218		100.0	%	$	78,202		100.0	%	$	77,090		100.0	%

Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740	$	41,738		57.5	%	$	42,301		57.6	%	$	41,975		57.6	%	$	41,333		57.6	%	$	41,053		57.7	%
680-739	25,078			34.6	%	25,240			34.4	%	25,013			34.3	%	24,488			34.1	%	24,122			33.9	%
620-679	5,368			7.4	%	5,444			7.4	%	5,501			7.5	%	5,494			7.7	%	5,476			7.7	%
<620	382			0.5	%	403			0.5	%	427			0.6	%	445			0.6	%	463			0.7	%
Total	$	72,566		100.0	%	$	73,388		100.0	%	$	72,916		100.0	%	$	71,760		100.0	%	$	71,114		100.0	%
Weighted average FICO score	743					743					743					743					743

Total RIF by Loan-To-Value (LTV):
95.01% and above	$	9,060		12.5	%	$	9,064		12.4	%	$	8,948		12.3	%	$	8,535		11.9	%	$	8,175		11.5	%
90.01% to 95.00%	39,594			54.6	%	40,136			54.7	%	40,086			55.0	%	39,777			55.4	%	39,500			55.5	%
85.01% to 90.00%	20,619			28.4	%	20,890			28.5	%	20,708			28.4	%	20,419			28.5	%	20,418			28.7	%
85.00% and below	3,293			4.5	%	3,298			4.5	%	3,174			4.4	%	3,029			4.2	%	3,021			4.2	%
Total	$	72,566		100.0	%	$	73,388		100.0	%	$	72,916		100.0	%	$	71,760		100.0	%	$	71,114		100.0	%
Weighted average LTV	93.0		%			93.0		%			93.1		%			93.1		%			93.1		%

Total RIF by State:
Texas	$	5,683		7.8	%	$	5,678		7.7	%	$	5,599		7.7	%	$	5,509		7.7	%	$	5,488		7.7	%
California	5,106			7.0	%	5,187			7.1	%	4,984			6.8	%	4,736			6.6	%	4,574			6.4	%
Florida	3,863			5.3	%	3,887			5.3	%	3,821			5.2	%	3,699			5.2	%	3,601			5.1	%
Georgia	2,819			3.9	%	2,753			3.8	%	2,667			3.7	%	2,599			3.6	%	2,565			3.6	%
Virginia	2,814			3.9	%	2,881			3.9	%	2,907			4.0	%	2,916			4.1	%	2,915			4.1	%
Illinois	2,621			3.6	%	2,616			3.6	%	2,602			3.6	%	2,536			3.5	%	2,492			3.5	%
Minnesota	2,509			3.5	%	2,514			3.4	%	2,480			3.4	%	2,434			3.4	%	2,404			3.4	%
North Carolina	2,475			3.4	%	2,470			3.4	%	2,469			3.4	%	2,462			3.4	%	2,477			3.5	%
Washington	2,426			3.3	%	2,474			3.4	%	2,466			3.4	%	2,421			3.4	%	2,408			3.4	%
Maryland	2,376			3.3	%	2,437			3.3	%	2,443			3.4	%	2,420			3.4	%	2,404			3.4	%
Others	39,874			54.9	%	40,491			55.2	%	40,478			55.5	%	40,028			55.8	%	39,786			55.9	%
Total	$	72,566		100.0	%	$	73,388		100.0	%	$	72,916		100.0	%	$	71,760		100.0	%	$	71,114		100.0	%

Weighted average coverage (end of period RIF divided by IIF)	25.5		%			25.6		%			25.6		%			25.7		%			25.7		%
U.S. mortgage insurance total RIF, net of reinsurance (4)	$	58,693				$	58,512				$	57,768				$	56,562				$	55,957
Analysts’ persistency (5)	72.6		%			75.7		%			78.6		%			80.9		%			81.3		%
Risk-to-capital ratio -- Arch MI U.S. (6)	11.3:1					12.0:1					12.9:1					11.4:1					12.2:1
PMIER sufficiency ratio -- Arch MI U.S. (7)	165		%			161		%			154		%			163		%			146		%

(1) The aggregate dollar amount of each insured mortgage loan’s current principal balance. (4) Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.


(2)	Includes GSE credit risk-sharing transactions and international insurance business. (5) Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.


(3)	The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied (6) Represents total current (non-delinquent) RIF, net of reinsurance, divided by total statutory capital

by the insurance coverage percentage specified in the policy for insurance policies issued and (estimate for March 31, 2020).

after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions. (7) Calculated as available assets divided by required assets as defined within PMIERs (estimate for March 31, 2020).



	17

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment



(U.S. Dollars in millions, except policy/loan/claim count)	Three Months Ended
	March 31, 2020					December 31, 2019					September 30, 2019					June 30, 2019					March 31, 2019
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)	$	16,778				$	24,051				$	25,313				$	17,161				$	11,207

Total NIW by credit quality (FICO score):
>=740	$	10,069		60.0	%	$	14,793		61.5	%	$	15,204		60.1	%	$	9,862		57.5	%	$	6,350		56.7	%
680-739	5,787			34.5	%	8,092			33.6	%	8,725			34.5	%	6,139			35.8	%	4,041			36.1	%
620-679	922			5.5	%	1,166			4.8	%	1,384			5.5	%	1,160			6.8	%	816			7.3	%
Total	$	16,778		100.0	%	$	24,051		100.0	%	$	25,313		100.0	%	$	17,161		100.0	%	$	11,207		100.0	%

Total NIW by LTV:
95.01% and above	$	1,668		9.9	%	$	2,260		9.4	%	$	3,182		12.6	%	$	2,530		14.7	%	$	1,808		16.1	%
90.01% to 95.00%	7,199			42.9	%	10,059			41.8	%	10,409			41.1	%	7,497			43.7	%	4,975			44.4	%
85.01% to 90.00%	5,329			31.8	%	7,839			32.6	%	7,762			30.7	%	5,026			29.3	%	3,149			28.1	%
85.00% and below	2,582			15.4	%	3,893			16.2	%	3,960			15.6	%	2,108			12.3	%	1,275			11.4	%
Total	$	16,778		100.0	%	$	24,051		100.0	%	$	25,313		100.0	%	$	17,161		100.0	%	$	11,207		100.0	%

Total NIW monthly vs. single:
Monthly	$	15,692		93.5	%	$	22,707		94.4	%	$	23,358		92.3	%	$	15,935		92.9	%	$	10,263		91.6	%
Single	1,086			6.5	%	1,344			5.6	%	1,955			7.7	%	1,226			7.1	%	944			8.4	%
Total	$	16,778		100.0	%	$	24,051		100.0	%	$	25,313		100.0	%	$	17,161		100.0	%	$	11,207		100.0	%

Total NIW purchase vs. refinance:
Purchase	$	12,299		73.3	%	$	16,476		68.5	%	$	19,068		75.3	%	$	14,992		87.4	%	$	10,289		91.8	%
Refinance	4,479			26.7	%	7,575			31.5	%	6,245			24.7	%	2,169			12.6	%	918			8.2	%
Total	$	16,778		100.0	%	$	24,051		100.0	%	$	25,313		100.0	%	$	17,161		100.0	%	$	11,207		100.0	%

Ending number of policies in force (PIF) (3)	1,293,799					1,307,884					1,304,263					1,292,215					1,286,877

Rollforward of insured loans in default:
Beginning delinquent number of loans	20,163					19,243					18,761					19,827					20,665
Plus: new notices	9,419					10,289					10,111					8,906					9,711
Less: cures	(10,541		)			(8,724		)			(8,970		)			(9,201		)			(9,706		)
Less: paid claims	(627		)			(645		)			(659		)			(771		)			(843		)
Ending delinquent number of loans (3)	18,414					20,163					19,243					18,761					19,827

Ending percentage of loans in default (3)	1.42		%			1.54		%			1.48		%			1.45		%			1.54		%

Losses:
Number of claims paid	627					645					659					771					843
Total paid claims (in thousands)	$	26,038				$	25,253				$	26,082				$	32,025				$	33,494
Average per claim (in thousands)	$	41.5				$	39.2				$	39.6				$	41.5				$	39.7
Severity (2)	92.8		%			94.0		%			95.6		%			95.1		%			98.9		%

Average case reserve per default (in thousands)	$	14.4				$	13.3				$	14.7				$	16.1				$	16.6

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

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

(3) Includes first lien primary and pool policies.



	18

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment

Supplemental disclosures for U.S. primary mortgage insurance:



(U.S. Dollars in millions)	March 31, 2020												December 31, 2019
	Loss Reserves, Net (1)		Primary IIF (2)				Primary RIF (3)				Delinquency Rate		Loss Reserves, Net (1)		Primary IIF (2)				Primary RIF (3)				Delinquency Rate
	% of Total		Total		% of Total		Total		% of Total		Delinquency Rate		% of Total		Total		% of Total		Total		% of Total		Delinquency Rate
Policy year:
2010 and prior	56.1	%	$	16,352	5.8	%	3,763		5.2	%	8.17	%	58.2	%	$	17,251	6.0	%	3,990		5.4	%	8.79	%
2011	0.9	%	1,533		0.5	%	422		0.6	%	1.80	%	0.7	%	1,678		0.6	%	464		0.6	%	1.59	%
2012	1.3	%	5,777		2.0	%	1,604		2.2	%	0.86	%	1.3	%	6,293		2.2	%	1,753		2.4	%	0.89	%
2013	2.9	%	11,265		4.0	%	3,156		4.3	%	0.92	%	3.0	%	12,276		4.3	%	3,433		4.7	%	0.99	%
2014	2.6	%	12,733		4.5	%	3,511		4.8	%	1.14	%	2.4	%	13,714		4.8	%	3,778		5.1	%	1.16	%
2015	3.3	%	23,866		8.4	%	6,395		8.8	%	0.81	%	3.2	%	25,788		9.0	%	6,880		9.4	%	0.87	%
2016	7.7	%	38,155		13.4	%	9,997		13.8	%	1.01	%	7.6	%	40,898		14.2	%	10,670		14.5	%	1.03	%
2017	9.6	%	40,621		14.3	%	10,454		14.4	%	0.96	%	9.9	%	43,896		15.3	%	11,262		15.3	%	1.00	%
2018	11.7	%	47,068		16.6	%	11,914		16.4	%	0.91	%	11.2	%	51,776		18.0	%	13,086		17.8	%	0.86	%
2019	3.9	%	70,130		24.7	%	17,246		23.8	%	0.21	%	2.4	%	73,580		25.6	%	18,072		24.6	%	0.14	%
2020	0.0	%	16,703		5.9	%	4,104		5.7	%	0.01	%
Total	100.0	%	$	284,203	100.0	%	$	72,566	100.0	%	1.42	%	100.0	%	$	287,150	100.0	%	$	73,388	100.0	%	1.54	%


(1)	Total reserves for losses and loss adjustment expenses, net of recoverables, was $287.0 million at March 31, 2020, compared to $278.7 million at December 31, 2019.


(2)	The aggregate dollar amount of each insured mortgage loan’s current principal balance.


(3)	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 transactions.



	19

Arch Capital Group Ltd. and Subsidiaries

Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Gross premiums written	$	2,698,537		$	1,842,071		$	2,043,292		$	1,829,829		$	1,980,453
Premiums ceded	(747,991		)	(498,971		)	(585,587		)	(504,301		)	(600,581		)
Net premiums written	1,950,546			1,343,100			1,457,705			1,325,528			1,379,872
Change in unearned premiums	(346,141		)	39,337			(145,514		)	(13,119		)	(157,100		)
Net premiums earned	1,604,405			1,382,437			1,312,191			1,312,409			1,222,772
Other underwriting income (loss)	6,719			6,189			2,747			5,280			8,233
Losses and loss adjustment expenses	(1,004,743		)	(710,267		)	(706,241		)	(656,127		)	(607,682		)
Acquisition expenses	(225,479		)	(197,562		)	(188,048		)	(180,533		)	(168,822		)
Other operating expenses	(220,842		)	(192,125		)	(184,944		)	(183,302		)	(188,975		)
Underwriting income	$	160,060		$	288,672		$	235,705		$	297,727		$	265,526

Underwriting Ratios
Loss ratio	62.6		%	51.4		%	53.8		%	50.0		%	49.7		%
Acquisition expense ratio	14.1		%	14.3		%	14.3		%	13.8		%	13.8		%
Other operating expense ratio	13.8		%	13.9		%	14.1		%	14.0		%	15.5		%
Combined ratio	90.5		%	79.6		%	82.2		%	77.8		%	79.0		%

Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums	7.4		%	2.2		%	5.2		%	0.5		%	0.6		%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments	(1.1		)%	(4.0		)%	(3.9		)%	(2.7		)%	(3.0		)%
Combined ratio excluding catastrophic activity and prior year development (1)	84.2		%	81.4		%	80.9		%	80.0		%	81.4		%

Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses	$	530,012		$	627,929		$	508,364		$	494,368		$	430,724
Change in unpaid losses and loss adjustment expenses	474,731			82,338			197,877			161,759			176,958
Total losses and loss adjustment expenses	$	1,004,743		$	710,267		$	706,241		$	656,127		$	607,682

Net premiums written to gross premiums written	72.3		%	72.9		%	71.3		%	72.4		%	69.7		%


(1)	See ‘Comments on Regulation G’ for further discussion.



	20

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Selected Information on Losses and Loss Adjustment Expenses



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance	$	(776	)	$	(2,839	)	$	(3,934	)	$	(1,469	)	$	(1,651	)
Reinsurance	(10,960		)	(19,081		)	(14,716		)	(11,251		)	1,580
Mortgage	(6,101		)	(32,763		)	(33,031		)	(22,797		)	(36,622		)
Total	$	(17,837	)	$	(54,683	)	$	(51,681	)	$	(35,517	)	$	(36,693	)
Impact on losses and loss adjustment expenses:
Insurance	$	(1,115	)	$	(4,403	)	$	(4,354	)	$	(2,607	)	$	(4,426	)
Reinsurance	(11,627		)	(20,058		)	(15,309		)	(12,697		)	1,668
Mortgage	(6,101		)	(32,763		)	(33,031		)	(22,803		)	(36,622		)
Total	$	(18,843	)	$	(57,224	)	$	(52,694	)	$	(38,107	)	$	(39,380	)
Impact on acquisition expenses:
Insurance	$	339		$	1,564		$	420		$	1,138		$	2,775
Reinsurance	667			977			593			1,446			(88		)
Mortgage	—			—			—			6			—
Total	$	1,006		$	2,541		$	1,013		$	2,590		$	2,687
Impact on combined ratio:
Insurance	(0.1		)%	(0.4		)%	(0.6		)%	(0.2		)%	(0.3		)%
Reinsurance	(2.0		)%	(4.9		)%	(4.0		)%	(3.1		)%	0.5		%
Mortgage	(1.8		)%	(9.4		)%	(9.6		)%	(6.5		)%	(11.3		)%
Total	(1.1		)%	(4.0		)%	(3.9		)%	(2.7		)%	(3.0		)%
Impact on loss ratio:
Insurance	(0.2		)%	(0.7		)%	(0.7		)%	(0.4		)%	(0.8		)%
Reinsurance	(2.1		)%	(5.2		)%	(4.2		)%	(3.5		)%	0.5		%
Mortgage	(1.8		)%	(9.4		)%	(9.6		)%	(6.5		)%	(11.3		)%
Total	(1.2		)%	(4.1		)%	(4.0		)%	(2.9		)%	(3.2		)%
Impact on acquisition expense ratio:
Insurance	0.1		%	0.3		%	0.1		%	0.2		%	0.5		%
Reinsurance	0.1		%	0.3		%	0.2		%	0.4		%	0.0		%
Mortgage	0.0		%	0.0		%	0.0		%	0.0		%	0.0		%
Total	0.1		%	0.1		%	0.1		%	0.2		%	0.2		%

Estimated net losses incurred from current accident year catastrophic events (2)
Insurance	$	49,483		$	5,531		$	26,085		$	2,565		$	54
Reinsurance	68,953			24,831			41,948			4,589			7,824
Total	$	118,436		$	30,362		$	68,033		$	7,154		$	7,878
Impact on combined ratio:
Insurance	6.9		%	0.9		%	4.3		%	0.4		%	0.0		%
Reinsurance	12.7		%	6.4		%	11.5		%	1.2		%	2.3		%
Total	7.4		%	2.2		%	5.2		%	0.5		%	0.6		%

Estimated impact of COVID-19 event, net of reinsurance and reinstatement premiums, included in current accident year catastrophic events (3)
Insurance	$	35,946		$	—		$	—		$	—		$	—
Reinsurance	50,700			—			—			—			—
Total	$	86,646		$	—		$	—		$	—		$	—
Impact on combined ratio:
Insurance	5.0		%	—			—			—			—
Reinsurance	9.3		%	—			—			—			—
Total	5.4		%	—			—			—			—


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2)

Equals estimated losses from catastrophic events occurring in the current accident year (e.g. natural catastrophes, man-made events, pandemic events), net of reinsurance and reinstatement premiums. As regards the natural catastrophe estimates included within, amounts shown for the insurance segment are for named catastrophic events only, while amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.


(3)	Equals estimated losses for exposures through March 31, 2020 to the COVID-19 global pandemic, net of reinsurance and reinstatement premiums. The amounts represent a subset of the estimated losses for the current accident year catastrophic events.



	21

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Investable Asset Summary and Investment Portfolio Metrics

The following table summarizes the Company’s investable assets and portfolio metrics (1):



(U.S. Dollars in thousands)	March 31,					December 31,					September 30,					June 30,					March 31,
	2020					2019					2019					2019					2019
Investable assets (1) (2):
Fixed maturities available for sale, at fair value	$	16,163,702		72.2	%	$	16,187,651		72.6	%	$	15,831,411		73.4	%	$	15,184,279		73.1	%	$	14,627,478		72.9	%
Fixed maturities—fair value option (3)	342,241			1.5	%	337,860			1.5	%	345,588			1.6	%	348,298			1.7	%	366,470			1.8	%
Fixed maturities pledged under securities lending agreements, at fair value	177,442			0.8	%	368,510			1.7	%	409,795			1.9	%	427,217			2.1	%	388,732			1.9	%
Total fixed maturities	16,683,385			74.6	%	16,894,021			75.8	%	16,586,794			76.9	%	15,959,794			76.8	%	15,382,680			76.7	%

Equity securities, at fair value	1,118,734			5.0	%	773,588			3.5	%	506,998			2.4	%	606,240			2.9	%	430,885			2.1	%
Equity securities—fair value option (3)	29,905			0.1	%	42,896			0.2	%	41,436			0.2	%	47,367			0.2	%	48,587			0.2	%
Equity securities pledged under securities lending agreements, at fair value	—			0.0	%	11,358			0.1	%	10,620			0.0	%	13,293			0.1	%	15,530			0.1	%
Total equity securities	1,148,639			5.1	%	827,842			3.7	%	559,054			2.6	%	666,900			3.2	%	495,002			2.5	%

Other investments—fair value option (3)	1,153,737			5.2	%	1,336,920			6.0	%	1,369,554			6.4	%	1,327,134			6.4	%	1,313,816			6.6	%

Investments accounted for using the equity method (4)	1,676,055			7.5	%	1,660,396			7.5	%	1,575,832			7.3	%	1,581,972			7.6	%	1,563,779			7.8	%

Short-term investments available for sale, at fair value	944,531			4.2	%	956,546			4.3	%	751,989			3.5	%	821,961			4.0	%	706,214			3.5	%
Short-term investments—fair value option (3)	52,548			0.2	%	47,711			0.2	%	33,369			0.2	%	25,289			0.1	%	25,429			0.1	%
Total short-term investments	997,079			4.5	%	1,004,257			4.5	%	785,358			3.6	%	847,250			4.1	%	731,643			3.6	%

Cash	785,704			3.5	%	623,793			2.8	%	799,709			3.7	%	536,339			2.6	%	576,799			2.9	%

Securities transactions entered into but not settled at the balance sheet date	(68,747		)	(0.3	)%	(61,553		)	(0.3	)%	(110,213		)	(0.5	)%	(142,726		)	(0.7	)%	(8,339		)	0.0	%
Total investable assets held by the Company	$	22,375,852		100.0	%	$	22,285,676		100.0	%	$	21,566,088		100.0	%	$	20,776,663		100.0	%	$	20,055,380		100.0	%

Average effective duration (in years)	3.19					3.40					3.64					3.52					3.47
Average S&P/Moody’s credit ratings (5)	AA/Aa2					AA/Aa2					AA/Aa2					AA/Aa2					AA/Aa2
Embedded book yield (before investment expenses)	2.34		%			2.55		%			2.70		%			2.87		%			2.95		%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:



Investable assets in ‘other’ segment:
Cash	$	96,580		$	102,437		$	80,390		$	68,977		$	56,301
Investments accounted for using the fair value option	1,732,085			1,898,090			2,048,296			1,972,947			2,215,321
Fixed maturities available for sale, at fair value	677,869			706,875			639,112			697,453			549,834
Equity securities, at fair value	63,169			65,337			43,487			64,703			65,010
Securities sold but not yet purchased	(30,076		)	(66,257		)	(65,736		)	(48,823		)	(28,737		)
Securities transactions entered into but not settled at the balance sheet date	(37,039		)	(1,893		)	(15,302		)	13,209			(33,011		)
Total investable assets included in ‘other’ segment	$	2,502,588		$	2,704,589		$	2,730,247		$	2,768,466		$	2,824,718

(2) This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.

(3) Represents investments which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on the balance sheet.


(4)	Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.

(5) Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).



	22

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Net Investment Income, Yield and Total Return

The following table summarizes the Company’s net investment income, yield and total return (1):



(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Composition of net investment income (1):
Fixed maturities	$	101,763		$	108,885		$	109,953		$	111,335		$	110,651
Equity securities (dividends)	5,630			4,134			3,581			3,494			2,246
Short-term investments	3,385			3,464			3,432			3,448			4,298
Other (2)	20,479			19,211			24,170			20,115			22,944
Gross investment income	131,257			135,694			141,136			138,392			140,139
Investment expenses	(18,229		)	(15,788		)	(14,262		)	(15,354		)	(18,890		)
Net investment income	$	113,028		$	119,906		$	126,874		$	123,038		$	121,249
Per share	$	0.27		$	0.29		$	0.31		$	0.30		$	0.30

Investment income yield, at amortized cost (1) (3):
Pre-tax	2.20		%	2.36		%	2.58		%	2.62		%	2.67		%
After-tax	1.91		%	2.07		%	2.31		%	2.37		%	2.41		%

Total return on investments (1) (4)	(0.86		)%	1.07		%	1.00		%	2.37		%	2.70		%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


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


(3)	Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.

(4)

Total return on investments includes net investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in allowance for credit loses on non-investment related financial assets) and the change in unrealized gains or losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.



	23

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Fixed Maturities

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):



(U.S. Dollars in thousands)	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gains (Losses)			Allowance for Credit Losses			Amortized Cost		Fair Value / Amortized Cost		Fair Value % of Total
At March 31, 2020
Corporates	$	6,678,007	$	175,154	$	(113,931	)	$	61,223		$	(6,672	)	$	6,623,456	100.8	%	40.0	%
U.S. government and government agencies	4,309,804		135,352		(300		)	135,052			—			4,174,752		103.2	%	25.8	%
Municipal bonds	860,593		27,226		(7,550		)	19,676			(23		)	840,940		102.3	%	5.2	%
Non-U.S. government securities	1,964,810		53,250		(98,970		)	(45,720		)	—			2,010,530		97.7	%	11.8	%
Asset-backed securities	1,639,730		12,155		(60,443		)	(48,288		)	(2,139		)	1,690,157		97.0	%	9.8	%
Commercial mortgage-backed securities	781,417		11,657		(18,410		)	(6,753		)	(306		)	788,476		99.1	%	4.7	%
Residential mortgage-backed securities	449,024		16,006		(1,653		)	14,353			(206		)	434,877		103.3	%	2.7	%
Total	$	16,683,385	$	430,800	$	(301,257	)	$	129,543		$	(9,346	)	$	16,563,188	100.7	%	100.0	%

At December 31, 2019
Corporates	$	6,561,354	$	189,917	$	(12,752	)	$	177,165		$	—		$	6,384,189	102.8	%	38.8	%
U.S. government and government agencies	4,632,947		34,892		(9,997		)	24,895			—			4,608,052		100.5	%	27.4	%
Municipal bonds	880,119		24,582		(2,213		)	22,369			—			857,750		102.6	%	5.2	%
Non-U.S. government securities	1,995,813		45,019		(19,297		)	25,722			—			1,970,091		101.3	%	11.8	%
Asset-backed securities	1,547,744		23,403		(4,028		)	19,375			—			1,528,369		101.3	%	9.2	%
Commercial mortgage-backed securities	734,244		14,951		(2,330		)	12,621			—			721,623		101.7	%	4.3	%
Residential mortgage-backed securities	541,800		9,651		(887		)	8,764			—			533,036		101.6	%	3.2	%
Total	$	16,894,021	$	342,415	$	(51,504	)	$	290,911		$	—		$	16,603,110	101.8	%	100.0	%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.



	24

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Credit Quality Distribution and Maturity Profile

The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):



(U.S. Dollars in thousands)	March 31,				December 31,				September 30,				June 30,				March 31,
	2020				2019				2019				2019				2019
Credit quality distribution of total fixed maturities (2) (3):
U.S. government and government agencies (4)	$	4,804,048	28.8	%	$	5,215,489	30.9	%	$	5,403,271	32.6	%	$	5,030,769	31.5	%	$	4,895,315	31.8	%
AAA	3,486,700		20.9	%	3,392,341		20.1	%	3,240,708		19.5	%	3,325,260		20.8	%	3,096,530		20.1	%
AA	1,994,127		12.0	%	2,115,828		12.5	%	1,879,728		11.3	%	1,831,265		11.5	%	1,886,690		12.3	%
A	3,937,053		23.6	%	3,849,458		22.8	%	3,648,581		22.0	%	3,439,690		21.6	%	3,213,166		20.9	%
BBB	1,565,912		9.4	%	1,495,467		8.9	%	1,576,052		9.5	%	1,465,219		9.2	%	1,437,907		9.3	%
BB	366,759		2.2	%	355,803		2.1	%	362,117		2.2	%	361,389		2.3	%	363,887		2.4	%
B	205,181		1.2	%	216,663		1.3	%	210,824		1.3	%	226,885		1.4	%	231,544		1.5	%
Lower than B	51,712		0.3	%	56,865		0.3	%	61,205		0.4	%	60,858		0.4	%	60,577		0.4	%
Not rated	271,893		1.6	%	196,107		1.2	%	204,308		1.2	%	218,459		1.4	%	197,064		1.3	%
Total fixed maturities, at fair value	$	16,683,385	100.0	%	$	16,894,021	100.0	%	$	16,586,794	100.0	%	$	15,959,794	100.0	%	$	15,382,680	100.0	%

Maturity profile of total fixed maturities (2):
Due in one year or less	$	459,191	2.8	%	$	443,914	2.6	%	$	571,738	3.4	%	$	457,207	2.9	%	$	465,467	3.0	%
Due after one year through five years	9,381,924		56.2	%	9,875,925		58.5	%	9,924,224		59.8	%	9,559,981		59.9	%	9,261,391		60.2	%
Due after five years through ten years	3,416,637		20.5	%	3,296,839		19.5	%	3,052,774		18.4	%	2,992,411		18.7	%	2,932,045		19.1	%
Due after 10 years	555,462		3.3	%	453,555		2.7	%	229,085		1.4	%	245,868		1.5	%	202,377		1.3	%
	13,813,214		82.8	%	14,070,233		83.3	%	13,777,821		83.1	%	13,255,467		83.1	%	12,861,280		83.6	%
Mortgage-backed securities	449,024		2.7	%	541,800		3.2	%	528,227		3.2	%	513,760		3.2	%	492,255		3.2	%
Commercial mortgage-backed securities	781,417		4.7	%	734,244		4.3	%	754,306		4.5	%	686,707		4.3	%	610,754		4.0	%
Asset-backed securities	1,639,730		9.8	%	1,547,744		9.2	%	1,526,440		9.2	%	1,503,860		9.4	%	1,418,391		9.2	%
Total fixed maturities, at fair value	$	16,683,385	100.0	%	$	16,894,021	100.0	%	$	16,586,794	100.0	%	$	15,959,794	100.0	%	$	15,382,680	100.0	%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


(2)	This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.

(3) 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.

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



	25

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Analysis of Corporate Exposures

The following table summarizes the Company’s corporate bonds by sector (1):



(U.S. Dollars in thousands)	March 31,				December 31,				September 30,				June 30,				March 31,
	2020				2019				2019				2019				2019
Sector:
Industrials	$	3,903,927	58.5	%	$	3,639,891	55.5	%	$	3,588,041	55.2	%	$	3,311,161	52.7	%	$	3,212,269	53.1	%
Financials	2,400,415		35.9	%	2,645,393		40.3	%	2,612,883		40.2	%	2,671,207		42.5	%	2,543,207		42.0	%
Utilities	321,022		4.8	%	224,615		3.4	%	237,042		3.6	%	245,068		3.9	%	223,399		3.7	%
Covered bonds	2,662		0.0	%	3,520		0.1	%	2,543		0.0	%	2,461		0.0	%	7,713		0.1	%
All other (2)	49,981		0.7	%	47,935		0.7	%	54,145		0.8	%	52,000		0.8	%	67,526		1.1	%
Total fixed maturities, at fair value	$	6,678,007	100.0	%	$	6,561,354	100.0	%	$	6,494,654	100.0	%	$	6,281,897	100.0	%	$	6,054,114	100.0	%

Credit quality distribution (3):
AAA	$	86,420	1.3	%	$	95,559	1.5	%	$	95,340	1.5	%	$	91,266	1.5	%	$	135,630	2.2	%
AA	982,202		14.7	%	1,035,817		15.8	%	1,021,056		15.7	%	1,053,860		16.8	%	1,083,024		17.9	%
A	3,480,871		52.1	%	3,392,134		51.7	%	3,240,957		49.9	%	3,089,233		49.2	%	2,874,706		47.5	%
BBB	1,451,807		21.7	%	1,355,868		20.7	%	1,450,372		22.3	%	1,344,247		21.4	%	1,286,351		21.2	%
BB	348,848		5.2	%	334,264		5.1	%	339,952		5.2	%	334,068		5.3	%	336,354		5.6	%
B	198,828		3.0	%	207,713		3.2	%	201,352		3.1	%	217,324		3.5	%	217,043		3.6	%
Lower than B	22,869		0.3	%	22,233		0.3	%	26,969		0.4	%	22,758		0.4	%	25,901		0.4	%
Not rated	106,162		1.6	%	117,766		1.8	%	118,656		1.8	%	129,141		2.1	%	95,105		1.6	%
Total fixed maturities, at fair value	$	6,678,007	100.0	%	$	6,561,354	100.0	%	$	6,494,654	100.0	%	$	6,281,897	100.0	%	$	6,054,114	100.0	%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) Includes sovereign securities, supranational securities and other.

(3) 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.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at March 31, 2020 (1):



(U.S. Dollars in thousands)	Fair Value		% of Asset Class		% of Investable Assets		Credit Quality (2)
Issuer:
Bank of America Corporation	$	267,690	4.0	%	1.2	%	A-/A2
Wells Fargo & Company	266,260		4.0	%	1.2	%	A-/A2
JPMorgan Chase & Co.	231,644		3.5	%	1.0	%	A-/A2
Apple Inc.	188,372		2.8	%	0.8	%	AA+/Aa1
Morgan Stanley	139,910		2.1	%	0.6	%	BBB+/A3
Citigroup Inc.	126,042		1.9	%	0.6	%	A-/A2
The Walt Disney Company	125,294		1.9	%	0.6	%	A/A2
BP p.l.c.	110,570		1.7	%	0.5	%	A-/A1
The Goldman Sachs Group, Inc.	108,376		1.6	%	0.5	%	BBB+/A3
Oracle Corporation	108,266		1.6	%	0.5	%	A+/A3
Total	$	1,672,424	25.0	%	7.5	%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

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



	26

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Structured Securities

The following table provides the composition of the Company’s structured securities at March 31, 2020 (1):



(U.S. Dollars in thousands)	Agencies		AAA		AA		A		BBB		Non-Investment Grade		Total

Residential mortgage-backed securities	$	413,311	$	5,705	$	309	$	—	$	—	$	29,699	$	449,024
Commercial mortgage-backed securities	80,933		598,842		30,406		8,850		16,721		45,665		781,417
Asset-backed securities	—		1,266,615		100,448		185,991		32,594		54,082		1,639,730
Total	$	494,244	$	1,871,162	$	131,163	$	194,841	$	49,315	$	129,446	$	2,870,171


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.



	27

Arch Capital Group Ltd. and Subsidiaries

Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the 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 investment funds accounted for using the equity method, net foreign exchange gains or losses, and transaction costs and other, net of income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on the following page.

The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s 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 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). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions and Watford’s non-recurring listing expenses. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other from the calculation of after-tax operating income or loss available to Arch common shareholders.

The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.

In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s outstanding common equity. Watford has its own management and board of directors that is responsible for its own results and profitability. In addition, the Company does not guarantee or provide credit support for Watford. Because Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford and Watford is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.

The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 11.

In addition, the Company’s segment information includes the use of a combined ratio excluding catastrophic activity and prior year development, for the insurance and reinsurance segments, and a combined ratio excluding prior year development, for the mortgage segment. These ratios 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 on the individual segment pages. 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.

Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by the Company’s investment portfolio against benchmark returns during the periods presented.



	28

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation and Annualized Operating Return on Average Common Equity

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 and related diluted per share results. Each line item reflects the impact of the Company’s ownership of Watford’s outstanding common equity:



(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Net income available to Arch common shareholders	$	133,714		$	315,981		$	382,050		$	458,551		$	438,125
Net realized (gains) losses	109,364			(32,966		)	(77,959		)	(124,588		)	(114,335		)
Equity in net (income) loss of investment funds accounted for using the equity method	4,209			(27,139		)	(17,130		)	(32,536		)	(46,867		)
Net foreign exchange (gains) losses	(64,491		)	39,832			(30,160		)	6,054			(4,994		)
Transaction costs and other	2,595			9,081			1,995			2,178			1,190
Income tax expense (benefit) (1)	4,365			3,568			2,156			7,774			2,778
After-tax operating income available to Arch common shareholders	$	189,756		$	308,357		$	260,952		$	317,433		$	275,897

Diluted per common share results:
Net income available to Arch common shareholders	$	0.32		$	0.76		$	0.92		$	1.12		$	1.07
Net realized (gains) losses	0.27			(0.08		)	(0.19		)	(0.31		)	(0.29		)
Equity in net (income) loss of investment funds accounted for using the equity method	0.01			(0.07		)	(0.04		)	(0.08		)	(0.11		)
Net foreign exchange (gains) losses	(0.16		)	0.10			(0.07		)	0.01			(0.01		)
Transaction costs and other	0.01			0.02			0.00			0.01			0.00
Income tax expense (benefit) (1)	0.01			0.01			0.01			0.02			0.01
After-tax operating income available to Arch common shareholders	$	0.46		$	0.74		$	0.63		$	0.77		$	0.67

Weighted average common shares and common share equivalents outstanding - diluted	414,033,570			414,124,920			413,180,201			410,899,483			408,971,029

Beginning common shareholders’ equity	$	10,717,371		$	10,378,096		$	9,977,352		$	9,334,596		$	8,659,827
Ending common shareholders’ equity	10,587,244			10,717,371			10,378,096			9,977,352			9,334,596
Average common shareholders’ equity	$	10,652,308		$	10,547,734		$	10,177,724		$	9,655,974		$	8,997,212

Annualized return on average common equity	5.0		%	12.0		%	15.0		%	19.0		%	19.5		%
Annualized operating return on average common equity	7.1		%	11.7		%	10.3		%	13.1		%	12.3		%

(1)

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



	29

Arch Capital Group Ltd. and Subsidiaries

Operating Income and Effective Tax Rate Calculations

The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Arch Operating Income Components (1):
Income before income taxes	$	205,953		$	355,837		$	430,554		$	511,883		$	489,163
Net realized (gains) losses	72,109			(31,836		)	(80,014		)	(125,063		)	(111,124		)
Equity in net (income) loss of investment funds accounted for using the equity method	4,209			(27,139		)	(17,130		)	(32,536		)	(46,867		)
Net foreign exchange (gains) losses	(63,307		)	38,031			(29,794		)	6,190			(5,175		)
Transaction costs and other	2,538			9,081			1,995			2,178			1,190
Pre-tax operating income	221,502			343,974			305,611			362,652			327,187
Arch share of ‘other’ segment operating income (loss) (2)	2,237			(1,450		)	1,704			1,863			2,222
Pre-tax operating income available to Arch (b)	223,739			342,524			307,315			364,515			329,409
Income tax expense (a)	(23,580		)	(23,764		)	(35,960		)	(36,679		)	(43,109		)
After-tax operating income available to Arch	200,159			318,760			271,355			327,836			286,300
Preferred dividends	(10,403		)	(10,403		)	(10,403		)	(10,403		)	(10,403		)
After-tax operating income available to Arch common shareholders	$	189,756		$	308,357		$	260,952		$	317,433		$	275,897

Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)	10.5		%	6.9		%	11.7		%	10.1		%	13.1		%


(1)	Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


(2)	Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income (loss) is as follows:



(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Balances in ‘other’ segment:
Underwriting income (loss)	$	(6,010	)	$	(37,251	)	$	(4,443	)	$	(4,593	)	$	(5,378	)
Net investment income	32,125			34,357			34,614			32,000			35,700
Interest expense	(7,310		)	(7,558		)	(8,091		)	(5,905		)	(5,583		)
Preferred dividends	(1,096		)	(1,131		)	(6,600		)	(4,590		)	(4,588		)
Pre-tax operating income (loss) available to common shareholders	17,709			(11,583		)	15,480			16,912			20,151
Arch ownership	13		%	13		%	11		%	11		%	11		%
Arch share of ‘Other’ segment operating income (loss) (3)	$	2,237		$	(1,450	)	$	1,704		$	1,863		$	2,222

(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).



	30

Arch Capital Group Ltd. and Subsidiaries

Capital Structure and Share Repurchase Activity

The following table provides an analysis of the Company’s capital structure (1):



(U.S. Dollars in thousands, except share data)	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Debt:
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)	$	300,000		$	300,000		$	300,000		$	300,000		$	300,000
Arch-U.S. senior notes, due Nov. 1, 2043 ($500,000 principal, 5.144%) (2)	500,000			500,000			500,000			500,000			500,000
Arch Finance senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)	500,000			500,000			500,000			500,000			500,000
Arch Finance senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)	450,000			450,000			450,000			450,000			450,000
Deferred debt costs on senior notes	(15,616		)	(15,791		)	(15,963		)	(16,135		)	(16,306		)
Revolving credit agreement borrowings, due October 26, 2021 (variable)	—			—			—			—			—
Total debt	$	1,734,384		$	1,734,209		$	1,734,037		$	1,733,865		$	1,733,694

Shareholders’ equity available to Arch:
Series E non-cumulative preferred shares (5.25%)	450,000			450,000			450,000			450,000			450,000
Series F non-cumulative preferred shares (5.45%)	330,000			330,000			330,000			330,000			330,000
Common shareholders’ equity (a)	10,587,244			10,717,371			10,378,096			9,977,352			9,334,596
Total shareholders’ equity available to Arch	$	11,367,244		$	11,497,371		$	11,158,096		$	10,757,352		$	10,114,596

Total capital available to Arch	$	13,101,628		$	13,231,580		$	12,892,133		$	12,491,217		$	11,848,290

Common shares outstanding, net of treasury shares (b)	405,609,867			405,619,201			405,230,531			404,887,534			403,738,764

Book value per common share (4) (a)/(b)	$	26.10		$	26.42		$	25.61		$	24.64		$	23.12

Leverage ratios:
Senior notes/total capital available to Arch	13.2		%	13.1		%	13.5		%	13.9		%	14.6		%
Revolving credit agreement borrowings/total capital available to Arch	—		%	—		%	—		%	—		%	—		%
Debt/total capital available to Arch	13.2		%	13.1		%	13.5		%	13.9		%	14.6		%
Preferred/total capital available to Arch	6.0		%	5.9		%	6.1		%	6.2		%	6.6		%
Debt and preferred/total capital available to Arch	19.2		%	19.0		%	19.5		%	20.1		%	21.2		%


(1)	Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


(2)	Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a wholly owned subsidiary of Arch Capital, and fully and unconditionally guaranteed by Arch Capital.


(3)	Issued by Arch Capital Finance LLC (“Arch Finance”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by Arch Capital.


(4)	Excludes the effects of stock options, restricted and performance stock units outstanding.

The following table provides the impact of share repurchases under the Company’s share repurchase program:



(U.S. Dollars in thousands except share data)	Three Months Ended										Cumulative
	March 31,		December 31,		September 30,		June 30,		March 31,		March 31,
	2020		2019		2019		2019		2019		2020
Effect of share repurchases:
Aggregate cost of shares repurchased	$	75,486	$	—	$	—	$	—	$	2,871	$	4,043,780
Shares repurchased	2,599,388		—		—		—		110,598		388,941,368
Average price per share repurchased	$	29.04	$	—	$	—	$	—	$	25.96	$	10.40

Remaining share repurchase authorization (1)											$	924,514


(1)	Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.



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ARCH CAPITAL GROUP LTD. Reports