ARCH CAPITAL GROUP LTD. - FORM 8-K - EX-99.2 - October 29, 2020

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EXHIBIT 99.2
 
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Arch Capital Group Ltd.
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08 Bermuda
 

Financial Supplement

Financial Information
as of September 30, 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) 278-9250Donald Watson: (914) 872-3616; dwatson@archcapservices.com


Arch Capital Group Ltd. and Subsidiaries
Table of Contents

  Page
   
I.Financial Highlights
  
II.Consolidated Financial Statements
 a.Consolidated Statements of Income
 b.Consolidated Balance Sheets
 c.Consolidated Statements of Changes in Shareholders’ Equity
 d.Consolidated Statements of Cash Flows
  
III.Segment Information
 a.Overview
 b.Consolidated Results
 c.Insurance Segment Results
 d.Reinsurance Segment Results
e.Mortgage Segment Results
f.Consolidated Results Excluding ‘Other’ Segment
g.Selected Information on Losses and Loss Adjustment Expenses
  
IV.Investment Information
 a.Investable Asset Summary and Investment Portfolio Metrics
b.Composition of Net Investment Income, Yield and Total Return
 c.Composition of Fixed Maturities
d.Credit Quality Distribution and Maturity Profile
e.Analysis of Corporate Exposures
 f.Structured Securities
  
V.Other
 a.Comments on Regulation G
 b.Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
c.Operating Income and Effective Tax Rate Calculations
 d.Capital Structure and Share Repurchase Activity

1
Arch Capital Group Ltd. and Subsidiaries
Basis of Presentation

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 September 30, 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; changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR 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 EndedNine Months Ended
September 30,September 30,
20202019Change20202019Change
Underwriting results:
Gross premiums written$2,556,914 $2,043,292 25.1 %$7,461,860 $5,853,574 27.5 %
Net premiums written1,726,828 1,457,705 18.5 %5,239,829 4,163,105 25.9 %
Net premiums earned1,625,061 1,312,191 23.8 %4,763,285 3,847,372 23.8 %
Underwriting income (loss) (2)104,877 235,705 (55.5)%251,527 798,958 (68.5)%
Loss ratio67.7 %53.8 %13.9 67.8 %51.2 %16.6 
Acquisition expense ratio13.8 %14.3 %(0.5)14.3 %14.0 %0.3 
Other operating expense ratio12.4 %14.1 %(1.7)13.0 %14.5 %(1.5)
Combined ratio93.9 %82.2 %11.7 95.1 %79.7 %15.4 
Net investment income$99,857 $126,874 (21.3)%$313,916 $371,161 (15.4)%
Per diluted share$0.24 $0.31 (22.6)%$0.77 $0.90 (14.4)%
Net income available to Arch common shareholders$408,636 $382,050 7.0 %$830,768 $1,278,726 (35.0)%
Per diluted share$1.00 $0.92 8.7 %$2.02 $3.11 (35.0)%
After-tax operating income available to Arch common shareholders (2)$120,321 $260,952 (53.9)%$326,691 $854,282 (61.8)%
Per diluted share$0.29 $0.63 (54.0)%$0.80 $2.08 (61.5)%
Comprehensive income (loss) available to Arch$455,907 $397,340 14.7 %$1,036,243 $1,700,369 (39.1)%
Net cash provided by operating activities$963,654 $769,486 25.2 %$2,198,037 $1,366,762 60.8 %
Weighted average common shares and common share equivalents outstanding — diluted409,194,657 413,180,201 (1.0)%410,314,897 410,807,402 (0.1)%
Financial measures:      
Change in book value per common share during period4.1 %3.9 %0.2 8.8 %19.0 %(10.2)
Annualized return on average common equity14.3 %15.0 %(0.7)9.9 %17.9 %(8.0)
Annualized operating return on average common equity (2)4.2 %10.3 %(6.1)3.9 %12.0 %(8.1)
Total return on investments (3)2.30 %1.00 %130 bps5.19 %6.20 %-101 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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Revenues       
Net premiums written$1,874,144 $1,668,311 $2,137,246 $1,455,453 $1,613,457 $5,679,701 $4,583,614 
Change in unearned premiums(103,052)(2,957)(392,802)60,429 (175,434)(498,811)(312,998)
Net premiums earned1,771,092 1,665,354 1,744,444 1,515,882 1,438,023 5,180,890 4,270,616 
Net investment income128,512 131,485 145,153 154,263 161,488 405,150 473,475 
Net realized gains (losses)280,499 556,588 (366,960)40,830 61,355 470,127 322,368 
Other underwriting income5,413 6,667 6,852 6,757 3,326 18,932 18,104 
Equity in net income (loss) of investment funds accounted for using the equity method126,735 (65,119)(4,209)27,139 17,130 57,407 96,533 
Other income (loss)919 (3,140)8,548 (1,317)1,338 6,327 3,550 
Total revenues2,313,170 2,291,835 1,533,828 1,743,554 1,682,660 6,138,833 5,184,646 
Expenses
Losses and loss adjustment expenses(1,216,273)(1,230,522)(1,115,419)(844,922)(802,455)(3,562,214)(2,288,530)
Acquisition expenses(247,942)(254,789)(247,283)(221,888)(211,120)(750,014)(619,057)
Other operating expenses(215,686)(209,249)(234,544)(204,408)(196,512)(659,479)(596,589)
Corporate expenses(17,937)(17,920)(20,796)(26,837)(17,061)(56,653)(53,274)
Amortization of intangible assets(16,715)(16,489)(16,631)(21,890)(20,003)(49,835)(60,214)
Interest expense(41,343)(31,139)(32,555)(31,199)(31,328)(105,037)(89,673)
Net foreign exchange gains (losses)(44,885)(39,211)72,671 (52,306)33,124 (11,425)31,697 
Total expenses(1,800,781)(1,799,319)(1,594,557)(1,403,450)(1,245,355)(5,194,657)(3,675,640)
Income (loss) before income taxes512,389 492,516 (60,729)340,104 437,305 944,176 1,509,006 
Income tax expense(23,707)(26,127)(27,945)(27,336)(38,116)(77,779)(128,474)
Net income (loss)488,682 466,389 (88,674)312,768 399,189 866,397 1,380,532 
Net (income) loss attributable to noncontrolling interests(69,643)(167,568)232,791 13,616 (6,736)(4,420)(70,597)
Net income (loss) attributable to Arch419,039 298,821 144,117 326,384 392,453 861,977 1,309,935 
Preferred dividends(10,403)(10,403)(10,403)(10,403)(10,403)(31,209)(31,209)
Net income (loss) available to Arch common shareholders$408,636 $288,418 $133,714 $315,981 $382,050 $830,768 $1,278,726 
Comprehensive income (loss) available to Arch$455,907 $626,366 $(46,030)$326,760 $397,340 $1,036,243 $1,700,369 
Net income (loss) per common share and common share equivalent
Basic$1.01 $0.72 $0.33 $0.78 $0.95 $2.06 $3.19 
Diluted$1.00 $0.71 $0.32 $0.76 $0.92 $2.02 $3.11 
Weighted average common shares and common share equivalents outstanding
Basic402,850,485 402,503,687 403,892,161 402,941,290 402,564,121 403,081,266 401,419,153 
Diluted409,194,657 408,119,681 414,033,570 414,124,920 413,180,201 410,314,897 410,807,402 



4
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets

(U.S. Dollars in thousands, except share data)September 30,June 30,March 31,December 31,September 30,
20202020202020192019
Assets     
Investments:     
Fixed maturities available for sale, at fair value$18,452,888 $17,207,731 $16,841,571 $16,894,526 $16,470,523 
Short-term investments available for sale, at fair value2,039,097 2,277,866 944,531 956,546 751,989 
Collateral received under securities lending, at fair value64,259 473,790 182,284 388,376 430,263 
Equity securities, at fair value1,502,015 1,257,317 1,181,903 838,925 550,485 
Investments accounted for using the fair value option3,749,575 3,520,771 3,310,517 3,663,477 3,838,243 
Investments accounted for using the equity method1,883,702 1,727,302 1,676,055 1,660,396 1,575,832 
Total investments27,691,536 26,464,777 24,136,861 24,402,246 23,617,335 
Cash976,398 854,259 882,284 726,230 880,099 
Accrued investment income106,940 102,064 118,089 117,937 116,196 
Securities pledged under securities lending, at fair value62,749 464,503 177,442 379,868 420,415 
Premiums receivable2,225,311 2,203,753 2,155,204 1,778,717 1,618,186 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses4,621,937 4,363,507 4,303,135 4,346,816 3,168,195 
Contractholder receivables2,185,614 2,179,124 2,140,724 2,119,460 2,094,683 
Ceded unearned premiums1,450,200 1,364,603 1,357,284 1,234,683 1,168,258 
Deferred acquisition costs750,901 714,531 708,848 633,400 622,028 
Receivable for securities sold158,674 167,281 221,573 24,133 50,615 
Goodwill and intangible assets713,777 688,490 705,450 738,083 624,500 
Other assets1,771,998 1,632,756 1,509,232 1,383,788 1,192,093 
Total assets$42,716,035 $41,199,648 $38,416,126 $37,885,361 $35,572,603 
Liabilities     
Reserve for losses and loss adjustment expenses$15,900,526 $15,044,874 $14,309,580 $13,891,842 $12,389,384 
Unearned premiums5,062,052 4,827,445 4,817,191 4,339,549 4,243,372 
Reinsurance balances payable873,067 793,467 737,597 667,072 601,891 
Contractholder payables2,191,515 2,185,414 2,149,762 2,119,460 2,094,683 
Collateral held for insured obligations221,957 208,449 211,597 206,698 205,449 
Senior notes2,860,811 2,860,733 1,871,869 1,871,626 1,871,386 
Revolving credit agreement borrowings210,687 335,587 500,587 484,287 490,720 
Securities lending payable64,251 473,783 182,274 388,366 430,255 
Payable for securities purchased382,236 275,257 327,359 87,579 176,130 
Other liabilities1,681,181 1,467,739 1,392,905 1,513,330 1,007,524 
Total liabilities29,448,283 28,472,748 26,500,721 25,569,809 23,510,794 
Redeemable noncontrolling interests57,835 55,986 55,376 55,404 48,789 
Shareholders’ equity     
Non-cumulative preferred shares780,000 780,000 780,000 780,000 780,000 
Common shares642 642 642 638 638 
Additional paid-in capital1,950,782 1,935,514 1,921,487 1,889,683 1,864,468 
Retained earnings11,829,322 11,420,686 11,132,268 11,021,006 10,705,025 
Accumulated other comprehensive income (loss), net of deferred income tax386,357 349,488 21,944 212,091 211,714 
Common shares held in treasury, at cost(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,403,749)
Total shareholders’ equity available to Arch12,451,997 11,991,825 11,367,244 11,497,371 11,158,096 
Non-redeemable noncontrolling interests757,920 679,089 492,785 762,777 854,924 
Total shareholders’ equity13,209,917 12,670,914 11,860,029 12,260,148 12,013,020 
Total liabilities, noncontrolling interests and shareholders’ equity$42,716,035 $41,199,648 $38,416,126 $37,885,361 $35,572,603 
Common shares and common share equivalents outstanding, net of treasury shares406,018,958 405,970,251 405,609,867 405,619,201 405,230,531 
Book value per common share (1)$28.75 $27.62 $26.10 $26.42 $25.61 

(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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Non-cumulative preferred shares       
Balance at beginning and end of period$780,000 $780,000 $780,000 $780,000 $780,000 $780,000 $780,000 
Common shares
Balance at beginning of period642 642 638 638 638 638 634 
Common shares issued, net— — 4 — — 4 4 
Balance at end of period642 642 642 638 638 642 638 
Additional paid-in capital
Balance at beginning of period1,935,514 1,921,487 1,889,683 1,864,468 1,847,949 1,889,683 1,793,781 
Amortization of share-based compensation14,662 13,160 28,050 11,862 12,775 55,872 52,290 
All other606 867 3,754 13,353 3,744 5,227 18,397 
Balance at end of period1,950,782 1,935,514 1,921,487 1,889,683 1,864,468 1,950,782 1,864,468 
Retained earnings
Balance at beginning of period11,420,686 11,132,268 11,021,006 10,705,025 10,322,975 11,021,006 9,426,299 
Cumulative effect of an accounting change (1)— — (22,452)— — (22,452)— 
Balance at beginning of period, as adjusted11,420,686 11,132,268 10,998,554 10,705,025 10,322,975 10,998,554 9,426,299 
Net income488,682 466,389 (88,674)312,768 399,189 866,397 1,380,532 
Amounts attributable to noncontrolling interests(69,643)(167,568)232,791 13,616 (6,736)(4,420)(70,597)
Preferred share dividends(10,403)(10,403)(10,403)(10,403)(10,403)(31,209)(31,209)
Balance at end of period11,829,322 11,420,686 11,132,268 11,021,006 10,705,025 11,829,322 10,705,025 
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period349,488 21,944 212,091 211,714 206,827 212,091 (178,720)
Change in unrealized appreciation (decline) in value of available-for-sale investments19,800 305,338 (145,337)(24,707)21,566 179,801 397,371 
Change in foreign currency translation adjustments17,069 22,206 (44,810)25,084 (16,679)(5,535)(6,937)
Balance at end of period386,357 349,488 21,944 212,091 211,714 386,357 211,714 
Common shares held in treasury, at cost
Balance at beginning of period(2,494,505)(2,489,097)(2,406,047)(2,403,749)(2,401,037)(2,406,047)(2,382,167)
Shares repurchased for treasury(601)(5,408)(83,050)(2,298)(2,712)(89,059)(21,582)
Balance at end of period(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,403,749)(2,495,106)(2,403,749)
Total shareholders’ equity available to Arch12,451,997 11,991,825 11,367,244 11,497,371 11,158,096 12,451,997 11,158,096 
Non-redeemable noncontrolling interests757,920 679,089 492,785 762,777 854,924 757,920 854,924 
Total shareholders’ equity$13,209,917 $12,670,914 $11,860,029 $12,260,148 $12,013,020 $13,209,917 $12,013,020 

(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 EndedNine Months Ended
September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Operating Activities       
Net income (loss)$488,682 $466,389 $(88,674)$312,768 $399,189 $866,397 $1,380,532 
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses(282,907)(557,740)362,964 (51,435)(63,597)(477,683)(326,532)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss(95,078)96,350 29,034 24,899 6,808 30,306 (38,912)
Amortization of intangible assets16,715 16,489 16,631 21,890 20,003 49,835 60,214 
Share-based compensation14,521 13,363 28,549 11,985 12,895 56,433 54,432 
Changes in:
Reserve for losses and loss adjustment expenses, net509,623 652,389 506,057 112,907 222,678 1,668,069 377,074 
Unearned premiums, net103,052 2,957 392,802 (60,429)175,434 498,811 312,998 
Premiums receivable1,872 (45,181)(418,457)91,013 (26,715)(461,766)(328,765)
Deferred acquisition costs(14,801)(17,302)(75,135)(8,654)(13,816)(107,238)(38,606)
Reinsurance balances payable73,459 52,354 79,807 (32,770)75,487 205,620 214,902 
Other items, net194,732 31,058 (223,124)83,146 22,249 2,666 (124,198)
Net cash provided by operating activities1,009,870 711,126 610,454 505,320 830,615 2,331,450 1,543,139 
Investing Activities       
Purchases of fixed maturity investments(8,640,034)(13,444,854)(11,965,995)(6,043,154)(7,677,977)(34,050,883)(24,010,623)
Purchases of equity securities(330,699)(264,466)(760,683)(287,916)(92,112)(1,355,848)(524,051)
Purchases of other investments(340,194)(273,221)(228,471)(455,620)(337,862)(841,886)(1,014,925)
Proceeds from sales of fixed maturity investments7,711,837 13,109,907 11,723,123 5,888,011 7,075,372 32,544,867 22,707,854 
Proceeds from sales of equity securities151,447 314,045 266,301 58,688 194,429 731,793 371,130 
Proceeds from sales, redemptions and maturities of other investments319,619 256,057 216,131 382,042 292,819 791,807 827,517 
Proceeds from redemptions and maturities of fixed maturity investments276,052 170,884 198,356 248,546 149,770 645,292 394,719 
Net settlements of derivative instruments12,819 (45,017)195,488 (32,441)4,722 163,290 92,423 
Net (purchases) sales of short-term investments164,012 (1,311,586)(11,777)(89,245)(72,442)(1,159,351)129,078 
Change in cash collateral related to securities lending26,614 (405)55,001 (69,183)(600)81,210 6,990 
Purchases of fixed assets(9,030)(9,217)(8,470)(10,202)(11,276)(26,717)(27,635)
Other(140,671)(33,821)42,500 (145,533)(28,375)(131,992)(202,953)
Net cash provided by (used for) investing activities(798,228)(1,531,694)(278,496)(556,007)(503,532)(2,608,418)(1,250,476)
Financing Activities       
Purchases of common shares under share repurchase program— — (75,486)— — (75,486)(2,871)
Proceeds from common shares issued, net5 (5,134)(4,527)5,685 1,075 (9,656)518 
Proceeds from borrowings13,875 988,618 16,300 — 137,283 1,018,793 200,083 
Repayments of borrowings(139,000)(165,000)— (21,644)— (304,000)(27,538)
Change in cash collateral related to securities lending(26,614)405 (55,001)69,183 600 (81,210)(6,990)
Change in third party investment in non-redeemable noncontrolling interests— — (2,867)(75,056)— (2,867)— 
Change in third party investment in redeemable noncontrolling interests — — — (8)(161,874)— (161,874)
Dividends paid to redeemable noncontrolling interests(1,001)(1,359)(1,181)(1,107)(2,414)(3,541)(11,408)
Other57,891 (1,294)(1,331)(816)(1,678)55,266 (5,207)
Preferred dividends paid(10,403)(10,403)(10,403)(10,403)(10,403)(31,209)(31,209)
Net cash provided by (used for) financing activities(105,247)805,833 (134,496)(34,166)(37,411)566,090 (46,496)
Effects of exchange rate changes on foreign currency cash and restricted cash15,895 8,981 (30,723)26,076 (10,272)(5,847)(8,335)
Increase (decrease) in cash and restricted cash122,290 (5,754)166,739 (58,777)279,400 283,275 237,832 
Cash and restricted cash, beginning of period1,064,683 1,070,437 903,698 962,475 683,075 903,698 724,643 
Cash and restricted cash, end of period$1,186,973 $1,064,683 $1,070,437 $903,698 $962,475 $1,186,973 $962,475 
Income taxes paid (received)$136,404 $3,023 $7,387 $62,398 $3,565 $146,814 $47,065 
Interest paid$3,141 $50,767 $6,647 $58,385 $7,702 $60,555 $68,560 
Net cash provided by operating activities, excluding the ‘other’ segment$963,654 $648,427 $585,956 $443,298 $769,486 $2,198,037 $1,366,762 

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
September 30, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,206,328 $1,004,590 $346,248 $2,556,914 $197,480 $2,681,032 
Premiums ceded(382,167)(400,388)(47,783)(830,086)(50,164)(806,888)
Net premiums written824,161 604,202 298,465 1,726,828 147,316 1,874,144 
Change in unearned premiums(105,007)(49,704)52,944 (101,767)(1,285)(103,052)
Net premiums earned719,154 554,498 351,409 1,625,061 146,031 1,771,092 
Other underwriting income (loss)(31)298 4,600 4,867 546 5,413 
Losses and loss adjustment expenses(525,321)(422,084)(153,055)(1,100,460)(115,813)(1,216,273)
Acquisition expenses(102,420)(85,388)(35,716)(223,524)(24,418)(247,942)
Other operating expenses(122,541)(41,818)(36,708)(201,067)(14,619)(215,686)
Underwriting income (loss)$(31,159)$5,506 $130,530 104,877 (8,273)96,604 
Net investment income99,857 28,655 128,512 
Net realized gains (losses)210,984 69,515 280,499 
Equity in net income (loss) of investment funds accounted for using the equity method126,735 — 126,735 
Other income919 — 919 
Corporate expenses (2)(16,263)— (16,263)
Transaction costs and other (2)(1,674)— (1,674)
Amortization of intangible assets(16,715)— (16,715)
Interest expense(36,224)(5,119)(41,343)
Net foreign exchange gains (losses)(38,681)(6,204)(44,885)
Income (loss) before income taxes433,815 78,574 512,389 
Income tax (expense) benefit(23,638)(69)(23,707)
Net income (loss)410,177 78,505 488,682 
Dividends attributable to redeemable noncontrolling interests(882)(993)(1,875)
Amounts attributable to nonredeemable noncontrolling interests— (67,768)(67,768)
Net income (loss) available to Arch409,295 9,744 419,039 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$398,892 $9,744 $408,636 
Underwriting Ratios
Loss ratio73.0 %76.1 %43.6 %67.7 %79.3 %68.7 %
Acquisition expense ratio14.2 %15.4 %10.2 %13.8 %16.7 %14.0 %
Other operating expense ratio17.0 %7.5 %10.4 %12.4 %10.0 %12.2 %
Combined ratio104.2 %99.0 %64.2 %93.9 %106.0 %94.9 %
Net premiums written to gross premiums written68.3 %60.1 %86.2 %67.5 %74.6 %69.9 %
Total investable assets$25,724,501 $2,693,452 $28,417,953 
Total assets39,105,137 3,610,898 42,716,035 
Total liabilities26,747,061 2,701,222 29,448,283 
 
(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
September 30, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,005,874 $662,572 $375,092 $2,043,292 $249,960 $2,181,121 
Premiums ceded(302,034)(226,096)(57,703)(585,587)(94,208)(567,664)
Net premiums written703,840 436,476 317,389 1,457,705 155,752 1,613,457 
Change in unearned premiums(98,504)(72,621)25,611 (145,514)(29,920)(175,434)
Net premiums earned605,336 363,855 343,000 1,312,191 125,832 1,438,023 
Other underwriting income (loss)— (1,208)3,955 2,747 579 3,326 
Losses and loss adjustment expenses(422,782)(270,379)(13,080)(706,241)(96,214)(802,455)
Acquisition expenses(91,259)(62,393)(34,396)(188,048)(23,072)(211,120)
Other operating expenses(115,408)(32,533)(37,003)(184,944)(11,568)(196,512)
Underwriting income (loss)$(24,113)$(2,658)$262,476 235,705 (4,443)231,262 
Net investment income126,874 34,614 161,488 
Net realized gains (losses)80,014 (18,659)61,355 
Equity in net income (loss) of investment funds accounted for using the equity method17,130 — 17,130 
Other income (loss)1,338 — 1,338 
Corporate expenses (2)(15,066)— (15,066)
Transaction costs and other (2)(1,995)— (1,995)
Amortization of intangible assets(20,003)— (20,003)
Interest expense(23,237)(8,091)(31,328)
Net foreign exchange gains (losses)29,794 3,330 33,124 
Income (loss) before income taxes430,554 6,751 437,305 
Income tax (expense) benefit(38,116)— (38,116)
Net income (loss)392,438 6,751 399,189 
Dividends attributable to redeemable noncontrolling interests— (6,600)(6,600)
Amounts attributable to nonredeemable noncontrolling interests— (136)(136)
Net income (loss) available to Arch392,438 15 392,453 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$382,035 $15 $382,050 
Underwriting Ratios
Loss ratio69.8 %74.3 %3.8 %53.8 %76.5 %55.8 %
Acquisition expense ratio15.1 %17.1 %10.0 %14.3 %18.3 %14.7 %
Other operating expense ratio19.1 %8.9 %10.8 %14.1 %9.2 %13.7 %
Combined ratio104.0 %100.3 %24.6 %82.2 %104.0 %84.2 %
Net premiums written to gross premiums written70.0 %65.9 %84.6 %71.3 %62.3 %74.0 %
Total investable assets$21,566,088 $2,730,247 $24,296,335 
Total assets31,961,107 3,611,496 35,572,603 
Total liabilities20,912,352 2,598,442 23,510,794 
 
(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
(U.S. Dollars in thousands)Nine Months Ended
September 30, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$3,444,335 $2,934,174 $1,084,337 $7,461,860 $590,309 $7,831,554 
Premiums ceded(1,119,165)(967,698)(136,154)(2,222,031)(150,437)(2,151,853)
Net premiums written2,325,170 1,966,476 948,183 5,239,829 439,872 5,679,701 
Change in unearned premiums(202,188)(388,321)113,965 (476,544)(22,267)(498,811)
Net premiums earned2,122,982 1,578,155 1,062,148 4,763,285 417,605 5,180,890 
Other underwriting income (loss)(31)1,767 15,649 17,385 1,547 18,932 
Losses and loss adjustment expenses(1,550,632)(1,235,586)(444,721)(3,230,939)(331,275)(3,562,214)
Acquisition expenses(317,428)(255,516)(108,304)(681,248)(68,766)(750,014)
Other operating expenses(370,947)(125,831)(120,178)(616,956)(42,523)(659,479)
Underwriting income (loss)$(116,056)$(37,011)$404,594 251,527 (23,412)228,115 
Net investment income313,916 91,234 405,150 
Net realized gains (losses)523,964 (53,837)470,127 
Equity in net income (loss) of investment funds accounted for using the equity method57,407 — 57,407 
Other income (loss)6,327 — 6,327 
Corporate expenses (2)(51,407)— (51,407)
Transaction costs and other (2)(5,246)— (5,246)
Amortization of intangible assets(49,835)— (49,835)
Interest expense(86,599)(18,438)(105,037)
Net foreign exchange gains (losses)(17,812)6,387 (11,425)
Income (loss) before income taxes 942,242 1,934 944,176 
Income tax (expense) benefit(78,112)333 (77,779)
Net income (loss)864,130 2,267 866,397 
Dividends attributable to redeemable noncontrolling interests(1,873)(3,125)(4,998)
Amounts attributable to nonredeemable noncontrolling interests— 578 578 
Net income (loss) available to Arch862,257 (280)861,977 
Preferred dividends(31,209)— (31,209)
Net income (loss) available to Arch common shareholders$831,048 $(280)$830,768 
Underwriting Ratios
Loss ratio73.0 %78.3 %41.9 %67.8 %79.3 %68.8 %
Acquisition expense ratio15.0 %16.2 %10.2 %14.3 %16.5 %14.5 %
Other operating expense ratio17.5 %8.0 %11.3 %13.0 %10.2 %12.7 %
Combined ratio105.5 %102.5 %63.4 %95.1 %106.0 %96.0 %
Net premiums written to gross premiums written67.5 %67.0 %87.4 %70.2 %74.5 %72.5 %
 
(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.
12
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Nine Months Ended
September 30, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$2,867,753 $1,890,974 $1,095,607 $5,853,574 $598,627 $6,196,809 
Premiums ceded(914,751)(627,120)(149,358)(1,690,469)(178,118)(1,613,195)
Net premiums written1,953,002 1,263,854 946,249 4,163,105 420,509 4,583,614 
Change in unearned premiums(201,719)(186,450)72,436 (315,733)2,735 (312,998)
Net premiums earned1,751,283 1,077,404 1,018,685 3,847,372 423,244 4,270,616 
Other underwriting income (loss)— 4,393 11,867 16,260 1,844 18,104 
Losses and loss adjustment expenses(1,168,677)(751,147)(50,226)(1,970,050)(318,480)(2,288,530)
Acquisition expenses(265,177)(173,504)(98,722)(537,403)(81,654)(619,057)
Other operating expenses(338,327)(102,197)(116,697)(557,221)(39,368)(596,589)
Underwriting income (loss)$(20,898)$54,949 $764,907 798,958 (14,414)784,544 
Net investment income371,161 102,314 473,475 
Net realized gains (losses)316,201 6,167 322,368 
Equity in net income (loss) of investment funds accounted for using the equity method96,533 — 96,533 
Other income (loss)3,550 — 3,550 
Corporate expenses (2)(47,911)— (47,911)
Transaction costs and other (2)(5,363)— (5,363)
Amortization of intangible assets(60,214)— (60,214)
Interest expense(70,094)(19,579)(89,673)
Net foreign exchange gains (losses)28,779 2,918 31,697 
Income (loss) before income taxes1,431,600 77,406 1,509,006 
Income tax (expense) benefit(128,454)(20)(128,474)
Net income (loss)1,303,146 77,386 1,380,532 
Dividends attributable to redeemable noncontrolling interests— (15,778)(15,778)
Amounts attributable to nonredeemable noncontrolling interests— (54,819)(54,819)
Net income (loss) available to Arch1,303,146 6,789 1,309,935 
Preferred dividends(31,209)— (31,209)
Net income (loss) available to Arch common shareholders$1,271,937 $6,789 $1,278,726 
Underwriting Ratios
Loss ratio66.7 %69.7 %4.9 %51.2 %75.2 %53.6 %
Acquisition expense ratio15.1 %16.1 %9.7 %14.0 %19.3 %14.5 %
Other operating expense ratio19.3 %9.5 %11.5 %14.5 %9.3 %14.0 %
Combined ratio101.1 %95.3 %26.1 %79.7 %103.8 %82.1 %
Net premiums written to gross premiums written68.1 %66.8 %86.4 %71.1 %70.2 %74.0 %
 
(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.

13
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Gross premiums written$1,206,328 $1,030,362 $1,207,645 $1,040,240 $1,005,874 $3,444,335 $2,867,753 
Premiums ceded(382,167)(358,101)(378,897)(351,516)(302,034)(1,119,165)(914,751)
Net premiums written824,161 672,261 828,748 688,724 703,840 2,325,170 1,953,002 
Change in unearned premiums(105,007)15,648 (112,829)(42,927)(98,504)(202,188)(201,719)
Net premiums earned719,154 687,909 715,919 645,797 605,336 2,122,982 1,751,283 
Other underwriting income (loss)(31)— — — — (31)— 
Losses and loss adjustment expenses(525,321)(518,203)(507,108)(446,798)(422,782)(1,550,632)(1,168,677)
Acquisition expenses(102,420)(107,671)(107,337)(96,437)(91,259)(317,428)(265,177)
Other operating expenses(122,541)(118,757)(129,649)(116,443)(115,408)(370,947)(338,327)
Underwriting income (loss)$(31,159)$(56,722)$(28,175)$(13,881)$(24,113)$(116,056)$(20,898)
Underwriting Ratios
Loss ratio73.0 %75.3 %70.8 %69.2 %69.8 %73.0 %66.7 %
Acquisition expense ratio14.2 %15.7 %15.0 %14.9 %15.1 %15.0 %15.1 %
Other operating expense ratio17.0 %17.3 %18.1 %18.0 %19.1 %17.5 %19.3 %
Combined ratio104.2 %108.3 %103.9 %102.1 %104.0 %105.5 %101.1 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums10.3 %12.5 %6.9 %0.9 %4.3 %9.9 %1.6 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(0.2)%(0.3)%(0.1)%(0.4)%(0.6)%(0.2)%(0.4)%
Combined ratio excluding catastrophic activity and prior year development (1)94.1 %96.1 %97.1 %101.6 %100.3 %95.8 %99.9 %
Net premiums written to gross premiums written68.3 %65.2 %68.6 %66.2 %70.0 %67.5 %68.1 %
 
(1)See ‘Comments on Regulation G’ for further discussion.

14
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Net premiums written
Property, energy, marine and aviation$152,193 18.5 %$159,801 23.8 %$127,585 15.4 %$95,849 13.9 %$97,966 13.9 %$439,579 18.9 %$272,271 13.9 %
Professional lines (1)199,163 24.2 %157,899 23.5 %169,118 20.4 %145,841 21.2 %137,569 19.5 %526,180 22.6 %388,482 19.9 %
Programs123,768 15.0 %104,930 15.6 %112,532 13.6 %96,653 14.0 %120,039 17.1 %341,230 14.7 %329,882 16.9 %
Construction and national accounts88,790 10.8 %57,144 8.5 %115,999 14.0 %114,437 16.6 %98,522 14.0 %261,933 11.3 %254,765 13.0 %
Excess and surplus casualty (2)78,889 9.6 %64,703 9.6 %65,419 7.9 %61,549 8.9 %62,843 8.9 %209,011 9.0 %166,474 8.5 %
Travel, accident and health28,972 3.5 %27,997 4.2 %126,046 15.2 %65,337 9.5 %75,192 10.7 %183,015 7.9 %239,833 12.3 %
Lenders products60,830 7.4 %23,690 3.5 %33,292 4.0 %35,915 5.2 %31,005 4.4 %117,812 5.1 %75,793 3.9 %
Other (3)91,556 11.1 %76,097 11.3 %78,757 9.5 %73,143 10.6 %80,704 11.5 %246,410 10.6 %225,502 11.5 %
Total$824,161 100.0 %$672,261 100.0 %$828,748 100.0 %$688,724 100.0 %$703,840 100.0 %$2,325,170 100.0 %$1,953,002 100.0 %
Underwriting location
United States$574,699 69.7 %$453,215 67.4 %$602,677 72.7 %$507,193 73.6 %$532,808 75.7 %$1,630,591 70.1 %$1,476,283 75.6 %
Europe212,203 25.7 %181,566 27.0 %196,042 23.7 %151,182 22.0 %145,512 20.7 %589,811 25.4 %408,032 20.9 %
Other37,259 4.5 %37,480 5.6 %30,029 3.6 %30,349 4.4 %25,520 3.6 %104,768 4.5 %68,687 3.5 %
Total$824,161 100.0 %$672,261 100.0 %$828,748 100.0 %$688,724 100.0 %$703,840 100.0 %$2,325,170 100.0 %$1,953,002 100.0 %
Net premiums earned
Property, energy, marine and aviation$133,827 18.6 %$120,781 17.6 %$111,183 15.5 %$90,087 13.9 %$80,246 13.3 %$365,791 17.2 %$208,879 11.9 %
Professional lines (1)168,502 23.4 %154,812 22.5 %151,700 21.2 %133,423 20.7 %135,343 22.4 %475,014 22.4 %365,801 20.9 %
Programs104,861 14.6 %108,464 15.8 %108,878 15.2 %109,498 17.0 %104,432 17.3 %322,203 15.2 %304,605 17.4 %
Construction and national accounts95,386 13.3 %91,605 13.3 %99,700 13.9 %91,489 14.2 %81,472 13.5 %286,691 13.5 %234,198 13.4 %
Excess and surplus casualty (2)69,978 9.7 %60,966 8.9 %65,097 9.1 %56,397 8.7 %53,991 8.9 %196,041 9.2 %144,218 8.2 %
Travel, accident and health36,726 5.1 %52,117 7.6 %77,375 10.8 %67,922 10.5 %81,952 13.5 %166,218 7.8 %237,163 13.5 %
Lenders products (4)33,401 4.6 %23,111 3.4 %25,343 3.5 %25,001 3.9 %(5,724)(0.9)%81,855 3.9 %41,078 2.3 %
Other (3)76,473 10.6 %76,053 11.1 %76,643 10.7 %71,980 11.1 %73,624 12.2 %229,169 10.8 %215,341 12.3 %
Total$719,154 100.0 %$687,909 100.0 %$715,919 100.0 %$645,797 100.0 %$605,336 100.0 %$2,122,982 100.0 %$1,751,283 100.0 %

(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.
15
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Gross premiums written$1,004,590 $807,065 $1,122,519 $432,249 $662,572 $2,934,174 $1,890,974 
Premiums ceded(400,388)(241,971)(325,339)(93,380)(226,096)(967,698)(627,120)
Net premiums written604,202 565,094 797,180 338,869 436,476 1,966,476 1,263,854 
Change in unearned premiums(49,704)(84,897)(253,720)50,116 (72,621)(388,321)(186,450)
Net premiums earned554,498 480,197 543,460 388,985 363,855 1,578,155 1,077,404 
Other underwriting income (loss)298 (651)2,120 2,051 (1,208)1,767 4,393 
Losses and loss adjustment expenses(422,084)(383,433)(430,069)(260,182)(270,379)(1,235,586)(751,147)
Acquisition expenses(85,388)(90,522)(79,606)(65,528)(62,393)(255,516)(173,504)
Other operating expenses(41,818)(38,716)(45,297)(39,287)(32,533)(125,831)(102,197)
Underwriting income (loss)$5,506 $(33,125)$(9,392)$26,039 $(2,658)$(37,011)$54,949 
Underwriting Ratios
Loss ratio76.1 %79.8 %79.1 %66.9 %74.3 %78.3 %69.7 %
Acquisition expense ratio15.4 %18.9 %14.6 %16.8 %17.1 %16.2 %16.1 %
Other operating expense ratio7.5 %8.1 %8.3 %10.1 %8.9 %8.0 %9.5 %
Combined ratio99.0 %106.8 %102.0 %93.8 %100.3 %102.5 %95.3 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums23.3 %25.3 %12.7 %6.4 %11.5 %20.2 %5.0 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(7.4)%(6.0)%(2.0)%(4.9)%(4.0)%(5.1)%(2.3)%
Combined ratio excluding catastrophic activity and prior year development (1)83.1 %87.5 %91.3 %92.3 %92.8 %87.4 %92.6 %
Net premiums written to gross premiums written60.1 %70.0 %71.0 %78.4 %65.9 %67.0 %66.8 %
 
(1)See ‘Comments on Regulation G’ for further discussion.



16
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Net premiums written
Property excluding property catastrophe$223,880 37.1 %$163,639 29.0 %$158,924 19.9 %$85,859 25.3 %$118,671 27.2 %$546,443 27.8 %$317,461 25.1 %
Property catastrophe42,125 7.0 %117,676 20.8 %89,092 11.2 %37,069 10.9 %23,597 5.4 %248,893 12.7 %73,574 5.8 %
Other specialty (1)159,969 26.5 %117,375 20.8 %284,952 35.7 %103,254 30.5 %94,072 21.6 %562,296 28.6 %363,723 28.8 %
Casualty (2)142,401 23.6 %105,049 18.6 %190,880 23.9 %85,063 25.1 %178,802 41.0 %438,330 22.3 %425,311 33.7 %
Marine and aviation27,839 4.6 %32,372 5.7 %49,785 6.2 %11,921 3.5 %10,181 2.3 %109,996 5.6 %41,758 3.3 %
Other (3)7,988 1.3 %28,983 5.1 %23,547 3.0 %15,703 4.6 %11,153 2.6 %60,518 3.1 %42,027 3.3 %
Total$604,202 100.0 %$565,094 100.0 %$797,180 100.0 %$338,869 100.0 %$436,476 100.0 %$1,966,476 100.0 %$1,263,854 100.0 %
Underwriting location
Bermuda$240,193 39.8 %$240,451 42.6 %$333,619 41.8 %$116,974 34.5 %$190,998 43.8 %$814,263 41.4 %$461,644 36.5 %
United States189,135 31.3 %162,027 28.7 %187,466 23.5 %119,003 35.1 %145,231 33.3 %538,628 27.4 %410,940 32.5 %
Europe and other174,874 28.9 %162,616 28.8 %276,095 34.6 %102,892 30.4 %100,247 23.0 %613,585 31.2 %391,270 31.0 %
Total$604,202 100.0 %$565,094 100.0 %$797,180 100.0 %$338,869 100.0 %$436,476 100.0 %$1,966,476 100.0 %$1,263,854 100.0 %
Net premiums earned
Property excluding property catastrophe$163,081 29.4 %$124,019 25.8 %$112,652 20.7 %$103,212 26.5 %$90,358 24.8 %$399,752 25.3 %$259,629 24.1 %
Property catastrophe69,524 12.5 %55,226 11.5 %53,000 9.8 %31,048 8.0 %22,617 6.2 %177,750 11.3 %59,886 5.6 %
Other specialty (1)141,201 25.5 %123,006 25.6 %203,385 37.4 %108,074 27.8 %112,349 30.9 %467,592 29.6 %370,443 34.4 %
Casualty (2)136,421 24.6 %132,756 27.6 %135,071 24.9 %118,258 30.4 %116,242 31.9 %404,248 25.6 %311,030 28.9 %
Marine and aviation26,744 4.8 %24,960 5.2 %24,858 4.6 %12,919 3.3 %11,798 3.2 %76,562 4.9 %35,355 3.3 %
Other (3)17,527 3.2 %20,230 4.2 %14,494 2.7 %15,474 4.0 %10,491 2.9 %52,251 3.3 %41,061 3.8 %
Total$554,498 100.0 %$480,197 100.0 %$543,460 100.0 %$388,985 100.0 %$363,855 100.0 %$1,578,155 100.0 %$1,077,404 100.0 %
                        
(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.    
17
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
2020202020202019201920202019
Gross premiums written$346,248 $369,144 $368,945 $370,658 $375,092 $1,084,337 $1,095,607 
Premiums ceded(47,783)(44,044)(44,327)(55,151)(57,703)(136,154)(149,358)
Net premiums written298,465 325,100 324,618 315,507 317,389 948,183 946,249 
Change in unearned premiums52,944 40,613 20,408 32,148 25,611 113,965 72,436 
Net premiums earned351,409 365,713 345,026 347,655 343,000 1,062,148 1,018,685 
Other underwriting income (1)4,600 6,450 4,599 4,138 3,955 15,649 11,867 
Losses and loss adjustment expenses(153,055)(224,100)(67,566)(3,287)(13,080)(444,721)(50,226)
Acquisition expenses(35,716)(34,052)(38,536)(35,597)(34,396)(108,304)(98,722)
Other operating expenses(36,708)(37,574)(45,896)(36,395)(37,003)(120,178)(116,697)
Underwriting income$130,530 $76,437 $197,627 $276,514 $262,476 $404,594 $764,907 
Underwriting Ratios
Loss ratio43.6 %61.3 %19.6 %0.9 %3.8 %41.9 %4.9 %
Acquisition expense ratio10.2 %9.3 %11.2 %10.2 %10.0 %10.2 %9.7 %
Other operating expense ratio10.4 %10.3 %13.3 %10.5 %10.8 %11.3 %11.5 %
Combined ratio64.2 %80.9 %44.1 %21.6 %24.6 %63.4 %26.1 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(1.3)%(0.1)%(1.8)%(9.4)%(9.6)%(1.0)%(9.1)%
Combined ratio excluding prior year development (2)65.5 %81.0 %45.9 %31.0 %34.2 %64.4 %35.2 %
Net premiums written to gross premiums written86.2 %88.1 %88.0 %85.1 %84.6 %87.4 %86.4 %
Net premiums written by underwriting location
United States$245,971 $261,124 $264,108 $258,512 $260,202 $771,203 $774,356 
Other52,494 63,976 60,510 56,995 57,187 176,980 171,893 
Total$298,465 $325,100 $324,618 $315,507 $317,389 $948,183 $946,249 
United States %82.4 %80.3 %81.4 %81.9 %82.0 %81.3 %81.8 %
Other %17.6 %19.7 %18.6 %18.1 %18.0 %18.7 %18.2 %

(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.
18
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions)September 30, 2020June 30, 2020March 31, 2020December 31, 2019September 30, 2019
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance$275,846 66.8 %$276,643 65.9 %$284,203 68.9 %$287,150 68.7 %$284,496 69.7 %
Mortgage reinsurance28,421 6.9 %27,457 6.5 %24,335 5.9 %26,768 6.4 %25,440 6.2 %
Other (2)108,786 26.3 %115,803 27.6 %103,731 25.2 %104,346 24.9 %98,054 24.0 %
Total$413,053 100.0 %$419,903 100.0 %$412,269 100.0 %$418,264 100.0 %$407,990 100.0 %
Risk In Force (RIF) (3)
U.S. primary mortgage insurance$69,620 91.0 %$70,200 91.0 %$72,566 92.0 %$73,388 91.9 %$72,916 92.0 %
Mortgage reinsurance2,145 2.8 %2,116 2.7 %1,961 2.5 %2,129 2.7 %2,086 2.6 %
Other (2)4,750 6.2 %4,795 6.2 %4,387 5.6 %4,380 5.5 %4,216 5.3 %
Total$76,515 100.0 %$77,111 100.0 %$78,914 100.0 %$79,897 100.0 %$79,218 100.0 %
Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740$40,017 57.5 %$40,297 57.4 %$41,738 57.5 %$42,301 57.6 %$41,975 57.6 %
680-73924,236 34.8 %24,346 34.7 %25,078 34.6 %25,240 34.4 %25,013 34.3 %
620-6795,016 7.2 %5,188 7.4 %5,368 7.4 %5,444 7.4 %5,501 7.5 %
<620351 0.5 %369 0.5 %382 0.5 %403 0.5 %427 0.6 %
Total$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %$72,916 100.0 %
Weighted average FICO score743 743 743 743 743 
Total RIF by Loan-To-Value (LTV):
95.01% and above$8,789 12.6 %$8,859 12.6 %$9,060 12.5 %$9,064 12.4 %$8,948 12.3 %
90.01% to 95.00%37,278 53.5 %37,830 53.9 %39,594 54.6 %40,136 54.7 %40,086 55.0 %
85.01% to 90.00%19,870 28.5 %20,071 28.6 %20,619 28.4 %20,890 28.5 %20,708 28.4 %
85.00% and below3,683 5.3 %3,440 4.9 %3,293 4.5 %3,298 4.5 %3,174 4.4 %
Total$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %$72,916 100.0 %
Weighted average LTV92.9 %92.9 %93.0 %93.0 %93.1 %
Total RIF by State:
Texas$5,536 8.0 %$5,560 7.9 %$5,683 7.8 %$5,678 7.7 %$5,599 7.7 %
California5,019 7.2 %4,948 7.0 %5,106 7.0 %5,187 7.1 %4,984 6.8 %
Florida3,648 5.2 %3,737 5.3 %3,863 5.3 %3,887 5.3 %3,821 5.2 %
Georgia2,890 4.2 %2,861 4.1 %2,819 3.9 %2,753 3.8 %2,667 3.7 %
Illinois2,670 3.8 %2,643 3.8 %2,621 3.6 %2,616 3.6 %2,602 3.6 %
Virginia2,540 3.6 %2,656 3.8 %2,814 3.9 %2,881 3.9 %2,907 4.0 %
North Carolina2,516 3.6 %2,459 3.5 %2,475 3.4 %2,470 3.4 %2,469 3.4 %
Minnesota2,489 3.6 %2,473 3.5 %2,509 3.5 %2,514 3.4 %2,480 3.4 %
Massachusetts2,344 3.4 %2,345 3.3 %2,409 3.3 %2,432 3.3 %2,424 3.3 %
Washington2,222 3.2 %2,291 3.3 %2,426 3.3 %2,474 3.4 %2,466 3.4 %
Other37,746 54.2 %38,227 54.5 %39,841 54.9 %40,496 55.2 %40,497 55.5 %
Total$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %$72,916 100.0 %
Weighted average coverage (end of period RIF divided by IIF)25.2 %25.4 %25.5 %25.6 %25.6 %
U.S. mortgage insurance total RIF, net of reinsurance (4)$56,067 $57,258 $58,693 $58,512 $57,768 
Analysts’ persistency (5)62.5 %66.6 %72.6 %75.7 %78.6 %
Risk-to-capital ratio -- Arch MI U.S. (6)9.6:110.2:111.3:112.0:112.9:1
PMIER sufficiency ratio -- Arch MI U.S. (7)158 %161 %165 %161 %154 %

(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 current (non-delinquent) RIF, net of reinsurance, divided by statutory capital (estimate for September 30, 2020).
    by the insurance coverage percentage specified in the policy for insurance policies issued and    (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for September 30, 2020).
    after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.            There was approximately $1.33 billion of excess available assets at September 30, 2020.
19
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions, except policy/loan/claim count)Three Months Ended
September 30, 2020June 30, 2020March 31, 2020December 31, 2019September 30, 2019
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)$32,787 $24,551 $16,778 $24,051 $25,313 
Total NIW by credit quality (FICO score):
>=740$21,160 64.5 %$15,851 64.6 %$10,069 60.0 %$14,793 61.5 %$15,204 60.1 %
680-73910,562 32.2 %7,781 31.7 %5,787 34.5 %8,092 33.6 %8,725 34.5 %
620-6791,065 3.2 %919 3.7 %922 5.5 %1,166 4.8 %1,384 5.5 %
  Total$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %$25,313 100.0 %
Total NIW by LTV:
95.01% and above$2,561 7.8 %$1,948 7.9 %$1,668 9.9 %$2,260 9.4 %$3,182 12.6 %
90.01% to 95.00%13,967 42.6 %9,403 38.3 %7,199 42.9 %10,059 41.8 %10,409 41.1 %
85.01% to 90.00%10,052 30.7 %8,140 33.2 %5,329 31.8 %7,839 32.6 %7,762 30.7 %
85.00% and below6,207 18.9 %5,060 20.6 %2,582 15.4 %3,893 16.2 %3,960 15.6 %
  Total$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %$25,313 100.0 %
Total NIW monthly vs. single:
Monthly$31,928 97.4 %$23,391 95.3 %$15,692 93.5 %$22,707 94.4 %$23,358 92.3 %
Single859 2.6 %1,160 4.7 %1,086 6.5 %1,344 5.6 %1,955 7.7 %
  Total$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %$25,313 100.0 %
Total NIW purchase vs. refinance:
Purchase$24,256 74.0 %$14,956 60.9 %$12,299 73.3 %$16,476 68.5 %$19,068 75.3 %
Refinance8,531 26.0 %9,595 39.1 %4,479 26.7 %7,575 31.5 %6,245 24.7 %
  Total$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %$25,313 100.0 %
Ending number of policies in force (PIF) (2)1,245,408 1,259,328 1,293,799 1,307,884 1,304,263 
Rollforward of insured loans in default:
Beginning delinquent number of loans64,667 18,414 20,163 19,243 18,761 
Plus: new notices19,967 58,374 9,419 10,289 10,111 
Less: cures(26,029)(11,664)(10,541)(8,724)(8,970)
Less: paid claims(243)(457)(627)(645)(659)
Ending delinquent number of loans (2)58,362 64,667 18,414 20,163 19,243 
Ending percentage of loans in default (2)4.69 %5.14 %1.42 %1.54 %1.48 %
Losses:
Number of claims paid243 457 627 645 659 
Total paid claims (in thousands)$9,420 $20,101 $26,038 $25,253 $26,082 
Average per claim (in thousands)$38.8 $44.0 $41.5 $39.2 $39.6 
Severity (3)88.6 %96.3 %92.8 %94.0 %95.6 %
Average case reserve per default (in thousands)$10.1 $6.9 $14.4 $13.3 $14.7 

(1)    The original principal balance of all loans that received coverage during the period.    
(2)    Includes first lien primary and pool policies.    
(3)    Represents total paid claims divided by RIF of loans for which claims were paid.

20
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
Supplemental disclosures for U.S. primary mortgage insurance:
(U.S. Dollars in millions)September 30, 2020December 31, 2019
Loss Reserves, Net (1)Primary IIF (2)Primary RIF (3)Delinquency RateLoss Reserves, Net (1)Primary IIF (2)Primary RIF (3)Delinquency Rate
% of TotalTotal% of TotalTotal% of Total% of TotalTotal% of TotalTotal% of Total
Policy year:
2010 and prior27.8 %$14,603 5.3 %3,320 4.8 %11.59 %58.2 %$17,251 6.0 %3,990 5.4 %8.79 %
20110.6 %1,141 0.4 %308 0.4 %3.67 %0.7 %1,678 0.6 %464 0.6 %1.59 %
20121.5 %4,467 1.6 %1,228 1.8 %2.92 %1.3 %6,293 2.2 %1,753 2.4 %0.89 %
20133.2 %8,754 3.2 %2,447 3.5 %3.37 %3.0 %12,276 4.3 %3,433 4.7 %0.99 %
20142.5 %9,613 3.5 %2,647 3.8 %4.02 %2.4 %13,714 4.8 %3,778 5.1 %1.16 %
20153.9 %17,752 6.4 %4,778 6.9 %3.79 %3.2 %25,788 9.0 %6,880 9.4 %0.87 %
20169.5 %29,299 10.6 %7,753 11.1 %4.89 %7.6 %40,898 14.2 %10,670 14.5 %1.03 %
201712.9 %29,537 10.7 %7,639 11.0 %5.52 %9.9 %43,896 15.3 %11,262 15.3 %1.00 %
201816.1 %32,788 11.9 %8,304 11.9 %6.66 %11.2 %51,776 18.0 %13,086 17.8 %0.86 %
201917.6 %56,189 20.4 %13,900 20.0 %4.68 %2.4 %73,580 25.6 %18,072 24.6 %0.14 %
20204.6 %71,703 26.0 %17,296 24.8 %1.01 %
Total100.0 %$275,846 100.0 %$69,620 100.0 %4.69 %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 $593.2 million at September 30, 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.
21
Arch Capital Group Ltd. and Subsidiaries
Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))

(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Gross premiums written$2,556,914 $2,206,410 $2,698,537 $1,842,071 $2,043,292 $7,461,860 $5,853,574 
Premiums ceded(830,086)(643,955)(747,991)(498,971)(585,587)(2,222,031)(1,690,469)
Net premiums written1,726,828 1,562,455 1,950,546 1,343,100 1,457,705 5,239,829 4,163,105 
Change in unearned premiums(101,767)(28,636)(346,141)39,337 (145,514)(476,544)(315,733)
Net premiums earned1,625,061 1,533,819 1,604,405 1,382,437 1,312,191 4,763,285 3,847,372 
Other underwriting income (loss)4,867 5,799 6,719 6,189 2,747 17,385 16,260 
Losses and loss adjustment expenses(1,100,460)(1,125,736)(1,004,743)(710,267)(706,241)(3,230,939)(1,970,050)
Acquisition expenses(223,524)(232,245)(225,479)(197,562)(188,048)(681,248)(537,403)
Other operating expenses(201,067)(195,047)(220,842)(192,125)(184,944)(616,956)(557,221)
Underwriting income (loss)$104,877 $(13,410)$160,060 $288,672 $235,705 $251,527 $798,958 
Underwriting Ratios
Loss ratio67.7 %73.4 %62.6 %51.4 %53.8 %67.8 %51.2 %
Acquisition expense ratio13.8 %15.1 %14.1 %14.3 %14.3 %14.3 %14.0 %
Other operating expense ratio12.4 %12.7 %13.8 %13.9 %14.1 %13.0 %14.5 %
Combined ratio93.9 %101.2 %90.5 %79.6 %82.2 %95.1 %79.7 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums12.5 %13.5 %7.4 %2.2 %5.2 %11.1 %2.2 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(2.9)%(2.0)%(1.1)%(4.0)%(3.9)%(2.0)%(3.2)%
Combined ratio excluding catastrophic activity and prior year development (1)84.3 %89.7 %84.2 %81.4 %80.9 %86.0 %80.7 %
Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses$618,638 $550,481 $530,012 $627,929 $508,364 $1,699,131 $1,433,456 
Change in unpaid losses and loss adjustment expenses481,822 575,255 474,731 82,338 197,877 1,531,808 536,594 
Total losses and loss adjustment expenses$1,100,460 $1,125,736 $1,004,743 $710,267 $706,241 $3,230,939 $1,970,050 
Net premiums written to gross premiums written67.5 %70.8 %72.3 %72.9 %71.3 %70.2 %71.1 %
 
(1)See ‘Comments on Regulation G’ for further discussion.

22
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Selected Information on Losses and Loss Adjustment Expenses

(U.S. Dollars in thousands)Three Months EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance$(1,136)$(2,148)$(776)$(2,839)$(3,934)$(4,060)$(7,054)
Reinsurance(40,766)(28,933)(10,960)(19,081)(14,716)(80,659)(24,387)
Mortgage(4,523)(306)(6,101)(32,763)(33,031)(10,930)(92,450)
Total $(46,425)$(31,387)$(17,837)$(54,683)$(51,681)$(95,649)$(123,891)
Impact on losses and loss adjustment expenses:
Insurance$(2,282)$(2,518)$(1,115)$(4,403)$(4,354)$(5,915)$(11,387)
Reinsurance(41,960)(40,211)(11,627)(20,058)(15,309)(93,798)(26,338)
Mortgage(4,523)(208)(6,101)(32,763)(33,031)(10,832)(92,456)
Total$(48,765)$(42,937)$(18,843)$(57,224)$(52,694)$(110,545)$(130,181)
Impact on acquisition expenses:
Insurance$1,146 $370 $339 $1,564 $420 $1,855 $4,333 
Reinsurance1,194 11,278 667 977 593 13,139 1,951 
Mortgage— (98)— — — (98)6 
Total$2,340 $11,550 $1,006 $2,541 $1,013 $14,896 $6,290 
Impact on combined ratio:
Insurance(0.2)%(0.3)%(0.1)%(0.4)%(0.6)%(0.2)%(0.4)%
Reinsurance(7.4)%(6.0)%(2.0)%(4.9)%(4.0)%(5.1)%(2.3)%
Mortgage(1.3)%(0.1)%(1.8)%(9.4)%(9.6)%(1.0)%(9.1)%
Total (2.9)%(2.0)%(1.1)%(4.0)%(3.9)%(2.0)%(3.2)%
Impact on loss ratio:
Insurance(0.3)%(0.4)%(0.2)%(0.7)%(0.7)%(0.3)%(0.7)%
Reinsurance(7.6)%(8.4)%(2.1)%(5.2)%(4.2)%(5.9)%(2.4)%
Mortgage(1.3)%(0.1)%(1.8)%(9.4)%(9.6)%(1.0)%(9.1)%
Total(3.0)%(2.8)%(1.2)%(4.1)%(4.0)%(2.3)%(3.4)%
Impact on acquisition expense ratio:
Insurance0.1 %0.1 %0.1 %0.3 %0.1 %0.1 %0.3 %
Reinsurance0.2 %2.4 %0.1 %0.3 %0.2 %0.8 %0.1 %
Mortgage0.0 %0.0 %0.0 %0.0 %0.0 %0.0 %0.0 %
Total 0.1 %0.8 %0.1 %0.1 %0.1 %0.3 %0.2 %
Estimated net losses incurred from current accident year catastrophic events (2)
Insurance$74,365 $85,929 $49,483 $5,531 $26,085 $209,777 $28,704 
Reinsurance128,939 121,263 68,953 24,831 41,948 319,155 54,361 
Total$203,304 $207,192 $118,436 $30,362 $68,033 $528,932 $83,065 
Impact on combined ratio:
Insurance10.3 %12.5 %6.9 %0.9 %4.3 %9.9 %1.6 %
Reinsurance23.3 %25.3 %12.7 %6.4 %11.5 %20.2 %5.0 %
Total12.5 %13.5 %7.4 %2.2 %5.2 %11.1 %2.2 %
Estimated impact of COVID-19 event, net of reinsurance and reinstatement premiums, included in current accident year catastrophic events (3)
Insurance$3,442 $78,059 $35,946 $— $— $117,447 $— 
Reinsurance8,449 $95,039 50,700 — — 154,188 — 
Total$11,891 $173,098 $86,646 $— $— $271,635 $— 
Impact on combined ratio:
Insurance0.5 %11.3 %5.0 %0.0 %0.0 %5.5 %0.0 %
Reinsurance1.5 %19.8 %9.3 %0.0 %0.0 %9.8 %0.0 %
Total0.7 %11.3 %5.4 %0.0 %0.0 %5.7 %0.0 %
(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)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 September 30, 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.
23
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)September 30,June 30,March 31,December 31,September 30,
20202020202020192019
Investable assets (1) (2):
Fixed maturities available for sale, at fair value$17,844,866 69.4 %$16,557,966 67.5 %$16,163,702 72.2 %$16,187,651 72.6 %$15,831,411 73.4 %
Fixed maturities—fair value option (3)386,865 1.5 %375,793 1.5 %342,241 1.5 %337,860 1.5 %345,588 1.6 %
Fixed maturities pledged under securities lending agreements, at fair value62,749 0.2 %457,906 1.9 %177,442 0.8 %368,510 1.7 %409,795 1.9 %
Total fixed maturities18,294,480 71.1 %17,391,665 70.9 %16,683,385 74.6 %16,894,021 75.8 %16,586,794 76.9 %
Equity securities, at fair value1,449,208 5.6 %1,194,874 4.9 %1,118,734 5.0 %773,588 3.5 %506,998 2.4 %
Equity securities—fair value option (3)30,494 0.1 %31,197 0.1 %29,905 0.1 %42,896 0.2 %41,436 0.2 %
Equity securities pledged under securities lending agreements, at fair value— 0.0 %6,597 0.0 %— 0.0 %11,358 0.1 %10,620 0.0 %
Total equity securities1,479,702 5.8 %1,232,668 5.0 %1,148,639 5.1 %827,842 3.7 %559,054 2.6 %
Other investments—fair value option (3)1,276,867 5.0 %1,212,788 4.9 %1,153,737 5.2 %1,336,920 6.0 %1,369,554 6.4 %
Investments accounted for using the equity method (4)1,883,702 7.3 %1,727,302 7.0 %1,676,055 7.5 %1,660,396 7.5 %1,575,832 7.3 %
Short-term investments available for sale, at fair value2,039,097 7.9 %2,277,866 9.3 %944,531 4.2 %956,546 4.3 %751,989 3.5 %
Short-term investments—fair value option (3)118,313 0.5 %14,317 0.1 %52,548 0.2 %47,711 0.2 %33,369 0.2 %
Total short-term investments2,157,410 8.4 %2,292,183 9.3 %997,079 4.5 %1,004,257 4.5 %785,358 3.6 %
Cash781,065 3.0 %746,606 3.0 %785,704 3.5 %623,793 2.8 %799,709 3.7 %
Securities transactions entered into but not settled at the balance sheet date(148,725)(0.6)%(72,018)(0.3)%(68,747)(0.3)%(61,553)(0.3)%(110,213)(0.5)%
Total investable assets held by the Company$25,724,501 100.0 %$24,531,194 100.0 %$22,375,852 100.0 %$22,285,676 100.0 %$21,566,088 100.0 %
Average effective duration (in years)3.21 3.18 3.19 3.40 3.64  
Average S&P/Moody’s credit ratings (5) AA/Aa2  AA/Aa2  AA/Aa2  AA/Aa2  AA/Aa2  
Embedded book yield (before investment expenses)1.71 %1.85 %2.34 %2.55 %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. Such amounts are summarized as follows:
Investable assets in ‘other’ segment:
Cash$195,333 $107,653 $96,580 $102,437 $80,390 
Investments accounted for using the fair value option1,937,036 1,886,676 1,732,086 1,898,090 2,048,296 
Fixed maturities available for sale, at fair value608,022 649,765 677,869 706,875 639,112 
Equity securities, at fair value52,807 62,443 63,169 65,337 43,487 
Securities sold but not yet purchased(24,909)(29,289)(30,076)(66,257)(65,736)
Securities transactions entered into but not settled at the balance sheet date(74,837)(35,958)(37,039)(1,893)(15,302)
Total investable assets included in ‘other’ segment$2,693,452 $2,641,290 $2,502,589 $2,704,589 $2,730,247 

(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”).

24
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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Composition of net investment income (1):       
Fixed maturities$84,608 $91,491 $101,763 $108,885 $109,953 $277,862 $331,939 
Equity securities (dividends)6,659 6,023 5,630 4,134 3,581 18,312 9,321 
Short-term investments1,162 897 3,385 3,464 3,432 5,444 11,178 
Other (2)24,594 17,825 20,479 19,211 24,170 62,898 67,229 
Gross investment income117,023 116,236 131,257 135,694 141,136 364,516 419,667 
Investment expenses(17,166)(15,205)(18,229)(15,788)(14,262)(50,600)(48,506)
Net investment income$99,857 $101,031 $113,028 $119,906 $126,874 $313,916 $371,161 
Per share$0.24 $0.25 $0.27 $0.29 $0.31 $0.77 $0.90 
Investment income yield, at amortized cost (1) (3):
Pre-tax1.76 %1.92 %2.20 %2.36 %2.58 %1.94 %2.62 %
After-tax1.57 %1.68 %1.91 %2.07 %2.31 %1.70 %2.35 %
Total return on investments (1) (4)2.30 %3.72 %(0.86)%1.07 %1.00 %5.19 %6.20 %

(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.

25
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 September 30, 2020
Corporates$8,137,582 $382,992 $(35,491)$347,501 $(1,389)$7,791,470 104.4 %44.5 %
U.S. government and government agencies4,662,260 38,105 (4,388)33,717 — 4,628,543 100.7 %25.5 %
Municipal bonds525,617 26,873 (877)25,996 (62)499,683 105.2 %2.9 %
Non-U.S. government securities2,196,827 81,050 (16,135)64,915 — 2,131,912 103.0 %12.0 %
Asset-backed securities1,693,291 29,690 (15,536)14,154 (1,537)1,680,674 100.8 %9.3 %
Commercial mortgage-backed securities375,510 8,523 (4,660)3,863 (256)371,903 101.0 %2.1 %
Residential mortgage-backed securities703,393 12,456 (2,328)10,128 (280)693,545 101.4 %3.8 %
Total$18,294,480 $579,689 $(79,415)$500,274 $(3,524)$17,797,730 102.8 %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 agencies4,632,947 34,892 (9,997)24,895 — 4,608,052 100.5 %27.4 %
Municipal bonds880,119 24,582 (2,213)22,369 — 857,750 102.6 %5.2 %
Non-U.S. government securities1,995,813 45,019 (19,297)25,722 — 1,970,091 101.3 %11.8 %
Asset-backed securities1,547,744 23,403 (4,028)19,375 — 1,528,369 101.3 %9.2 %
Commercial mortgage-backed securities734,244 14,951 (2,330)12,621 — 721,623 101.7 %4.3 %
Residential mortgage-backed securities541,800 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.


26
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)September 30,June 30,March 31,December 31,September 30,
20202020202020192019
Credit quality distribution of total fixed maturities (2) (3):
U.S. government and government agencies (4)$5,360,798 29.3 %$5,566,339 32.0 %$4,804,048 28.8 %$5,215,489 30.9 %$5,403,271 32.6 %
AAA3,352,902 18.3 %3,035,513 17.5 %3,486,700 20.9 %3,392,341 20.1 %3,240,708 19.5 %
AA2,087,245 11.4 %1,818,693 10.5 %1,994,127 12.0 %2,115,828 12.5 %1,879,728 11.3 %
A3,895,053 21.3 %4,232,245 24.3 %3,937,053 23.6 %3,849,458 22.8 %3,648,581 22.0 %
BBB2,542,233 13.9 %1,874,332 10.8 %1,565,912 9.4 %1,495,467 8.9 %1,576,052 9.5 %
BB504,570 2.8 %406,342 2.3 %366,759 2.2 %355,803 2.1 %362,117 2.2 %
B231,774 1.3 %211,638 1.2 %205,181 1.2 %216,663 1.3 %210,824 1.3 %
Lower than B54,118 0.3 %51,273 0.3 %51,712 0.3 %56,865 0.3 %61,205 0.4 %
Not rated265,787 1.5 %195,290 1.1 %271,893 1.6 %196,107 1.2 %204,308 1.2 %
Total fixed maturities, at fair value$18,294,480 100.0 %$17,391,665 100.0 %$16,683,385 100.0 %$16,894,021 100.0 %$16,586,794 100.0 %
Maturity profile of total fixed maturities (2):
Due in one year or less$314,243 1.7 %$350,520 2.0 %$459,191 2.8 %$443,914 2.6 %$571,738 3.4 %
Due after one year through five years9,744,246 53.3 %9,730,262 55.9 %9,381,924 56.2 %9,875,925 58.5 %9,924,224 59.8 %
Due after five years through ten years4,861,677 26.6 %4,342,055 25.0 %3,416,637 20.5 %3,296,839 19.5 %3,052,774 18.4 %
Due after 10 years602,120 3.3 %467,099 2.7 %555,462 3.3 %453,555 2.7 %229,085 1.4 %
15,522,286 84.8 %14,889,936 85.6 %13,813,214 82.8 %14,070,233 83.3 %13,777,821 83.1 %
Mortgage-backed securities703,393 3.8 %593,799 3.4 %449,024 2.7 %541,800 3.2 %528,227 3.2 %
Commercial mortgage-backed securities375,510 2.1 %396,813 2.3 %781,417 4.7 %734,244 4.3 %754,306 4.5 %
Asset-backed securities1,693,291 9.3 %1,511,117 8.7 %1,639,730 9.8 %1,547,744 9.2 %1,526,440 9.2 %
Total fixed maturities, at fair value$18,294,480 100.0 %$17,391,665 100.0 %$16,683,385 100.0 %$16,894,021 100.0 %$16,586,794 100.0 %

(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.


27
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)
September 30,June 30,March 31,December 31,September 30,
20202020202020192019
Sector:
Industrials$5,303,089 65.2 %$4,650,615 63.6 %$3,903,927 58.5 %$3,639,891 55.5 %$3,588,041 55.2 %
Financials2,156,871 26.5 %2,164,859 29.6 %2,400,415 35.9 %2,645,393 40.3 %2,612,883 40.2 %
Utilities562,939 6.9 %409,778 5.6 %321,022 4.8 %224,615 3.4 %237,042 3.6 %
Covered bonds2,072 0.0 %1,974 0.0 %2,662 0.0 %3,520 0.1 %2,543 0.0 %
All other (2)112,611 1.4 %82,190 1.1 %49,981 0.7 %47,935 0.7 %54,145 0.8 %
Total$8,137,582 100.0 %$7,309,416 100.0 %$6,678,007 100.0 %$6,561,354 100.0 %$6,494,654 100.0 %
Credit quality distribution (3):
AAA$291,154 3.6 %$76,923 1.1 %$86,420 1.3 %$95,559 1.5 %$95,340 1.5 %
AA1,068,945 13.1 %894,495 12.2 %982,202 14.7 %1,035,817 15.8 %1,021,056 15.7 %
A3,478,591 42.7 %3,834,480 52.5 %3,480,871 52.1 %3,392,134 51.7 %3,240,957 49.9 %
BBB2,427,829 29.8 %1,773,620 24.3 %1,451,807 21.7 %1,355,868 20.7 %1,450,372 22.3 %
BB478,445 5.9 %388,112 5.3 %348,848 5.2 %334,264 5.1 %339,952 5.2 %
B224,644 2.8 %205,342 2.8 %198,828 3.0 %207,713 3.2 %201,352 3.1 %
Lower than B30,423 0.4 %27,865 0.4 %22,869 0.3 %22,233 0.3 %26,969 0.4 %
Not rated137,551 1.7 %108,579 1.5 %106,162 1.6 %117,766 1.8 %118,656 1.8 %
Total$8,137,582 100.0 %$7,309,416 100.0 %$6,678,007 100.0 %$6,561,354 100.0 %$6,494,654 100.0 %

(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 September 30, 2020 (1):
(U.S. Dollars in thousands)Fair
Value		% of Asset Class% of Investable AssetsCredit Quality (2)
Issuer:
Bank of America Corporation$320,603 3.9 %1.2 %A-/A2
Wells Fargo & Company259,752 3.2 %1.0 %BBB+/A2
Nestlé S.A.228,219 2.8 %0.9 %AA-/Aa3
JPMorgan Chase & Co.227,543 2.8 %0.9 %A-/A2
Johnson & Johnson220,521 2.7 %0.9 %AAA/Aaa
Apple Inc.169,793 2.1 %0.7 %AA+/Aa1
Citigroup Inc.145,195 1.8 %0.6 %BBB+/A3
Morgan Stanley134,680 1.7 %0.5 %BBB+/A3
Comcast Corporation120,210 1.5 %0.5 %A-/A3
BP p.l.c.120,177 1.5 %0.5 %A-/A1
Total$1,946,693 23.9 %7.6 %
 
(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.

28
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Structured Securities

The following table provides the composition of the Company’s structured securities at September 30, 2020 (1):

(U.S. Dollars in thousands)AgenciesAAAAAABBBNon-Investment GradeTotal
      
Residential mortgage-backed securities$669,672 $3,148 $320 $— $903 $29,350 $703,393 
Commercial mortgage-backed securities28,865 269,888 29,947 12,270 14,669 19,871 375,510 
Asset-backed securities— 1,171,008 100,096 256,038 52,024 114,125 1,693,291 
Total$698,537 $1,444,044 $130,363 $268,308 $67,596 $163,346 $2,772,194 

(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.


29
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 13.
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.
30
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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Net income available to Arch common shareholders$408,636 $288,418 $133,714 $315,981 $382,050 $830,768 $1,278,726 
Net realized (gains) losses(219,726)(406,645)109,364 (32,966)(77,959)(517,007)(316,882)
Equity in net (income) loss of investment funds accounted for using the equity method(126,735)65,119 4,209 (27,139)(17,130)(57,407)(96,533)
Net foreign exchange (gains) losses39,462 42,032 (64,491)39,832 (30,160)17,003 (29,100)
Transaction costs and other1,674 977 2,595 9,081 1,995 5,246 5,363 
Income tax expense (benefit) (1)17,010 26,713 4,365 3,568 2,156 48,088 12,708 
After-tax operating income available to Arch common shareholders$120,321 $16,614 $189,756 $308,357 $260,952 $326,691 $854,282 
Diluted per common share results:
Net income available to Arch common shareholders$1.00 $0.71 $0.32 $0.76 $0.92 $2.02 $3.11 
Net realized (gains) losses(0.54)(1.00)0.27 (0.08)(0.19)(1.25)(0.77)
Equity in net (income) loss of investment funds accounted for using the equity method(0.31)0.16 0.01 (0.07)(0.04)(0.14)(0.23)
Net foreign exchange (gains) losses0.10 0.10 (0.16)0.10 (0.07)0.04 (0.07)
Transaction costs and other0.00 0.00 0.01 0.02 0.00 0.01 0.01 
Income tax expense (benefit) (1)0.04 0.07 0.01 0.01 0.01 0.12 0.03 
After-tax operating income available to Arch common shareholders$0.29 $0.04 $0.46 $0.74 $0.63 $0.80 $2.08 
Weighted average common shares and common share equivalents outstanding - diluted409,194,657 408,119,681 414,033,570 414,124,920 413,180,201 410,314,897 410,807,402 
Beginning common shareholders’ equity$11,211,825 $10,587,244 $10,717,371 $10,378,096 $9,977,352 $10,717,371 $8,659,827 
Ending common shareholders’ equity11,671,997 11,211,825 10,587,244 10,717,371 10,378,096 11,671,997 10,378,096 
Average common shareholders’ equity$11,441,911 $10,899,535 $10,652,308 $10,547,734 $10,177,724 $11,194,684 $9,518,962 
Annualized return on average common equity14.3 %10.6 %5.0 %12.0 %15.0 %9.9 %17.9 %
Annualized operating return on average common equity4.2 %0.6 %7.1 %11.7 %10.3 %3.9 %12.0 %

(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.


31
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 EndedNine Months Ended
September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Arch Operating Income Components (1):
Income before income taxes$433,815 $302,474 $205,953 $355,837 $430,554 $942,242 $1,431,600 
Net realized (gains) losses(210,984)(385,089)72,109 (31,836)(80,014)(523,964)(316,201)
Equity in net (income) loss of investment funds accounted for using the equity method(126,735)65,119 4,209 (27,139)(17,130)(57,407)(96,533)
Net foreign exchange (gains) losses38,681 42,438 (63,307)38,031 (29,794)17,812 (28,779)
Transaction costs and other792 43 2,538 9,081 1,995 3,373 5,363 
Pre-tax operating income135,569 24,985 221,502 343,974 305,611 382,056 995,450 
Arch share of ‘other’ segment operating income (loss) (2)1,792 1,798 2,237 (1,450)1,704 5,827 5,789 
Pre-tax operating income available to Arch (b)137,361 26,783 223,739 342,524 307,315 387,883 1,001,239 
Income tax expense (a)(6,637)234 (23,580)(23,764)(35,960)(29,983)(115,748)
After-tax operating income available to Arch130,724 27,017 200,159 318,760 271,355 357,900 885,491 
Preferred dividends(10,403)(10,403)(10,403)(10,403)(10,403)(31,209)(31,209)
After-tax operating income available to Arch common shareholders$120,321 $16,614 $189,756 $308,357 $260,952 $326,691 $854,282 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)4.8 %(0.9)%10.5 %6.9 %11.7 %7.7 %11.6 %

(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 EndedNine Months Ended
September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2020202020202019201920202019
Balances in ‘other’ segment:
Underwriting income (loss)$(8,273)$(9,129)$(6,010)$(37,251)$(4,443)$(23,412)$(14,414)
Net investment income28,655 30,454 32,125 34,357 34,614 91,234 102,314 
Interest expense(5,119)(6,009)(7,310)(7,558)(8,091)(18,438)(19,579)
Preferred dividends(993)(1,036)(1,096)(1,131)(6,600)(3,125)(15,778)
Pre-tax operating income (loss) available to common shareholders14,270 14,280 17,709 (11,583)15,480 46,259 52,543 
Arch ownership13 %13 %13 %13 %11 %13 %11 %
Arch share of ‘Other’ segment operating income (loss) (3)$1,792 $1,798 $2,237 $(1,450)$1,704 $5,827 $5,789 

(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).
32
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)September 30,June 30,March 31,December 31,September 30,
20202020202020192019
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 
Arch Capital senior notes, due June 30, 2050 ($1,000,000 principal, 3.635%)1,000,000 1,000,000 — — — 
Deferred debt costs on senior notes(26,811)(26,820)(15,616)(15,791)(15,963)
Revolving credit agreement borrowings, due October 26, 2021 (variable)— — — — — 
Total debt$2,723,189 $2,723,180 $1,734,384 $1,734,209 $1,734,037 
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)11,671,997 11,211,825 10,587,244 10,717,371 10,378,096 
Total shareholders’ equity available to Arch$12,451,997 $11,991,825 $11,367,244 $11,497,371 $11,158,096 
Total capital available to Arch$15,175,186 $14,715,005 $13,101,628 $13,231,580 $12,892,133 
Common shares outstanding, net of treasury shares (b)406,018,958 405,970,251 405,609,867 405,619,201 405,230,531 
Book value per common share (4) (a)/(b)$28.75 $27.62 $26.10 $26.42 $25.61 
Leverage ratios:
Senior notes/total capital available to Arch17.9 %18.5 %13.2 %13.1 %13.5 %
Revolving credit agreement borrowings/total capital available to Arch— %— %— %— %— %
Debt/total capital available to Arch17.9 %18.5 %13.2 %13.1 %13.5 %
Preferred/total capital available to Arch5.1 %5.3 %6.0 %5.9 %6.1 %
Debt and preferred/total capital available to Arch23.1 %23.8 %19.2 %19.0 %19.5 %

(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)    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 EndedCumulative
 September 30,June 30,March 31,December 31,September 30,September 30,
 202020202020201920192020
Effect of share repurchases:
Aggregate cost of shares repurchased$— $— $75,486 $— $— $4,043,780 
Shares repurchased— — 2,599,388 — — 388,941,368 
Average price per share repurchased$— $— $29.04 $— $— $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.
33

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