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ARCH CAPITAL GROUP LTD. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"). In addition, readers should review "Risk Factors" set forth in Item 1A of Part I of our 2021 Form 10-K and "ITEM 1A-Risk Factors" of this Form 10-Q. Tabular amounts are inU.S. Dollars in thousands, except share amounts, unless otherwise noted.Arch Capital Group Ltd. ("Arch Capital " and, together with its subsidiaries, "Arch", "we", "our" or "us") is a publicly listedBermuda exempted company with approximately$15.1 billion in capital atJune 30, 2022 and, through operations inBermuda ,the United States ,Europe ,Canada ,Australia andHong Kong , writes insurance, reinsurance and mortgage insurance on a worldwide basis. Page No. Current Outlook 41 Financial Measures 41 Comments on Non-GAAP Measures 43 Results of Operations 45 Insurance Segment 45 Reinsurance Segment 48 Mortgage Segment 50 Corporate Segment 53 Critical Accounting Policies, Estimates and Recent Accounting Pronouncements 54 Financial Condition 54 Liquidity 60 Capital Resources and Other 60 ARCH CAPITAL 40 2022 SECOND QUARTER FORM 10-Q
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Table of Contents CURRENT OUTLOOK Our objective for 2022 remains the same, to deliver long term value for our shareholders. We are committed to agile cycle management predicated by a focus on risk-adjusted returns, and this commitment has enabled us to accelerate our growth through the deployment of meaningful capacity to our clients. We continue to execute our cycle management strategy by actively allocating capital to the sectors where rates allow for returns that are substantially higher than our cost of capital, as demonstrated by the strong underwriting performance across each of our three segments. Inflation continues to be a focus for our industry. We proactively analyze available data and incorporate emerging trends into our pricing and reserving. We believe that this discipline, coupled with increases in future investment returns and prudent reserving, mitigate inflation's impact. For our mortgage operations, inflation mainly has a positive effect as it increases homeowner equity, which can potentially mitigate future losses. The 2022 second quarter reflected growth across most property and casualty lines as we remain in a growth phase of the underwriting cycle. As a result, we continue to show improved underwriting margins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix of business. We believe that this time-tested strategy of protecting capital through soft markets and increasing our writings in hard markets gives us the best chance to generate superior risk adjusted returns over time. As long as rate increases support returns above our required thresholds, we expect to continue to grow our writings. Rate improvements have enabled us to continue to expand writings in our property casualty segments. Rate increases remain above the long-term loss cost trends and have spread to more lines than last year. In specialty insurance, underwriting conditions remain opportunistic as pricing discipline, terms and conditions, and limits management are stable across most lines. This stability, combined with the uncertainties in the insurance market, should keep the market disciplined and sustain rate increases. OurU.S. operations benefited from growth in professional liability, including cyber, as well as travel where we believe relative returns are attractive. Our specialty international insurance business, which includes our Lloyd's andU.K. regional businesses, delivered strong growth in the quarter with net premium written up 23%, primarily due to specialty, casualty and property. In reinsurance, the emphasis remains on quota share treaties over excess of loss reinsurance. This strategy allows us to participate in the rate increases on primary insurance while improving the balance between risk and return. We remained disciplined in property catastrophe exposure and we will deploy more capital to the line if expected returns improve meaningfully. TheJune 1 andJuly 1 renewals showed a property catastrophe market in transition and we are cautiously optimistic that this momentum could continue into the next year. Our mortgage business continues to deliver the consistent underwriting results we projected when we began building it a decade ago. In ourU.S. primary mortgage operations, delinquencies continue to trend to historically low levels, and cures on delinquent mortgages in our portfolio resulted in favorable prior year development in the quarter. The increase in mortgage interest rates is a steeper rise than we have seen in decades and have dramatically curtailed refinancing. Rising rates also mean that persistency is increasing, which allowed us to grow ourU.S. primary mortgage insurance in force to an all-time high of$292 billion . This should result in a more stable base of premium income to help drive underwriting income in future periods. The credit quality of homebuyers remains excellent and we believe our portfolio is well positioned for a variety of economic scenarios. Outside of theU.S. , we increased our writings inAustralia as a result of our acquisition of Westpac's LMI business in the 2021 third quarter. We remain committed to providing solutions across many offerings as the marketplace evolves, including the mortgage credit risk transfer programs initiated by government sponsored enterprises, or "GSEs." In addition, we have entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled inBermuda and have issued mortgage insurance linked notes, increasing our protection for mortgage tail risk. The Bellemeade structures provided approximately$4.3 billion of aggregate reinsurance coverage atJune 30, 2022 .
FINANCIAL MEASURES
Management uses the following three key financial indicators in evaluating our
performance and measuring the overall growth in value generated for
Capital's
Book Value per Share
Book value per share represents total common shareholders' equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per share as a key measure of the value generated for our common shareholders each period and believes that book value per share is the key driver ofArch Capital's share price over time. Book value per share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per share depending on the purchase price. Book value per share was$31.37 atJune 30, 2022 , ARCH CAPITAL 41 2022 SECOND QUARTER FORM 10-Q
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Table of Contents compared to$32.18 atMarch 31, 2022 and$32.02 atJune 30, 2021 . The 2.5% decrease in book value per share for the 2022 second quarter reflected negative total return on investments driven by rising interest rates on fixed maturities and mark-to-market impacts on our equity securities, which were partially offset by strong underwriting returns.
Operating Return on Average Common Equity
Operating return on average common equity ("Operating ROAE") represents
annualized after-tax operating income available to Arch common shareholders
divided by the average of beginning and ending common shareholders' equity
available to Arch during the period. After-tax operating income available to
Arch common shareholders, a non-GAAP financial measure as defined in Regulation
G, represents net income available to Arch common shareholders, excluding net
realized gains or losses (which includes changes in the allowance for credit
losses on financial assets and net impairment losses recognized in earnings)
equity in net income or loss of investment funds accounted for using the equity
method, net foreign exchange gains or losses, transaction costs and other, loss
on redemption of preferred shares and income taxes. Management uses Operating
ROAE as a key measure of the return generated to common shareholders. See
"Comment on Non-GAAP Financial Measures."
Our annualized net income return on average common equity was 13.3% for the 2022
second quarter, compared to 21.2% for the 2021 second quarter, and 9.5% for the
six months ended June 30, 2022 , compared to 17.4% for the 2021 period. Our
Operating ROAE was 17.1% for the 2022 second quarter, compared to 13.0% for the
2021 second quarter, and 15.3% for the six months ended June 30, 2022 , compared
to 10.3% for the 2021 period. The 2022 periods reflected strong underwriting
returns and a lower level of catastrophic activity, while the 2021 periods
reflected lower underwriting returns due to an increased level of catastrophic
activity and higher income from operating affiliates.
Total Return on Investments
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 and reflects the effect of
financial market conditions along with foreign currency fluctuations. In
addition, total return incorporates the timing of investment returns during the
periods. The following table summarizes our total return compared to the
benchmark return against which we measured our portfolio during the periods. See
"Comment on Non-GAAP Financial Measures."
Arch Benchmark
Portfolio Return
Pre-tax total return (before investment expenses):
2022 Second Quarter
(3.02) % (5.37) % 2021 Second Quarter 1.58 % 1.80 %
Six Months Ended
Six Months Ended
Total return for the 2022 periods reflected rising interest rates on fixed maturities and mark-to-market impacts on our equity securities. We continue to maintain a relative short duration on our portfolio of 2.94 years atJune 30, 2022 . The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. AtJune 30, 2022 , the benchmark return index had an average credit quality of "Aa3" by Moody's Investors Service ("Moody's"), and an estimated duration of 3.34 years.
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The benchmark return index included weightings to the following indices:
%
ICE BoAML 1-5 Year A - AAA U.S. Corporate Index 13.00 %
ICE BoAML 5-10 Year A - AAA U.S. Corporate Index 11.00
ICE BoAML 1-5 Year U.S. Treasury Index 11.00
MSCI ACWI Net Total Return USD Index 9.30
ICE BoAML 1-10 Year BBB U.S. Corporate Index 5.00
JPM CLOIE Investment Grade 5.00
S&P/LSTA Leveraged Loan Total Return Index 4.965
ICE BoAML U.S. Mortgage Backed Securities Index 4.00
ICE BoAML AAA US Fixed Rate CMBS 4.00
ICE BoAML 1-5 Year U.K. Gilt Index 4.00
ICE BoAML German Government 1-10 Year Index 3.50
ICE BoAML 0-3 Year U.S. Treasury Index 3.25
ICE BoAML 5-10 Year U.S. Treasury Index 3.00
ICE BoAML 1-10 Year U.S. Municipal Securities Index 3.00
Bloomberg Barclays ABS Aaa Index 3.00
ICE BoAML 1-5 Year Australia Government Index 2.75
ICE BoAML U.S. High Yield Constrained Index 2.50
ICE BoAML 1-5 Year Canada Government Index 2.00
ICE BofA CCC and Lower US High Yield Constrained Index 1.38
Bloomberg Barclays Global High Yield Index 1.38
S&P DJ Global ex-US Select Real Estate Securities Net Index 0.825
FTSE Nareit All Mortgage Capped Index Total Return USD
0.825 Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD 0.825 ICE BoAML 15+ Year Canada Government Index 0.50 Total 100.00 %
COMMENT ON NON-GAAP FINANCIAL MEASURES
Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized net income return on average
common equity (the most directly comparable GAAP financial measures) in
accordance with Regulation G is included under "Results of Operations" below.
We believe 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, transaction costs and other and loss on redemption of preferred shares in any particular period are not indicative of the performance, of or trends, in our business. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of 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 our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our investments is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way we account for our other investments and the timing of the recognition of equity in net income or loss of 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. We believe that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, our business performance. The loss on redemption of preferred shares related to the redemption of some of Arch's preferred shares had no impact on shareholders' equity or cash flows. Due to these reasons, we exclude net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares from the calculation of after-tax operating income available to Arch common shareholders.
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Table of Contents We believe that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons. Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the 'other' segment. The 'other' segment includes the results of Somers throughJune 30, 2021 . Such measures represent the pre-tax profitability of our underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in our corporate segment. While these measures are presented in note 4, "Segment Information," of the notes accompanying our 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 subtotal before the contribution from the 'other' segment through June 30, 2021, in accordance with Regulation G, is shown in note 4, "Segment Information" to our consolidated financial statements. We measure segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangibles and, accordingly, investment income and other non-underwriting related items are not allocated to each underwriting segment. The 'other' segment includes the results of Somers throughJune 30, 2021 . Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution from the 'other' segment. ThroughJune 30, 2021 , the 'other' segment included the results ofSomers Group Holdings Ltd. Somers Group Holdings Ltd. is the parent ofSomers Re Ltd. , a multi-lineBermuda reinsurance company (together withSomers Group Holdings Ltd. , "Somers"). Pursuant to GAAP, Somers was considered a variable interest entity and we concluded that we were the primary beneficiary of Somers. As such, we consolidated the results of Somers in our consolidated financial statements throughJune 30, 2021 . In the 2020 fourth quarter,Arch Capital , Somers, andGreysbridge Ltd. , a wholly-owned subsidiary ofArch Capital , entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement").Arch Capital assigned its rights under the Merger Agreement toGreysbridge Holdings Ltd. ("Greysbridge"). The merger contemplated by the Merger Agreement and the related Greysbridge equity financing closed onJuly 1, 2021 . In connection therewith and effectiveJuly 1, 2021 , Somers became wholly owned by Greysbridge, and Greysbridge became owned 40% by Arch and 30% by certain funds managed by Kelso and 30% by certain funds managed by Warburg. Based on the governing documents of Greysbridge, we concluded that, while we retain significant influence over Greysbridge, Greysbridge does not constitute a variable interest entity. Accordingly, effectiveJuly 1, 2021 , we no longer consolidate the results of Somers in our consolidated financial statements and footnotes. See note 11, "Variable Interest Entities and Noncontrolling Interests" and note 4, "Segment Information," to our consolidated financial statements for additional information on Somers. Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis of the underwriting performance of each of our underwriting segments. Total return on investments includes investment income, equity in net income or loss of 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. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by our investment portfolio against benchmark returns during the periods.
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Table of Contents RESULTS OF OPERATIONS
The following table summarizes our consolidated financial data, including a
reconciliation of net income or loss available to Arch common shareholders to
after-tax operating income or loss available to Arch common shareholders.
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income available to Arch
common shareholders $ 394,160 $ 663,820 $ 579,776 $ 1,091,573
Net realized (gains) losses 266,579 (167,438) 558,993 (272,989)
Equity in net (income) loss of
investment funds accounted for
using the equity method (58,061) (122,186) (94,366) (193,872)
Net foreign exchange (gains)
losses (87,797) 17,888 (91,652) (3,444)
Transaction costs and other 261 (1,421) 658 (147)
Income tax expense (1) (8,646) 16,553 (24,914) 25,864
After-tax operating income
available to Arch common
shareholders $ 506,496 $ 407,216
Beginning common shareholders' equity$ 12,089,589 $ 12,316,472 $ 12,715,896 $ 12,325,886 Ending common shareholders' equity$ 11,587,566 $ 12,706,072 $ 11,587,566 $ 12,706,072 Average common shareholders' equity$ 11,838,578 $ 12,511,272
Annualized net income return on average common equity % 13.3 21.2 9.5 17.4 Annualized operating return on average common equity % 17.1 13.0 15.3 10.3 (1) Income tax expense on 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 reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction. Segment Information We classify our businesses into three underwriting segments - insurance, reinsurance and mortgage - and two other operating segments - corporate and 'other.' Our insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to our chief operating decision makers, the Chief Executive Officer ofArch Capital , the Chief Financial Officer and Treasurer ofArch Capital and the President and Chief Underwriting Officer ofArch Capital . The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment. We determined our reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
Insurance Segment
The following tables set forth our insurance segment's underwriting results:
Three Months Ended June 30,
%
2022 2021 Change
Gross premiums written $ 1,705,167 $ 1,368,867 24.6
Premiums ceded (476,910) (405,312)
Net premiums written 1,228,257 963,555 27.5
Change in unearned premiums (126,113) (98,128)
Net premiums earned 1,102,144 865,427 27.4
Losses and loss adjustment expenses (629,759) (545,880)
Acquisition expenses (213,688) (136,852)
Other operating expenses (161,088) (133,342)
Underwriting income (loss) $ 97,609 $ 49,353 97.8
% Point
Underwriting Ratios Change
Loss ratio 57.1 % 63.1 % (6.0)
Acquisition expense ratio 19.4 % 15.8 % 3.6
Other operating expense ratio 14.6 % 15.4 % (0.8)
Combined ratio 91.1 % 94.3 % (3.2)
ARCH CAPITAL 45 2022 SECOND QUARTER FORM 10-Q
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Six Months Ended June 30,
2022 2021 % Change
Gross premiums written $ 3,424,772 $ 2,784,753 23.0
Premiums ceded (989,619) (826,359)
Net premiums written 2,435,153 1,958,394 24.3
Change in unearned premiums (306,313) (273,493)
Net premiums earned 2,128,840 1,684,901 26.3
Losses and loss adjustment expenses (1,230,498) (1,081,627)
Acquisition expenses (409,338) (265,074)
Other operating expenses (327,913) (270,455)
Underwriting income (loss) $ 161,091 $ 67,745 137.8
% Point
Underwriting Ratios Change
Loss ratio 57.8 % 64.2 % (6.4)
Acquisition expense ratio 19.2 % 15.7 % 3.5
Other operating expense ratio 15.4 % 16.1 % (0.7)
Combined ratio 92.4 % 96.0 % (3.6)
The insurance segment consists of our 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, cyber insurance, 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 standalone 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.
Premiums Written.
The following tables set forth our insurance segment's net premiums written by
major line of business:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Professional lines $ 349,402 28.4 $ 254,961 26.5
Property, energy, marine and aviation 258,765 21.1 207,762 21.6
Programs 163,339 13.3 149,373 15.5
Excess and surplus casualty 120,509 9.8 74,346 7.7
Travel, accident and health 105,970 8.6 71,071 7.4
Construction and national accounts 87,615 7.1 77,579 8.1
Lenders products 36,042 2.9 40,386 4.2
Other 106,615 8.7 88,077 9.1
Total $ 1,228,257 100.0 $ 963,555 100.0
2022 Second Quarter versus 2021 Period. Gross premiums written by the insurance
segment in the 2022 second quarter were 24.6% higher than in the 2021 second
quarter, while net premiums written were 27.5% higher. The higher level of net
premiums written reflected increases in most lines of business, due in part to
rate increases, new business opportunities and growth in existing accounts.
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Six Months Ended June 30,
2022 2021
Amount % Amount %
Professional lines $ 697,243 28.6 $ 493,207 25.2
Property, energy, marine and aviation 468,986 19.3 378,260 19.3
Programs 292,740 12.0 307,774 15.7
Excess and surplus casualty 220,798 9.1 159,939 8.2
Travel, accident and health 271,302 11.1 163,377 8.3
Construction and national accounts 213,738 8.8 212,371 10.8
Lenders products 61,274 2.5 75,246 3.8
Other 209,072 8.6 168,220 8.6
Total $ 2,435,153 100.0 $ 1,958,394 100.0
Six Months Ended June 30, 2022 versus 2021 period. Gross premiums written by the
insurance segment for the six months ended June 30, 2022 were 23.0% higher than
in the 2021 period, while net premiums written were 24.3% higher than in the
2021 period. The increase in net premiums written reflected growth in
professional lines and in property, primarily due to rate increases, new
business opportunities and growth in existing accounts, and in travel, primarily
due to new business and growth in existing accounts.
Net Premiums Earned.
The following tables set forth our insurance segment's net premiums earned by
major line of business:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Professional lines $ 314,115 28.5 $ 214,098 24.7
Property, energy, marine and aviation 192,410 17.5 167,716 19.4
Programs 148,681 13.5 118,974 13.7
Excess and surplus casualty 98,369 8.9 72,899 8.4
Travel, accident and health 130,185 11.8 62,610 7.2
Construction and national accounts 87,084 7.9 95,849 11.1
Lenders products 27,594 2.5 46,396 5.4
Other 103,706 9.4 86,885 10.0
Total $ 1,102,144 100.0 $ 865,427 100.0
Six Months Ended June 30,
2022 2021
Amount % Amount %
Professional lines $ 603,928 28.4 $ 413,769 24.6
Property, energy, marine and aviation 378,065 17.8 324,975 19.3
Programs 288,490 13.6 231,814 13.8
Excess and surplus casualty 189,130 8.9 148,266 8.8
Travel, accident and health 234,815 11.0 112,276 6.7
Construction and national accounts 173,232 8.1 198,520 11.8
Lenders products 58,182 2.7 86,477 5.1
Other 202,998 9.5 168,804 10.0
Total $ 2,128,840 100.0 $ 1,684,901 100.0
Net premiums written are primarily earned on a pro rata basis over the terms of
the policies for all products, usually 12 months. Net premiums earned reflect
changes in net premiums written over the previous five quarters. Net premiums
earned in the 2022 second quarter were 27.4% higher than in the 2021 second
quarter. Net premiums earned for the six months ended June 30, 2022 were 26.3%
higher than in the 2021 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Current year 57.7 % 63.6 % 58.5 % 64.7 %
Prior period reserve development (0.6) % (0.5) % (0.7) % (0.5) %
Loss ratio 57.1 % 63.1 % 57.8 % 64.2 %
Current Year Loss Ratio.
2022 Second Quarter versus 2021 Period. The insurance segment's current year
loss ratio in the 2022 second quarter was 5.9 points lower than in the 2021
second quarter. The 2022 second quarter loss ratio reflected 1.2 points of
current year catastrophic activity, compared to 3.2 points of catastrophic
activity for the 2021 second quarter.
Six Months EndedJune 30, 2022 versus 2021 Period. The insurance segment's current year loss ratio for the six months endedJune 30, 2022 was 6.2 points lower than in the 2021 period and reflected 2.1 points of current year catastrophic activity, primarily related toRussia's invasion ofUkraine and other natural catastrophes, compared to 4.1 points in the 2021 period. The balance of the change in the 2022 loss ratios resulted, in part, from changes in mix of business. ARCH CAPITAL 47 2022 SECOND QUARTER FORM 10-Q
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Table of Contents PriorPeriod Reserve Development . The insurance segment's net favorable development was$6.7 million , or 0.6 points, for the 2022 second quarter, compared to$4.0 million , or 0.5 points, for the 2021 second quarter, and$14.0 million , or 0.7 points, for the six months endedJune 30, 2022 , compared to$8.1 million , or 0.5 points, for the 2021 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses," to our consolidated financial statements for information about the insurance segment's prior year reserve development.
Underwriting Expenses.
2022 Second Quarter versus 2021 Period. The insurance segment's underwriting expense ratio was 34.0% in the 2022 second quarter, compared to 31.2% in the 2021 second quarter. The increase in the 2022 second quarter was primarily due to higher gross commission ratios, growth in lines with higher acquisition costs, such as travel, and targeted personnel expansion to support our growth. This increase was partially offset by a higher level of net premiums earned.
Six Months Ended
underwriting expense ratio was 34.6% for the six months ended
compared to 31.8% for the 2021 period, with the increase primarily due to
changing mix of business and growth in lines with higher acquisition costs.
Reinsurance Segment
The following tables set forth our reinsurance segment's underwriting results:
Three Months Ended June 30,
%
2022 2021 Change
Gross premiums written $ 1,793,398 $ 1,358,020 32.1
Premiums ceded (630,764) (433,288)
Net premiums written 1,162,634 924,732 25.7
Change in unearned premiums (234,635) (187,708)
Net premiums earned 927,999 737,024 25.9
Other underwriting income (loss) 4,526 1,053
Losses and loss adjustment expenses (537,578) (463,823)
Acquisition expenses (189,494) (133,585)
Other operating expenses (66,053) (44,695)
Underwriting income (loss) $ 139,400 $ 95,974 45.2
% Point
Underwriting Ratios Change
Loss ratio 57.9 % 62.9 % (5.0)
Acquisition expense ratio 20.4 % 18.1 % 2.3
Other operating expense ratio 7.1 % 6.1 % 1.0
Combined ratio 85.4 % 87.1 % (1.7)
Six Months Ended June 30,
2022 2021 % Change
Gross premiums written $ 3,512,340 $ 2,829,080 24.2
Premiums ceded (1,210,582) (905,236)
Net premiums written 2,301,758 1,923,844 19.6
Change in unearned premiums (569,359) (541,920)
Net premiums earned 1,732,399 1,381,924 25.4
Other underwriting income 5,362 (145)
Losses and loss adjustment expenses (992,278) (948,693)
Acquisition expenses (361,490) (251,610)
Other operating expenses (135,829) (105,209)
Underwriting income (loss) $ 248,164 $ 76,267 225.4
% Point
Underwriting Ratios Change
Loss ratio 57.3 % 68.7 % (11.4)
Acquisition expense ratio 20.9 % 18.2 % 2.7
Other operating expense ratio 7.8 % 7.6 % 0.2
Combined ratio 86.0 % 94.5 % (8.5)
The reinsurance segment consists of our reinsurance underwriting units which
offer specialty product lines on a worldwide basis. Reinsurance agreements are
typically offered on a proportional and/or excess of loss basis and provide
coverage to ceding company clients for specific underlying written policies.
Product lines include:
Casualty: provides coverage on third party liability exposures including, among
others, executive assurance, professional liability, excess and umbrella
liability, excess motor and healthcare business, and workers' compensation.
Business is assumed primarily on a treaty basis, with some facultative coverages
also offered.
Marine and aviation: provides coverage for energy, hull, cargo, specie,
liability and transit, and aviation business, including airline and general
aviation risks. Business written may also include space business, which includes
coverages for satellite assembly, launch and operation for commercial space
programs.
Other specialty: provides coverage for proportional motor reinsurance, whole account multi-line treaties, cyber, trade credit and surety, accident and health, workers' compensation catastrophe, agriculture and political risk, among others. Property catastrophe: provides protection for most types of catastrophic losses, including hurricane, earthquake, flood, tornado, hail and fire, and for other perils on a case-by-case basis. Excess of loss coverages are triggered when aggregate losses and loss adjustment expense from a single occurrence or aggregation of losses from a covered peril exceed the retention specified in the contract. Property excluding property catastrophe: provides coverage for personal lines and/or commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, ARCH CAPITAL 48 2022 SECOND QUARTER FORM 10-Q
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explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake.
Business is assumed on either a treaty basis or facultative basis.
Other: includes life reinsurance business, casualty clash business and, in
limited instances, non-traditional business which is intended to provide
insurers with risk management solutions that complement traditional reinsurance.
Premiums Written.
The following tables set forth our reinsurance segment's net premiums written by
major line of business:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Other Specialty $ 434,710 37.4 $ 296,325 32.0
Property excluding property
catastrophe 299,042 25.7 249,101 26.9
Casualty 212,724 18.3 225,890 24.4
Property catastrophe 154,451 13.3 87,642 9.5
Marine and aviation 35,129 3.0 50,248 5.4
Other 26,578 2.3 15,526 1.7
Total $ 1,162,634 100.0 $ 924,732 100.0
2022 Second Quarter versus 2021 Period. Gross premiums written by the
reinsurance segment in the 2022 second quarter were 32.1% higher than in the
2021 second quarter, while net premiums written were 25.7% higher. The growth in
net premiums written reflected increases in other specialty, property
catastrophe and property excluding property catastrophe lines, primarily related
to rate increases, new business opportunities and growth in existing accounts.
Six Months Ended June 30,
2022 2021
Amount % Amount %
Other Specialty $ 798,544 34.7 $ 580,656 30.2
Property excluding property catastrophe 594,461 25.8 541,934 28.2
Casualty 479,179 20.8 444,146 23.1
Property catastrophe 283,422 12.3 204,849 10.6
Marine and aviation 86,946 3.8 111,886 5.8
Other 59,206 2.6 40,373 2.1
Total $ 2,301,758 100.0 $ 1,923,844 100.0
Six Months Ended June 30, 2022 versus 2021 period. Gross premiums written by the
reinsurance segment for the six months ended June 30, 2022 were 24.2% higher
than in the 2021 period, while net premiums written were 19.6% higher than in
the 2021 period. The increase in net premiums written reflected growth in other
specialty, primarily due to new business and rate increases..
Net Premiums Earned.
The following tables set forth our reinsurance segment's net premiums earned by
major line of business:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Other Specialty $ 284,321 30.6 $ 211,817 28.7
Property excluding property
catastrophe 266,545 28.7 202,780 27.5
Casualty 214,714 23.1 183,846 24.9
Property catastrophe 94,679 10.2 76,167 10.3
Marine and aviation 41,768 4.5 42,773 5.8
Other 25,972 2.8 19,641 2.7
Total $ 927,999 100.0 $ 737,024 100.0
Six Months Ended June 30,
2022 2021
Amount % Amount %
Other Specialty $ 515,939 29.8 $ 375,715 27.2
Property excluding property catastrophe 499,074 28.8 390,562 28.3
Casualty 412,572 23.8 332,877 24.1
Property catastrophe 171,755 9.9 164,178 11.9
Marine and aviation 83,960 4.8 82,881 6.0
Other 49,099 2.8 35,711 2.6
Total $ 1,732,399 100.0 $ 1,381,924 100.0
Net premiums written, irrespective of the class of business, are generally
earned on a pro rata basis over the terms of the underlying policies or
reinsurance contracts. Net premiums earned by the reinsurance segment in the
2022 second quarter were 25.9% higher than in the 2021 second quarter, and
reflect changes in net premiums written over the previous five quarters.
Other Underwriting Income (Loss).
Other underwriting income for the 2022 second quarter was$4.5 million , compared to$1.1 million for the 2021 second quarter, and$5.4 million for the six months endedJune 30, 2022 , compared to a loss of$0.1 million for the 2021 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Current year 62.9 % 65.7 % 61.9 % 72.1 %
Prior period reserve development (5.0) % (2.8) % (4.6) % (3.4) %
Loss ratio 57.9 % 62.9 % 57.3 % 68.7 %
ARCH CAPITAL 49 2022 SECOND QUARTER FORM 10-Q
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Table of Contents Current Year Loss Ratio. 2022 Second Quarter versus 2021 Period. The reinsurance segment's current year loss ratio in the 2022 second quarter was 2.8 points lower than in the 2021 second quarter. The 2022 second quarter loss ratio reflected 7.5 points of current year catastrophic activity, primarily due to a series of natural events outside theU.S. The 2021 second quarter included 2.6 points of catastrophic activity, including winter storms Uri and Viola as well as other minor global events. Six Months EndedJune 30, 2022 versus 2021 Period. The reinsurance segment's current year loss ratio for the six months endedJune 30, 2022 was 10.2 points lower than in the 2021 period and reflected 7.0 points of current year catastrophic activity, primarily related to a series of natural events outside theU.S. andRussia's invasion ofUkraine , compared to 12.9 points in the 2021 period.
Prior
The reinsurance segment's net favorable development was$46.4 million , or 5.0 points, for the 2022 second quarter, compared to$20.5 million , or 2.8 points, for the 2021 second quarter, and$78.9 million , or 4.6 points, for the six months endedJune 30, 2022 , compared to$47.3 million , or 3.4 points, for the 2021 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses," to our consolidated financial statements for information about the reinsurance segment's prior year reserve development.
Underwriting Expenses.
2022 Second Quarter versus 2021 Period. The underwriting expense ratio for the reinsurance segment was 27.5% in the 2022 second quarter, compared to 24.2% in the 2021 second quarter, with the increase primarily resulting from growth in lines with higher acquisition costs and targeted personnel expansion to support our growth. This increase was partially offset by a higher level of net premiums earned. Six Months EndedJune 30, 2022 versus 2021 period. The underwriting expense ratio for the reinsurance segment was 28.7% for the six months endedJune 30, 2022 , compared to 25.8% for the 2021 period. The comparison of the underwriting expense ratios also reflected changes in the mix and type of business and a higher level of net premiums earned for the 2022 period. Mortgage Segment
Our mortgage operations include
reinsurance operations as well as participation in GSE credit risk-sharing
transactions.
The following tables set forth our mortgage segment's underwriting results.
Three Months Ended June 30,
2022 2021 % Change
Gross premiums written $ 371,896 $ 391,511 (5.0)
Premiums ceded (78,148) (55,665)
Net premiums written 293,748 335,846 (12.5)
Change in unearned premiums 1,884 (1,625)
Net premiums earned 295,632 334,221 (11.5)
Other underwriting income (1,556) 4,148
Losses and loss adjustment expenses 64,681 (9,880)
Acquisition expenses (10,137) (30,117)
Other operating expenses (50,251) (48,312)
Underwriting income $ 298,369 $ 250,060 19.3
% Point
Underwriting Ratios Change
Loss ratio (21.9) % 3.0 % (24.9)
Acquisition expense ratio 3.4 % 9.0 % (5.6)
Other operating expense ratio 17.0 % 14.5 % 2.5
Combined ratio (1.5) % 26.5 % (28.0)
Six Months Ended June 30,
2022 2021 % Change
Gross premiums written $ 736,735 $ 782,757 (5.9)
Premiums ceded (154,867) (111,716)
Net premiums written 581,868 671,041 (13.3)
Change in unearned premiums 3,301 (503)
Net premiums earned 585,169 670,538 (12.7)
Other underwriting income 3,505 11,045
Losses and loss adjustment expenses 119,285 (73,569)
Acquisition expenses (20,650) (60,199)
Other operating expenses (103,593) (97,443)
Underwriting income $ 583,716 $ 450,372 29.6
% Point
Underwriting Ratios Change
Loss ratio (20.4) % 11.0 % (31.4)
Acquisition expense ratio 3.5 % 9.0 % (5.5)
Other operating expense ratio 17.7 % 14.5 % 3.2
Combined ratio 0.8 % 34.5 % (33.7)
ARCH CAPITAL 50 2022 SECOND QUARTER FORM 10-Q
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Premiums Written.
The following tables set forth our mortgage segment's net premiums written by
underwriting location:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 201,166 68.5 $ 234,645 69.9
Other 92,582 31.5 101,201 30.1
Total $ 293,748 100.0 $ 335,846 100.0
2022 Second Quarter versus 2021 Period. Gross premiums written by the mortgage
segment in the 2022 second quarter were 5.0% lower than in the 2021 second
quarter, while net premiums written were 12.5% lower. Net premiums written for
the 2022 second quarter reflected a higher level of premiums ceded than in the
2021 second quarter.
Six Months Ended June 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 402,316 69.1 $ 482,174 71.9
Other 179,552 30.9 188,867 28.1
Total $ 581,868 100.0 $ 671,041 100.0
Six Months Ended June 30, 2022 versus 2021 Period. Gross premiums written by the
mortgage segment for the six months ended June 30, 2022 were 5.9% lower than in
the 2021 period. The reduction in gross premiums written primarily reflected
lower U.S. primary mortgage insurance single premium volume and a decrease in
monthly premiums. Net premiums written for the six months ended June 30, 2022
were 13.3% lower than in the 2021 period and reflected a higher level of
premiums ceded than in the 2021 period.
The persistency rate, which represents the percentage of mortgage insurance in
force at the beginning of a 12-month period that remains in force at the end of
such period, was 71.3% for the Arch MI U.S. portfolio of mortgage insurance
policies at June 30, 2022 , reflecting a lower level of mortgage refinancing
activity, compared to 62.4% at December 31, 2021 .
The following tables provide details on the new insurance written ("NIW")
generated by Arch MI
loans that received coverage during the period.
(U.S. Dollars in millions) Three Months Ended June 30,
2022 2021
Amount % Amount %
Total new insurance written (NIW)
(1) $ 23,499 $ 28,372
Credit quality (FICO):
>=740 $ 16,121 68.6 $ 19,240 67.8
680-739 6,800 28.9 8,113 28.6
620-679 576 2.5 1,019 3.6
<620 2 - - -
Total $ 23,499 100.0 $ 28,372 100.0
Loan-to-value (LTV):
95.01% and above $ 1,195 5.1 $ 1,484 5.2
90.01% to 95.00% 13,290 56.6 13,936 49.1
85.01% to 90.00% 6,591 28.0 8,675 30.6
85.00% and below 2,423 10.3 4,277 15.1
Total $ 23,499 100.0 $ 28,372 100.0
Monthly vs. single:
Monthly $ 22,872 97.3 $ 26,725 94.2
Single 627 2.7 1,647 5.8
Total $ 23,499 100.0 $ 28,372 100.0
Purchase vs. refinance:
Purchase $ 23,059 98.1 $ 25,010 88.2
Refinance 440 1.9 3,362 11.8
Total $ 23,499 100.0 $ 28,372 100.0
(1)Represents the original principal balance of all loans that received coverage
during the period.
ARCH CAPITAL 51 2022 SECOND QUARTER FORM 10-Q
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(U.S. Dollars in millions) Six Months Ended June 30,
2022 2021
Amount % Amount %
Total new insurance written (NIW)
(1) $ 43,514 $ 55,391
Credit quality (FICO):
>=740 $ 29,273 67.3 $ 37,058 66.9
680-739 13,054 30.0 16,531 29.8
620-679 1,182 2.7 1,802 3.3
<620 5 - - -
Total $ 43,514 100.0 $ 55,391 100.0
Loan-to-value (LTV):
95.01% and above $ 2,291 5.3 $ 3,092 5.6
90.01% to 95.00% 24,068 55.3 26,224 47.3
85.01% to 90.00% 12,324 28.3 16,987 30.7
85.01% and below 4,831 11.1 9,088 16.4
Total $ 43,514 100.0 $ 55,391 100.0
Monthly vs. single:
Monthly $ 42,073 96.7 $ 51,714 93.4
Single 1,441 3.3 3,677 6.6
Total $ 43,514 100.0 $ 55,391 100.0
Purchase vs. refinance:
Purchase $ 42,216 97.0 $ 45,515 82.2
Refinance 1,298 3.0 9,876 17.8
Total $ 43,514 100.0 $ 55,391 100.0
Net Premiums Earned.
The following tables set forth our mortgage segment's net premiums earned by
underwriting location:
Three Months Ended June 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 209,200 70.8 $ 248,388 74.3
Other 86,432 29.2 85,833 25.7
Total $ 295,632 100.0 $ 334,221 100.0
2022 Second Quarter versus 2021 Period. Net premiums earned for the 2022 second
quarter were 11.5% lower than in the 2021 second quarter, and reflected a lower
level of earnings from single premium policy terminations and a decline in
monthly premiums.
Six Months Ended June 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 418,725 71.6 $ 510,938 76.2
Other 166,444 28.4 159,600 23.8
Total $ 585,169 100.0 $ 670,538 100.0
Six Months Ended June 30, 2022 versus 2021 Period. For the six months ended June
30, 2022 , net premiums earned were 12.7% lower than in the 2021 period, and
reflected a lower level of earnings from single premium policy terminations and
a decline in monthly premiums.
Other Underwriting Income (Loss).
Other underwriting income or loss, which is primarily related to GSE credit risk-sharing and our whole mortgage loan purchase and sell program was a loss of$1.6 million for the 2022 second quarter, compared to an income of$4.1 million for the 2021 second quarter.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Current year 18.0 % 15.9 % 17.2 % 19.1 %
Prior period reserve development (39.9) % (12.9) % (37.6) % (8.1) %
Loss ratio (21.9) % 3.0 % (20.4) % 11.0 %
Current Year Loss Ratio.
2022 Second Quarter versus 2021 Period. The mortgage segment's current year loss
ratio was 2.1 points higher in the 2022 second quarter than in the 2021 second
quarter. The higher current year loss ratio for the 2022 period reflected a
lower level of net premiums earned in the U.S. primary mortgage insurance
business.
Six Months Ended June 30, 2022 versus 2021 Period. The mortgage segment's
current year loss ratio was 1.9 points lower for the six months ended June 30,
2022 than for the 2021 period. The lower current year loss ratio for the 2022
period reflected lower delinquencies.
Prior
The mortgage segment's net favorable development was$118.1 million , or 39.9 points, for the 2022 second quarter, compared to$43.1 million , or 12.9 points, for the 2021 second quarter, and$220.2 million , or 37.6 points, for the six months endedJune 30, 2022 , compared to$54.0 million , or 8.1 points, for the 2021 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses," to our consolidated financial statements for information about the mortgage segment's prior year reserve development.
Underwriting Expenses.
2022 Second Quarter versus 2021 Period. The underwriting expense ratio for the mortgage segment was 20.4% in the 2022 second quarter, compared to 23.5% in the 2021 second quarter, with the decrease primarily due to lower acquisition expenses on Australian mortgage insurance following the acquisition of Westpac LMI in the 2021 third quarter and profit commissions adjustments related to favorable development of prior year loss reserves. Such amounts were partially offset by a lower level of net premiums earned in theU.S. primary mortgage insurance business. ARCH CAPITAL 52 2022 SECOND QUARTER FORM 10-Q
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Table of Contents Six Months EndedJune 30, 2022 versus 2021 period. The underwriting expense ratio for the mortgage segment was 21.2% for the six months endedJune 30, 2022 , compared to 23.5% for the 2021 period, with the decrease primarily due to lower acquisition expenses on Australian mortgage insurance following the acquisition of Westpac LMI in the 2021 third quarter and profit commissions adjustments related to favorable development of prior year loss reserves. Such amounts were partially offset by a lower level of net premiums earned in theU.S. primary mortgage insurance business.
Corporate Segment
The corporate segment results include net investment income, net realized gains
or losses (which includes changes in the allowance for credit losses on
financial assets and net impairment losses recognized in earnings), equity in
net income or loss of investments accounted for using the equity method, other
income (loss), corporate expenses, transaction costs and other, amortization of
intangible assets, interest expense, net foreign exchange gains or losses,
income taxes, income from operating affiliates and items related to our
non-cumulative preferred shares. Such amounts exclude the results of the 'other'
segment.
Net Investment Income.
The components of net investment income were derived from the following sources:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Fixed maturities $ 105,342 $ 77,709 $ 187,395 $ 156,726
Equity securities 6,121 8,282 12,359 13,932
Short-term investments 4,120 972 6,695 1,616
Other (1) 7,984 21,026 20,060 36,585
Gross investment income 123,567 107,989 226,509 208,859
Investment expenses (2) (17,175) (18,559) (39,681) (40,700)
Net investment income $ 106,392 $ 89,430 $ 186,828 168,159
(1) Amounts include dividends and other distributions on investment funds, term
loan investments, funds held balances, cash balances and other items.
(2) Investment expenses were approximately 0.27% of average invested assets for the 2022 second quarter, compared to 0.30% for the 2021 second quarter, and 0.31% for the six months endedJune 30, 2022 , compared to 0.32% for the 2021 period. The higher level of net investment income for the 2022 period, primarily related to higher yields available in the financial market. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 1.76% for the 2022 second quarter, compared to 1.47% for the 2021 second quarter, and 1.54% for the six
months ended
Corporate Expenses.
Corporate expenses were$27.4 million for the 2022 second quarter, compared to$17.2 million for the 2021 second quarter, and$59.3 million for the six months endedJune 30, 2022 , compared to$40.6 million for the 2021 period. The increase in corporate expenses was primarily due to higher incentive compensation costs.
Other Income (Losses)
Other loss for the 2022 second quarter was$11.8 million , compared to income of$6.9 million for the 2021 second quarter, and a loss of$20.8 million for the six months endedJune 30, 2022 , compared to income of$5.1 million for the 2021 period. Amounts in both periods primarily reflect changes in the cash surrender value of our investment in corporate-owned life insurance.
Transaction Costs and Other.
Transaction costs and other were
compared to a benefit of
expense of
benefit of
periods reflect acquisitions activity for the respective periods.
Amortization of Intangible Assets.
Amortization of intangible assets for the 2022 second quarter was$27.2 million , compared to$14.4 million for the 2021 second quarter, and$54.4 million for the six months endedJune 30, 2022 , compared to$28.8 million for the 2021 period. Amounts in 2022 and 2021 period primarily attributed to amortization of finite-lived intangible assets. The increase in amortization of intangible assets expense was a result of acquisitions closed during the 2021 period.
Interest Expense.
Interest expense was$32.8 million for the 2022 second quarter, compared to the$31.4 million for the 2021 second quarter, and$65.5 million for the six months endedJune 30, 2022 , consistent with$65.6 million for the 2021 period. Interest expense primarily reflects amounts related to our outstanding senior notes.
Net Realized Gains or Losses.
We recorded net realized losses of$266.6 million for the 2022 second quarter, which included$109.9 million of mark-to-market losses on equity securities, compared to net realized gains of$163.4 million for the 2021 second quarter, and net realized losses of$559.0 million for the six months endedJune 30, 2022 , compared to net realized gains of$264.7 million for the 2021 period. Currently, our portfolio is
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Table of Contents actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations. Net realized gains or losses also include realized and unrealized contract gains and losses on our derivative instruments, changes in the fair value of assets accounted for using the fair value option and in the fair value of equities, along with changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings. See note 7, "Investment Information-Net Realized Gains (Losses)" and note 7, "Investment Information-Allowance for Expected Credit Losses," to our consolidated financial statements for additional information.
Equity in Net Income or Losses of Investment Funds Accounted for Using the
Equity Method.
We recorded$58.1 million of equity in net income related to investment funds accounted for using the equity method in the 2022 second quarter, compared to$122.2 million for the 2021 second quarter, and$94.4 million for the six months endedJune 30, 2022 , compared to$193.9 million for the 2021 period. Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Investment funds accounted for using the equity method totaled$3.5 billion atJune 30, 2022 , compared to$3.1 billion atDecember 31, 2021 . See note 7, "Investment Information-Investments Accounted For Using the Equity Method," to our consolidated financial statements for additional information.
Net Foreign Exchange Gains or Losses.
Net foreign exchange gains for the 2022 second quarter were$87.8 million , compared to net foreign exchange losses for the 2021 second quarter of$17.9 million . Net foreign exchange gains for the six months endedJune 30, 2022 were$91.6 million , compared to net foreign exchange gains for the 2021 period of$3.6 million . Amounts in both periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.
Income Tax Expense.
Our income tax provision on income (loss) before income taxes, including income (loss) from operating affiliates, resulted in an expense of 5.2% for the 2022 second quarter, compared to 7.1% for the 2021 second quarter, and 5.3% for the six months endedJune 30, 2022 , compared to 7.5% for the 2021 period. Our effective tax rate, which is based upon
the expected annual effective tax rate, may fluctuate from period to period
based on the relative mix of income or loss reported by jurisdiction and the
varying tax rates in each jurisdiction.
Income or Losses from Operating Affiliates.
Income from operating affiliates for 2022 second quarter was$4.6 million , compared to$24.5 million for the 2021 second quarter, and$29.2 million for the six months endedJune 30, 2022 , compared to$99.9 million for the 2021 period. Results for the 2021 period reflected a one-time gain of$74.5 million realized from our investment in Coface SA. See note 7, "Investment Information-Investments in Operating Affiliates," to our consolidated financial statements for additional information. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2021 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including
note 1, "Basis of Presentation and Recent Accounting Pronouncements."
FINANCIAL CONDITION
Investable Assets Held by Arch
AtJune 30, 2022 , approximately$18.0 billion , or 68.1%, of total investable assets held by Arch were internally managed, compared to$18.5 billion , or 67.3%, at December 31, 2021. See note 7, "Investment Information" to our consolidated financial statements for additional information. June 30, 2022, December
31, 2021
Average effective duration (in years) 2.94 2.70 Average S&P/Moody's credit ratings (1) AA-/Aa3
AA-/Aa3
(1)Average credit ratings on our investment portfolio on securities with ratings
assigned by
Service ("Moody's").
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The following table provides the credit quality distribution of our fixed
maturities. For individual fixed maturities, S&P ratings are used. In the
absence of an S&P rating, ratings from Moody's are used, followed by ratings
from Fitch Ratings.
% of
Estimated Fair Value Total
June 30, 2022
U.S. government and gov't agencies (1) $ 4,892,483 27.0
AAA 3,352,551 18.5
AA 2,064,313 11.4
A 3,464,240 19.1
BBB 3,114,961 17.2
BB 551,876 3.0
B 367,275 2.0
Lower than B 4,742 -
Not rated 298,039 1.6
Total $ 18,110,480 100.0
December 31, 2021
U.S. government and gov't agencies (1) $ 5,063,191 27.5
AAA 3,783,386 20.5
AA 2,459,413 13.4
A 2,943,594 16.0
BBB 2,936,398 15.9
BB 501,588 2.7
B 371,747 2.0
Lower than B 43,756 0.2
Not rated 311,734 1.7
Total $ 18,414,807 100.0
(1)Includes
securities and agency commercial mortgage-backed securities.
The following table provides information on the severity of the unrealized loss
position as a percentage of amortized cost for all fixed maturities which were
in an unrealized loss position:
% of
Gross Total Gross
Unrealized Unrealized
Severity of gross unrealized losses: Estimated Fair Value Losses Losses
June 30, 2022
0-10% $ 12,462,902 $ (621,590) 49.4
10-20% 3,933,567 (586,383) 46.6
20-30% 138,629 (44,066) 3.5
Greater than 30% 8,619 (5,292) 0.4
Total $ 16,543,717 $ (1,257,331) 100.0
December 31, 2021
0-10% $ 12,231,146 $ (166,867) 97.6
10-20% 16,884 (2,412) 1.4
20-30% 2,593 (759) 0.4
Greater than 30% 684 (916) 0.5
Total $ 12,251,307 $ (170,954) 100.0
The following table summarizes our top ten exposures to fixed income corporate
issuers by fair value at June 30, 2022 , excluding guaranteed amounts and covered
bonds:
Credit
Estimated Fair Value Rating (1)
Bank of America Corporation $ 449,059 A-/A2
JPMorgan Chase & Co. 321,238 A-/A2
Citigroup Inc. 307,423 BBB+/A3
Morgan Stanley 284,134 A-/A1
The Goldman Sachs Group, Inc. 254,836 BBB+/A2
Wells Fargo & Company 250,140 BBB+/A1
Blackstone Inc. 169,489 BBB/Baa3
UBS Group AG 133,298 A/Aa3
Athene Global Funding 113,452 A+/NA
Dai-ichi Life Holdings, Inc. 112,215 AA-/A1
Total $ 2,395,284
(1)Average credit ratings as assigned by S&P and Moody's, respectively.
The following table provides information on our structured securities, which
includes residential mortgage-backed securities ("RMBS"), commercial
mortgage-backed securities ("CMBS") and asset-backed securities ("ABS"):
Agencies Investment Grade Below Investment Grade Total
June 30, 2022
RMBS $ 505,253 $ 152,348 $ 40,567 $ 698,168
CMBS 19,080 943,027 60,981 1,023,088
ABS - 1,454,312 155,566 1,609,878
Total $ 524,333 $ 2,549,687 $ 257,114 $ 3,331,134
December 31, 2021
RMBS $ 268,229 $ 129,296 $ 10,952 $ 408,477
CMBS 22,198 926,302 97,984 1,046,484
ABS - 2,543,907 152,551 2,696,458
Total $ 290,427 $ 3,599,505 $ 261,487 $ 4,151,419
The following table summarizes our equity securities, which include investments
in exchange traded funds:
June 30, December 31,
2022 2021
Equities (1) $ 480,981 $ 883,722
Exchange traded funds
Fixed income (2) 276,392 455,467
Equity and other (3) 29,805 491,474
Total $ 787,178 $ 1,830,663
(1)Primarily in consumer non-cyclical, technology, communications, consumer
cyclical and financial at June 30, 2022 .
(2)Primarily in corporate at June 30, 2022 .
(3)Primarily in large cap stocks, foreign equities, technology, healthcare and
industrials at June 30, 2022 .
For details on our other investments and other investable assets, see note 7,
"Investment Information-Other Investments" to our consolidated financial
statements.
ARCH CAPITAL 55 2022 SECOND QUARTER FORM 10-Q
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Table of Contents For details on our investments accounted for using the equity method, see note 7, "Investment Information-Investments Accounted For Using the Equity Method," to our consolidated financial statements. Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See note 9, "Derivative Instruments," to our consolidated financial statements for additional disclosures related to derivatives. Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. See note 8, "Fair Value," to our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value, segregated by level in the fair value hierarchy.
Reinsurance
The effects of reinsurance on written and earned premiums and losses and loss
adjustment expenses ("LAE") with unaffiliated reinsurers were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Premiums written:
Direct $ 2,124,594 $ 1,909,893 $ 4,255,903 $ 3,802,138
Assumed 1,745,133 1,376,398 3,414,599 2,881,359
Ceded (1,185,088) (886,767) (2,351,723) (1,775,516)
Net $ 2,684,639 $ 2,399,524 $ 5,318,779 $ 4,907,981
Premiums earned:
Direct $ 1,973,735 $ 1,795,899 $ 3,858,850 $ 3,508,824
Assumed 1,339,749 1,091,968 2,512,553 2,039,582
Ceded (987,709) (766,958) (1,924,995) (1,479,075)
Net $ 2,325,775 $ 2,120,909 $ 4,446,408 $ 4,069,331
Losses and LAE:
Direct $ 898,551 $ 1,046,579 $ 1,788,353 $ 2,032,512
Assumed 637,285 554,256 1,291,546 1,221,567
Ceded (433,180) (441,004) (976,408) (891,148)
Net $ 1,102,656 $ 1,159,831 $ 2,103,491 $ 2,362,931
See note 6, "Allowance for Expected Credit Losses," to our consolidated
financial statements for information about our reinsurance recoverables and
related allowance for credit losses.
Bellemeade Re
We have entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled inBermuda (the "Bellemeade Agreements"). For the respective coverage periods, we will retain the first layer of the respective aggregate losses and the special purpose reinsurance companies will provide second layer coverage up to the outstanding coverage amount. We will then retain losses in excess of the outstanding coverage limit. The aggregate excess of loss reinsurance coverage generally decreases over a ten-year period as the underlying covered mortgages amortize, unless provisional call options embedded within certain of the Bellemeade Agreements are executed or if pre-defined delinquency triggering events occur.
The following table summarizes the respective coverages and retentions at
Bellemeade Entities Initial Coverage at Remaining Retention,
(Issue Date) Issuance Current Coverage Net
2017-1 Ltd. (1) $ 368,114 $ 61,328 $ 134,231
2018-1 Ltd. (2) 374,460 122,190 134,417
2018-3 Ltd. (3) 506,110 244,257 140,403
2019-1 Ltd. (4) 341,790 134,972 100,485
2019-2 Ltd. (5) 621,022 383,737 177,021
2019-3 Ltd. (6) 700,920 296,466 198,510
2019-4 Ltd. (7) 577,267 312,668 131,922
2020-2 Ltd. (8) 449,167 151,985 231,059
2020-3 Ltd. (9) 451,816 313,790 160,325
2020-4 Ltd. (10) 337,013 130,572 137,414
2021-1 Ltd. (11) 643,577 568,482 155,403
2021-2 Ltd. (12) 616,017 578,554 143,190
2021-3 Ltd. (13) 639,391 639,391 140,170
2022-1 Ltd. (14) 316,760 316,760 153,915
Total $ 6,943,424 $ 4,255,152 $ 2,138,465
(1) Issued in
1, 2017
(2) Issued in
2017
(3) Issued in
1, 2018
(4) Issued inMarch 2019 , covering in-force policies primarily issued between 2005-2008 underUnited Guaranty Residential Insurance Company ("UGRIC"); as well as policies issued through 2015 under bothUGRIC andArch Mortgage Insurance Company .
(5) Issued in
2018
(6) Issued in
(7) Issued in
1, 2019
(8) Issued inSeptember 2020 , covering in-force policies issued betweenJanuary 1, 2020 andMay 31, 2020 .$423 million was directly funded by Bellemeade 2020-2 Ltd. with an additional$26 million of capacity provided directly to Arch MIU.S. by a separate panel of reinsurers.
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Table of Contents (9) Issued inNovember 2020 , covering in-force policies issued betweenJune 1, 2020 andAugust 31, 2020 .$418 million was directly funded by Bellemeade 2020-3 Ltd. with an additional$34 million of capacity provided directly to Arch MIU.S. by a separate panel of reinsurers. (10) Issued inDecember 2020 , covering in-force policies issued betweenJuly 1, 2019 andDecember 31, 2019 .$321 million was directly funded by Bellemeade 2020-4 Ltd. with an additional$16 million of capacity provided directly to Arch MIU.S. by a separate panel of reinsurers. (11) Issued inMarch 2021 , covering in-force policies issued betweenSeptember 1, 2020 andNovember 30, 2020 .$580 million was directly funded by Bellemeade Re 2021-1 Ltd. with an additional$64 million capacity provided directly to Arch MIU.S. by a separate panel of reinsurers. (12) Issued inJune 2021 , covering in-force policies issued betweenDecember 1, 2020 andMarch 31, 2021 .$523 million was directly funded by Bellemeade Re 2021-2 Ltd. via insurance-linked notes, with an additional$93 million capacity provided directly to Arch MIU.S. by a separate panel of reinsurers. (13) Issued inSeptember 2021 , covering in-force policies issued betweenApril 1, 2021 andJune 30, 2021 .$508 million was directly funded by Bellemeade Re 2021-3 Ltd. via insurance-linked notes, with an additional$131 million capacity provided directly to Arch MIU.S. by a separate panel of reinsurers. (14) Issued inJanuary 2022 , covering in-force policies issued betweenJuly 1, 2021 andNovember 30, 2021 .$284 million was directly funded by Bellemeade Re 2022-1 Ltd. via insurance-linked notes, with an additional$33 million capacity provided directly to Arch MIU.S. by a separate panel of reinsurers.
Reserve for Losses and Loss Adjustment Expenses
We establish reserve for losses and loss adjustment expenses ("Loss Reserves")
which represent estimates involving actuarial and statistical projections, at a
given point in time, of our expectations of the ultimate settlement and
administration costs of losses incurred. Estimating Loss Reserves is inherently
difficult. We utilize actuarial models as well as available historical insurance
industry loss ratio experience and loss development patterns to assist in the
establishment of Loss Reserves. Actual losses and loss adjustment expenses paid
will deviate, perhaps substantially, from the reserve estimates reflected in our
financial statements.
At June 30, 2022 and December 31, 2021 , our Loss Reserves, net of unpaid losses
and loss adjustment expenses recoverable, by type and by operating segment were
as follows:
June 30, December 31,
2022 2021
Insurance segment:
Case reserves $ 2,151,564 $ 2,102,891
IBNR reserves 4,531,601 4,269,904
Total net reserves 6,683,165 6,372,795
Reinsurance segment:
Case reserves 1,730,929 1,733,571
Additional case reserves 400,013 426,531
IBNR reserves 2,851,212 2,656,527
Total net reserves 4,982,154 4,816,629
Mortgage segment:
Case reserves 576,874 741,897
IBNR reserves 265,783 226,604
Total net reserves 842,657 968,501
Total:
Case reserves 4,459,367 4,578,359
Additional case reserves 400,013 426,531
IBNR reserves 7,648,596 7,153,035
Total net reserves $ 12,507,976 $ 12,157,925
At
major line of business, net of unpaid losses and loss adjustment expenses
recoverable, were as follows:
June 30, December 31,
2022 2021
Insurance segment:
Professional lines $ 1,798,210 $ 1,673,615
Construction and national accounts 1,528,805 1,490,206
Programs
830,573 793,187 Excess and surplus casualty 712,247 657,307 Property, energy, marine and aviation 606,472 599,093 Travel, accident and health 119,726 96,051 Lenders products 41,249 58,351 Other 1,045,883 1,004,985 Total net reserves$ 6,683,165 $ 6,372,795 AtJune 30, 2022 andDecember 31, 2021 , the reinsurance segment's Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows: June 30, December 31, 2022 2021 Reinsurance segment: Casualty$ 2,199,745 $ 2,123,360 Other specialty 1,165,155 1,113,766 Property excluding property catastrophe 756,569 711,859 Property catastrophe 435,468 486,911 Marine and aviation 284,315 246,861 Other 140,902 133,872 Total net reserves$ 4,982,154 $ 4,816,629 ARCH CAPITAL 57 2022 SECOND QUARTER FORM 10-Q
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Table of Contents
At
major line of business, net of unpaid losses and loss adjustment expenses
recoverable, were as follows:
June 30 , December 31,
2022 2021
112,549 International mortgage insurance/ reinsurance 125,849 145,244 Total net reserves$ 842,657 $ 968,501 (1) AtJune 30, 2022 , 33.7% of total net reserves represents policy years 2012 and prior and the remainder from later policy years. AtDecember 31, 2021 , 27.9% of total net reserves represent policy years 2012 and prior and the remainder from later policy years.
Mortgage Operations Supplemental Information
The mortgage segment's insurance in force ("IIF") and risk in force ("RIF") were
as follows at
(U.S. Dollars in millions) June 30, 2022 December 31, 2021
Amount % Amount %
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance $ 291,952 59.8 $ 280,945 61.0
U.S. credit risk transfer (CRT) and other
(2) 129,203 26.5 110,018 23.9
International mortgage
insurance/reinsurance (3) 67,082 13.7 69,655 15.1
Total $ 488,237 100.0 $ 460,618 100.0
Risk In Force (RIF) (4):
U.S. primary mortgage insurance $ 74,258 85.0 $ 70,619 84.3
U.S. credit risk transfer (CRT) and other
(2) 6,037 6.9 5,120 6.1
International mortgage
insurance/reinsurance (3) 7,103 8.1 7,983 9.5
Total $ 87,398 100.0 $ 83,722 100.0
(1)Represents the aggregate dollar amount of each insured mortgage loan's
current principal balance.
(2)Includes all CRT transactions, which are predominantly with GSEs, and other
U.S. reinsurance transactions.
(3)International mortgage insurance and reinsurance with risk primarily located
in Australia and to lesser extent Europe and Asia .
(4)The aggregate dollar amount of each insured mortgage loan's current principal
balance multiplied by the insurance coverage percentage specified in the policy
for insurance policies issued and after contract limits and/or loss ratio caps
for risk-sharing or reinsurance.
The IIF and RIF for our
were as follows at
(U.S. Dollars in millions) IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:
2012 and prior $ 10,972 3.8 $ 2,620 3.5 8.15 %
2013 3,446 1.2 927 1.2 2.19 %
2014 4,129 1.4 1,135 1.5 2.74 %
2015 7,167 2.5 1,930 2.6 2.12 %
2016 11,866 4.1 3,179 4.3 2.52 %
2017 10,745 3.7 2,842 3.8 3.28 %
2018 11,494 3.9 2,926 3.9 4.04 %
2019 21,384 7.3 5,382 7.2 2.31 %
2020 73,516 25.2 18,332 24.7 0.84 %
2021 94,557 32.4 23,852 32.1 0.08 %
2022 42,676 14.6 11,133 15.0 0.50 %
Total $ 291,952 100.0 $ 74,258 100.0 1.77 %
(1)Represents the ending percentage of loans in default.
The IIF and RIF for our
were as follows at
(U.S. Dollars in millions) IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:
2012 and prior $ 13,030 4.6 $ 2,960 4.2 8.48 %
2013 4,206 1.5 1,148 1.6 2.63 %
2014 4,822 1.7 1,328 1.9 3.14 %
2015 8,703 3.1 2,340 3.3 2.67 %
2016 14,344 5.1 3,841 5.4 3.29 %
2017 13,128 4.7 3,436 4.9 4.09 %
2018 14,046 5.0 3,562 5.0 5.28 %
2019 25,841 9.2 6,467 9.2 3.13 %
2020 82,502 29.4 20,341 28.8 0.97 %
2021 100,323 35.7 25,196 35.7 0.29 %
Total $ 280,945 100.0 $ 70,619 100.0 2.36 %
(1)Represents the ending percentage of loans in default.
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Table of Contents The following tables provide supplemental disclosures on risk in force for ourU.S. primary mortgage insurance business atJune 30, 2022 andDecember 31, 2021 : (U.S. Dollars in millions) June 30, 2022 December 31, 2021 Amount % Amount % Credit quality (FICO): >=740$ 45,612 61.4 $ 42,451 60.1 680-739 24,409 32.9 23,646 33.5 620-679 3,942 5.3 4,196 5.9 <620 295 0.4 326 0.5 Total$ 74,258 100.0 $ 70,619 100.0 Weighted average FICO score 747 746 Loan-to-value (LTV): 95.01% and above$ 7,400 10.0 $ 7,538 10.7 90.01% to 95.00% 41,951 56.5 38,829 55.0 85.01% to 90.00% 20,718 27.9 20,006 28.3 85.00% and below 4,189 5.6 4,246 6.0 Total$ 74,258 100.0 $ 70,619 100.0 Weighted average LTV 92.8 % 92.8 % Total RIF, net of external reinsurance$ 56,529
$ 54,574
(U.S. Dollars in millions) June 30, 2022 December 31, 2021
Amount % Amount %
Total RIF by State:
California $ 6,077 8.2 $ 5,559 7.9
Texas 5,971 8.0 5,594 7.9
Florida 3,301 4.4 3,303 4.7
Georgia 3,109 4.2 2,902 4.1
North Carolina 3,075 4.1 2,921 4.1
Illinois 3,054 4.1 2,933 4.2
Minnesota 2,980 4.0 2,916 4.1
Massachusetts 2,684 3.6 2,537 3.6
Virginia 2,634 3.5 2,446 3.5
Michigan 2,558 3.4 2,492 3.5
Other 38,815 52.3 37,016 52.4
Total $ 74,258 100.0 $ 70,619 100.0
The following table provides supplemental disclosures for our
mortgage insurance business related to insured loans and loss metrics:
(U.S. Dollars in thousands, except policy, loan and Six Months Ended
claim count) June 30,
2022 2021
Roll-forward of insured loans in default:
Beginning delinquent number of loans 27,645 52,234
New notices 16,813 18,415
Cures (23,393) (32,924)
Paid claims (373) (406)
Ending delinquent number of loans (1) 20,692 37,319
Ending number of policies in force (1) 1,168,147 1,199,918
Delinquency rate (1) 1.77 % 3.11 %
Losses:
Number of claims paid 373 406
Total paid claims $ 11,642 $ 15,297
Average per claim $ 31.2 $ 37.7
Severity (2) 75.2 % 81.0 %
Average case reserve per default (in thousands) (1) $ 30.3 $ 19.5
(1)Includes first lien primary and pool policies.
(2)Represents total paid claims divided by RIF of loans for which claims were
paid.
The risk to capital ratio, which represents total current (non-delinquent) risk
in force, net of reinsurance, divided by total statutory capital, for Arch MI
U.S. was approximately 7.8 to 1 at June 30, 2022 , compared to 8 to 1 at
December 31, 2021 .
Shareholders' Equity and Book Value per Share
The following table presents the calculation of book value per share:
(U.S. dollars in thousands, except June 30, December 31, share data) 2022 2021 Total shareholders' equity available to Arch$ 12,417,566 $ 13,545,896 Less preferred shareholders' equity 830,000 830,000 Common shareholders' equity available to Arch$ 11,587,566 $ 12,715,896 Common shares and common share equivalents outstanding, net of treasury shares (1) 369,346,815 378,923,894 Book value per share $ 31.37 $ 33.56 (1)Excludes the effects of 15,922,638 and 17,083,160 stock options and 564,448 and 729,636 restricted stock units outstanding atJune 30, 2022 andDecember 31, 2021 , respectively. ARCH CAPITAL 59 2022 SECOND QUARTER FORM 10-Q
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Table of Contents LIQUIDITY
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations.
Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally,Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares. For the six months endedJune 30, 2022 ,Arch Capital received dividends of$689.9 million fromArch Reinsurance Ltd. ("Arch Re Bermuda"), ourBermuda based reinsurer and insurer which can pay approximately$3.1 billion toArch Capital during the remainder of 2022 without providing an affidavit to theBermuda Monetary Authority . We expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities. OnApril 7, 2022 Arch Capital and certain of its subsidiaries amended the existing credit agreement. For details on our credit agreement, see note 10, "Commitments and Contingencies" to our consolidated financial statements.
Cash Flows
The following table summarizes our cash flows from operating, investing and
financing activities.
Six Months Ended
June 30,
2022 2021
Total cash provided by (used for):
Operating activities $ 1,453,968 $ 1,565,718
Investing activities (815,602) (1,174,033)
Financing activities (682,116) 8,352
Effects of exchange rate changes on foreign currency cash (42,790)
(9,868)
Increase (decrease) in cash and restricted cash$ (86,540)
•Cash provided by operating activities for the six months endedJune 30, 2022 primarily reflected a higher level of expenses paid and higher premiums ceded to Somers than in the 2021 period. •Cash used for investing activities for the six months endedJune 30, 2022 was lower than in the 2021 period. Activity for the 2021 period reflected our$546.3 million purchase of 29.5% interest in Coface. •Cash used for financing activities for the six months endedJune 30, 2022 reflected$575.7 million of repurchases under our share repurchase program. Activity for the 2021 period, reflected$485.3 million of repurchases under our share repurchase program and$485.8 million issuance of preferred shares.
CAPITAL RESOURCES
The following table provides an analysis of our capital structure:
(U.S. dollars in thousands, except June 30, Dec 31, share data) 2022 2021 Senior notes$ 2,724,896 $ 2,724,394
Shareholders' equity available to Arch:
Series F non-cumulative preferred shares 330,000 330,000 Series G non-cumulative preferred shares 500,000 500,000 Common shareholders' equity 11,587,566 12,715,896 Total$ 12,417,566 $ 13,545,896 Total capital available to Arch$ 15,142,462 $ 16,270,290 Debt to total capital (%) 18.0 16.7 Preferred to total capital (%) 5.5 5.1 Debt and preferred to total capital (%) 23.5 21.8 Arch MIU.S. is required to maintain compliance with the GSEs requirements, known as the Private Mortgage Insurer Eligibility Requirements or "PMIERs." The financial requirements require an eligible mortgage insurer's available assets, which generally include only the most liquid assets of an insurer, to meet or exceed "minimum required assets" as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the delinquency status of non-performing loans) and are subject to a minimum amount. Arch MIU.S. satisfied the PMIERs' financial requirements as ofJune 30, 2022 with an estimated PMIER sufficiency ratio of 219%, compared to 197% atDecember 31, 2021 .Arch Capital , through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements beneficial to the ratings of such subsidiaries. Historically, our insurance, reinsurance and mortgage insurance subsidiaries have entered into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business. ARCH CAPITAL 60 2022 SECOND QUARTER FORM 10-Q
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Table of Contents GUARANTOR INFORMATION The below table provides a description of our senior notes payable atJune 30, 2022 : Interest Principal Carrying Issuer/Due (Fixed) Amount AmountArch Capital : May 1, 2034 7.350 %$ 300,000 $ 297,552 June 30, 2050 3.635 % 1,000,000 988,833 Arch-U.S.: Nov. 1, 2043 (1) 5.144 % 500,000 495,125 Arch Finance: Dec. 15, 2026 (1) 4.011 % 500,000 497,851 Dec. 15, 2046 (1) 5.031 % 450,000 445,535 Total$ 2,750,000 $ 2,724,896
(1)Fully and unconditionally guaranteed by
Our senior notes were issued byArch Capital ,Arch Capital Group (U.S.) Inc. ("Arch-U.S. ") andArch Capital Finance LLC ("Arch Finance"). Arch-U.S. is a wholly-owned subsidiary ofArch Capital and Arch Finance is a wholly-owned finance subsidiary of Arch-U.S. Our 2034 senior notes and 2050 senior notes issued byArch Capital are unsecured and unsubordinated obligations ofArch Capital and ranked equally with all of its existing and future unsecured and unsubordinated indebtedness. The 2043 senior notes issued by Arch-U.S. are unsecured and unsubordinated obligations of Arch-U.S. andArch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. andArch Capital . The 2026 senior notes and 2046 senior notes issued by Arch Finance are unsecured and unsubordinated obligations ofArch Finance andArch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness ofArch Finance andArch Capital .
Arch-
investments and dividends or other distributions from their subsidiaries or
affiliates to make payments, including the payment of debt service obligations
and operating expenses they may incur.
The following tables present condensed financial information for
(parent guarantor) and Arch-
June 30, 2022
Arch Capital Arch-U.S.
Assets
Total investments $ 14,864 $ 146,590
Cash 29,358 9,725
Investment in operating affiliates 5,867 -
Due from subsidiaries and affiliates 41 15
Other assets 7,674 29,119
Total assets $ 57,804 $ 185,449
Liabilities
Senior notes 1,286,385 495,125
Due to subsidiaries and affiliates - 501,816
Other liabilities 17,122 36,757
Total liabilities $ 1,303,507 $ 1,033,698
Non-cumulative preferred shares $ 830,000 -
December 31, 2021
Arch Capital Arch-U.S.
Assets
Total investments $ 2,038 $ 137,124
Cash 16,317 18,392
Investment in operating affiliates 6,877
-
Due from subsidiaries and affiliates - 26,000 Other assets 9,615 37,040 Total assets$ 34,847 $ 218,556 Liabilities Senior notes 1,286,208 495,063 Due to subsidiaries and affiliates - 521,839 Other liabilities 24,767 47,410 Total liabilities$ 1,310,975 $ 1,064,312 Non-cumulative preferred shares$ 830,000 - June 30, 2022 Arch Six Months Ended Capital Arch-U.S. Revenues Net investment income $ 744 $ 154 Net realized gains (losses) - (338) Equity in net income (loss) of investments accounted for using the equity method - 5,651 Total revenues 744 5,467 Expenses Corporate expenses 52,542 8,838 Interest expense 29,377 23,572 Total expenses 81,919 32,410 Income (loss) before income taxes and income (loss) from operating affiliates (81,175) (26,943) Income tax (expense) benefit - 5,453 Income (loss) from operating affiliates (551) - Net income available to Arch (81,726) (21,490) Preferred dividends (20,368) - Net income (loss) available to Arch common shareholders$ (102,094) $ (21,490) ARCH CAPITAL 61 2022 SECOND QUARTER FORM 10-Q
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Table of Contents
December 31, 2021
Year Ended Arch Capital Arch-U.S.
Revenues
Net investment income 1,524 11,596
Net realized gains (losses) - 72,437
Equity in net income (loss) of investments
accounted for using the equity method - 18,149
Total revenues 1,524 102,182
Expenses
Corporate expenses 71,818 5,875
Interest expense 58,741 47,292
Net foreign exchange (gains) losses 7 -
Total expenses 130,566 53,167
Income (loss) before income taxes and income
(loss) from operating affiliates (129,042) 49,015
Income tax (expense) benefit - (12,513)
Income (loss) from operating affiliates (590) -
Net income available to Arch (129,632) 36,502
Preferred dividends (48,343) -
Loss on redemption of preferred shares (15,101) -
Net income (loss) available to Arch common
shareholders $ (193,076) $ 36,502
SHARE REPURCHASE PROGRAM
The board of directors ofArch Capital has authorized the investment inArch Capital's common shares through a share repurchase program. For the six months endedJune 30, 2022 ,Arch Capital repurchased 12.7 million shares under the share repurchase program with an aggregate purchase price of$575.7 million . Since the inception of the share repurchase program throughJune 30, 2022 ,Arch Capital has repurchased 433.3 million common shares for an aggregate purchase price of$5.86 billion . AtJune 30, 2022 , approximately$606.6 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. We will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, we will consider share repurchases on an opportunistic basis.
CATASTROPHIC EVENTS AND SEVERE ECONOMIC EVENTS
We have large aggregate exposures to natural and man-made catastrophic events, pandemic events like COVID-19 and severe economic events. Natural catastrophes can be caused by various events, including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes, explosions, severe winter weather, fires, droughts and other natural disasters. Man-made catastrophic events may include acts of war, acts of terrorism and political instability. Catastrophes can also cause
losses in non-property business such as mortgage insurance, workers'
compensation or general liability. In addition to the nature of property
business, we believe that economic and geographic trends affecting insured
property, including inflation, property value appreciation and geographic
concentration, tend to generally increase the size of losses from catastrophic
events over time.
Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. We seek to limit the probable maximum pre-tax loss to a specific level for severe catastrophic events. Currently, we seek to limit our 1-in-250 year return period net probable maximum loss from a severe catastrophic event in any geographic zone to approximately 25% of tangible shareholders' equity available to Arch (total shareholders' equity available to Arch less goodwill and intangible assets). We reserve the right to change this threshold at any time. Based on in-force exposure estimated as ofJuly 1, 2022 , our modeled peak zone catastrophe exposure was a windstorm affecting the Florida Tri-County, with a net probable maximum pre-tax loss of$888 million , followed by windstorms affecting theGulf of Mexico and theNortheastern U.S. regions with net probable maximum pre-tax losses of$732 and$720 million , respectively. Our exposures to other perils, such asU.S. earthquake and international events, were less than the exposures arising fromU.S. windstorms and hurricanes. As ofJuly 1, 2022 , our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 69% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (UK windstorm) was substantially less than both our peak zone windstorm and earthquake exposures. We also have significant exposure to losses due to mortgage defaults resulting from severe economic events in the future. For ourU.S. mortgage insurance business, we have developed a proprietary risk model ("Realistic Disaster Scenario" or "RDS") that simulates the maximum loss resulting from a severe economic downturn impacting the housing market. The RDS models the collective impact of adverse conditions for key economic indicators, the most significant of which is a decline in home prices. The RDS model projects paths of future home prices, unemployment rates, income levels and interest rates and assumes correlation across states and geographic regions. The resulting future performance of our in-force portfolio is then estimated under the economic stress scenario, reflecting loan and borrower information. Currently, we seek to limit our modeled RDS loss from a severe economic event to approximately 25% of tangible shareholders' equity available to Arch. We reserve the right to change this threshold at any time. Based on in-force
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Table of Contents exposure estimated as ofJuly 1, 2022 , our modeled RDS loss was approximately 9% of tangible shareholders' equity available to Arch. Net probable maximum loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. RDS loss estimates are net of expected reinsurance recoveries and before income tax. Catastrophe loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our catastrophe loss estimates include clash estimates from other zones. Our catastrophe loss estimates and RDS loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than 25% of our tangible shareholders' equity from one or more catastrophic events or severe economic events due to several factors. These factors include the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders' equity exposed to a single catastrophic event or severe economic event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See "Risk Factors-Risks Relating to Our Industry" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Catastrophic Events and Severe Economic Events" in our 2021 Form 10-K.
MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
In accordance with theSEC's Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as ofJune 30, 2022 . Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. An analysis of material changes in market risk exposures atJune 30, 2022 that affect the quantitative and qualitative disclosures presented in our 2021 Form 10-K (see section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations-Market Sensitive Instruments and Risk Management") were as follows:
Investment Market Risk
Fixed Income Securities . We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed maturities, short-term investments and certain of our other investments, equity securities and investment funds accounted for using the equity method which invest in fixed income securities (collectively, "Fixed Income Securities ") and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of ourFixed Income Securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, at times interest rate movements in certain credit sectors exhibit a much lower correlation to changes inU.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables. The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on ourFixed Income Securities : (U.S. dollars in Interest Rate Shift in Basis Points billions) -100 -50 - +50 +100June 30, 2022 Total fair value$ 25.50 $ 25.10 $ 24.73 $ 24.36 $ 24.01 Change from base 3.1 % 1.5 % (1.5) % (2.9) % Change in unrealized value$ 0.77 $ 0.37 $ (0.37) $ (0.72) December 31, 2021 Total fair value$ 25.79 $ 25.44 $ 25.21 $ 24.75 $ 24.43 Change from base 2.3 % 0.9 % (1.8) % (3.1) % Change in unrealized value$ 0.58 $ 0.23 $ (0.45) $ (0.78) In addition, we consider the effect of credit spread movements on the market value of ourFixed Income Securities and the corresponding change in unrealized value. As credit spreads widen, the fair value of ourFixed Income Securities falls, and the converse is also true. In periods where the spreads on ourFixed Income Securities are much higher than their historical average due to short-term market dislocations, a parallel shift in credit spread levels would result in a much more pronounced change in unrealized value.
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Table of Contents The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on ourFixed Income Securities : (U.S. dollars in Credit Spread Shift in Percentage Points billions) -100 -50 - +50 +100June 30, 2022 Total fair value$ 25.86 $ 25.29 $ 24.73 $ 24.17 $ 23.60 Change from base 4.6 % 2.3 % (2.3) % (4.6) % Change in unrealized value$ 1.13 $ 0.56 $ (0.56) $ (1.13) December 31, 2021 Total fair value$ 26.17 $ 25.69 $ 25.21 $ 24.72 $ 24.24 Change from base 3.8 % 1.9 % (1.9) % (3.8) % Change in unrealized value$ 0.97 $ 0.48 $
(0.48)
Another method that attempts to measure portfolio risk is Value-at-Risk ("VaR").
VaR measures the worst expected loss under normal market conditions over a
specific time interval at a given confidence level. The 1-year 95th percentile
parametric VaR reported herein estimates that 95% of the time, the portfolio
loss in a one-year horizon would be less than or equal to the calculated number,
stated as a percentage of the measured portfolio's initial value. The VaR is a
variance-covariance based estimate, based on linear sensitivities of a portfolio
to a broad set of systematic market risk factors and idiosyncratic risk factors
mapped to the portfolio exposures. The relationships between the risk factors
are estimated using historical data, and the most recent data points are
generally given more weight. As of June 30, 2022 , our portfolio's VaR was
estimated to be 7.0% compared to an estimated 4.8% at December 31, 2021 . In
periods where the volatility of the risk factors mapped to our portfolio's
exposures is higher due to market conditions, the resulting VaR is higher than
in other periods.
Equity Securities . At June 30, 2022 and December 31, 2021 , the fair value of our
investments in equity securities and certain investments accounted for using the
equity method with underlying equity strategies totaled $0.9 billion and $1.4
billion , respectively. These investments are exposed to price risk, which is the
potential loss arising from decreases in fair value. An immediate hypothetical
10% decline in the value of each position would reduce the fair value of such
investments by approximately $85.1 million and $137.5 million at June 30, 2022
and December 31, 2021 , respectively, and would have decreased book value per
share by approximately $0.23 and $0.36 , respectively. An immediate hypothetical
10% increase in the value of each position would increase the fair value of such
investments by approximately $85.1 million and $137.5 million at June 30, 2022
and December 31, 2021 , respectively, and would have increased book value per
share by approximately $0.23 and $0.36 , respectively.
Investment-Related Derivatives. At June 30, 2022 , the notional value of all
derivative instruments (excluding foreign currency forward contracts which are
included in the foreign currency exchange risk analysis below) was $6.5 billion ,
compared to $6.4 billion at December 31, 2021 . If the underlying exposure of
each investment-related derivative held at June 30, 2022 depreciated by 100
basis points, it would have resulted in a reduction in net income of
approximately $65.4 million , and a decrease in book value per share of
approximately $0.18 per share, compared to $63.8 million and $0.17 per share,
respectively, on investment-related derivatives held at December 31, 2021 . If
the underlying exposure of each investment-related derivative held at June 30,
2022 appreciated by 100 basis points, it would have resulted in an increase in
net income of approximately $65.4 million , and an increase in book value per
share of approximately $0.18 per share, compared to $63.8 million and $0.17 per
share, respectively, on investment-related derivatives held at December 31,
2021. See note 9, "Derivative Instruments," to our consolidated financial
statements for additional disclosures concerning derivatives.
For further discussion on investment activity, please refer to "Financial
Condition-Investable Assets."
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Table of Contents Foreign Currency Exchange Risk Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than theU.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. We may also utilize foreign currency forward contracts and currency options as part of our investment strategy. See note 9, "Derivative Instruments," to our consolidated financial statements for additional information.
The following table provides a summary of our net foreign currency exchange
exposures, as well as foreign currency derivatives in place to manage these
exposures:
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