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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$14.5 billion in capital atSeptember 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 42 Financial Measures 42 Comments on Non-GAAP Measures 44 Results of Operations 46 Insurance Segment 46 Reinsurance Segment 49 Mortgage Segment 51 Corporate Segment 54 Critical Accounting Policies, Estimates and Recent Accounting Pronouncements 55 Financial Condition 55 Liquidity 61 Capital Resources and Other 61 ARCH CAPITAL 41 2022 THIRD QUARTER FORM 10-Q
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Table of Contents CURRENT OUTLOOK As we approach the end of 2022, we are cautiously optimistic regarding the opportunities ahead of us in the fourth quarter and into 2023. Our objective 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 higher than our cost of capital. Inflation continues to be a focus for our industry. We proactively analyze available data and we incorporate emerging trends into our pricing and reserving. We believe that this discipline, coupled with increases in future investment returns and prudent reserving, helps us somewhat mitigate inflation's impact. Hurricane Ian, alongside a fair amount of other catastrophic activity in the third quarter, served as a stark reminder of the importance of insurance capacity. The catastrophic activity in the third quarter has significantly increased pressure on property catastrophe markets, which could have a ripple effect across all property and casualty lines. 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 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. Cyber insurance has become increasingly important to our insureds globally, and we have substantially increased our focus because we believe that today's cyber market has changed for the better. Additionally, insurance terms and conditions have sufficiently tightened, retentions have increased and rates have reached a level where we have an opportunity to earn an appropriate return for the assumption of risk. 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. Excellent market conditions and the likelihood of capacity constraints will likely create an eventfulJanuary 1 renewal period, and our teams are actively planning to meet the demands of our clients. In mortgage, we continue to be thoughtful in how we manage our portfolio and, because of our diversified model, we have the ability to take a measured view of the business as just one component of our diversified enterprise. Our mortgage business continues to deliver consistent underwriting results, once again demonstrating its sustainable earnings model. Although higher interest rates affected new loan origination volume, the persistency rate of our portfolio improved andU.S. primary mortgage insurance in force grew to nearly$295 billion . The credit quality of homebuyers remains excellent and we believe our portfolio is well positioned for a variety of economic scenarios. 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 atSeptember 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$29.69 atSeptember 30, 2022 , compared to$31.37 atJune 30, 2022 and$32.43 at
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Table of ContentsSeptember 30, 2021 . The 5.4% decrease in book value per share for the 2022 third quarter reflected negative total return on investments driven by rising interest rates on fixed maturities, along with higher level of catastrophic loss activity, primarily related to Hurricane Ian.
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 0.2% for the 2022
third quarter, compared to 12.3% for the 2021 third quarter, and 6.6% for the
nine months ended September 30, 2022 , compared to 15.9% for the 2021 period. Our
Operating ROAE was 3.8% for the 2022 third quarter, compared to 9.3% for the
2021 third quarter, and 11.6% for the nine months ended September 30, 2022 ,
compared to 10.1% for the 2021 period. The 2022 periods reflected increased
levels of catastrophic activity, while the 2021 periods reflected 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 Third Quarter
(3.01) % (4.01) % 2021 Third Quarter 0.01 % (0.40) %
Nine Months Ended
Nine Months Ended
Total return for the 2022 periods reflected rising interest rates on fixed
maturities and weak equity markets. We continue to maintain a relative short
duration on our portfolio of 2.84 years at
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. AtSeptember 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 3.15 years.
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Table of Contents
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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income available to Arch
common shareholders $ 6,917 $ 388,751 $ 586,693 $ 1,480,324
Net realized (gains) losses 183,674 25,040 742,667 (247,949)
Equity in net (income) loss of
investment funds accounted for
using the equity method 18,861 (105,398) (75,505) (299,270)
Net foreign exchange (gains)
losses (90,537) (36,078) (182,189) (39,522)
Transaction costs and other 76 1,036 734 889
Loss on redemption of preferred
shares - 15,101 - 15,101
Income tax expense (benefit)
(1) (13,019) 6,236 (37,933) 32,100
After-tax operating income
available to Arch common
shareholders $ 105,972 $ 294,688
Beginning common shareholders' equity$ 11,587,566 $ 12,706,072 $ 12,715,896 $ 12,325,886 Ending common shareholders' equity$ 10,965,110 $ 12,557,526 $ 10,965,110 $ 12,557,526 Average common shareholders' equity$ 11,276,338 $ 12,631,799
Annualized net income return on average common equity % 0.2 12.3 6.6 15.9 Annualized operating return on average common equity % 3.8 9.3 11.6 10.1 (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
%
2022 2021 Change
Gross premiums written $ 1,862,026 $ 1,596,619 16.6
Premiums ceded (493,267) (442,806)
Net premiums written 1,368,759 1,153,813 18.6
Change in unearned premiums (181,851) (215,143)
Net premiums earned 1,186,908 938,670 26.4
Losses and loss adjustment expenses (822,663) (668,630)
Acquisition expenses (232,469) (152,467)
Other operating expenses (165,499) (138,931)
Underwriting income (loss) $ (33,723) $ (21,358) (57.9)
% Point
Underwriting Ratios Change
Loss ratio 69.3 % 71.2 % (1.9)
Acquisition expense ratio 19.6 % 16.2 % 3.4
Other operating expense ratio 13.9 % 14.8 % (0.9)
Combined ratio 102.8 % 102.2 % 0.6
ARCH CAPITAL 46 2022 THIRD QUARTER FORM 10-Q
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Table of Contents
Nine Months Ended
2022 2021 % Change Gross premiums written$ 5,286,798 $ 4,381,372 20.7 Premiums ceded (1,482,886) (1,269,165) Net premiums written 3,803,912 3,112,207 22.2 Change in unearned premiums (488,164) (488,636) Net premiums earned 3,315,748 2,623,571 26.4 Losses and loss adjustment expenses (2,053,161) (1,750,257) Acquisition expenses (641,807) (417,541) Other operating expenses (493,412) (409,386) Underwriting income (loss)$ 127,368 $ 46,387 174.6 % Point Underwriting Ratios Change Loss ratio 61.9 % 66.7 % (4.8) Acquisition expense ratio 19.4 % 15.9 % 3.5 Other operating expense ratio 14.9 % 15.6 % (0.7) Combined ratio 96.2 % 98.2 % (2.0)
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 September 30,
2022 2021
Amount % Amount %
Professional lines $ 412,173 30.1 $ 310,185 26.9
Property, energy, marine and aviation 241,357 17.6 205,021 17.8
Programs 189,263 13.8 196,048 17.0
Excess and surplus casualty 110,917 8.1 98,320 8.5
Travel, accident and health 107,434 7.8 62,837 5.4
Construction and national accounts 98,381 7.2 102,294 8.9
Lenders products 41,889 3.1 38,905 3.4
Other 167,345 12.2 140,203 12.2
Total $ 1,368,759 100.0 $ 1,153,813 100.0
2022 Third Quarter versus 2021 Period. Gross premiums written by the insurance
segment in the 2022 third quarter were 16.6% higher than in the 2021 third
quarter, while net premiums written were 18.6% 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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Nine Months Ended September 30,
2022 2021
Amount % Amount %
Professional lines $ 1,109,416 29.2 $ 803,392 25.8
Property, energy, marine and aviation 687,742 18.1 564,462 18.1
Programs 482,003 12.7 503,822 16.2
Excess and surplus casualty 331,715 8.7 258,259 8.3
Travel, accident and health 378,736 10.0 226,214 7.3
Construction and national accounts 334,720 8.8 333,484 10.7
Lenders products 103,163 2.7 114,151 3.7
Other 376,417 9.9 308,423 9.9
Total $ 3,803,912 100.0 $ 3,112,207 100.0
Nine Months Ended September 30, 2022 versus 2021 period. Gross premiums written
by the insurance segment for the nine months ended September 30, 2022 were 20.7%
higher than in the 2021 period, while net premiums written were 22.2% 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 September 30,
2022 2021
Amount % Amount %
Professional lines $ 341,833 28.8 $ 249,007 26.5
Property, energy, marine and aviation 202,483 17.1 178,167 19.0
Programs 150,453 12.7 137,299 14.6
Excess and surplus casualty 100,175 8.4 84,048 9.0
Travel, accident and health 133,445 11.2 56,102 6.0
Construction and national accounts 109,905 9.3 104,261 11.1
Lenders products 33,253 2.8 33,030 3.5
Other 115,361 9.7 96,756 10.3
Total $ 1,186,908 100.0 $ 938,670 100.0
Nine Months Ended September 30,
2022 2021
Amount % Amount %
Professional lines $ 945,761 28.5 $ 662,776 25.3
Property, energy, marine and aviation 557,481 16.8 488,326 18.6
Programs 438,943 13.2 369,113 14.1
Excess and surplus casualty 289,305 8.7 232,314 8.9
Travel, accident and health 368,260 11.1 168,378 6.4
Construction and national accounts 306,204 9.2 317,597 12.1
Lenders products 91,435 2.8 119,507 4.6
Other 318,359 9.6 265,560 10.1
Total $ 3,315,748 100.0 $ 2,623,571 100.0
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 for both 2022 periods were 26.4% higher than in the 2021 periods.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment's loss ratio:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Current year 69.8 % 71.7 % 62.5 % 67.2 %
Prior period reserve development (0.5) % (0.5) % (0.6) % (0.5) %
Loss ratio 69.3 % 71.2 % 61.9 % 66.7 %
Current Year Loss Ratio.
2022 Third Quarter versus 2021 Period. The insurance segment's current year loss
ratio in the 2022 third quarter was 1.9 points lower than in the 2021 third
quarter. The 2022 third quarter loss ratio reflected 13.4 points of current year
catastrophic activity, primarily related to Hurricane Ian, compared to 12.2
points of catastrophic activity for the 2021 third quarter, primarily related to
Hurricane Ida.
Nine Months Ended September 30, 2022 versus 2021 Period. The insurance segment's
current year loss ratio for the nine months ended September 30, 2022 was 4.7
points lower than in the 2021 period and reflected 6.1 points of current year
catastrophic activity, primarily related to Hurricane Ian, Russia's invasion of
Ukraine and other natural catastrophes, compared to 7.0 points in the 2021
period. The balance of the change in the 2022 loss ratios resulted, in part,
from changes in mix of business.
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Table of Contents PriorPeriod Reserve Development . The insurance segment's net favorable development was$5.4 million , or 0.5 points, for the 2022 third quarter, compared to$5.1 million , or 0.5 points, for the 2021 third quarter, and$19.4 million , or 0.6 points, for the nine months endedSeptember 30, 2022 , compared to$13.1 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 Third Quarter versus 2021 Period. The insurance segment's underwriting expense ratio was 33.5% in the 2022 third quarter, compared to 31.0% in the 2021 third quarter. The increase in the 2022 third quarter was primarily due to growth in lines with higher acquisition costs, such as travel, higher contingent commission accruals on profitable business and a slightly lower ceded premium ratio. Partially offsetting this increase in the acquisition expense ratio was a reduction in the operating expense ratio where the growth in net earned premium outpaced the growth in operating expense. Nine Months EndedSeptember 30, 2022 versus 2021 period. The insurance segment's underwriting expense ratio was 34.3% for the nine months endedSeptember 30, 2022 , compared to 31.5% 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 September 30,
%
2022 2021 Change
Gross premiums written $ 1,639,061 $ 1,251,760 30.9
Premiums ceded (560,225) (630,371)
Net premiums written 1,078,836 621,389 73.6
Change in unearned premiums (77,062) 57,313
Net premiums earned 1,001,774 678,702 47.6
Other underwriting income (loss) 452
3,293
Losses and loss adjustment expenses (927,911) (545,846) Acquisition expenses (208,425) (129,450) Other operating expenses (62,777) (45,647) Underwriting income (loss)$ (196,887) $ (38,948) (405.5) % Point Underwriting Ratios Change Loss ratio 92.6 % 80.4 % 12.2 Acquisition expense ratio 20.8 % 19.1 % 1.7 Other operating expense ratio 6.3 % 6.7 % (0.4) Combined ratio 119.7 % 106.2 % 13.5 Nine Months Ended September 30, 2022 2021 % Change Gross premiums written$ 5,151,401 $ 4,080,840 26.2 Premiums ceded (1,770,807) (1,535,607) Net premiums written 3,380,594 2,545,233 32.8 Change in unearned premiums (646,421) (484,607) Net premiums earned 2,734,173 2,060,626 32.7 Other underwriting income 5,814 3,148 Losses and loss adjustment expenses (1,920,189) (1,494,539) Acquisition expenses (569,915) (381,060) Other operating expenses (198,606) (150,856) Underwriting income (loss)$ 51,277 $ 37,319 37.4 % Point Underwriting Ratios Change Loss ratio 70.2 % 72.5 % (2.3) Acquisition expense ratio 20.8 % 18.5 % 2.3 Other operating expense ratio 7.3 % 7.3 % - Combined ratio 98.3 % 98.3 % - 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 49 2022 THIRD 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 September 30,
2022 2021
Amount % Amount %
Other specialty $ 381,004 35.3 $ 167,006 26.9
Property excluding property
catastrophe 341,809 31.7 237,025 38.1
Casualty 230,308 21.3 187,066 30.1
Property catastrophe 77,606 7.2 (7,125) (1.1)
Marine and aviation 28,633 2.7 19,159 3.1
Other 19,476 1.8 18,258 2.9
Total $ 1,078,836 100.0 $ 621,389 100.0
2022 Third Quarter versus 2021 Period. Gross premiums written by the reinsurance
segment in the 2022 third quarter were 30.9% higher than in the 2021 third
quarter, while net premiums written were 73.6% higher. Net premiums written for
the reinsurance segment in the 2021 third quarter were affected by a one time
$161.2 million adjustment, resulting from retrocessions to Somers Re Ltd.
(formerly known as Watford Re Ltd. ) following its ownership change on July 1,
2021 . Absent this item, net premiums written by the reinsurance segment were
37.9% higher than in the 2021 third quarter. The growth in net premiums written
reflected increases in all lines of business, primarily related to rate
increases, new business opportunities and growth in existing accounts.
Nine Months Ended September 30,
2022 2021
Amount % Amount %
Other specialty $ 1,179,548 34.9 $ 747,662 29.4
Property excluding property
catastrophe 936,270 27.7 778,959 30.6
Casualty 709,487 21.0 631,212 24.8
Property catastrophe 361,028 10.7 197,724 7.8
Marine and aviation 115,579 3.4 131,045 5.1
Other 78,682 2.3 58,631 2.3
Total $ 3,380,594 100.0 $ 2,545,233 100.0
Nine Months Ended September 30, 2022 versus 2021 period. Gross premiums written
by the reinsurance segment for the nine months ended September 30, 2022 were
26.2% higher than in the 2021 period, while net premiums written were 32.8%
higher than in the 2021 period. The increase in net premiums written reflected
growth in most lines of business,
primarily due to new business, rate increases and growth in existing accounts.
Net Premiums Earned.
The following tables set forth our reinsurance segment's net premiums earned by
major line of business:
Three Months Ended September 30,
2022 2021
Amount % Amount %
Other specialty $ 330,142 33.0 $ 195,649 28.8
Property excluding property
catastrophe 282,488 28.2 210,280 31.0
Casualty 221,636 22.1 159,697 23.5
Property catastrophe 117,820 11.8 61,107 9.0
Marine and aviation 25,182 2.5 29,818 4.4
Other 24,506 2.4 22,151 3.3
Total $ 1,001,774 100.0 $ 678,702 100.0
Nine Months Ended September 30,
2022 2021
Amount % Amount %
Other specialty $ 846,081 30.9 $ 571,364 27.7
Property excluding property
catastrophe 781,562 28.6 600,842 29.2
Casualty 634,208 23.2 492,574 23.9
Property catastrophe 289,575 10.6 225,285 10.9
Marine and aviation 109,142 4.0 112,699 5.5
Other 73,605 2.7 57,862 2.8
Total $ 2,734,173 100.0 $ 2,060,626 100.0
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 third quarter were 47.6% higher than in the 2021 third quarter, and reflect
changes in net premiums written over the previous five quarters.
Other Underwriting Income (Loss).
Other underwriting income for the 2022 third quarter was$0.5 million , compared to$3.3 million for the 2021 third quarter, and$5.8 million for the nine months endedSeptember 30, 2022 , compared to$3.1 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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Current year 97.5 % 91.1 % 74.9 % 78.3 %
Prior period reserve development (4.9) % (10.7) % (4.7) % (5.8) %
Loss ratio 92.6 % 80.4 % 70.2 % 72.5 %
ARCH CAPITAL 50 2022 THIRD QUARTER FORM 10-Q
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Table of Contents Current Year Loss Ratio. 2022 Third Quarter versus 2021 Period. The reinsurance segment's current year loss ratio in the 2022 third quarter was 6.4 points higher than in the 2021 third quarter. The 2022 third quarter loss ratio reflected 42.8 points of current year catastrophic activity, primarily due to Hurricane Ian and other global events. The 2021 third quarter included 34.6 points of catastrophic activity, primarily related to Hurricane Ida and European floods. Nine Months EndedSeptember 30, 2022 versus 2021 Period. The reinsurance segment's current year loss ratio for the nine months endedSeptember 30, 2022 was 3.4 points lower than in the 2021 period and reflected 20.1 points of current year catastrophic activity, primarily related to Hurricane Ian,Russia's invasion ofUkraine and other global events, compared to 20.1 points in the 2021 period.
Prior
The reinsurance segment's net favorable development was$49.2 million , or 4.9 points, for the 2022 third quarter, compared to$72.3 million , or 10.7 points, for the 2021 third quarter, and$128.1 million , or 4.7 points, for the nine months endedSeptember 30, 2022 , compared to$119.6 million , or 5.8 points, for the 2021 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses," to our consolidated financial statements for information about the reinsurance segment's prior year reserve development.
Underwriting Expenses.
2022 Third Quarter versus 2021 Period. The underwriting expense ratio for the reinsurance segment was 27.1% in the 2022 third quarter, compared to 25.8% in the 2021 third quarter, with the increase primarily resulting from higher level of pro rata business, which generally has higher ceding commissions than excess of loss business. Such increase in the acquisition expense ratio was partially offset by a lower operating expense ratio due to a higher level of earned premium. Nine Months EndedSeptember 30, 2022 versus 2021 period. The underwriting expense ratio for the reinsurance segment was 28.1% for the nine months endedSeptember 30, 2022 , compared to 25.8% for the 2021 period. The comparison of the underwriting expense ratios also reflected changes in the mix and type of business and a higher level of net premiums earned for the 2022 period. Mortgage Segment
Our mortgage operations include
reinsurance operations as well as participation in GSE credit risk-sharing
transactions.
The following tables set forth our mortgage segment's underwriting results.
Three Months Ended
2022 2021 % Change Gross premiums written$ 362,409 $ 360,934 0.4 Premiums ceded (86,230) (60,207) Net premiums written 276,179 300,727 (8.2) Change in unearned premiums 5,889 11,238 Net premiums earned 282,068 311,965 (9.6) Other underwriting income 2,625 3,981 Losses and loss adjustment expenses 67,878 (11,543) Acquisition expenses (6,693) (24,098) Other operating expenses (46,471) (46,254) Underwriting income$ 299,407 $ 234,051 27.9 % Point Underwriting Ratios Change Loss ratio (24.1) % 3.7 % (27.8) Acquisition expense ratio 2.4 % 7.7 % (5.3) Other operating expense ratio 16.5 % 14.8 % 1.7 Combined ratio (5.2) % 26.2 % (31.4)
Nine Months Ended
2022 2021 % Change Gross premiums written$ 1,099,144 $ 1,143,691 (3.9) Premiums ceded (241,097) (171,923) Net premiums written 858,047 971,768 (11.7) Change in unearned premiums 9,190 10,735 Net premiums earned 867,237 982,503 (11.7) Other underwriting income 6,130 15,026 Losses and loss adjustment expenses 187,163 (85,112) Acquisition expenses (27,343) (84,297) Other operating expenses (150,064) (143,697) Underwriting income$ 883,123 $ 684,423 29.0 % Point Underwriting Ratios Change Loss ratio (21.6) % 8.7 % (30.3) Acquisition expense ratio 3.2 % 8.6 % (5.4) Other operating expense ratio 17.3 % 14.6 % 2.7 Combined ratio (1.1) % 31.9 % (33.0) ARCH CAPITAL 51 2022 THIRD 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 September 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 188,290 68.2 $ 221,315 73.6
Other 87,889 31.8 79,412 26.4
Total $ 276,179 100.0 $ 300,727 100.0
2022 Third Quarter versus 2021 Period. Gross premiums written by the mortgage
segment in the 2022 third quarter were 0.4% higher than in the 2021 third
quarter, while net premiums written were 8.2% lower. Net premiums written for
the 2022 third quarter reflected a higher level of premiums ceded than in the
2021 third quarter.
Nine Months Ended September 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 590,606 68.8 $ 703,489 72.4
Other 267,441 31.2 268,279 27.6
Total $ 858,047 100.0 $ 971,768 100.0
Nine Months Ended September 30, 2022 versus 2021 Period. Gross premiums written
by the mortgage segment for the nine months ended September 30, 2022 were 3.9%
lower than in the 2021 period. The reduction in gross premiums written primarily
reflected a lower U.S. primary mortgage insurance single premium volume and a
decrease in monthly premiums. Net premiums written for the nine months ended
September 30, 2022 were 11.7% 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 75.4% for the Arch MI U.S. portfolio of mortgage insurance
policies at September 30, 2022 , reflecting a lower level of mortgage refinancing
activity, compared to 57.7% at September 30, 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
2022 2021
Amount % Amount %
Total new insurance written (NIW)
(1) $ 17,425 $ 27,841
Credit quality (FICO):
>=740 $ 11,615 66.7 $ 17,514 62.9
680-739 5,322 30.5 9,012 32.4
620-679 485 2.8 1,315 4.7
<620 3 - - -
Total $ 17,425 100.0 $ 27,841 100.0
Loan-to-value (LTV):
95.01% and above $ 973 5.6 $ 1,554 5.6
90.01% to 95.00% 9,916 56.9 14,240 51.1
85.01% to 90.00% 4,839 27.8 8,394 30.1
85.00% and below 1,697 9.7 3,653 13.1
Total $ 17,425 100.0 $ 27,841 100.0
Monthly vs. single:
Monthly $ 16,911 97.1 $ 26,515 95.2
Single 514 2.9 1,326 4.8
Total $ 17,425 100.0 $ 27,841 100.0
Purchase vs. refinance:
Purchase $ 17,159 98.5 $ 25,711 92.3
Refinance 266 1.5 2,130 7.7
Total $ 17,425 100.0 $ 27,841 100.0
(1)Represents the original principal balance of all loans that received coverage
during the period.
ARCH CAPITAL 52 2022 THIRD QUARTER FORM 10-Q
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(U.S. Dollars in millions) Nine Months Ended September 30,
2022 2021
Amount % Amount %
Total new insurance written (NIW)
(1) $ 60,939 $ 83,232
Credit quality (FICO):
>=740 $ 40,888 67.1 $ 54,572 65.6
680-739 18,376 30.2 25,543 30.7
620-679 1,667 2.7 3,117 3.7
<620 8 - - -
Total $ 60,939 100.0 $ 83,232 100.0
Loan-to-value (LTV):
95.01% and above $ 3,264 5.4 $ 4,646 5.6
90.01% to 95.00% 33,984 55.8 40,464 48.6
85.01% to 90.00% 17,163 28.2 25,381 30.5
85.01% and below 6,528 10.7 12,741 15.3
Total $ 60,939 100.0 $ 83,232 100.0
Monthly vs. single:
Monthly $ 58,984 96.8 $ 78,229 94.0
Single 1,955 3.2 5,003 6.0
Total $ 60,939 100.0 $ 83,232 100.0
Purchase vs. refinance:
Purchase $ 59,375 97.4 $ 71,226 85.6
Refinance 1,564 2.6 12,006 14.4
Total $ 60,939 100.0 $ 83,232 100.0
Net Premiums Earned.
The following tables set forth our mortgage segment's net premiums earned by
underwriting location:
Three Months Ended September 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 196,874 69.8 $ 236,892 75.9
Other 85,194 30.2 75,073 24.1
Total $ 282,068 100.0 $ 311,965 100.0
2022 Third Quarter versus 2021 Period. Net premiums earned for the 2022 third
quarter were 9.6% lower than in the 2021 third quarter, and reflected a
reduction in earnings from single premium policy terminations and a lower level
of monthly premiums.
Nine Months Ended September 30,
2022 2021
Amount % Amount %
Underwriting location:
United States $ 615,599 71.0 $ 747,830 76.1
Other 251,638 29.0 234,673 23.9
Total $ 867,237 100.0 $ 982,503 100.0
Nine Months Ended September 30, 2022 versus 2021 Period. For the nine months
ended September 30, 2022 , net premiums earned were 11.7% 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, which is primarily related to GSE credit risk-sharing transactions and our whole mortgage loan purchase and sell program was$2.6 million for the 2022 third quarter, compared to$4.0 million for the 2021 third quarter.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment's loss ratio:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Current year 20.6 % 18.2 % 18.3 % 18.8 %
Prior period reserve development (44.7) % (14.5) % (39.9) % (10.1) %
Loss ratio (24.1) % 3.7 % (21.6) % 8.7 %
Current Year Loss Ratio.
2022 Third Quarter versus 2021 Period. The mortgage segment's current year loss ratio was 2.4 points higher in the 2022 third quarter than in the 2021 third quarter. The higher current year loss ratio for the 2022 period reflected a lower level of net premiums earned in theU.S. primary mortgage insurance business. Nine Months EndedSeptember 30, 2022 versus 2021 Period. The mortgage segment's current year loss ratio was 0.5 points lower for the nine months endedSeptember 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$126.2 million , or 44.7 points, for the 2022 third quarter, compared to$45.1 million , or 14.5 points, for the 2021 third quarter, and$346.4 million , or 39.9 points, for the nine months endedSeptember 30, 2022 , compared to$99.1 million , or 10.1 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 Third Quarter versus 2021 Period. The underwriting expense ratio for the mortgage segment was 18.9% in the 2022 third quarter, compared to 22.5% in the 2021 third 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 53 2022 THIRD QUARTER FORM 10-Q
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Table of Contents Nine Months EndedSeptember 30, 2022 versus 2021 period. The underwriting expense ratio for the mortgage segment was 20.5% for the nine months endedSeptember 30, 2022 , compared to 23.2% 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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Fixed maturities $ 123,568 $ 75,964 $ 310,963 $ 232,690
Equity securities 4,261 9,867 16,620 23,799
Short-term investments 9,304 1,858 15,999 3,474
Other (1) 8,644 19,114 28,704 55,699
Gross investment income 145,777 106,803 372,286 315,662
Investment expenses (2) (17,137) (18,608) (56,818) (59,308)
Net investment income $ 128,640 $ 88,195 $ 315,468 256,354
(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 0.29% of average invested assets for the 2022 third quarter, compared to 0.32% for the 2021 third quarter, and 0.30% for the nine months endedSeptember 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 2.06% for the 2022 third quarter, compared to 1.41% for the 2021 third quarter, and 1.72% for the nine
months ended
Corporate Expenses.
Corporate expenses were$17.6 million for the 2022 third quarter, compared to$18.6 million for the 2021 third quarter, and$76.9 million for the nine months endedSeptember 30, 2022 , compared to$59.3 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 third quarter was$13.7 million , compared to a loss of$4.0 million for the 2021 third quarter, and a loss of$34.5 million for the nine months endedSeptember 30, 2022 , compared to an income of$1.2 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$0.1 million for the 2022 third quarter, compared to$1.0 million for the 2021 third quarter, and an expense of$0.7 million for the nine months endedSeptember 30, 2022 , compared to$0.8 million for the 2021 period. Amounts in the 2022 and 2021 periods reflect acquisitions activity for the respective periods.
Amortization of Intangible Assets.
Amortization of intangible assets for the 2022 third quarter was$26.1 million , compared to$20.1 million for the 2021 third quarter, and$80.5 million for the nine months endedSeptember 30, 2022 , compared to$48.9 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$33.1 million for the 2022 third quarter, compared to the$33.2 million for the 2021 third quarter, and$98.6 million for the nine months endedSeptember 30, 2022 , consistent with$98.8 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$183.7 million for the 2022 third quarter, of which approximately 40% represented unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, compared to net realized losses of$25.0 million for the 2021 third quarter, and net realized losses of$742.7 million for the nine months endedSeptember 30, 2022 , compared to net realized gains of$239.7 million for the 2021 period. Currently, our portfolio is ARCH CAPITAL 54 2022 THIRD QUARTER FORM 10-Q
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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 a loss of$18.9 million related to investment funds accounted for using the equity method in the 2022 third quarter, compared to an income of$105.4 million for the 2021 third quarter, and$75.5 million for the nine months endedSeptember 30, 2022 , compared to$299.3 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$3.6 billion atSeptember 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 third quarter were$90.5 million , compared to net foreign exchange gains for the 2021 third quarter of$36.1 million . Net foreign exchange gains for the nine months endedSeptember 30, 2022 were$182.1 million , compared to net foreign exchange gains for the 2021 period of$39.7 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 3.0% for the nine months endedSeptember 30, 2022 , compared to 5.8% for the 2021 period. The effective tax rate for the nine months endedSeptember 30, 2022 and 2021 periods included discrete income tax benefits of$36.5 million and$28.7 million , respectively. The discrete income tax benefits had the effect of decreasing the effective tax rate on net income available to Arch common shareholders by 5.7% and 1.7%, respectively. The discrete tax items in the 2022 and 2021 periods primarily related to the releases of valuation allowance onU.K. deferred tax assets. 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 third quarter was$8.5 million , compared to$124.1 million for the 2021 third quarter, and$37.7 million for the nine months endedSeptember 30, 2022 , compared to$224.1 million for the 2021 period. Results for the 2021 period reflected a one-time gain of$95.7 million and$74.5 million realized from our investments inSomers and Coface SA, respectively. 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
At
investable assets held by Arch were internally managed, compared to
billion
Information" to our consolidated financial statements for additional
information.
September 30, 2022 , December 31, 2021
Average effective duration (in years) 2.84
2.70
Average S&P/Moody's credit ratings (1) AA/Aa2
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
September 30, 2022
U.S. government and gov't agencies (1) $ 5,746,853 30.8
AAA 3,344,746 17.9
AA 2,030,730 10.9
A 3,382,545 18.1
BBB 3,001,304 16.1
BB 532,162 2.9
B 357,543 1.9
Lower than B 12,417 0.1
Not rated 242,730 1.3
Total $ 18,651,030 100.0
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
September 30, 2022
0-10% $ 10,662,904 $ (551,217) 29.6
10-20% 5,851,810 (952,285) 51.2
20-30% 1,070,957 (326,093) 17.5
Greater than 30% 63,903 (31,059) 1.7
Total $ 17,649,574 $ (1,860,654) 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 September 30, 2022 , excluding guaranteed amounts and
covered bonds:
Credit
Estimated Fair Value Rating (1)
Bank of America Corporation $ 430,809 A-/A2
JPMorgan Chase & Co. 297,868 A-/A1
Morgan Stanley 268,742 A-/A1
Citigroup Inc. 260,312 BBB+/A3
The Goldman Sachs Group, Inc. 243,516 BBB+/A2
Wells Fargo & Company 237,947 BBB+/A1
Blackstone Inc. 165,585 BBB/Baa3
Blue Owl Capital Inc. 157,904 BBB-/Baa3
UBS Group AG 125,810 A/Aa3
Dai-ichi Life Holdings, Inc. 106,357 AA-/A1
Total $ 2,294,850
(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"):
Below Investment
Agencies Investment Grade Grade Total
September 30, 2022
RMBS $ 602,423 $ 143,188 $ 17,760 $ 763,371
CMBS 18,022 957,327 88,889 1,064,238
ABS - 1,410,672 180,970 1,591,642
Total $ 620,445 $ 2,511,187 $ 287,619 $ 3,419,251
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:
September 30, December 31,
2022 2021
Equities (1) $ 527,658 $ 883,722
Exchange traded funds
Fixed income (2) 269,276 455,467
Equity and other (3) 26,840 491,474
Total $ 823,774 $ 1,830,663
(1)Primarily in consumer non-cyclical, technology, communications, consumer
cyclical and financial at September 30, 2022 .
(2)Primarily in corporate at September 30, 2022 .
(3)Primarily in large cap stocks, foreign equities, technology, healthcare and
consumer discretionary at September 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 56 2022 THIRD 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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Premiums written:
Direct $ 2,247,480 $ 1,993,098 $ 6,503,383 $ 5,795,236
Assumed 1,613,203 1,214,317 5,027,802 4,095,676
Ceded (1,136,909) (1,131,486) (3,488,632) (2,907,002)
Net $ 2,723,774 $ 2,075,929 $ 8,042,553 $ 6,983,910
Premiums earned:
Direct $ 2,067,084 $ 1,754,462 $ 5,925,934 $ 5,263,286
Assumed 1,525,027 1,129,434 4,037,580 3,169,016
Ceded (1,121,361) (954,559) (3,046,356) (2,433,634)
Net $ 2,470,750 $ 1,929,337 $ 6,917,158 $ 5,998,668
Losses and LAE:
Direct $ 1,228,281 $ 1,101,793 $ 3,016,634 $ 3,134,305
Assumed 1,370,308 961,285 2,661,854 2,182,852
Ceded (915,893) (837,059) (1,892,301) (1,728,207)
Net $ 1,682,696 $ 1,226,019 $ 3,786,187 $ 3,588,950
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 $ 46,772 $ 137,613
2018-1 Ltd. (2) 374,460 103,131 136,200
2018-3 Ltd. (3) 506,110 217,701 143,738
2019-1 Ltd. (4) 341,790 119,193 109,450
2019-2 Ltd. (5) 621,022 347,050 182,251
2019-3 Ltd. (6) 700,920 257,663 203,047
2019-4 Ltd. (7) 577,267 283,684 136,334
2020-2 Ltd. (8) 449,167 123,049 233,262
2020-3 Ltd. (9) 451,816 276,954 159,632
2020-4 Ltd. (10) 337,013 112,191 137,694
2021-1 Ltd. (11) 643,577 540,267 152,499
2021-2 Ltd. (12) 616,017 551,307 140,012
2021-3 Ltd. (13) 639,391 627,436 136,033
2022-1 Ltd. (14) 316,760 316,760 150,269
2022-2 Ltd. (15) 327,165 327,165 222,386
Total $ 7,270,589 $ 4,250,323 $ 2,380,420
(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.
(15) Issued in
Bellemeade Re 2022-2 Ltd. via insurance-linked notes, with an additional
million
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
losses and loss adjustment expenses recoverable, by type and by operating
segment were as follows:
September 30, December 31,
2022 2021
Insurance segment:
Case reserves $ 2,214,924 $ 2,102,891
IBNR reserves 4,797,323 4,269,904
Total net reserves 7,012,247 6,372,795
Reinsurance segment:
Case reserves 1,720,426 1,733,571
Additional case reserves 583,197 426,531
IBNR reserves 3,100,704 2,656,527
Total net reserves 5,404,327 4,816,629
Mortgage segment:
Case reserves 542,975 741,897
IBNR reserves 222,194 226,604
Total net reserves 765,169 968,501
Total:
Case reserves 4,478,325 4,578,359
Additional case reserves 583,197 426,531
IBNR reserves 8,120,221 7,153,035
Total net reserves $ 13,181,743 $ 12,157,925
At
Reserves by major line of business, net of unpaid losses and loss adjustment
expenses recoverable, were as follows:
September 30, December 31,
2022 2021
Insurance segment:
Professional lines $ 1,888,083 $ 1,673,615
Construction and national accounts 1,559,888 1,490,206
Programs 846,580 793,187
Excess and surplus casualty 739,676 657,307
Property, energy, marine and aviation 713,021 599,093
Travel, accident and health 132,337 96,051
Lenders products 40,960 58,351
Other 1,091,702 1,004,985
Total net reserves $ 7,012,247 $ 6,372,795
At
Reserves by major line of business, net of unpaid losses and loss adjustment
expenses recoverable, were as follows:
September 30, December 31,
2022 2021
Reinsurance segment:
Casualty $ 2,223,204 $ 2,123,360
Other specialty 1,215,362 1,113,766
Property excluding property catastrophe 971,430 711,859
Property catastrophe 586,249 486,911
Marine and aviation 270,574 246,861
Other 137,508 133,872
Total net reserves $ 5,404,327 $ 4,816,629
ARCH CAPITAL 58 2022 THIRD QUARTER FORM 10-Q
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Table of Contents
At
Reserves by major line of business, net of unpaid losses and loss adjustment
expenses recoverable, were as follows:
September 30 , December
31,
2022 2021
108,667
112,549
International mortgage insurance/ reinsurance 110,925 145,244 Total net reserves$ 765,169 $ 968,501 (1) AtSeptember 30, 2022 , 34.9% 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) September 30, 2022 December 31, 2021
Amount % Amount %
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance $ 294,857 58.8 $ 280,945 61.0
U.S. credit risk transfer (CRT) and other
(2) 143,897 28.7 110,018 23.9
International mortgage
insurance/reinsurance (3) 63,068 12.6 69,655 15.1
Total $ 501,822 100.0 $ 460,618 100.0
Risk In Force (RIF) (4):
U.S. primary mortgage insurance $ 75,343 85.1 $ 70,619 84.3
U.S. credit risk transfer (CRT) and other
(2) 6,473 7.3 5,120 6.1
International mortgage
insurance/reinsurance (3) 6,727 7.6 7,983 9.5
Total $ 88,543 100.0 $ 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 $ 10,362 3.5 $ 2,509 3.3 8.22 %
2013 3,196 1.1 855 1.1 2.12 %
2014 3,903 1.3 1,071 1.4 2.61 %
2015 6,607 2.2 1,780 2.4 2.11 %
2016 11,021 3.7 2,953 3.9 2.47 %
2017 10,017 3.4 2,654 3.5 3.27 %
2018 10,744 3.6 2,742 3.6 3.95 %
2019 19,961 6.8 5,038 6.7 2.24 %
2020 68,974 23.4 17,294 23.0 0.87 %
2021 91,486 31.0 23,152 30.7 0.66 %
2022 58,586 19.9 15,295 20.3 0.17 %
Total $ 294,857 100.0 $ 75,343 100.0 1.73 %
(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 atSeptember 30, 2022 andDecember 31, 2021 : (U.S. Dollars in millions) September 30, 2022 December 31, 2021 Amount % Amount % Credit quality (FICO): >=740 $ 46,538 61.8 $ 42,451 60.1 680-739 24,671 32.7 23,646 33.5 620-679 3,850 5.1 4,196 5.9 <620 284 0.4 326 0.5 Total $ 75,343 100.0 $ 70,619 100.0 Weighted average FICO score 748 746 Loan-to-value (LTV): 95.01% and above $ 7,334 9.7 $ 7,538 10.7 90.01% to 95.00% 43,049 57.1 38,829 55.0 85.01% to 90.00% 20,876 27.7 20,006 28.3 85.00% and below 4,084 5.4 4,246 6.0 Total $ 75,343 100.0 $ 70,619 100.0 Weighted average LTV 92.9 % 92.8 % Total RIF, net of external reinsurance $ 56,890 $ 54,574 (U.S. Dollars in millions) September 30, 2022 December 31, 2021 Amount % Amount % Total RIF by State: California $ 6,219 8.3 $ 5,559 7.9 Texas 6,080 8.1 5,594 7.9 Florida 3,275 4.3 3,303 4.7 Georgia 3,150 4.2 2,902 4.1 North Carolina 3,139 4.2 2,921 4.1 Illinois 3,087 4.1 2,933 4.2 Minnesota 2,996 4.0 2,916 4.1 Massachusetts 2,771 3.7 2,537 3.6 Virginia 2,647 3.5 2,446 3.5 Michigan 2,587 3.4 2,492 3.5 Other 39,392 52.3 37,016 52.4 Total $ 75,343 100.0 $ 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 Nine Months Ended
claim count) September 30,
2022 2021
Roll-forward of insured loans in default:
Beginning delinquent number of loans 27,645 52,234
New notices 26,328 26,483
Cures (33,225) (46,334)
Paid claims (534) (613)
Ending delinquent number of loans (1) 20,214 31,770
Ending number of policies in force (1) 1,168,735 1,188,768
Delinquency rate (1) 1.73 % 2.67 %
Losses:
Number of claims paid 534 613
Total paid claims $ 16,865 $ 22,848
Average per claim $ 31.6 $ 37.3
Severity (2) 74.3 % 80.2 %
Average case reserve per default (in thousands) (1) $ 27.7 $ 23.5
(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 7.6 to 1 at September 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 September 30, December 31, share data) 2022 2021 Total shareholders' equity available to Arch$ 11,795,110 $ 13,545,896 Less preferred shareholders' equity 830,000 830,000 Common shareholders' equity available to Arch$ 10,965,110 $ 12,715,896 Common shares and common share equivalents outstanding, net of treasury shares (1) 369,321,990 378,923,894 Book value per share $ 29.69 $ 33.56
(1)Excludes the effects of 15,628,546 and 17,083,160 stock options and 560,945
and 729,636 restricted stock units outstanding at
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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 nine months endedSeptember 30, 2022 ,Arch Capital received dividends of$735.3 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 at least the next twelve months and thereafter for the forseable future, 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.
Nine Months Ended
September 30,
2022 2021
Total cash provided by (used for):
Operating activities $ 2,833,717 $ 2,580,697
Investing activities (2,106,721) (1,184,436)
Financing activities (703,877) (895,943)
Effects of exchange rate changes on foreign currency cash (79,566)
(30,501)
Increase (decrease) in cash and restricted cash$ (56,447)
•Cash provided by operating activities for the nine months ended
2022
•Cash used for investing activities for the nine months endedSeptember 30, 2022 was higher than in the 2021 period. Activity for the 2022 period reflected a lower level of proceeds from sales and redemptions of fixed
income securities. Activity for the 2021 period reflected cash used to invest in
Coface and Somers.
•Cash used for financing activities for the nine months endedSeptember 30, 2022 reflected$585.8 million of repurchases under our share repurchase program. Activity for the 2021 period, reflected$872.2 million of repurchases under our share repurchase program. CAPITAL RESOURCES
The following table provides an analysis of our capital structure:
(
share data)
2022 2021 Senior notes$ 2,725,153 $ 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 10,965,110 12,715,896 Total$ 11,795,110 $ 13,545,896 Total capital available to Arch$ 14,520,263 $ 16,270,290 Debt to total capital (%) 18.8 16.7 Preferred to total capital (%) 5.7 5.1 Debt and preferred to total capital (%) 24.5 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 ofSeptember 30, 2022 with an estimated PMIER sufficiency ratio of 237%, 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 61 2022 THIRD QUARTER FORM 10-Q
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Table of Contents GUARANTOR INFORMATION The below table provides a description of our senior notes payable atSeptember 30, 2022 : Interest Principal Carrying Issuer/Due (Fixed) Amount AmountArch Capital : May 1, 2034 7.350 %$ 300,000 $ 297,585 June 30, 2050 3.635 % 1,000,000 988,891 Arch-U.S.: Nov. 1, 2043 (1) 5.144 % 500,000 495,156 Arch Finance: Dec. 15, 2026 (1) 4.011 % 500,000 497,962 Dec. 15, 2046 (1) 5.031 % 450,000 445,559 Total$ 2,750,000 $ 2,725,153
(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-
September 30, 2022
Arch Capital Arch-U.S.
Assets
Total investments $ 47,722 $ 169,143
Cash 12,798 7,463
Investment in operating affiliates 5,448 -
Due from subsidiaries and affiliates 1,485 15
Other assets 7,437 29,346
Total assets $ 74,890 $ 205,967
Liabilities
Senior notes 1,286,476 495,156
Due to subsidiaries and affiliates 1,838 507,103
Other liabilities 36,038 41,580
Total liabilities $ 1,324,352 $ 1,043,839
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 - September 30, 2022 Arch Nine Months Ended Capital Arch-U.S. Revenues Net investment income$ 1,349 $ 600 Net realized gains (losses) 23 (338) Equity in net income (loss) of investments accounted for using the equity method - 6,913 Total revenues 1,372 7,175 Expenses Corporate expenses 70,048 10,882 Interest expense 44,068 35,328 Total expenses 114,116 46,210 Income (loss) before income taxes and income (loss) from operating affiliates (112,744) (39,035) Income tax (expense) benefit - 7,918 Income (loss) from operating affiliates (758) - Net income available to Arch (113,502) (31,117) Preferred dividends (30,552) - Net income (loss) available to Arch common shareholders$ (144,054) $ (31,117) ARCH CAPITAL 62 2022 THIRD 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 nine months endedSeptember 30, 2022 ,Arch Capital repurchased 12.9 million shares under the share repurchase program with an aggregate purchase price of$585.8 million . Since the inception of the share repurchase program throughSeptember 30, 2022 ,Arch Capital has repurchased 433.6 million common shares for an aggregate purchase price of$5.9 billion . AtSeptember 30, 2022 , approximately$596.4 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 ofOctober 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$851 million , followed by windstorms affecting theGulf of Mexico and theNortheastern U.S. regions with net probable maximum pre-tax losses of$748 and$747 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 ofOctober 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 ofOctober 1, 2022 , our modeled RDS loss was approximately 10% 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 ofSeptember 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 atSeptember 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 +100September 30, 2022 Total fair value$ 25.75 $ 25.40 $ 25.05 $ 24.70 $ 24.37 Change from base 2.8 % 1.4 % (1.4) % (2.7) % Change in unrealized value$ 0.70 $ 0.35 $ (0.35) $ (0.68) 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 +100September 30, 2022 Total fair value$ 26.03 $ 25.54 $ 25.05 $ 24.56 $ 24.07 Change from base 3.9 % 2.0 % (2.0) % (3.9) % Change in unrealized value$ 0.98 $ 0.49 $ (0.49) $ (0.98) 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 September 30, 2022 , our portfolio's VaR was
estimated to be 7.9% 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 September 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 $0.8 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 $81.9 million and $137.5 million at
September 30, 2022 and December 31, 2021 , respectively, and would have decreased
book value per share by approximately $0.22 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 $81.9 million and $137.5
million at September 30, 2022 and December 31, 2021 , respectively, and would
have increased book value per share by approximately $0.22 and $0.36 ,
respectively.
Investment-Related Derivatives. At September 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 $5.9 billion ,
compared to $6.4 billion at December 31, 2021 . If the underlying exposure of
each investment-related derivative held at September 30, 2022 depreciated by 100
basis points, it would have resulted in a reduction in net income of
approximately $58.6 million , and a decrease in book value per share of
approximately $0.16 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
September 30, 2022 appreciated by 100 basis points, it would have resulted in an
increase in net income of approximately $58.6 million , and an increase in book
value per share of approximately $0.16 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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