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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, 2022 ("2022 Form 10-K"). In addition, readers should review "Risk Factors" set forth in Item 1A of Part I of our 2022 Form 10-K and "ITEM 1A-Risk Factors" of this Form 10-Q. All amounts are in millions, except per 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$16.7 billion in capital atMarch 31, 2023 and, through operations inBermuda ,the United States ,Europe ,Canada andAustralia , writes insurance, reinsurance and mortgage insurance on a worldwide basis. Page No. Current Outlook 35 Financial Measures 35 Comments on Non-GAAP Measures 36 Results of Operations 38 Insurance Segment 38 Reinsurance Segment 40 Mortgage Segment 41 Corporate Segment 43 Critical Accounting Policies, Estimates and Recent Accounting Pronouncements 44 Financial Condition 44 Liquidity 50 Capital Resources and Other 50 ARCH CAPITAL 34 2023 FIRST QUARTER FORM 10-Q
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Table of Contents CURRENT OUTLOOK Our objective in 2023 remains the same, to deliver long term value for our shareholders. The 2023 first quarter financial highlights included book value per share growth of 8.4% and an annualized net income and operating return on average common equity of 22.3% and 20.7%, respectively. See "Comment on Non-GAAP Financial Measures." Our property casualty underwriting teams continue to lean into attractive market conditions where excellent risk-adjusted returns remain available. The property and casualty environment continues to offer opportunities, as evidenced by the growth in our premiums numbers. A key element of cycle management is to respond aggressively when conditions change. 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. Being an effective underwriting cycle manager means that our underwriters know that they have degrees of freedom in choosing to deploy capital across our diversified, specialty-focused platform. Our belief is that, because we have a wide range of choices to allocate underwriting capital at any time, we can generate more consistent and stable underwriting income over the long run. In our insurance segment, we continue to take advantage of favorable market conditions. For the past few quarters, property has seen significant rate escalation. The property market is still broadly dislocated, and we believe it will take further rate improvement before it finds equilibrium. General liability rates have picked up again and large account D&O is one of the very few lines that has seen decelerating rates. Overall, the market remains disciplined in its behavior and we continue to obtain rate above trend. In the reinsurance property market, pricing forJanuary 1 renewals was strong. This was fueled in part by improved pricing and terms and conditions on the primary side. As a result, property catastrophe net premiums written for the 2023 first quarter were nearly double from the 2022 first quarter. From our perspective, the improved conditions atJanuary 1 renewals are a leading indicator as we prepare for the mid-year renewals. 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.
Our mortgage segment operates on a different cycle than the property and
casualty segments, but it remains a significant contributor to earnings,
generating
underwriting income in the 2023 first quarter. Our mortgage portfolio was shaped with a focus on credit quality and data-driven risk selection as demonstrated by our 1.65% delinquency rate atMarch 31, 2023 , the lowest sinceMarch 31, 2020 . Our disciplined underwriting approach has produced a portfolio with a favorable risk profile, including higher FICO scores and favorable loan-to-value and debt-to-income ratios. 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$35.35 atMarch 31, 2023 , compared to$32.62 atDecember 31, 2022 , and$32.18 atMarch 31, 2022 . The 8.4% increase in book value per share for the 2023 first quarter reflected strong underwriting and investment results.
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."
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Table of Contents Our annualized net income return on average common equity was 22.3% for the 2023 first quarter, compared to 6.0% for the 2022 first quarter. Our Operating ROAE was 20.7% for the 2023 first quarter, compared to 13.6% for the 2022 first quarter. The 2023 first quarter annualized net income return reflected strong underwriting and investment results, while the 2022 period reflected strong underwriting results, partially offset by a higher level of net realized losses which included mark-to-market losses on equities.
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):
2023 First Quarter
2.54 % 2.64 % 2022 First Quarter (3.07) % (3.97) % Total return for the 2023 first quarter primarily reflected strong returns in our fixed income portfolio which benefited from a slight downward pressure on interest rates during the quarter. We continue to maintain a relatively short duration on our portfolio of 2.89 years atMarch 31, 2023 . 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. AtMarch 31, 2023 , the benchmark return index had an average credit quality of "A1" by Moody's
Investors Service ("Moody's"), and an estimated duration of 2.81 years.
The benchmark return index included weightings to the following indices:
%
ICE BofA 1-10 Year U.S. Corporate Index 28.50
Alternatives - Yield on 3-5 Year
ICE BofA 1-10 Year
15.75 ICE BofAU.S. High Yield Constrained Index 8.00 ICEBofA 1-5 YearU.K. Gilt Index 5.50 JPM CLOIE Investment Grade 4.50 ICE BofA German Government 1-10 Year Index 4.00 S&P 500 Total Return Index 4.00 ICEBofA 0-3 MonthU.S. Treasury Index 3.00 ICE BofAU.S. ABS & CMBS Index 3.00 ICEBofA 1-5 Year Canada Government Index 2.50 ICEBofA 1-5 Year Australia Government Index 2.50 ICE BofAU.S. Mortgage Backed Securities Index 1.50 ICEBofA 15+ Year Canada Government Index 0.50 ICEBofA 1-5 Year Japan Government Index 0.25 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, 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 in any particular period are not indicative of the performance, of or trends, in our business.
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Table of Contents 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 these items, are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of 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. 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 and transaction costs and other from the calculation of after-tax operating income available to Arch common shareholders. 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. 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, 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.
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, 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 ARCH CAPITAL 37 2023 FIRST QUARTER FORM 10-Q
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Table of Contents investment portfolio against benchmark returns during the periods.
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. See
"Comment on Non-GAAP Financial Measures."
Three Months Ended
March 31,
2023 2022
Net income available to Arch common shareholders $ 705 $ 186
Net realized (gains) losses (17) 292
Equity in net (income) loss of investment funds accounted
for using the equity method
(48) (36) Net foreign exchange (gains) losses 18 (4) Transaction costs and other (1) - Income tax expense (benefit) (1) (3) (16)
After-tax operating income available to Arch common
shareholders
$ 654
Beginning common shareholders' equity$ 12,080 $ 12,716 Ending common shareholders' equity 13,158 12,090 Average common shareholders' equity$ 12,619
Annualized net income return on average common equity % 22.3 6.0 Annualized operating return on average common equity % 20.7 13.6 (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. 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, the Chief Financial Officer and Treasurer and the President and Chief Underwriting Officer are the Company's chief operating decision makers. They 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 March 31,
%
2023 2022 Change
Gross premiums written $ 1,979 $ 1,720 15.1
Premiums ceded (542) (513)
Net premiums written 1,437 1,207 19.1
Change in unearned premiums (180) (180)
Net premiums earned 1,257 1,027 22.4
Losses and loss adjustment expenses (703) (601)
Acquisition expenses (245) (196)
Other operating expenses (195) (167)
Underwriting income (loss) $ 114 $ 63 81.0
% Point
Underwriting Ratios Change
Loss ratio 55.9 % 58.5 % (2.6)
Acquisition expense ratio 19.5 % 19.1 % 0.4
Other operating expense ratio 15.5 % 16.2 % (0.7)
Combined ratio 90.9 % 93.8 % (2.9)
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 for middle market and large construction accounts, a comprehensive range of products for middle market accounts in specialty industries and casualty solutions for large national accounts, including loss sensitive primary insurance programs (large deductible, self-insured retention and retrospectively rated programs).
Excess and surplus casualty: primary and excess casualty insurance coverages
written on a non-admitted basis.
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. ARCH CAPITAL 38 2023 FIRST QUARTER FORM 10-Q
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Table of Contents Programs: primarily targeting program managers with unique expertise and niche products offering some combination of general liability, commercial automobile, property, inland marine, umbrella and workers' compensation. Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, cargo, war, specie and liability. Aviation, stand-alone terrorism and political risks are also offered. Coverage may be provided for operational and construction risk. Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups. Warranty and lenders solutions: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing. 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, commercial and transactional surety coverages.
Premiums Written.
The following tables set forth our insurance segment's net premiums written by
major line of business:
Three Months Ended
2023 2022
Amount % Amount %
Professional lines $ 328 22.8 $ 348 28.8
Property, energy, marine and aviation 275 19.1 201 16.7
Travel, accident and health 180 12.5 165 13.7
Construction and national accounts 173 12.0 136 11.3
Programs 141 9.8 129 10.7
Excess and surplus casualty 131 9.1 100 8.3
Warranty and lenders solutions 89 6.2 25 2.1
Other 120 8.4 103 8.5
Total $ 1,437 100.0 $ 1,207 100.0
2023 First Quarter versus 2022 Period. Gross premiums written by the insurance
segment in the 2023 first quarter were 15.1% higher than in the 2022 first
quarter, while net premiums written were 19.1% higher. The higher level of net
premiums written reflected increases in most lines of
business, due in part to new business opportunities, growth in existing accounts
and rate increases. In addition, the insurance segment retained more business in
the 2023 first quarter due to ongoing changes to its reinsurance programs and
was impacted by changes in the mix of business.
Net Premiums Earned.
The following tables set forth our insurance segment's net premiums earned by
major line of business:
Three Months Ended
2023 2022
Amount % Amount %
Professional lines $ 349 27.8 $ 290 28.2
Property, energy, marine and aviation 227 18.1 174 16.9
Travel, accident and health 128 10.2 105 10.2
Construction and national accounts 126 10.0 97 9.4
Programs 144 11.5 140 13.6
Excess and surplus casualty 111 8.8 91 8.9
Warranty and lenders solutions 50 4.0 31 3.0
Other 122 9.7 99 9.6
Total $ 1,257 100.0 $ 1,027 100.0
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. For the 2023
first quarter, net premiums earned were 22.4% higher than in the 2022 first
quarter.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment's loss ratio:
Three Months Ended
March 31,
2023 2022
Current year 56.8 % 59.2 %
Prior period reserve development (0.9) % (0.7) %
Loss ratio 55.9 % 58.5 %
Current Year Loss Ratio.
2023 First Quarter versus 2022 Period. The insurance segment's current year loss
ratio in the 2023 first quarter was 2.4 points lower than in the 2022 first
quarter. The 2023 first quarter loss ratio reflected 1.4 points of current year
catastrophic activity, spread across a series of global events, compared to 3.1
points of catastrophic activity for the 2022 first quarter, primarily related to
Russia's invasion of Ukraine and other natural catastrophes occurring in the
2022 first quarter.
ARCH CAPITAL 39 2023 FIRST QUARTER FORM 10-Q
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Table of Contents PriorPeriod Reserve Development . The insurance segment's net favorable development was$12 million , or 0.9 points, for the 2023 first quarter, compared to$7 million , or 0.7 points, for the 2022 first quarter. 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.
2023 First Quarter versus 2022 Period. The insurance segment's underwriting
expense ratio was 35.0% in the 2023 first quarter, compared to 35.3% in the 2022
first quarter, with the decrease primarily due to growth in net premiums earned.
Reinsurance Segment
The following tables set forth our reinsurance segment's underwriting results:
Three Months Ended March 31,
%
2023 2022 Change
Gross premiums written $ 2,460 $ 1,719 43.1
Premiums ceded (734) (580)
Net premiums written 1,726 1,139 51.5
Change in unearned premiums (396) (335)
Net premiums earned 1,330 804 65.4
Other underwriting income (loss) 4
1
Losses and loss adjustment expenses (766) (454) Acquisition expenses (281) (172) Other operating expenses (74) (70) Underwriting income (loss) $ 213$ 109 95.4 % Point Underwriting Ratios Change Loss ratio 57.6 % 56.5 % 1.1 Acquisition expense ratio 21.1 % 21.4 % (0.3) Other operating expense ratio 5.6 % 8.7 % (3.1) Combined ratio 84.3 % 86.6 % (2.3) 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, 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 March 31,
2023 2022
Amount % Amount %
Other specialty $ 619 35.9 $ 364 32.0
Property excluding property catastrophe 446 25.8 295 25.9
Casualty 283 16.4 266 23.4
Property catastrophe 257 14.9 129 11.3
Marine and aviation 99 5.7 52 4.6
Other 22 1.3 33 2.9
Total $ 1,726 100.0 $ 1,139 100.0
2023 First Quarter versus 2022 Period. Gross premiums written by the reinsurance
segment in the 2023 first quarter were 43.1% higher than in the 2022 first
quarter, while net premiums written were 51.5% higher. Growth in net premiums
written reflected increases in most lines of business, due in part to rate
increases, new business opportunities and growth in existing accounts. In
addition, the reinsurance segment retained more business in the 2023
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Table of Contents first quarter due to a lower level of retrocession activity than in the 2022 first quarter and was impacted by changes in the mix of business.
Net Premiums Earned.
The following tables set forth our reinsurance segment's net premiums earned by
major line of business:
Three Months Ended March 31,
2023 2022
Amount % Amount %
Other specialty $ 511 38.4 $ 232 28.9
Property excluding property catastrophe 354 26.6 232 28.9
Casualty 253 19.0 198 24.6
Property catastrophe 139 10.5 77 9.6
Marine and aviation 51 3.8 42 5.2
Other 22 1.7 23 2.9
Total $ 1,330 100.0 $ 804 100.0
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
2023 first quarter were 65.4% higher than in the 2022 first quarter, and reflect
changes in net premiums written over the previous five quarters.
Other Underwriting Income (Loss).
Other underwriting income for the 2023 first quarter was
Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance segment's loss ratio:
Three Months Ended
March 31,
2023 2022
Current year 61.6 % 60.5 %
Prior period reserve development (4.0) % (4.0) %
Loss ratio 57.6 % 56.5 %
Current Year Loss Ratio.
2023 First Quarter versus 2022 Period. The reinsurance segment's current year
loss ratio in the 2023 first quarter was 1.1 points higher than in the 2022
first quarter. The 2023 first quarter loss ratio reflected 5.4 points of current
year catastrophic activity spread across a series of global events. The 2022
first quarter included 6.5 points of catastrophic activity, primarily related to
Russia's invasion of Ukraine . In addition, the 2023 first quarter loss ratio
reflected the impact of rate increases and changes in mix of business compared
to the 2022 first quarter.
Prior
The reinsurance segment's net favorable development was$53 million , or 4.0 points, for the 2023 first quarter, compared to$32 million , or 4.0 points, for the 2022 first quarter. 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.
2023 First Quarter versus 2022 Period. The underwriting expense ratio for the reinsurance segment was 26.7% in the 2023 first quarter, compared to 30.1% in the 2022 first quarter, with the decrease primarily due to growth in net premiums earned.
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
2023 2022 % Change Gross premiums written $ 343$ 365 (6.0) Premiums ceded (82) (77) Net premiums written 261 288 (9.4) Change in unearned premiums 35 2 Net premiums earned 296 290 2.1 Other underwriting income 6 5 Losses and loss adjustment expenses (2) 54 Acquisition expenses (7) (10) Other operating expenses (50) (53) Underwriting income $ 243$ 286 (15.0) % Point Underwriting Ratios Change Loss ratio 0.6 % (18.9) % 19.5 Acquisition expense ratio 2.5 % 3.6 % (1.1) Other operating expense ratio 16.9 % 18.4 % (1.5) Combined ratio 20.0 % 3.1 % 16.9 ARCH CAPITAL 41 2023 FIRST QUARTER FORM 10-Q
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Table of Contents
Premiums Written.
The following tables set forth our mortgage segment's net premiums written by
underwriting location:
Three Months Ended March 31,
2023 2022
Amount % Amount %
Underwriting location:
United States $ 188 72.0 $ 201 69.8
Other 73 28.0 87 30.2
Total $ 261 100.0 $ 288 100.0
2023 First Quarter versus 2022 Period. Gross premiums written by the mortgage
segment in the 2023 first quarter were 6.0% lower than in the 2022 first
quarter, while net premiums written were 9.4% lower. The decrease in gross
premiums written primarily reflected lower originations in the Australian market
and a reduction in U.S. primary mortgage insurance single premium business,
which was partially offset by a higher volume of credit risk transfer
transactions. Net premiums written for the 2023 first quarter reflected a higher
level of ceded premiums through quota share reinsurance agreements than in the
2022 first quarter.
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 81.7% for the Arch MI U.S. portfolio of mortgage insurance
policies at March 31, 2023 , reflecting a lower level of mortgage refinancing
activity, compared to 66.9% at March 31, 2022 .
The following tables provide details on the new insurance written ("NIW")
generated by Arch MI
loans that received coverage during the period.
Three Months Ended March 31,
2023 2022
Amount % Amount %
Total new insurance written (NIW)
(1) $ 10,394 $ 20,015
Credit quality (FICO):
>=740 $ 6,672 64.2 $ 13,152 65.7
680-739 3,490 33.6 6,254 31.2
620-679 229 2.2 606 3.0
<620 3 0.0 3 0.0
Total $ 10,394 100.0 $ 20,015 100.0
Loan-to-value (LTV):
95.01% and above $ 519 5.0 $ 1,096 5.5
90.01% to 95.00% 6,043 58.1 10,778 53.8
85.01% to 90.00% 2,772 26.7 5,733 28.6
85.00% and below 1,060 10.2 2,408 12.0
Total $ 10,394 100.0 $ 20,015 100.0
Monthly vs. single:
Monthly $ 10,106 97.2 $ 19,201 95.9
Single 288 2.8 814 4.1
Total $ 10,394 100.0 $ 20,015 100.0
Purchase vs. refinance:
Purchase $ 10,201 98.1 $ 19,157 95.7
Refinance 193 1.9 858 4.3
Total $ 10,394 100.0 $ 20,015 100.0
(1)Represents the original principal balance of all loans that received coverage
during the period.
Net Premiums Earned.
The following tables set forth our mortgage segment's net premiums earned by
underwriting location:
Three Months Ended March 31,
2023 2022
Amount % Amount %
Underwriting location:
United States $ 197 66.6 $ 210 72.4
Other 99 33.4 80 27.6
Total $ 296 100.0 $ 290 100.0
2023 First Quarter versus 2022 Period. Net premiums earned for the 2023 first
quarter were 2.1% higher than in the 2022 first quarter, primarily due to growth
in credit risk transfer and international business, which was partially offset
by higher ceded premiums and lower single premium policy terminations on U.S.
primary mortgage insurance.
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$6 million for the 2023 first quarter, compared to$5 million for the 2022 first quarter. ARCH CAPITAL 42 2023 FIRST QUARTER FORM 10-Q
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Table of Contents Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment's loss ratio:
Three Months Ended
March 31,
2023 2022
Current year 24.5 % 16.4 %
Prior period reserve development (23.9) % (35.3) %
Loss ratio 0.6 % (18.9) %
Current Year Loss Ratio.
2023 First Quarter versus 2022 Period. The mortgage segment's current year loss
ratio was 8.1 points higher in the 2023 first quarter than in the 2022 first
quarter. The higher current year loss ratio for the 2023 first quarter reflected
higher delinquencies and an increase in reserves due to higher estimated claim
rates.
Prior
The mortgage segment's net favorable development was$71 million , or 23.9 points, for the 2023 first quarter, compared to$102 million , or 35.3 points, for the 2022 first quarter. 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.
2023 First Quarter versus 2022 Period. The underwriting expense ratio for the mortgage segment was 19.4% in the 2023 first quarter, compared to 22.0% in the 2022 first quarter, with the decrease reflecting lower operating expenses due to lower headcount, and higher profit commissions on business ceded related to favorable development of prior year loss reserves.
Corporate Segment
The corporate segment results include net investment income, net realized gains or losses (which includes realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains and losses on derivative instruments and changes in the allowance for credit losses on financial assets), equity in net income or loss of investments accounted for using the equity method, other income or 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.
Net Investment Income.
The components of net investment income were derived from the following sources:
Three Months Ended
March 31,
2023 2022
Fixed maturities $ 188 $ 82
Equity securities 4 6
Short-term investments 14 3
Other (1) 13 12
Gross investment income 219 103
Investment expenses (2) (20) (23)
Net investment income $ 199 $ 80
(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 0.26% of average invested assets for
the 2023 first quarter, compared to 0.35% for the 2022 first quarter.
The higher level of net investment income for the 2023 first quarter was 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 3.03% for the 2023 first quarter, compared to 1.34% for the 2022 first quarter. Corporate Expenses.
Corporate expenses were
million
primarily due to lower incentive compensation costs.
Other Income (Losses).
Other income for the 2023 first quarter was$11 million , compared to a loss of$9 million for the 2022 first quarter. Amounts in both periods primarily reflect changes in the cash surrender value of our investment in corporate-owned life insurance.
Amortization of Intangible Assets.
Amortization of intangible assets for the 2023 first quarter was$23 million , compared to$27 million for the 2022 first quarter. Amounts in 2023 and 2022 period primarily attributed to amortization of finite-lived intangible assets.
Interest Expense.
Interest expense was$32 million for the 2023 first quarter, compared to the$33 million for the 2022 first quarter. Interest expense primarily reflects amounts related to our outstanding senior notes.
--------------------------------------------------------------------------------
Table of Contents Net Realized Gains or Losses. We recorded net realized gains of$17 million for the 2023 first quarter, compared to net realized losses of$292 million for the 2022 first quarter. Amounts in the 2022 period included mark-to-market losses on equity securities. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains 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.
Equity in net income of investment funds accounted for using the equity method was$48 million in the 2023 first quarter, compared to$36 million for the 2022 first quarter. 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$3.9 billion atMarch 31, 2023 , compared to$3.8 billion atDecember 31, 2022 . 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 losses for the 2023 first quarter were$18 million , compared to net foreign exchange gains for the 2022 first quarter of$4 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 or loss before income taxes, including income or loss from operating affiliates, resulted in an expense of 8.2% for the three months endedMarch 31, 2023 , compared to 5.6% for the 2022 period. See note 13, "Income Taxes" to our consolidated financial statements for additional information.
Income or Losses from Operating Affiliates.
Income from operating affiliates for 2023 first quarter was
compared to
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 2022 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
assets held by Arch were internally managed, compared to
at
consolidated financial statements for additional information.
March 31, 2023, December 31, 2022
Average effective duration (in years) 2.89 2.89
Average S&P/Moody's credit ratings (1) AA-/Aa3
AA-/Aa3
(1)Average credit ratings on our investment portfolio on securities with ratings
assigned by
Service
ARCH CAPITAL 44 2023 FIRST QUARTER FORM 10-Q
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Table of Contents
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
March 31, 2023
U.S. government and gov't agencies (1) $ 5,274 24.7
AAA 3,826 17.9
AA 2,136 10.0
A 4,540 21.3
BBB 3,875 18.2
BB 711 3.3
B 384 1.8
Lower than B 18 0.1
Not rated 559 2.6
Total $ 21,323 100.0
December 31, 2022
U.S. government and gov't agencies (1) $ 5,831 28.8
AAA 3,617 17.9
AA 2,214 10.9
A 3,993 19.7
BBB 3,324 16.4
BB 560 2.8
B 377 1.9
Lower than B 12 0.1
Not rated 309 1.5
Total $ 20,237 100.0
(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
March 31, 2023
0-10% $ 12,393 $ (587) 45.3
10-20% 4,094 (646) 49.8
20-30% 140 (43) 3.3
Greater than 30% 39 (21) 1.6
Total $ 16,666 $ (1,297) 100.0
December 31, 2022
0-10% $ 12,343 $ (580) 35.2
10-20% 5,331 (844) 51.2
20-30% 692 (199) 12.1
Greater than 30% 44 (24) 1.5
Total $ 18,410 $ (1,647) 100.0
The following table summarizes our top ten exposures to fixed income corporate
issuers by fair value at March 31, 2023 , excluding guaranteed amounts and
covered bonds:
Credit
Estimated Fair Value Rating (1)
Bank of America Corporation $ 427 A-/A2
JPMorgan Chase & Co. 313 A-/A1
Morgan Stanley 290 A-/A1
Citigroup Inc. 269 BBB+/A3
The Goldman Sachs Group, Inc. 248 BBB+/A2
Wells Fargo & Company 182 BBB+/A1
Blue Owl Capital Inc. 166 BBB-/Baa3
HSBC Holdings plc 163 A-/A2
Blackstone Inc. 146 BBB-/Baa3
Deere & Company 132 A/A2
Total $ 2,336
(1)Average credit ratings as assigned by S&P and Moody's, respectively.
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Table of Contents
The following table provides information on our structured securities, which
includes residential mortgage-backed securities ("RMBS"), commercial
mortgage-backed securities ("CMBS") and asset-backed securities ("ABS"):
Agencies Investment Grade Below Investment Grade Total
March 31, 2023
RMBS $ 686 $ 136 $ 1 $ 823
CMBS 17 942 76 1,035
ABS - 2,127 236 2,363
Total $ 703 $ 3,205 $ 313 $ 4,221
December 31, 2022
RMBS $ 645 $ 134 $ 16 $ 795
CMBS 18 947 82 1,047
ABS - 1,788 141 1,929
Total $ 663 $ 2,869 $ 239 $ 3,771
The following table summarizes our equity securities, which include investments
in exchange traded funds:
March 31, December 31,
2023 2022
Equities (1) $ 554 $ 570
Exchange traded funds
Fixed income (2) 276 272
Equity and other (3) 36 32
Total $ 866 $ 874
(1)Primarily in consumer non-cyclical, technology, communications and financial
at March 31, 2023 .
(2)Primarily in corporate at March 31, 2023 .
(3)Primarily in large cap stocks, foreign equities, healthcare, technology and
consumer discretionary at March 31, 2023 .
For details on our other investments and other investable assets, see note 7,
"Investment Information-Other Investments" to our consolidated financial
statements.
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
March 31,
2023 2022
Premiums written:
Direct $ 2,358 $ 2,132
Assumed 2,422 1,669
Ceded (1,356) (1,167)
Net $ 3,424 $ 2,634
Premiums earned:
Direct $ 2,154 $ 1,885
Assumed 1,774 1,173
Ceded (1,045) (937)
Net $ 2,883 $ 2,121
Losses and LAE:
Direct $ 1,071 $ 890
Assumed 997 654
Ceded (597) (543)
Net $ 1,471 $ 1,001
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. ARCH CAPITAL 46 2023 FIRST QUARTER FORM 10-Q
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Table of Contents
The following table summarizes the respective coverages and retentions at
Bellemeade Entities Initial Coverage at Remaining Retention,
(Issue Date) Issuance Current Coverage Net
2018-1 Ltd. (1) 374 78 145
2018-3 Ltd. (2) 506 183 155
2019-1 Ltd. (3) 342 99 123
2019-2 Ltd. (4) 621 307 193
2019-3 Ltd. (5) 701 182 211
2019-4 Ltd. (6) 577 252 143
2020-2 Ltd. (7) 449 89 239
2020-3 Ltd. (8) 452 230 162
2020-4 Ltd. (9) 337 91 139
2021-1 Ltd. (10) 644 467 155
2021-2 Ltd. (11) 616 505 138
2021-3 Ltd. (12) 639 606 133
2022-1 Ltd. (13) 317 317 141
2022-2 Ltd. (14) 327 327 213
Total $ 6,902 $ 3,733 $ 2,290
(1) Issued in
2017
(2) Issued in
1, 2018
(3) 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 .
(4) Issued in
2018
(5) Issued in
(6) Issued in
1, 2019
(7) 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. (8) 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. (9) 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. (10) 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. (11) 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. (12) 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. (13) 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.
(14) 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 March 31, 2023 and December 31, 2022 , our Loss Reserves, net of unpaid losses
and loss adjustment expenses recoverable, by type and by operating segment were
as follows:
March 31, December 31,
2023 2022
Insurance segment:
Case reserves $ 2,441 $ 2,398
IBNR reserves 5,127 4,934
Total net reserves 7,568 7,332
Reinsurance segment:
Case reserves 2,181 1,903
Additional case reserves 517 481
IBNR reserves 3,516 3,403
Total net reserves 6,214 5,787
Mortgage segment:
Case reserves 422 447
IBNR reserves 207 186
Total net reserves 629 633
Total:
Case reserves 5,044 4,748
Additional case reserves 517 481
IBNR reserves 8,850 8,523
Total net reserves $ 14,411 $ 13,752
ARCH CAPITAL 47 2023 FIRST QUARTER FORM 10-Q
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Table of Contents AtMarch 31, 2023 andDecember 31, 2022 , the insurance segment's Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows: March 31, December 31, 2023 2022 Insurance segment: Professional lines$ 2,180 $ 2,070 Construction and national accounts 1,584 1,558 Programs 856 843 Excess and surplus casualty 825 786 Property, energy, marine and aviation 764 764 Travel, accident and health 135 139 Warranty and lenders solutions 56 47 Other 1,168 1,125 Total net reserves$ 7,568 $ 7,332 AtMarch 31, 2023 andDecember 31, 2022 , the reinsurance segment's Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows: March 31, December 31, 2023 2022 Reinsurance segment: Casualty$ 2,429 $ 2,342 Other specialty 1,736 1,476 Property excluding property catastrophe 1,022 993 Property catastrophe 581 536 Marine and aviation 302 292 Other 144 148 Total net reserves$ 6,214 $ 5,787
At
major line of business, net of unpaid losses and loss adjustment expenses
recoverable, were as follows:
March 31 , December 31,
2023 2022
105 109 International mortgage insurance/ reinsurance 106 109 Total net reserves$ 629 $ 633 (1) AtMarch 31, 2023 , 33.4% of total net reserves represents policy years 2013 and prior and the remainder from later policy years. AtDecember 31, 2022 , 36.1% of total net reserves represent policy years 2013 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
March 31, 2023 December 31, 2022
Amount % Amount %
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance $ 294,244 57.3 $ 295,651 57.6
U.S. credit risk transfer (CRT) and other
(2) 147,731 28.8 145,087 28.3
International mortgage
insurance/reinsurance (3) 71,327 13.9 72,315 14.1
Total $ 513,302 100.0 $ 513,053 100.0
Risk In Force (RIF) (4):
U.S. primary mortgage insurance $ 75,770 84.8 $ 75,806 84.8
U.S. credit risk transfer (CRT) and other
(2) 6,286 7.0 6,245 7.0
International mortgage
insurance/reinsurance (3) 7,333 8.2 7,369 8.2
Total $ 89,389 100.0 $ 89,420 100.0
(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
IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:
2013 and prior $ 12,179 4.1 $ 3,070 4.1 6.66 %
2014 3,418 1.2 934 1.2 2.36 %
2015 5,752 2.0 1,546 2.0 1.88 %
2016 9,272 3.2 2,496 3.3 2.44 %
2017 9,045 3.1 2,401 3.2 3.02 %
2018 9,841 3.3 2,525 3.3 3.70 %
2019 18,254 6.2 4,647 6.1 2.21 %
2020 61,353 20.9 15,575 20.6 0.94 %
2021 87,086 29.6 22,183 29.3 0.84 %
2022 67,714 23.0 17,697 23.4 0.43 %
2023 10,330 3.5 2,696 3.6 0.02 %
Total $ 294,244 100.0 $ 75,770 100.0 1.65 %
(1)Represents the ending percentage of loans in default.
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Table of Contents The IIF and RIF for ourU.S. primary mortgage insurance business by policy year were as follows atDecember 31, 2022 : IIF RIF Delinquency Amount % Amount % Rate (1) Policy year: 2013 and prior$ 12,931 4.4$ 3,222 4.3 7.07 % 2014 3,696 1.3 1,012 1.3 2.61 % 2015 6,236 2.1 1,680 2.2 2.08 % 2016 10,225 3.5 2,744 3.6 2.66 % 2017 9,508 3.2 2,521 3.3 3.06 % 2018 10,260 3.5 2,625 3.5 4.11 % 2019 19,096 6.5 4,840 6.4 2.36 % 2020 65,141 22.0 16,414 21.7 1.20 % 2021 89,621 30.3 22,740 30.0 0.95 % 2022 68,937 23.3 18,008 23.8 0.20 % Total$ 295,651 100.0$ 75,806 100.0 1.77 %
(1)Represents the ending percentage of loans in default.
The following tables provide supplemental disclosures on risk in force for ourU.S. primary mortgage insurance business atMarch 31, 2023 andDecember 31, 2022 : March 31, 2023 December 31, 2022 Amount % Amount % Credit quality (FICO): >=740$ 46,788 61.8 $ 46,812 61.8 680-739 25,016 33.0 24,945 32.9 620-679 3,699 4.9 3,772 5.0 <620 267 0.4 277 0.4 Total$ 75,770 100.0 $ 75,806 100.0 Weighted average FICO score 748 750 Loan-to-value (LTV): 95.01% and above$ 7,215 9.5 $ 7,289 9.6 90.01% to 95.00% 44,066 58.2 43,681 57.6 85.01% to 90.00% 20,665 27.3 20,851 27.5 85.00% and below 3,824 5.0 3,985 5.3 Total$ 75,770 100.0 $ 75,806 100.0 Weighted average LTV 92.9 % 92.8 % Total RIF, net of external reinsurance$ 57,001 $ 57,151 March 31, 2023 December 31, 2022 Amount % Amount % Total RIF by State: California $ 6,369 8.4 $ 6,341 8.4 Texas 6,179 8.2 6,151 8.1 Florida 3,225 4.3 3,268 4.3 North Carolina 3,191 4.2 3,160 4.2 Georgia 3,167 4.2 3,169 4.2 Illinois 3,054 4.0 3,081 4.1 Minnesota 2,994 4.0 3,003 4.0 Massachusetts 2,822 3.7 2,809 3.7 Virginia 2,634 3.5 2,656 3.5 Michigan 2,626 3.5 2,618 3.5 Other 39,509 52.1 39,550 52.2 Total$ 75,770 100.0 $ 75,806 100.0
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 Three Months Ended
claim count) March 31,
2023 2022
Roll-forward of insured loans in default:
Beginning delinquent number of loans 20,567 27,645
New notices 9,476 8,835
Cures (10,853) (12,030)
Paid claims (215) (180)
Ending delinquent number of loans (1) 18,975 24,270
Ending number of policies in force (1) 1,147,081 1,159,020
Delinquency rate (1) 1.65 % 2.09 %
Losses:
Number of claims paid 215 180
Total paid claims $ 7,185 $ 6,016
Average per claim $ 33.4 $ 33.4
Severity (2) 81.8 % 78.1 %
Average case reserve per default (1) $ 23.0 $ 28.4
(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 6.9 to 1 at March 31, 2023 , compared to 7.2 to 1 at
December 31, 2022 .
ARCH CAPITAL 49 2023 FIRST QUARTER FORM 10-Q
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Table of Contents Shareholders' Equity and Book Value per Share
The following table presents the calculation of book value per share:
March 31 ,
2023 2022
Total shareholders' equity available to Arch $ 13,988 $ 12,910
Less preferred shareholders' equity 830 830
Common shareholders' equity available to Arch $ 13,158
$ 12,080 Common shares and common share equivalents outstanding, net of treasury shares (1) 372.2 370.3 Book value per share $ 35.35 $ 32.62 (1)Excludes the effects of 13.3 million and 14.4 million stock options and 0.6 million and 0.6 million restricted stock units outstanding atMarch 31, 2023 andDecember 31, 2022 , respectively.
LIQUIDITY
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations.
Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally,Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares. For the three months endedMarch 31, 2023 ,Arch Capital received dividends of$55 million fromArch Reinsurance Ltd. ("Arch Re Bermuda"), ourBermuda based reinsurer and insurer which can pay approximately$3.7 billion toArch Capital during the remainder of 2023 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 foreseeable 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.
Cash Flows
The following table summarizes our cash flows from operating, investing and
financing activities:
Three Months Ended
March 31,
2023 2022
Total cash provided by (used for):
Operating activities $ 963 $ 552
Investing activities (996) (313)
Financing activities (30) (233)
Effects of exchange rate changes on foreign currency cash and
restricted cash
5 (4) Increase (decrease) in cash and restricted cash $
(58) $ 2
•Cash provided by operating activities for the three months ended
primarily reflected a higher level of premiums collected than in the 2022
period.
•Cash used for investing activities for the three months endedMarch 31, 2023 was higher than in the 2022 period. Activity for the three months endedMarch 31, 2023 reflected higher net purchases of fixed maturity investments than in the 2022 period.
•Cash used for financing activities for the three months ended
reflected no repurchases under our share repurchase program while the 2022
period included
CAPITAL RESOURCES
The following table provides an analysis of our capital structure:
March 31, December 31,
2023 2022
Senior notes $ 2,726 $ 2,725
Shareholders' equity available to Arch:
Series F non-cumulative preferred shares
Series G non-cumulative preferred shares 500
500 Common shareholders' equity 13,158 12,080 Total$ 13,988 $ 12,910 Total capital available to Arch$ 16,714 $ 15,635 Debt to total capital (%) 16.3 17.4 Preferred to total capital (%) 5.0 5.3 Debt and preferred to total capital (%) 21.3 22.7 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
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Table of Contents 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 with an estimated PMIER sufficiency ratio of 248% atMarch 31, 2023 , compared to 236% atDecember 31, 2022 .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. GUARANTOR INFORMATION The below table provides a description of our senior notes payable atMarch 31, 2023 : Interest Principal Carrying Issuer/Due (Fixed) Amount AmountArch Capital : May 1, 2034 7.350 %$ 300 $ 298 June 30, 2050 3.635 % 1,000 989 Arch-U.S.: Nov. 1, 2043 (1) 5.144 % 500 495 Arch Finance: Dec. 15, 2026 (1) 4.011 % 500 498 Dec. 15, 2046 (1) 5.031 % 450 446 Total$ 2,750 $ 2,726
(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-
March 31, 2023
Arch Capital Arch-U.S.
Assets
Total investments $ 9 $ 79
Cash 10 8
Investment in operating affiliates 5 -
Due from subsidiaries and affiliates 2 -
Other assets 18 35
Total assets $ 44 $ 122
Liabilities
Senior notes 1,287 495
Due to subsidiaries and affiliates - 1,004
Other liabilities 42 42
Total liabilities $ 1,329 $ 1,541
Non-cumulative preferred shares $ 830 -
December 31, 2022
Arch Capital Arch-U.S.
Assets
Total investments $ 7 $ 79
Cash 11 10
Investment in operating affiliates 5 -
Due from subsidiaries and affiliates 2 -
Other assets 18 30
Total assets $ 43 $ 119
Liabilities
Senior notes 1,287 495
Due to subsidiaries and affiliates - 991
Other liabilities 37 37
Total liabilities $ 1,324 $ 1,523
Non-cumulative preferred shares $ 830 -
Three Months Ended
March 31, 2023
Arch Capital Arch-U.S.
Revenues
Net investment income $ 1 $ 1
Total revenues 1 1
Expenses
Corporate expenses 28 4
Interest expense 15 19
Total expenses 43 23
Income (loss) before income taxes and income
(loss) from operating affiliates (42) (22)
Income tax (expense) benefit - 6
Net income available to Arch (42) (16)
Preferred dividends (10) -
Net income (loss) available to Arch common
shareholders $ (52) $ (16)
ARCH CAPITAL 51 2023 FIRST QUARTER FORM 10-Q
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Table of Contents
Year Ended
December 31, 2022
Arch Capital Arch-U.S.
Revenues
Net investment income 2 1
Equity in net income (loss) of investments
accounted for using the equity method - 10
Total revenues 2 11
Expenses
Corporate expenses 86 13
Interest expense 59 48
Total expenses 145 61
Income (loss) before income taxes and income
(loss) from operating affiliates (143) (50)
Income tax (expense) benefit - 10
Income (loss) from operating affiliates (1) -
Net income available to Arch (144) (40)
Preferred dividends (41) -
Net income (loss) available to Arch common
shareholders $ (185) $ (40)
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 ofApril 1, 2023 , our modeled peak zone catastrophe exposure was a windstorm affecting theNortheastern U.S. regions, with a net probable maximum pre-tax loss of$1.07 billion , followed by windstorms affecting theGulf of Mexico and the Florida Tri-County regions with net probable maximum pre-tax losses of$1.07 billion and$1.05 billion , 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 ofApril 1, 2023 , our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 64% 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 exposure estimated as ofApril 1, 2023 , our modeled RDS loss was approximately 13% 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
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Table of Contents 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 2022 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 ofMarch 31, 2023 . 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 atMarch 31, 2023 that affect the quantitative and qualitative disclosures presented in our 2022 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 +100March 31, 2023 Total fair value$ 28.6 $ 28.2 $ 27.8 $ 27.4 $ 27.0 Change from base 2.9 % 1.4 % (1.4) % (2.8) % Change in unrealized value$ 0.8 $ 0.4 $ (0.4) $ (0.8) December 31, 2022 Total fair value$ 27.2 $ 26.8 $ 26.4 $ 26.0 $ 25.7 Change from base 2.9 % 1.4 % (1.4) % (2.7) % Change in unrealized value$ 0.8 $ 0.4 $ (0.4) $ (0.7) 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. 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 +100 March 31, 2023 Total fair value$ 29.3 $ 28.5 $ 27.8 $ 27.1 $ 26.4 Change from base 5.2 % 2.6 % (2.6) % (5.2) % Change in unrealized value$ 1.4 $ 0.7 $ (0.7) $ (1.4) December 31, 2022 Total fair value$ 27.5 $ 26.9 $ 26.4 $ 25.9 $ 25.3 Change from base 4.1 % 2.0 % (2.0) % (4.1) % Change in unrealized value$ 1.1 $ 0.5
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
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Table of Contents recent data points are generally given more weight. As ofMarch 31, 2023 , our portfolio's 95th percentile VaR was estimated to be 8.8%, compared to an estimated 8.8% atDecember 31, 2022 . In periods where the volatility of the risk factors mapped to our portfolio's exposures is higher due to market conditions, the resulting VaR is higher than in other periods.Equity Securities . AtMarch 31, 2023 andDecember 31, 2022 , the fair value of our investments in equity securities and certain investments accounted for using the equity method with underlying equity strategies totaled$783 million and$791 million , 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$78 million and$79 million atMarch 31, 2023 andDecember 31, 2022 , respectively, and would have decreased book value per share by approximately$0.21 and$0.21 , respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately$78 million and$79 million atMarch 31, 2023 andDecember 31, 2022 , respectively, and would have increased book value per share by approximately$0.21 and$0.21 , respectively. Investment-Related Derivatives. AtMarch 31, 2023 , the notional value of all derivative instruments (excluding foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was$3.4 billion , compared to$6.6 billion atDecember 31, 2022 . If the underlying exposure of each investment-related derivative held atMarch 31, 2023 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately$34 million , and a decrease in book value per share of approximately$0.09 per share, compared to$66 million and$0.18 per share, respectively, on investment-related derivatives held atDecember 31, 2022 . If the underlying exposure of each investment-related derivative held atMarch 31, 2023 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately$34 million , and an increase in book value per share of approximately$0.09 per share, compared to$66 million and$0.18 per share, respectively, on investment-related derivatives held atDecember 31, 2022 . 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."
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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