Arch Capital : Third Quarter 2024 Financial Supplement

Published: 2024-10-30 18:47:17 ET ACGL

Arch Capital Group Ltd.

Waterloo House, Ground Floor

100 Pitts Bay Road

Pembroke HM 08 Bermuda

Financial Supplement

September 30, 2024

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

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

Arch Capital Group Ltd.

Investor Relations

François Morin: (441) 278-9250

Donald Watson: (914) 872-3616; [email protected]

IV.

Investment Information

Arch Capital Group Ltd. and Subsidiaries

Table of Contents

Consolidated Statements of Income

Consolidated Balance Sheets

Consolidated Statements of Changes in Shareholders' Equity

Consolidated Statements of Cash Flows

Overview

Consolidated Results

Insurance Segment Results

Reinsurance Segment Results

Mortgage Segment Results

Segment Consolidated Results

Selected Information on Losses and Loss Adjustment Expenses

Investable Asset Summary and Investment Portfolio Metrics

Composition of Net Investment Income, Yield and Total Return

Composition of Fixed Maturities

Credit Quality Distribution and Maturity Profile

Analysis of Corporate Exposures

Structured Securities

Comments on Non-GAAP Financial Measures

Operating Income Reconciliation and Annualized Operating Return on Average Common Equity Operating Income and Effective Tax Rate Calculations

Capital Structure and Share Repurchase Activity

Page

Arch Capital Group Ltd. and Subsidiaries

Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2023 is derived from or agrees to audited financial information. Unless otherwise noted, all amounts are in millions, except for per share amounts and ratio information. Amounts presented have been rounded for presentation purposes and may not reconcile due to rounding differences.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch and its subsidiaries may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.

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

attacks, the use of artificial intelligence technologies or other technology on the Company's systems or those of the Company's business partners and service providers, which could negatively impact the Company's business and/or expose the Company to litigation; and other factors identified in the Company's filings with the U.S. Securities and Exchange Commission.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company's forward-looking statements speak only as of the date of this press release or as of the date they are made, and the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights

The following table presents financial highlights:

(U.S. Dollars and shares in millions, except per share data)

Three Months Ended

Nine Months Ended

September 30,

2024

2023

Change

2024

2023

Change

Underwriting results:

Gross premiums written

5,440

4,527

20.2 %

16,755

14,152

18.4 %

Net premiums written

4,047

3,355

20.6 %

11,913

10,207

16.7 %

Net premiums earned

3,970

3,248

22.2 %

10,957

9,096

20.5 %

Underwriting income (loss) (1)

538

721

(25.4)%

2,036

1,897

7.3 %

Loss ratio

60.5 %

50.7 %

9.8

54.4 %

50.7 %

3.7

Acquisition expense ratio

17.2 %

17.7 %

(0.5)

17.5 %

18.3 %

(0.8)

Other operating expense ratio

8.9 %

9.5 %

(0.6)

9.7 %

10.4 %

(0.7)

Combined ratio

86.6 %

77.9 %

8.7

81.6 %

79.4 %

2.2

Net investment income

399

269

48.3 %

1,090

710

53.5 %

Per diluted share

1.04

0.71

46.5 %

2.86

1.88

52.1 %

Net income available to Arch common shareholders

978

713

37.2 %

3,347

2,079

61.0 %

Per diluted share

2.56

1.88

36.2 %

8.78

5.50

59.6 %

After-tax operating income available to Arch common shareholders (1)

762

876

(13.0)%

2,676

2,256

18.6 %

Per diluted share

1.99

2.31

(13.9)%

7.02

5.96

17.8 %

Comprehensive income (loss) available to Arch

1,598

589

171.3 %

3,853

2,302

67.4 %

Net cash provided by operating activities

2,018

1,970

2.4 %

5,100

4,084

24.9 %

Weighted average common shares and common share equivalents outstanding - diluted

382.3

379.4

0.8 %

381.3

378.3

0.8 %

Financial measures:

Change in book value per common share during period

8.1 %

4.3 %

3.8

21.4 %

18.4 %

3.0

Annualized net income return on average common equity

19.0 %

20.2 %

(1.2)

22.9 %

20.9 %

2.0

Annualized operating return on average common equity (1)

14.8 %

24.8 %

(10.0)

18.3 %

22.7 %

(4.4)

Total return on investments (2)

3.97 %

(0.40)%

437 bps

6.20 %

2.68 %

352 bps

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

(U.S. Dollars and shares in millions, except per share data)

Three Months Ended

Nine Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

2024

2023

2024

2023

Revenues

Net premiums earned

3,970

3,565

3,422

3,344

3,248

10,957

9,096

Net investment income

399

364

327

313

269

1,090

710

Net realized gains (losses)

169

122

189

(248)

358

(354)

Other underwriting income

Equity in net income (loss) of investment funds accounted for using the equity method

171

167

102

437

176

Other income (loss)

(4)

Total revenues

4,722

4,229

3,941

3,975

3,329

12,892

9,659

Expenses

Losses and loss adjustment expenses

(2,403)

(1,827)

(1,728)

(1,637)

(1,647)

(5,958)

(4,609)

Acquisition expenses

(681)

(633)

(607)

(643)

(575)

(1,921)

(1,669)

Other operating expenses

(353)

(346)

(363)

(359)

(310)

(1,062)

(942)

Corporate expenses

(49)

(41)

(53)

(31)

(20)

(143)

(71)

Amortization of intangible assets

(88)

(27)

(21)

(24)

(136)

(71)

Interest expense

(35)

(34)

(104)

(99)

Net foreign exchange gains (losses)

(63)

(59)

(31)

(1)

Total expenses

(3,672)

(2,908)

(2,775)

(2,787)

(2,588)

(9,355)

(7,462)

Income (loss) before income taxes and income (loss) from operating affiliates

1,050

1,321

1,166

1,188

741

3,537

2,197

Income tax (expense) benefit

(98)

(97)

(101)

1,076

(72)

(296)

(203)

Income (loss) from operating affiliates

136

115

Net income (loss)

988

1,269

1,120

2,333

723

3,377

2,109

Net (income) loss attributable to noncontrolling interests

Net income (loss) attributable to Arch

988

1,269

1,120

2,334

723

3,377

2,109

Preferred dividends

(10)

(30)

Net income (loss) available to Arch common shareholders

978

1,259

1,110

2,324

713

3,347

2,079

Comprehensive income (loss) available to Arch

1,598

1,280

975

3,111

589

3,853

2,302

Net income (loss) per common share and common share equivalent

Basic

2.62

3.38

2.99

6.29

1.93

8.99

5.64

Diluted

2.56

3.30

2.92

6.12

1.88

8.78

5.50

Weighted average common shares and common share equivalents outstanding

Basic

373.2

372.7

370.9

369.6

369.2

372.3

368.4

Diluted

382.3

381.6

380.5

379.8

379.4

381.3

378.3

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

(U.S. Dollars and shares in millions, except per share data)

September 30,

June 30,

March 31,

December 31,

September 30,

2024

2023

Assets

Investments:

Fixed maturities available for sale, at fair value

28,434

25,202

23,628

23,553

22,485

Short-term investments available for sale, at fair value

3,341

2,297

2,142

2,063

1,682

Equity securities, at fair value

1,623

1,397

1,720

1,186

894

Other investments

3,261

3,206

2,886

2,488

2,068

Investments accounted for using the equity method

5,244

4,983

4,842

4,566

4,251

Total investments

41,903

37,085

35,218

33,856

31,380

Cash

1,025

1,020

993

917

859

Accrued investment income

292

287

236

217

Investment in operating affiliates

1,236

1,143

1,174

1,119

1,000

Premiums receivable

6,364

6,268

5,765

4,644

4,937

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses

7,948

7,473

7,509

7,064

6,821

Contractholder receivables

2,078

2,016

1,907

1,814

1,805

Ceded unearned premiums

2,935

2,981

2,717

2,170

2,444

Deferred acquisition costs

1,744

1,635

1,625

1,531

1,483

Receivable for securities sold

790

116

166

Goodwill and intangible assets

1,486

725

778

731

739

Other assets

5,855

4,716

4,680

4,761

3,483

Total assets

73,656

65,465

62,768

58,906

55,227

Liabilities

Reserve for losses and loss adjustment expenses

28,679

24,466

23,705

22,752

21,836

Unearned premiums

11,238

10,452

9,971

8,808

9,074

Reinsurance balances payable

2,586

2,591

2,497

2,000

2,215

Contractholder payables

2,082

2,020

1,910

1,817

1,807

Collateral held for insured obligations

268

263

259

274

Senior notes

2,727

2,726

Payable for securities purchased

967

410

433

247

417

Other liabilities

2,835

1,871

1,905

1,942

1,637

Total liabilities

51,382

44,800

43,411

40,551

39,986

Redeemable noncontrolling interests

Shareholders' equity

Non-cumulative preferred shares

830

Common shares

Additional paid-in capital

2,465

2,443

2,401

2,327

2,297

Retained earnings

23,642

22,664

21,405

20,295

17,971

Accumulated other comprehensive income (loss), net of deferred income tax

(200)

(810)

(821)

(676)

(1,453)

Common shares held in treasury, at cost

(4,464)

(4,463)

(4,461)

(4,424)

(4,407)

Total shareholders' equity

22,274

20,665

19,355

18,353

15,239

Total liabilities, noncontrolling interests and shareholders' equity

73,656

65,465

62,768

58,906

55,227

Common shares and common share equivalents outstanding, net of treasury shares

376.2

376.0

375.3

373.3

373.1

Book value per common share (1)

57.00

52.75

49.36

46.94

38.62

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

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

(U.S. Dollars in millions)

Three Months Ended

Nine Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

2024

2023

2024

2023

Non-cumulative preferred shares

Balance at beginning and end of period

830

Common shares

Balance at beginning and end of period

Additional paid-in capital

Balance at beginning of period

2,443

2,401

2,327

2,297

2,278

2,327

2,211

Amortization of share-based compensation

100

All other

Balance at end of period

2,465

2,443

2,401

2,327

2,297

2,465

2,297

Retained earnings

Balance at beginning of period

22,664

21,405

20,295

17,971

17,258

20,295

15,892

Net income

988

1,269

1,120

2,333

723

3,377

2,109

Amounts attributable to noncontrolling interests

Preferred share dividends

(10)

(30)

Balance at end of period

23,642

22,664

21,405

20,295

17,971

23,642

17,971

Accumulated other comprehensive income (loss), net of deferred income tax

Balance at beginning of period

(810)

(821)

(676)

(1,453)

(1,319)

(676)

(1,646)

Change in unrealized appreciation (decline) in value of available-for-sale investments

585

(112)

721

(94)

500

226

Change in foreign currency translation adjustments

(16)

(33)

(40)

(24)

(33)

Balance at end of period

(200)

(810)

(821)

(676)

(1,453)

(200)

(1,453)

Common shares held in treasury, at cost

Balance at beginning of period

(4,463)

(4,461)

(4,424)

(4,407)

(4,424)

(4,378)

Shares repurchased for treasury

(1)

(2)

(37)

(17)

(40)

(29)

Balance at end of period

(4,464)

(4,463)

(4,461)

(4,424)

(4,407)

(4,464)

(4,407)

Total shareholders' equity

22,274

20,665

19,355

18,353

15,239

22,274

15,239

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. Dollars in millions)

Three Months Ended

Nine Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

2024

2023

2024

2023

Operating Activities

Net income (loss)

988

1,269

1,120

2,333

723

3,377

2,109

Adjustments to reconcile net income to net cash provided by operating activities:

Net realized (gains) losses

(165)

(144)

(52)

(185)

257

(361)

367

Equity in net (income) or loss of investment funds accounted for using the equity method and

other income or loss

(162)

(62)

(112)

(111)

(55)

(336)

(104)

Amortization of intangible assets

136

Share-based compensation

100

Changes in:

Reserve for losses and loss adjustment expenses, net

1,078

709

660

534

584

2,447

1,604

Unearned premiums, net

216

663

(83)

107

956

1,111

Premiums receivable

178

(523)

(1,159)

352

315

(1,504)

(1,333)

Deferred acquisition costs

(86)

(82)

(45)

(38)

(166)

(190)

Reinsurance balances payable

(27)

521

(237)

589

692

Deferred income tax assets, net

(1,201)

(18)

Other items, net

(108)

264

(199)

(356)

Net cash provided by operating activities

2,018

1,518

1,564

1,665

1,970

5,100

4,084

Investing Activities

Purchases of fixed maturity investments

(7,436)

(5,798)

(8,325)

(5,038)

(4,184)

(21,559)

(13,024)

Purchases of equity securities

(278)

(145)

(509)

(280)

(72)

(932)

(176)

Purchases of other investments

(529)

(875)

(494)

(1,059)

(555)

(1,898)

(1,112)

Proceeds from sales of fixed maturity investments

5,227

3,691

7,529

4,450

2,576

16,447

9,655

Proceeds from sales of equity securities

126

482

673

216

Proceeds from sales, redemptions and maturities of other investments

405

503

116

423

144

1,024

345

Proceeds from redemptions and maturities of fixed maturity investments

392

515

363

192

221

1,270

589

Net settlements of derivative instruments

115

119

(115)

127

(69)

Net (purchases) sales of short-term investments

(793)

(90)

(373)

(818)

(323)

Acquisitions, net of cash

852

Purchases of fixed assets

(12)

(11)

(15)

(11)

(38)

(37)

Other

(32)

(54)

(23)

(4)

(29)

Net cash provided by (used for) investing activities

(1,963)

(1,509)

(1,409)

(1,532)

(1,935)

(4,881)

(3,936)

Financing Activities

Proceeds from common shares issued, net

(32)

(7)

(2)

Change in third party investment in redeemable noncontrolling interests

(22)

Other

(3)

(2)

(3)

(5)

Preferred dividends paid

(10)

(30)

Net cash provided by (used for) financing activities

(7)

(42)

(17)

(7)

(35)

(52)

Effects of exchange rate changes on foreign currency cash and restricted cash

(11)

(26)

(14)

Increase (decrease) in cash and restricted cash

102

143

214

Cash and restricted cash, beginning of period

1,627

1,600

1,498

1,355

1,353

1,498

1,273

Cash and restricted cash, end of period

1,712

1,627

1,600

1,498

1,355

1,712

1,355

Income taxes paid (received)

151

(6)

140

221

127

Interest paid

Arch Capital Group Ltd. and Subsidiaries

Segment Information - Overview

The Company's Insurance, Reinsurance and Mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company's chief operating decision makers, the Chief Executive Officer and the Chief Financial Officer and Treasurer. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

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

Insurance Segment

The Company's insurance segment primarily consists of commercial insurance lines of business, with a focus on specialty insurance products. These products are mainly offered in North America, Bermuda, the United Kingdom, continental Europe and Australia. Products offered in North America include: commercial automobile; commercial multi-peril; other liability-claims made, which includes financial and professional lines; other liability- occurrence, which includes admitted and excess and surplus casualty lines; property and short-tail specialty; workers compensation; and other. Products offered across the Company's International units include: property and short-tail specialty; and casualty and other.

Reinsurance Segment

The Company's reinsurance segment offers reinsurance products on a worldwide basis. Lines of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe; and other.

Mortgage Segment

The Company's mortgage segment includes: U.S. primary mortgage insurance business written predominantly through its eligible mortgage insurers by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), each a government sponsored entity ("GSE"), and also through non GSE- approved entities (combined "Arch MI U.S."); U.S. credit-risk transfer ("CRT") business and other U.S. mortgage reinsurance transactions; and international mortgage insurance and reinsurance operations.

The Company's results also 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, changes in the allowance for credit losses on financial assets and gains and losses realized from acquisition or disposition of subsidiaries), equity in net income or loss of investment funds 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 items (which for the 2023 fourth quarter reflects the establishment of a net deferred tax asset related to the enactment of Bermuda's new corporate income tax), income or loss from operating affiliates and items related to the Company's non cumulative preferred shares.

Arch Capital Group Ltd. and Subsidiaries

Segment Information

(U.S. Dollars in millions)

Three Months Ended

September 30, 2024

Insurance

Reinsurance

Mortgage

Total

Gross premiums written (1)

2,341

2,763

339

5,440

Premiums ceded (1)

(521)

(818)

(57)

(1,393)

Net premiums written

1,820

1,945

282

4,047

Change in unearned premiums

(55)

(53)

(77)

Net premiums earned

1,765

1,892

313

3,970

Other underwriting income (loss)

Losses and loss adjustment expenses

(1,087)

(1,317)

(2,403)

Acquisition expenses

(308)

(374)

(681)

Other operating expenses

(250)

(54)

(49)

(353)

Underwriting income (loss)

120

149

269

538

Net investment income

399

Net realized gains (losses)

169

Equity in net income (loss) of investment funds accounted for using the equity method

171

Other income (loss)

Corporate expenses (2)

(19)

Transaction costs and other (2)

(30)

Amortization of intangible assets

(88)

Interest expense

(35)

Net foreign exchange gains (losses)

(63)

Income (loss) before income taxes and income (loss) from operating affiliates

1,050

Income tax (expense) benefit

(98)

Income (loss) from operating affiliates

Net income (loss) available to Arch

988

Preferred dividends

(10)

Net income (loss) available to Arch common shareholders

978

Underwriting Ratios

Loss ratio

61.6 %

69.6 %

(0.4)%

60.5 %

Acquisition expense ratio

17.4 %

19.8 %

(0.4)%

17.2 %

Other operating expense ratio

14.1 %

2.9 %

15.6 %

8.9 %

Combined ratio

93.1 %

92.3 %

14.8 %

86.6 %

Net premiums written to gross premiums written

77.7 %

70.4 %

83.2 %

74.4 %

Total investable assets

42,751

Total assets

73,656

Total liabilities

51,382

Disclaimer

Arch Capital Group Ltd. published this content on October 30, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on October 30, 2024 at 22:30:58.607.