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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | September 30, 2024 | |
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Or |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-16209
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
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Bermuda | 98-0374481 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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Waterloo House, Ground Floor | |
100 Pitts Bay Road, | Pembroke | HM 08, | Bermuda | (441) | 278-9250 |
(Address of principal executive offices) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class | | Trading Symbol (s) | | Name of each exchange on which registered |
Common shares, $0.0011 par value per share | | ACGL | | NASDAQ | Stock Market |
Depositary shares, each representing a 1/1000th interest in a 5.45% Series F preferred share
| | ACGLO | | NASDAQ | Stock Market |
Depositary shares, each representing a 1/1000th interest in a 4.55% Series G preferred share | | ACGLN | | NASDAQ | Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☑ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2024, there were 376,241,879 common shares, $0.0011 par value per share, of the registrant outstanding.
ARCH CAPITAL GROUP LTD.
INDEX TO FORM 10-Q
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Item 1A. | | | |
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Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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ARCH CAPITAL | 1 | 2024 THIRD QUARTER FORM 10-Q |
PART I. FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our 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 report are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this report and in our periodic reports filed with the Securities and Exchange Commission (“SEC”), and include:
•our ability to successfully implement our business strategy across underwriting cycles during “soft” as well as “hard” markets;
•acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;
•our ability to consummate acquisitions and integrate the business we have acquired or may acquire into our existing operations;
•our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;
•general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets in which we operate;
•competition, including increased competition, on the basis of pricing, capacity (including alternative sources of capital), coverage terms, or other factors;
•developments in the world’s financial and capital markets and our access to such markets;
•our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;
•the loss and addition of key personnel;
•material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;
•accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, deferred income tax assets, contingencies and litigation, and any determination to use the deposit method of accounting;
•greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance, reinsurance and mortgage subsidiaries;
•the adequacy of the Company’s loss reserves;
•severity and/or frequency of losses;
•greater frequency or severity of unpredictable natural and man-made catastrophic events;
•claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our results of operations;
•the effect of climate change on our business;
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ARCH CAPITAL | 2 | 2024 THIRD QUARTER FORM 10-Q |
•the effect of contagious diseases on our business;
•acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
•availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;
•the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;
•the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;
•changes in general economic conditions, including sovereign debt concerns or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations;
•the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies;
•changes in accounting principles or policies or in our application of such accounting principles or policies;
•changes in the political environment of certain countries in which we operate or underwrite business;
•an incident, disruption in operations or other cyber event caused by cyber attacks, the use of artificial intelligence technologies or other technology on our systems or those of our business partners and service providers, which could negatively impact our business and/or expose us to litigation;
•statutory or regulatory developments, including as to tax matters and insurance and other regulatory matters such as the adoption of legislation that affects Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the implementation of the Organization for Economic Cooperation and Development (“OECD”) Pillar I and Pillar II initiatives and the enactment of Bermuda corporate income tax; and
•the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K for the year ended December 31, 2023, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our 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 report or as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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ARCH CAPITAL | 3 | 2024 THIRD QUARTER FORM 10-Q |
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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September 30, 2024 and December 31, 2023 (unaudited) | | |
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For the three and nine month periods ended September 30, 2024 and 2023 (unaudited) | | |
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For the three and nine month periods ended September 30, 2024 and 2023 (unaudited) | | |
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For the three and nine month periods ended September 30, 2024 and 2023 (unaudited) | | |
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For the nine month periods ended September 30, 2024 and 2023 (unaudited) | | |
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Notes to Consolidated Financial Statements (unaudited) | | |
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ARCH CAPITAL | 4 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars and shares in millions)
| | | | | | | | | | | |
| (Unaudited) |
| September 30, 2024 | | December 31, 2023 |
Assets | | | |
Investments: | | | |
Fixed maturities available for sale, at fair value (amortized cost: $28,466 and $24,131; net of allowance for credit losses: $19 and $28) | $ | 28,434 | | | $ | 23,553 | |
Short-term investments available for sale, at fair value (amortized cost: $3,337 and $2,064; net of allowance for credit losses: $0 and $0) | 3,341 | | | 2,063 | |
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Equity securities, at fair value | 1,623 | | | 1,186 | |
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Other investments, at fair value | 3,261 | | | 2,488 | |
Investments accounted for using the equity method | 5,244 | | | 4,566 | |
Total investments | 41,903 | | | 33,856 | |
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Cash | 1,025 | | | 917 | |
Accrued investment income | 292 | | | 236 | |
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Investment in operating affiliates | 1,236 | | | 1,119 | |
Premiums receivable (net of allowance for credit losses: $52 and $34) | 6,364 | | | 4,644 | |
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $17 and $21) | 7,948 | | | 7,064 | |
Contractholder receivables (net of allowance for credit losses: $4 and $3) | 2,078 | | | 1,814 | |
Ceded unearned premiums | 2,935 | | | 2,170 | |
Deferred acquisition costs | 1,744 | | | 1,531 | |
Receivable for securities sold | 790 | | | 63 | |
Goodwill and intangible assets | 1,486 | | | 731 | |
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Other assets | 5,855 | | | 4,761 | |
Total assets | $ | 73,656 | | | $ | 58,906 | |
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Liabilities | | | |
Reserve for losses and loss adjustment expenses | $ | 28,679 | | | $ | 22,752 | |
Unearned premiums | 11,238 | | | 8,808 | |
Reinsurance balances payable | 2,586 | | | 2,000 | |
Contractholder payables | 2,082 | | | 1,817 | |
Collateral held for insured obligations | 268 | | | 259 | |
Senior notes | 2,727 | | | 2,726 | |
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Payable for securities purchased | 967 | | | 247 | |
Other liabilities | 2,835 | | | 1,942 | |
Total liabilities | 51,382 | | | 40,551 | |
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Commitments and contingencies (refer to Note 11) | | | |
Redeemable noncontrolling interests | — | | | 2 | |
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Shareholders' Equity | | | |
Non-cumulative preferred shares | 830 | | | 830 | |
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Common shares ($0.0011 par, shares issued: 595.2 and 591.9) | 1 | | | 1 | |
Additional paid-in capital | 2,465 | | | 2,327 | |
Retained earnings | 23,642 | | | 20,295 | |
Accumulated other comprehensive income (loss), net of deferred income tax | (200) | | | (676) | |
Common shares held in treasury, at cost (shares: 219.0 and 218.5) | (4,464) | | | (4,424) | |
Total shareholders' equity available to Arch | 22,274 | | | 18,353 | |
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Total liabilities, noncontrolling interests and shareholders' equity | $ | 73,656 | | | $ | 58,906 | |
See Notes to Consolidated Financial Statements
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ARCH CAPITAL | 5 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars and shares in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenues | | | | | | | |
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Net premiums earned | $ | 3,970 | | | $ | 3,248 | | | 10,957 | | | 9,096 | |
Net investment income | 399 | | | 269 | | | 1,090 | | | 710 | |
Net realized gains (losses) | 169 | | | (248) | | | 358 | | | (354) | |
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Other underwriting income | 5 | | | 5 | | | 20 | | | 21 | |
Equity in net income (loss) of investment funds accounted for using the equity method | 171 | | | 59 | | | 437 | | | 176 | |
Other income (loss) | 8 | | | (4) | | | 30 | | | 10 | |
Total revenues | 4,722 | | | 3,329 | | | 12,892 | | | 9,659 | |
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Expenses | | | | | | | |
Losses and loss adjustment expenses | 2,403 | | | 1,647 | | | 5,958 | | | 4,609 | |
Acquisition expenses | 681 | | | 575 | | | 1,921 | | | 1,669 | |
Other operating expenses | 353 | | | 310 | | | 1,062 | | | 942 | |
Corporate expenses | 49 | | | 20 | | | 143 | | | 71 | |
Amortization of intangible assets | 88 | | | 24 | | | 136 | | | 71 | |
Interest expense | 35 | | | 34 | | | 104 | | | 99 | |
Net foreign exchange (gains) losses | 63 | | | (22) | | | 31 | | | 1 | |
Total expenses | 3,672 | | | 2,588 | | | 9,355 | | | 7,462 | |
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Income (loss) before income taxes and income (loss) from operating affiliates | 1,050 | | | 741 | | | 3,537 | | | 2,197 | |
Income tax (expense) benefit | (98) | | | (72) | | | (296) | | | (203) | |
Income (loss) from operating affiliates | 36 | | | 54 | | | 136 | | | 115 | |
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Net income (loss) available to Arch | 988 | | | 723 | | | 3,377 | | | 2,109 | |
Preferred dividends | (10) | | | (10) | | | (30) | | | (30) | |
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Net income (loss) available to Arch common shareholders | $ | 978 | | | $ | 713 | | | $ | 3,347 | | | $ | 2,079 | |
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Net income per common share and common share equivalent | | | | | | | |
Basic | $ | 2.62 | | | $ | 1.93 | | | $ | 8.99 | | | $ | 5.64 | |
Diluted | $ | 2.56 | | | $ | 1.88 | | | $ | 8.78 | | | $ | 5.50 | |
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Weighted average common shares and common share equivalents outstanding | | | | | | | |
Basic | 373.2 | | | 369.2 | | | 372.3 | | | 368.4 | |
Diluted | 382.3 | | | 379.4 | | | 381.3 | | | 378.3 | |
See Notes to Consolidated Financial Statements
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ARCH CAPITAL | 6 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in millions)
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| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Comprehensive Income | | | | | | | |
Net income (loss) | $ | 988 | | | $ | 723 | | | $ | 3,377 | | | $ | 2,109 | |
Other comprehensive income (loss), net of deferred income tax | | | | | | | |
Unrealized appreciation (decline) in value of available-for-sale investments: | | | | | | | |
Unrealized holding gains (losses) arising during period | 645 | | | (190) | | | 478 | | | (118) | |
Portion of other-than-temporary impairment losses recognized in other comprehensive income | — | | | — | | | — | | | — | |
Reclassification of net realized (gains) losses, included in net income (loss) | (60) | | | 96 | | | 22 | | | 344 | |
Foreign currency translation adjustments | 25 | | | (40) | | | (24) | | | (33) | |
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Comprehensive income (loss) available to Arch | $ | 1,598 | | | $ | 589 | | | $ | 3,853 | | | $ | 2,302 | |
See Notes to Consolidated Financial Statements
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ARCH CAPITAL | 7 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in millions)
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| (Unaudited) | | (Unaudited) |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Non-cumulative preferred shares | | | | | | | |
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Balance at beginning and end of period | $ | 830 | | | $ | 830 | | | $ | 830 | | | $ | 830 | |
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Common shares | | | | | | | |
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Balance at beginning and end of period | 1 | | | 1 | | | 1 | | | 1 | |
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Additional paid-in capital | | | | | | | |
Balance at beginning of period | 2,443 | | | 2,278 | | | 2,327 | | | 2,211 | |
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Amortization of share-based compensation | 16 | | | 15 | | | 100 | | | 73 | |
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Other changes | 6 | | | 4 | | | 38 | | | 13 | |
Balance at end of period | 2,465 | | | 2,297 | | | 2,465 | | | 2,297 | |
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Retained earnings | | | | | | | |
Balance at beginning of period | 22,664 | | | 17,258 | | | 20,295 | | | 15,892 | |
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Net income (loss) | 988 | | | 723 | | | 3,377 | | | 2,109 | |
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Preferred share dividends | (10) | | | (10) | | | (30) | | | (30) | |
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Balance at end of period | 23,642 | | | 17,971 | | | 23,642 | | | 17,971 | |
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Accumulated other comprehensive income (loss), net of deferred income tax | | | | | | | |
Balance at beginning of period | (810) | | | (1,319) | | | (676) | | | (1,646) | |
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | | | | | | | |
Balance at beginning of period | (650) | | | (1,192) | | | (565) | | | (1,512) | |
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Unrealized holding gains (losses) during period, net of reclassification adjustment | 585 | | | (94) | | | 500 | | | 226 | |
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Balance at end of period | (65) | | | (1,286) | | | (65) | | | (1,286) | |
Foreign currency translation adjustments, net of deferred income tax: | | | | | | | |
Balance at beginning of period | (160) | | | (127) | | | (111) | | | (134) | |
Foreign currency translation adjustments | 25 | | | (40) | | | (24) | | | (33) | |
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Balance at end of period | (135) | | | (167) | | | (135) | | | (167) | |
Balance at end of period | (200) | | | (1,453) | | | (200) | | | (1,453) | |
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Common shares held in treasury, at cost | | | | | | | |
Balance at beginning of period | (4,463) | | | (4,407) | | | (4,424) | | | (4,378) | |
Shares repurchased for treasury | (1) | | | — | | | (40) | | | (29) | |
Balance at end of period | (4,464) | | | (4,407) | | | (4,464) | | | (4,407) | |
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Total shareholders’ equity | $ | 22,274 | | | $ | 15,239 | | | $ | 22,274 | | | $ | 15,239 | |
See Notes to Consolidated Financial Statements
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ARCH CAPITAL | 8 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
| | | | | | | | | | | |
| (Unaudited) |
| Nine Months Ended |
| September 30, |
| 2024 | | 2023 |
Operating Activities | | | |
Net income (loss) | $ | 3,377 | | | $ | 2,109 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Net realized (gains) losses | (361) | | | 367 | |
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Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss | (336) | | | (104) | |
Amortization of intangible assets | 136 | | | 71 | |
Share-based compensation | 100 | | | 73 | |
Changes in: | | | |
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 2,447 | | | 1,604 | |
Unearned premiums, net of ceded unearned premiums | 956 | | | 1,111 | |
Premiums receivable | (1,504) | | | (1,333) | |
Deferred acquisition costs | (166) | | | (190) | |
Reinsurance balances payable | 589 | | | 692 | |
Deferred income tax assets, net | 61 | | | 40 | |
Other items, net | (199) | | | (356) | |
Net cash provided by operating activities | 5,100 | | | 4,084 | |
Investing Activities | | | |
Purchases of fixed maturity investments | (21,559) | | | (13,024) | |
Purchases of equity securities | (932) | | | (176) | |
Purchases of other investments | (1,898) | | | (1,112) | |
Proceeds from sales of fixed maturity investments | 16,447 | | | 9,655 | |
Proceeds from sales of equity securities | 673 | | | 216 | |
Proceeds from sales, redemptions and maturities of other investments | 1,024 | | | 345 | |
Proceeds from redemptions and maturities of fixed maturity investments | 1,270 | | | 589 | |
Net settlements of derivative instruments | 127 | | | (69) | |
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Net (purchases) sales of short-term investments | (818) | | | (323) | |
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Acquisitions, net of cash | 852 | | | — | |
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Purchases of fixed assets | (38) | | | (37) | |
Other | (29) | | | — | |
Net cash used for investing activities | (4,881) | | | (3,936) | |
Financing Activities | | | |
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Proceeds from common shares issued, net | (2) | | | 5 | |
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Change in third party investment in redeemable noncontrolling interests | — | | | (22) | |
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Other | (3) | | | (5) | |
Preferred dividends paid | (30) | | | (30) | |
Net cash used for financing activities | (35) | | | (52) | |
Effects of exchange rate changes on foreign currency cash and restricted cash | 30 | | | (14) | |
Increase (decrease) in cash and restricted cash | 214 | | | 82 | |
Cash and restricted cash, beginning of year | 1,498 | | | 1,273 | |
Cash and restricted cash, end of period | $ | 1,712 | | | $ | 1,355 | |
Income taxes paid (received) | 221 | | | 127 | |
Interest paid | 63 | | | 63 | |
See Notes to Consolidated Financial Statements
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ARCH CAPITAL | 9 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Recent Accounting Pronouncements
General
Arch Capital Group Ltd. (“Arch Capital”) is a publicly listed Bermuda exempted company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries.
Basis of Presentation
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. All amounts are in millions, except per share amounts, unless otherwise noted.
Recent Accounting Pronouncements
For information regarding additional accounting standards that the Company has not yet adopted, see note 3(t), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2023 Form 10-K.
2. Acquisitions
On August 1, 2024, the Company completed the acquisition of Allianz’s U.S Middle Market Property & Casualty Insurance and U.S. Entertainment Property and Casualty Insurance Business. This business is written by Fireman’s Fund Insurance Company, an affiliate of Allianz (“MCE”), and its subsidiaries (together with MCE, collectively, the “Business Entities”), in each case, relating to relevant policies with accident years 2016 and onwards (collectively, the “Business”), as well as certain assets of Allianz and its affiliates related to the Business. In connection with the acquisition of the Business, the Company also entered into certain reinsurance agreements relating to the Business and the Business Entities and other agreements providing for administration and other services for the Business Entities by the Company for the applicable policies being reinsured following the closing. The acquisition of the Business is an important part of the Company’s growth strategy, and provides a ballast to our existing insurance business. It further enhances the Company’s capabilities in the U.S. middle markets and represents an attractive way to enter a new niche entertainment insurance market.
Aggregate cash consideration for the transaction was $450 million. Direct costs related to the acquisition are immaterial, and were expensed as incurred. These include one-time costs that are directly attributable to third party consulting fees and other professional and legal fees related to the acquisition. Such costs are included within ‘corporate expenses’ in the consolidated statement of income. The Business acquired is included within the Company’s insurance segment beginning from the acquisition date, August 1, 2024.
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ARCH CAPITAL | 10 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Company’s allocation of the purchase price to the acquired assets and liabilities assumed based on estimated fair values on August 1, 2024. The fair value of the assets and liabilities are preliminary and may change with offsetting adjustments to goodwill. The Company may make further adjustments to its purchase price allocation through the end of the permissible one-year measurement period.
| | | | | | | | | | | | | | |
| | Total | | Useful Life |
Purchase price | | | |
| Cash paid (a) | $ | 450 | | | |
| | | | |
Assets Acquired | | | |
| Cash and investments, at fair value | $ | 2,332 | | | |
| Premiums receivable | 290 | | |
| Intangible asset -- distribution relationships | 220 | | 10 years |
| Intangible asset -- value of business acquired | 163 | | 1-2 years |
| Intangible asset -- other (1) | 178 | | 5-7 years |
| Other assets acquired | 158 | | |
| Total assets acquired | $ | 3,341 | | | |
| | | | |
Liabilities Acquired | | | |
| Reserves for losses and loss adjustment expenses | $ | 2,404 | | | |
| Unearned premiums | 632 | | |
| Other liabilities acquired | 121 | | |
| Total liabilities acquired | 3,157 | | | |
| Identifiable net assets acquired (b) | $ | 184 | | | |
Goodwill (a) - (b) | $ | 266 | | | |
(1) Includes $128 million related to the net fair value adjustment to reserves for loss and loss adjustment expenses on August 1, 2024.
The Company recognized goodwill of $266 million that is primarily attributed to the expanded presence and long-term growth opportunities in the insurance market provided by this strategic acquisition. Approximately $568 million of the acquired goodwill and intangibles is expected to be deductible for income tax purposes. At the date of the acquisition, the Company established a net deferred tax asset of $23 million related to the estimated fair value of reserves for losses and loss adjustment expenses and unearned premiums.
Intangible assets resulting from the acquisition are amortized as part of ‘amortization of intangible assets’ in the Company’s consolidated statements of income. The significant fair value adjustments and related future amortization are as follows:
Value of business acquired (“VOBA”)— which represents the present value of the expected underwriting profit within the unearned premium liability, less costs to service the related policies and a risk premium. The fair value of VOBA was determined after taking into consideration certain key assumptions, including the estimated cost of capital, investment yield, loss ratio and related expenses;
Reserves for losses and loss adjustment expenses—to reflect a decrease related to the present value of the reserve for losses and loss adjustment expenses based on the estimated payout patterns, partially offset by an increase in losses and loss adjustment expenses related to the estimated market based risk margin. The risk margin represents the estimated costs of capital required by a market participant to assume the losses and loss adjustment expenses. The fair value of the reserve for losses and loss adjustment expenses was determined after taking into consideration certain key assumptions, including the estimated cost of capital, and investment yield.
Distribution relationships—the value of the distribution relationships was determined after taking into consideration certain key assumptions, including the estimated cost of capital, investment yield, retention rates, loss ratios, related expenses and effective tax rates that would impact the expected cash flows from Business policies written on a go forward basis.
The results of the acquired Business Entities have been included in the Company’s consolidated financial statements beginning as of their acquisition date. It is impracticable to provide historical supplemental pro forma financial information along with revenue and earnings subsequent to the acquisition due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete operations within the Company’s organizational structure.
3. Share Transactions
Share Repurchases
The Board of Directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. At September 30, 2024, $1.0 billion of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 31, 2024. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
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ARCH CAPITAL | 11 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income (loss) available to Arch | $ | 988 | | | $ | 723 | | | $ | 3,377 | | | $ | 2,109 | |
Preferred dividends | (10) | | | (10) | | | (30) | | | (30) | |
| | | | | | | |
Net income (loss) available to Arch common shareholders | $ | 978 | | | $ | 713 | | | $ | 3,347 | | | $ | 2,079 | |
| | | | | | | |
Denominator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average common shares and common share equivalents outstanding — basic | 373.2 | | | 369.2 | | | 372.3 | | | 368.4 | |
Effect of dilutive common share equivalents: | | | | | | | |
Nonvested restricted shares | 2.0 | | | 2.6 | | | 1.8 | | | 2.4 | |
Stock options (1) | 7.1 | | | 7.6 | | | 7.2 | | | 7.5 | |
Weighted average common shares and common share equivalents outstanding — diluted | 382.3 | | | 379.4 | | | 381.3 | | | 378.3 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | $ | 2.62 | | | $ | 1.93 | | | $ | 8.99 | | | $ | 5.64 | |
Diluted | $ | 2.56 | | | $ | 1.88 | | | $ | 8.78 | | | $ | 5.50 | |
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2024 third quarter and 2023 third quarter, the number of stock options excluded were 0.2 million and 0.3 million, respectively. For the nine months ended September 30, 2024 and 2023, the number of stock options excluded were 0.4 million and 0.5 million, respectively.
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ARCH CAPITAL | 12 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Segment Information
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 are the Company’s chief operating decision makers. The Company’s 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 reportable segments based on underwriting income or loss. The Company does not manage its assets by segment, with the exception of goodwill and intangible assets, and accordingly, investment income is not allocated to each segment.
The Company determined its 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.
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.
The Company’s reinsurance segment offers reinsurance products on a worldwide basis. Product lines of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe; and other.
The Company’s mortgage segment consists of U.S. primary mortgage insurance business written predominantly on loans sold to 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.”); reinsurance and underwriting services related to U.S. credit-risk transfer (“CRT”) business which are predominately with the GSEs and other U.S. mortgage reinsurance transactions; and international mortgage insurance and reinsurance business covering loans primarily in Australia and Europe.
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 or losses on derivative instruments, changes in the allowance for credit losses on financial assets and gains or losses realized from the 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 tax items, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares.
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ARCH CAPITAL | 13 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | | | 31 | | | | | | | (77) | |
Net premiums earned | 1,765 | | | 1,892 | | | 313 | | | | | | | 3,970 | |
Other underwriting income (loss) | — | | | 2 | | | 3 | | | | | | | 5 | |
Losses and loss adjustment expenses | (1,087) | | | (1,317) | | | 1 | | | | | | | (2,403) | |
Acquisition expenses | (308) | | | (374) | | | 1 | | | | | | | (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) | | | | | | | | | | | 8 | |
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 | | | | | | | | | | | 36 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 | % |
| | | | | | | | | | | |
Goodwill and intangible assets | $ | 1,025 | | | $ | 113 | | | $ | 348 | | | | | | | $ | 1,486 | |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| | | | | | | | |
ARCH CAPITAL | 14 | 2024 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2023 |
| Insurance | | Reinsurance | | Mortgage | | | | | | Total |
| | | | | | | | | | | |
Gross premiums written (1) | $ | 2,043 | | | $ | 2,138 | | | $ | 347 | | | | | | | $ | 4,527 | |
Premiums ceded (1) | (521) | | | (576) | | | (76) | | | | | | | (1,172) | |
Net premiums written | 1,522 | | | 1,562 | | | 271 | | | | | | | 3,355 | |
Change in unearned premiums | (110) | | | (19) | | | 22 | | | | | | | (107) | |
Net premiums earned | 1,412 | | | 1,543 | | | 293 | | | | | | | 3,248 | |
Other underwriting income (loss) | — | | | 2 | | | 3 | | | | | | | 5 | |
Losses and loss adjustment expenses | (812) | | | (870) | | | 35 | | | | | | | (1,647) | |
Acquisition expenses | (269) | | | (304) | | | (2) | | | | | | | (575) | |
Other operating expenses | (202) | | | (61) | | | (47) | | | | | | | (310) | |
Underwriting income (loss) | $ | 129 | | | $ | 310 | | | $ | 282 | | | | | | | 721 | |
| | | | | | | | | | | |
Net investment income | | | | | | | | | | | 269 | |
Net realized gains (losses) | | | | | | | | | | | (248) | |
| | | | | | | | | | | |
Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | | | | | 59 | |
Other income (loss) | | | | | | | | | | | (4) | |
Corporate expenses (2) | | | | | | | | | | | (20) | |
Transaction costs and other (2) | | | | | | | | | | | — | |
Amortization of intangible assets | | | | | | | | | | | (24) | |
Interest expense | | | | | | | | | | | (34) | |
Net foreign exchange gains (losses) | | | | | | | | | | | 22 | |
Income (loss) before income taxes and income (loss) from operating affiliates | | | | | | | | | | | 741 | |
Income tax (expense) benefit | | | | | | | | | | | (72) | |
Income (loss) from operating affiliates | | | | | | | | | | | 54 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) available to Arch | | | | | | | | | | | 723 | |
Preferred dividends | | | | | | | | | | | (10) | |
| | | | | | | | | | | |
Net income (loss) available to Arch common shareholders | | | | | | | | | | | $ | 713 | |
| | | | | | | | | | | |
Underwriting Ratios | | | | | | | | | | | |
Loss ratio | 57.5 | % | | 56.4 | % | | (12.1) | % | | | | | | 50.7 | % |
Acquisition expense ratio | 19.1 | % | | 19.7 | % | | 0.6 | % | | | | | | 17.7 | % |
Other operating expense ratio | |