ARCH CAPITAL GROUP LTD. 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, 2020 ("2020 Form 10-K"). In addition, readers should review "Risk Factors" set forth in Item 1A of Part I of our 2020 Form 10-K and "ITEM 1A-Risk Factors" of this Form 10-Q. Tabular amounts are inU.S. Dollars in thousands, except share amounts, unless otherwise noted.Arch Capital Group Ltd. ("Arch Capital " and, together with its subsidiaries, "Arch", "we" or "us") is a publicly listedBermuda exempted company with approximately$16.7 billion in capital atJune 30, 2021 and, through operations inBermuda ,the United States ,Europe ,Canada ,Australia andHong Kong , writes insurance, reinsurance and mortgage insurance on a worldwide basis. CURRENT OUTLOOK Our three primary areas of focus for 2021 are to continue our growth in the sectors where rates allow for returns that are substantially more than our cost of capital, to optimize our mortgage insurance book as it transitions from forbearance to recovery on its way back to normalcy in the next few quarters, and to actively manage our investments and capital to enhance our returns over the long run. From an operating perspective, the 2021 second quarter reflected the benefits of attractive pricing in almost all of our insurance markets. As a result, we currently expect the next several quarters to continue to show improved underwriting margins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix of business. Importantly, the market is showing discipline in maintaining its momentum. We believe that this time-tested strategy of protecting capital through soft markets and writing business aggressively in hard markets gives us the best chance to generate superior risk adjusted returns over time. As long as rate increases support returns above our required thresholds, we expect to continue to grow our writings. Consequently, these rate improvements have enabled us to continue to expand writings in our property casualty segments. We are now in the sixth consecutive quarter of rate increases with a weighted increase of approximately 10% this quarter, comfortably in excess of loss cost trends. Premiums increased across most lines of business and geographic areas as pricing improvements spread and, while rate increases have tapered off from previous highs in some lines, our insurance segment is seeing increases in lines that had been resistant to meaningful change. In reinsurance, strong growth was observed across most of our lines of business, but especially in our casualty and other specialty lines where strong rates increases and growth in new accounts helped increase the top line. Consistent with our insurance segment, we expect the ongoing rate improvements to be reflected in our underwriting results over the next several quarters. For ourU.S. primary mortgage operations, reported delinquencies were 3.11% atJune 30, 2021 , roughly 40% lower than it was at the end of the 2020 second quarter. Delinquencies continue to be better than our expectations at the beginning of the COVID-19 pandemic but delinquency rates remain at elevated levels, reflecting the impact of the recession and forbearance programs under the CARES Act to borrowers experiencing a hardship. Forbearance allows for mortgage payments to be suspended for up to 360 days or longer along with a suspension of foreclosures and evictions. See "Results of Operations-Mortgage Segment" for further details on our mortgage operations. In the second quarter, ourU.S. primary mortgage operations insurance in force remained steady at approximately$278 billion and$422 billion for the total mortgage segment. The refinancing boom that began last year has slowed and we expect improving persistency through remainder of the year. Outside of theU.S. , we increased our writings inAustralia as the housing market remains strong there. We like the long-term opportunity inAustralia as demonstrated by our announcement in March to acquire Westpac's LMI business. The agreement allows us to free up capital even as we build our Australian presence and diversify our earning streams at attractive risk-adjusted returns. We remain committed to providing solutions across many offerings as the marketplace evolves, including the mortgage credit risk transfer programs initiated by government sponsored enterprises, or "GSEs." In addition, we enter into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled inBermuda and issue mortgage insurance linked notes, increasing our protection for mortgage tail risk. The Bellemeade structures provide approximately$4.7 billion of aggregate reinsurance coverage atJune 30, 2021 .
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Table of Contents FINANCIAL MEASURES Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated forArch Capital's common shareholders: 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$32.02 atJune 30, 2021 , compared to$30.54 atMarch 31, 2021 and$27.62 atJune 30, 2020 . The 4.8% increase in book value per share for the 2021 second quarter and 15.9% increase in book value per share over the trailing twelve months reflected strong underwriting results and investment returns. Operating Return on Average Common Equity Operating return on average common equity ("Operating ROAE") represents annualized after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders' equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a non-GAAP financial measure as defined in Regulation G, represents net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings) equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders. See "Comment on Non-GAAP Financial Measures." Our Operating ROAE was 13.0% for the 2021 second quarter, compared to 0.6% for the 2020 second quarter, and 10.3% for the six months endedJune 30, 2021 , compared to 3.8% for the 2020 period. The higher 2021 period results, reflected strong underwriting returns and a one-time gain of$74.5 million realized during the 2021 first quarter from our acquisition of 29.5% stake in Coface, while the 2020 period reflected the impact of COVID-19 on the underwriting results. 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, excludes amounts reflected in the 'other' segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. 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): 2021 Second Quarter
1.58 % 1.80 %
2020 Second Quarter 3.72 % 6.06 %
Six Months Ended
Total return for the 2021 second quarter reflected movements in interest rates and credit spreads on our fixed income portfolio. We continue to maintain a short duration on our portfolio of 2.31 years atJune 30, 2021 . The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. AtJune 30, 2021 , the benchmark return index had an average credit quality of "Aa2" by Moody's Investors Service ("Moody's"), and an estimated duration of 3.13 years. ARCH CAPITAL 44 2021 SECOND QUARTER FORM 10-Q -------------------------------------------------------------------------------- Table of Contents The benchmark return index included weightings to the following indices: % ICE BoAML 1-5 Year A - AAA U.S. Corporate Index 13.00 % ICE BoAML 5-10 Year A - AAA U.S. Corporate Index 11.00 ICE BoAML 1-5 Year U.S. Treasury Index 11.00 MSCI ACWI Net Total Return USD Index 9.30 ICE BoAML 1-10 Year BBB U.S. Corporate Index 5.00 JPM CLOIE Investment Grade 5.00 S&P/LSTA Leveraged Loan Total Return Index 4.965 ICE BoAML U.S. Mortgage Backed Securities Index 4.00 ICE BoAML AAA US Fixed Rate CMBS 4.00 ICE BoAML 1-5 Year U.K. Gilt Index 4.00 ICE BoAML German Government 1-10 Year Index 3.50 ICE BoAML 0-3 Year U.S. Treasury Index 3.25 ICE BoAML 5-10 Year U.S. Treasury Index 3.00 ICE BoAML 1-10 Year U.S. Municipal Securities Index 3.00 Bloomberg Barclays ABS Aaa Index 3.00 ICE BoAML 1-5 Year Australia Government Index 2.75 ICE BoAML U.S. High Yield Constrained Index 2.50 ICE BoAML 1-5 Year Canada Government Index 2.00 ICE BofA CCC and Lower US High Yield Constrained Index 1.38 Bloomberg Barclays Global High Yield Index 1.38
S&P DJ Global ex-US Select Real Estate Securities Net Index 0.825 FTSE Nareit All Mortgage Capped Index Total Return USD
0.825
Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD 0.825
ICE BoAML 15+ Year Canada Government Index 0.50
Total 100.00 %
COMMENT ON NON-GAAP FINANCIAL MEASURES
Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized 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 and transaction costs and other in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company's 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 in certain funds that invest in fixed maturity securities 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 fixed maturity securities 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 ARCH CAPITAL 45 2021 SECOND QUARTER FORM 10-Q
-------------------------------------------------------------------------------- Table of Contents since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons. Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the 'other' segment. 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 (non-underwriting) segment. While these measures are presented in note 4, "Segment Information," of the notes accompanying our consolidated financial statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a subtotal before the contribution from the 'other' segment, 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. For the 'other' segment, performance is measured based on net income or loss.
Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution from the 'other' segment. ThroughJune 30, 2021 , the 'other' segment included the results of Watford Holdings Ltd. Watford Holdings Ltd. is the parent ofWatford Re Ltd. , a multi-lineBermuda reinsurance company (together with Watford Holdings Ltd., "Watford"). Pursuant to GAAP, Watford was considered a variable interest entity and we concluded that we are the primary beneficiary of Watford. As such, we consolidated the results of Watford in our consolidated financial statements throughJune 30, 2021 , although we only owned approximately 10% of Watford's common equity. Watford's own management and board of directors are responsible for its results and profitability. In addition, we do not guarantee or provide credit support for Watford. Since Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford andWatford is solely responsible for its own liabilities and commitments. Our financial exposure toWatford is limited to our investment inWatford's senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. We believe that presenting certain information excluding the 'other' segment enables investors and other users of our financial information to analyze our performance in a manner similar to how our management analyzes performance. See note 11, "Variable Interest Entities and Noncontrolling Interests," note 4, "Segment Information," and Note 16, "Subsequent Event," to our consolidated financial statements for additional information onWatford . Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis of the underwriting performance of each of our underwriting segments. Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch's investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the 'other' segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by our investment portfolio against benchmark returns during the periods. ARCH CAPITAL 46 2021 SECOND QUARTER FORM 10-Q -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table summarizes our consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders. Each line item reflects the impact of our percentage ownership ofWatford's common equity during such period. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net income available to Arch common shareholders$ 663,820 $ 288,418 $ 1,091,573 $ 422,132 Net realized (gains) losses (167,438) (406,645) (272,989) (297,281) Equity in net (income) loss of investment funds accounted for using the equity method (122,186) 65,119 (193,872) 69,328 Net foreign exchange (gains) losses 17,888 42,032 (3,444) (22,459) Transaction costs and other (1,421) 977 (147) 3,572 Income tax expense (1) 16,553 26,713 25,864 31,078 After-tax operating income available to Arch common shareholders$ 407,216 $ 16,614
Beginning common shareholders' equity$ 12,316,472 $ 10,587,244 $ 12,325,886 $ 10,717,371 Ending common shareholders' equity$ 12,706,072 $ 11,211,825 $ 12,706,072 $ 11,211,825 Average common shareholders' equity$ 12,511,272 $ 10,899,535
Annualized return on average common equity % 21.2 10.6 17.4 7.7 Annualized operating return on average common equity % 13.0 0.6 10.3 3.8 (1) Income tax expense on net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction. Segment Information We classify our businesses into three underwriting segments - insurance, reinsurance and mortgage - and two other operating segments - corporate (non-underwriting) and 'other.' Our insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to our chief operating decision makers, the Chief Executive Officer ofArch Capital , the Chief Financial Officer and Treasurer ofArch Capital and the President and Chief Underwriting Officer ofArch Capital . The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment. We determined our reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results. Insurance Segment The following tables set forth our insurance segment's underwriting results: Three Months Ended June 30, % 2021 2020 Change Gross premiums written$ 1,368,867 $ 1,030,362 32.9 Premiums ceded (405,312) (358,101) Net premiums written 963,555 672,261 43.3 Change in unearned premiums (98,128) 15,648 Net premiums earned 865,427 687,909 25.8 Losses and loss adjustment expenses (545,880) (518,203) Acquisition expenses (136,852) (107,671) Other operating expenses (133,342) (118,757) Underwriting income (loss)$ 49,353 $ (56,722) 187.0 % Point Underwriting Ratios Change Loss ratio 63.1 % 75.3 % (12.2) Acquisition expense ratio 15.8 % 15.7 % 0.1 Other operating expense ratio 15.4 % 17.3 % (1.9) Combined ratio 94.3 % 108.3 % (14.0) ARCH CAPITAL 47 2021 SECOND QUARTER FORM 10-Q
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Six Months Ended June 30,
2021 2020 % Change
Gross premiums written $ 2,784,753 $ 2,238,007 24.4
Premiums ceded (826,359) (736,998)
Net premiums written 1,958,394 1,501,009 30.5
Change in unearned premiums (273,493) (97,181)
Net premiums earned 1,684,901 1,403,828 20.0
Losses and loss adjustment expenses (1,081,627) (1,025,311)
Acquisition expenses (265,074) (215,008)
Other operating expenses (270,455) (248,406)
Underwriting income (loss) $ 67,745 $ (84,897) 179.8
% Point
Underwriting Ratios Change
Loss ratio 64.2 % 73.0 % (8.8)
Acquisition expense ratio 15.7 % 15.3 % 0.4
Other operating expense ratio 16.1 % 17.7 % (1.6)
Combined ratio 96.0 % 106.0 % (10.0)
The insurance segment consists of our insurance underwriting units which offer
specialty product lines on a worldwide basis. Product lines include:
•Construction and national accounts: primary and excess casualty coverages to
middle and large accounts in the construction industry and a wide range of
products for middle and large national accounts, specializing in loss sensitive
primary casualty insurance programs (including large deductible, self-insured
retention and retrospectively rated programs).
•Excess and surplus casualty: primary and excess casualty insurance coverages,
including middle market energy business, and contract binding, which primarily
provides casualty coverage through a network of appointed agents to small and
medium risks.
•Lenders products: collateral protection, debt cancellation and service contract
reimbursement products to banks, credit unions, automotive dealerships and
original equipment manufacturers and other specialty programs that pertain to
automotive lending and leasing.
•Professional lines: directors' and officers' liability, errors and omissions
liability, employment practices liability, fiduciary liability, crime,
professional indemnity and other financial related coverages for corporate,
private equity, venture capital, real estate investment trust, limited
partnership, financial institution and not-for-profit clients of all sizes and
medical professional and general liability insurance coverages for the
healthcare industry. The business is predominately written on a claims-made
basis.
•Programs: primarily package policies, underwriting workers' compensation and
umbrella liability business in support of desirable package programs, targeting
program managers with unique expertise and niche products offering
general liability, commercial automobile, inland marine and property business
with minimal catastrophe exposure.
•Property, energy, marine and aviation: primary and excess general property
insurance coverages, including catastrophe-exposed property coverage, for
commercial clients. Coverages for marine include hull, war, specie and
liability. Aviation and standalone terrorism are also offered.
•Travel, accident and health: specialty travel and accident and related
insurance products for individual, group travelers, travel agents and suppliers,
as well as accident and health, which provides accident, disability and medical
plan insurance coverages for employer groups, medical plan members, students and
other participant groups.
•Other: includes alternative market risks (including captive insurance
programs), excess workers' compensation and employer's liability insurance
coverages for qualified self-insured groups, associations and trusts, and
contract and commercial surety coverages, including contract bonds (payment and
performance bonds) primarily for medium and large contractors and commercial
surety bonds for Fortune 1,000 companies and smaller transaction business
programs.
Premiums Written.
The following tables set forth our insurance segment's net premiums written by
major line of business:
Three Months Ended June 30,
2021 2020
Amount % Amount %
Property, energy, marine and aviation $ 207,762 21.6 $ 159,801 23.8
Professional lines 254,961 26.5 157,899 23.5
Programs 149,373 15.5 104,930 15.6
Construction and national accounts 77,579 8.1 57,144 8.5
Excess and surplus casualty 74,346 7.7 64,703 9.6
Travel, accident and health 71,071 7.4 27,997 4.2
Lenders products 40,386 4.2 23,690 3.5
Other 88,077 9.1 76,097 11.3
Total $ 963,555 100.0 $ 672,261 100.0
2021 Second Quarter versus 2020 Period. Gross premiums written by the insurance
segment in the 2021 second quarter were 32.9% higher than in the 2020 second
quarter, while net premiums written were 43.3% higher. The higher level of net
premiums written reflected increases across most lines of business, due in part
to rate increases, new business opportunities and growth in existing accounts.
ARCH CAPITAL 48 2021 SECOND QUARTER FORM 10-Q
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Six Months Ended June 30,
2021 2020
Amount % Amount %
Property, energy, marine and aviation $ 378,260 19.3 $ 287,386 19.1
Professional Lines 493,207 25.2 327,017 21.8
Programs 307,774 15.7 217,462 14.5
Construction and national accounts 212,371 10.8 173,143 11.5
Excess and surplus casualty 159,939 8.2 130,122 8.7
Travel, accident and health 163,377 8.3 154,043 10.3
Lenders products 75,246 3.8 56,982 3.8
Other 168,220 8.6 154,854 10.3
Total $ 1,958,394 100.0 $ 1,501,009 100.0
Six Months Ended June 30, 2021 versus 2020 period. Gross premiums written by the
insurance segment for the six months ended June 30, 2021 were 24.4% higher than
in the 2020 period, while net premiums written were 30.5% higher than in the
2020 period. The increase in net premiums written reflected growth across most
lines of business, due in part to rate increases, new business opportunities and
growth in existing accounts.
Net Premiums Earned.
The following tables set forth our insurance segment's net premiums earned by
major line of business:
Three Months Ended June 30,
2021 2020
Amount % Amount %
Property, energy, marine and aviation $ 167,716 19.4 $ 120,781 17.6
Professional lines 214,098 24.7 154,812 22.5
Programs 118,974 13.7 108,464 15.8
Construction and national accounts 95,849 11.1 91,605 13.3
Excess and surplus casualty 72,899 8.4 60,966 8.9
Travel, accident and health 62,610 7.2 52,117 7.6
Lenders products 46,396 5.4 23,111 3.4
Other 86,885 10.0 76,053 11.1
Total $ 865,427 100.0 $ 687,909 100.0
Six Months Ended June 30,
2021 2020
Amount % Amount %
Property, energy, marine and aviation $ 324,975 19.3 $ 231,964 16.5
Professional Lines 413,769 24.6 306,512 21.8
Programs 231,814 13.8 217,342 15.5
Construction and national accounts 198,520 11.8 191,305 13.6
Excess and surplus casualty 148,266 8.8 126,063 9.0
Travel, accident and health 112,276 6.7 129,492 9.2
Lenders products 86,477 5.1 48,454 3.5
Other 168,804 10.0 152,696 10.9
Total $ 1,684,901 100.0 $ 1,403,828 100.0
Net premiums written are primarily earned on a pro rata basis over the terms of
the policies for all products, usually 12 months. Net premiums earned reflect
changes in net premiums written over the previous five quarters. Net premiums
earned in the 2021 second quarter were 25.8% higher than in the 2020 second
quarter. Net premiums earned for the six months ended June 30, 2021 were 20.0%
higher than in the 2020 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Current year 63.6 % 75.7 % 64.7 % 73.3 %
Prior period reserve development (0.5) % (0.4) % (0.5) % (0.3) %
Loss ratio 63.1 % 75.3 % 64.2 % 73.0 %
Current Year Loss Ratio.
2021 Second Quarter versus 2020 Period. The insurance segment's current year
loss ratio in the 2021 second quarter was 12.1 points lower than in the 2020
second quarter. The 2021 second quarter loss ratio reflected 3.2 points of
current year catastrophic activity, primarily from winter storms Uri and Viola,
compared to 12.5 points of catastrophic activity for the 2020 second quarter,
which included exposure to the COVID-19 global pandemic. The insurance segment's
current year loss ratio for the six months ended June 30, 2021 was 8.6 points
lower than in the 2020 period and reflected 4.1 points of current year
catastrophic activity, compared to 9.6 points in the 2020 period. The balance of
the change in the 2021 loss ratios resulted, in part, from changes in mix of
business and the level of large attritional losses.
ARCH CAPITAL 49 2021 SECOND QUARTER FORM 10-Q
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Prior Period Reserve Development .
The insurance segment's net favorable development was $4.0 million , or 0.5
points, for the 2021 second quarter, compared to $2.5 million , or 0.4 points,
for the 2020 second quarter, and $8.1 million , or 0.5 points for the six months
ended June 30, 2021 , compared to $3.6 million , or 0.3 points, for the 2020
period. See note 5, "Reserve for Losses and Loss Adjustment Expenses," to
our consolidated financial statements for information about the insurance
segment's prior year reserve development.
Underwriting Expenses.
2021 Second Quarter versus 2020 Period. The insurance segment's underwriting
expense ratio was 31.2% in the 2021 second quarter, compared to 33.0% in the
2020 second quarter, with the decrease primarily due to growth in net premiums
earned.
Six Months Ended June 30, 2021 versus 2020 Period. The insurance segment's
underwriting expense ratio was 31.8% six months ended June 30, 2021 , compared to
33.0% for the 2020 period, 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 June 30,
%
2021 2020 Change
Gross premiums written $ 1,358,020 $ 807,065 68.3
Premiums ceded (433,288) (241,971)
Net premiums written 924,732 565,094 63.6
Change in unearned premiums (187,708) (84,897)
Net premiums earned 737,024 480,197 53.5
Other underwriting income (loss) 1,053 (651)
Losses and loss adjustment expenses (463,823) (383,433)
Acquisition expenses (133,585) (90,522)
Other operating expenses (44,695) (38,716)
Underwriting income (loss) $ 95,974 $ (33,125) 389.7
% Point
Underwriting Ratios Change
Loss ratio 62.9 % 79.8 % (16.9)
Acquisition expense ratio 18.1 % 18.9 % (0.8)
Other operating expense ratio 6.1 % 8.1 % (2.0)
Combined ratio 87.1 % 106.8 % (19.7)
Six Months Ended June 30,
2021 2020 % Change
Gross premiums written $ 2,829,080 $ 1,929,584 46.6
Premiums ceded (905,236) (567,310)
Net premiums written 1,923,844 1,362,274 41.2
Change in unearned premiums (541,920) (338,617)
Net premiums earned 1,381,924 1,023,657 35.0
Other underwriting income (145) 1,469
Losses and loss adjustment expenses (948,693) (813,502)
Acquisition expenses (251,610) (170,128)
Other operating expenses (105,209) (84,013)
Underwriting income (loss) $ 76,267 $ (42,517) 279.4
% Point
Underwriting Ratios Change
Loss ratio 68.7 % 79.5 % (10.8)
Acquisition expense ratio 18.2 % 16.6 % 1.6
Other operating expense ratio 7.6 % 8.2 % (0.6)
Combined ratio 94.5 % 104.3 % (9.8)
The reinsurance segment consists of our reinsurance underwriting units which
offer specialty product lines on a worldwide basis. Product lines include:
•Casualty: provides coverage to ceding company clients on third party liability
and workers' compensation exposures from ceding company clients, primarily on a
treaty basis. Exposures include, among others, executive assurance, professional
liability, workers' compensation, excess and umbrella liability, excess motor
and healthcare business.
•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 to ceding company clients for proportional
motor and other lines, including surety, accident and health, workers'
compensation catastrophe, agriculture, trade credit and political risk.
•Property catastrophe: provides protection for most catastrophic losses that are
covered in the underlying policies written by reinsureds, including hurricane,
earthquake, flood, tornado, hail and fire, and coverage for other perils on a
case-by-case basis. Property catastrophe reinsurance provides coverage on an
excess of loss basis 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 both personal
lines and commercial property exposures and principally covers buildings,
structures, equipment and contents. The primary perils in this business
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include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and
earthquake. Business is assumed on both a proportional and excess of loss treaty
basis and on a facultative basis. In addition, facultative business is written
which focuses on commercial property risks on an excess of loss basis.
•Other: includes life reinsurance business on both a proportional and
non-proportional basis, casualty clash business and, in limited instances,
non-traditional business which is intended to provide insurers with risk
management solutions that complement traditional reinsurance.
Premiums Written.
The following tables set forth our reinsurance segment's net premiums written by
major line of business:
Three Months Ended June 30,
2021 2020
Amount % Amount %
Property excluding property
catastrophe $ 249,101 26.9 $ 163,639 29.0
Property catastrophe 87,642 9.5 117,676 20.8
Other specialty 296,325 32.0 117,375 20.8
Casualty 225,890 24.4 105,049 18.6
Marine and aviation 50,248 5.4 32,372 5.7
Other 15,526 1.7 28,983 5.1
Total $ 924,732 100.0 $ 565,094 100.0
2021 Second Quarter versus 2020 Period. Gross premiums written by the
reinsurance segment in the 2021 second quarter were 68.3% higher than in the
2020 second quarter, while net premiums written were 63.6% higher. The growth in
net premiums written was observed in most lines of business, primarily related
to new business opportunities in other specialty, casualty and property
excluding property catastrophe lines and the benefit of rate increases.
Six Months Ended June 30,
2021 2020
Amount % Amount %
Property excluding property catastrophe
322,563 23.7 Property catastrophe 204,849 10.6 206,768 15.2 Other Specialty 580,656 30.2 402,327 29.5 Casualty 444,146 23.1 295,929 21.7 Marine and aviation 111,886 5.8 82,157 6.0 Other 40,373 2.1 52,530 3.9 Total$ 1,923,844 100.0$ 1,362,274 100.0 Six Months EndedJune 30, 2021 versus 2020 period. Gross premiums written by the reinsurance segment for the six months endedJune 30, 2021 were 46.6% higher than in the 2020 period, while net premiums written were 41.2% higher than in the 2020 period. The increase in net premiums written reflected growth in property excluding property catastrophe, other specialty and casualty primarily due to new business and rate increases. Net Premiums Earned. The following tables set forth our reinsurance segment's net premiums earned by major line of business: Three Months Ended June 30, 2021 2020 Amount % Amount % Property excluding property catastrophe$ 202,780 27.5$ 124,019 25.8 Property catastrophe 76,167 10.3 55,226 11.5 Other specialty 211,817 28.7 123,006 25.6 Casualty 183,846 24.9 132,756 27.6 Marine and aviation 42,773 5.8 24,960 5.2 Other 19,641 2.7 20,230 4.2 Total$ 737,024 100.0$ 480,197 100.0 Six Months Ended June 30, 2021 2020 Amount % Amount %
Property excluding property catastrophe
236,671 23.1 Property catastrophe 164,178 11.9 108,226 10.6 Other Specialty 375,715 27.2 326,391 31.9 Casualty 332,877 24.1 267,827 26.2 Marine and aviation 82,881 6.0 49,818 4.9 Other 35,711 2.6 34,724 3.4 Total$ 1,381,924 100.0$ 1,023,657 100.0 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 2021 second quarter were 53.5% higher than in the 2020 second quarter, and reflect changes in net premiums written over the previous five quarters. Other Underwriting Income (Loss). Other underwriting income for the 2021 second quarter was$1.1 million , compared to a loss of$0.7 million for the 2020 second quarter, and a loss of$0.1 million for the six months endedJune 30, 2021 , compared to an income of$1.5 million for the 2020 period.
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Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Current year 65.7 % 88.2 % 72.1 % 84.6 %
Prior period reserve development (2.8) % (8.4) % (3.4) % (5.1) %
Loss ratio 62.9 % 79.8 % 68.7 % 79.5 %
Current Year Loss Ratio.
2021 Second Quarter versus 2020 Period. The reinsurance segment's current year
loss ratio in the 2021 second quarter was 22.5 points lower than in the 2020
second quarter. The 2021 second quarter loss ratio reflected 2.6 points of
current year catastrophic activity, including winter storms Uri and Viola as
well as other minor global events. The 2020 second quarter included 26.3 points
of catastrophic activity, which included exposure to the COVID-19 pandemic.
Six Months Ended June 30, 2021 versus 2020 period.The reinsurance segment's
current year loss ratio for the six months ended June 30, 2021 was 12.5 points
lower than in the 2020 period and reflected 12.9 points of current year
catastrophic activity, compared to 19.1 points in the 2020 period. The 2020
period loss ratio included exposure to the COVID-19 pandemic.
Prior Period Reserve Development .
The reinsurance segment's net favorable development was $20.5 million , or 2.8
points, for the 2021 second quarter, compared to $40.2 million , or 8.4 points,
for the 2020 second quarter, and $47.3 million , or 3.4 points, for the six
months ended June 30, 2021 , compared to $51.8 million , or 5.1 points, for the
2020 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses,"
to our consolidated financial statements for information about the reinsurance
segment's prior year reserve development.
Underwriting Expenses.
2021 Second Quarter versus 2020 Period. The underwriting expense ratio for the
reinsurance segment was 24.2% in the 2021 second quarter, compared to 27.0% in
the 2020 second quarter. Approximately 2.1 points of the difference is due to a
lower level of acquisition expenses related to favorable prior year loss reserve
development this quarter than in the 2020 second quarter. The remainder of the
decrease in the underwriting expense ratio was primarily related to growth in
net premiums earned.
Six Months Ended June 30, 2021 versus 2020 period. The underwriting expense
ratio for the reinsurance segment was 25.8% for the six months ended June 30,
2021 , compared to 24.8% for the 2020 period. The comparison of the underwriting
expense ratios also reflected changes in the mix and type of business and a
higher level of net premiums earned for the 2021 period.
Mortgage Segment
Our mortgage operations include U.S. and international mortgage insurance and
reinsurance operations as well as participation in GSE credit risk-sharing
transactions. Our mortgage group includes direct mortgage insurance in the U.S.
primarily through Arch Mortgage Insurance Company , United Guaranty Residential
Insurance Company and Arch Mortgage Guaranty Company (together, "Arch MI U.S. ");
mortgage reinsurance by Arch Reinsurance Ltd. ("Arch Re Bermuda") to mortgage
insurers on both a proportional and non-proportional basis globally; direct
mortgage insurance in Europe through Arch Insurance (EU) Designated Activity
Company ("Arch Insurance EU"); in Hong Kong through Arch MI Asia Limited ("Arch
MI Asia "); in Australia through Arch LMI Pty Ltd ("Arch LMI") and participation
in various GSE credit risk-sharing products primarily through Arch Re Bermuda.
The following tables set forth our mortgage segment's underwriting results.
Three Months Ended June 30,
2021 2020 % Change
Gross premiums written $ 391,511 $ 369,144 6.1
Premiums ceded (55,665) (44,044)
Net premiums written 335,846 325,100 3.3
Change in unearned premiums (1,625) 40,613
Net premiums earned 334,221 365,713 (8.6)
Other underwriting income 4,148 6,450
Losses and loss adjustment expenses (9,880) (224,100)
Acquisition expenses (30,117) (34,052)
Other operating expenses (48,312) (37,574)
Underwriting income $ 250,060 $ 76,437 227.1
% Point
Underwriting Ratios Change
Loss ratio 3.0 % 61.3 % (58.3)
Acquisition expense ratio 9.0 % 9.3 % (0.3)
Other operating expense ratio 14.5 % 10.3 % 4.2
Combined ratio 26.5 % 80.9 % (54.4)
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Six Months Ended June 30,
2021 2020 % Change
Gross premiums written $ 782,757 $ 738,089 6.1
Premiums ceded (111,716) (88,371)
Net premiums written 671,041 649,718 3.3
Change in unearned premiums (503) 61,021
Net premiums earned 670,538 710,739 (5.7)
Other underwriting income 11,045 11,049
Losses and loss adjustment expenses (73,569) (291,666)
Acquisition expenses (60,199) (72,588)
Other operating expenses (97,443) (83,470)
Underwriting income $ 450,372 $ 274,064 64.3
% Point
Underwriting Ratios Change
Loss ratio 11.0 % 41.0 % (30.0)
Acquisition expense ratio 9.0 % 10.2 % (1.2)
Other operating expense ratio 14.5 % 11.7 % 2.8
Combined ratio 34.5 % 62.9 % (28.4)
Premiums Written.
The following tables set forth our mortgage segment's net premiums written by
underwriting location (i.e., where the business is underwritten):
Three Months Ended June 30,
2021 2020
Amount % Amount %
Underwriting location:
United States $ 234,645 69.9 $ 261,124 80.3
Other 101,201 30.1 63,976 19.7
Total $ 335,846 100.0 $ 325,100 100.0
2021 Second Quarter versus 2020 Period. Gross premiums written by the mortgage
segment in the 2021 second quarter were 6.1% higher than in the 2020 second
quarter, while net premiums written were 3.3% higher, primarily reflecting
growth in Australian single premium mortgage insurance and the benefit of
premiums received related to the exercise of early redemption options by GSEs
for certain seasoned callable credit risk transfer contracts. This growth was
partially offset by a lower level of U.S. primary mortgage insurance in force on
monthly premium policies, which resulted from the continued high level of
refinancing activity.
Six Months Ended June 30,
2021 2020
Amount % Amount %
Underwriting location:
United States $ 482,174 71.9 $ 525,232 80.8
Other 188,867 28.1 124,486 19.2
Total $ 671,041 100.0 $ 649,718 100.0
Six Months Ended June 30, 2021 versus 2020 period. Gross premiums written by the
mortgage segment for the six months ended June 30, 2021 were 6.1% higher than in
the 2020 period, while net premiums written for the six months
ended June 30, 2021 were 3.3% higher than in the 2020 period, primarily
reflecting growth in Australian single premium mortgage insurance and the
benefit of premiums received related to the exercise of early redemption options
by GSEs for certain seasoned callable credit risk transfer contracts. This
growth was partially offset by a lower level of U.S. primary mortgage insurance
in force on monthly premium policies, which resulted from the continued high
level of refinancing activity.
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 54.8% for the Arch MI U.S. portfolio of mortgage insurance
policies at June 30, 2021 , reflecting the higher level of mortgage refinancing
activity, compared to 58.7% at December 31, 2020 .
The following tables provide details on the new insurance written ("NIW")
generated by Arch MI U.S. NIW represents the original principal balance of all
loans that received coverage during the period.
(U.S. Dollars in millions) Three Months Ended June 30,
2021 2020
Amount % Amount %
Total new insurance written (NIW)
(1) $ 28,372 $ 24,551
Credit quality (FICO):
>=740 $ 19,240 67.8 $ 15,851 64.6
680-739 8,113 28.6 7,781 31.7
620-679 1,019 3.6 919 3.7
Total $ 28,372 100.0 $ 24,551 100.0
Loan-to-value (LTV):
95.01% and above $ 1,484 5.2 $ 1,948 7.9
90.01% to 95.00% 13,936 49.1 9,403 38.3
85.01% to 90.00% 8,675 30.6 8,140 33.2
85.00% and below 4,277 15.1 5,060 20.6
Total $ 28,372 100.0 $ 24,551 100.0
Monthly vs. single:
Monthly $ 26,725 94.2 $ 23,391 95.3
Single 1,647 5.8 1,160 4.7
Total $ 28,372 100.0 $ 24,551 100.0
Purchase vs. refinance:
Purchase $ 25,010 88.2 $ 14,956 60.9
Refinance 3,362 11.8 9,595 39.1
Total $ 28,372 100.0 $ 24,551 100.0
(1)Represents the original principal balance of all loans that received coverage during the period.
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(U.S. Dollars in millions) Six Months Ended June 30,
2021 2020
Amount % Amount %
Total new insurance written (NIW)
(1) $ 55,391 $ 41,329
Credit quality (FICO):
>=740 $ 37,058 66.9 $ 25,920 62.7
680-739 16,531 29.8 13,568 32.8
620-679 1,802 3.3 1,841 4.5
Total $ 55,391 100.0 $ 41,329 100.0
Loan-to-value (LTV):
95.01% and above $ 3,092 5.6 $ 3,616 8.7
90.01% to 95.00% 26,224 47.3 16,602 40.2
85.01% to 90.00% 16,987 30.7 13,469 32.6
85.01% and below 9,088 16.4 7,642 18.5
Total $ 55,391 100.0 $ 41,329 100.0
Monthly vs. single:
Monthly $ 51,714 93.4 $ 39,083 94.6
Single 3,677 6.6 2,246 5.4
Total $ 55,391 100.0 $ 41,329 100.0
Purchase vs. refinance:
Purchase $ 45,515 82.2 $ 27,255 65.9
Refinance 9,876 17.8 14,074 34.1
Total $ 55,391 100.0 $ 41,329 100.0
(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 June 30,
2021 2020
Amount % Amount %
Underwriting location:
United States $ 248,388 74.3 $ 304,652 83.3
Other 85,833 25.7 61,061 16.7
Total $ 334,221 100.0 $ 365,713 100.0
2021 Second Quarter versus 2020 Period. Net premiums earned for the 2021 second
quarter were 8.6% lower than in the 2020 second quarter, and reflected a lower
level of single premium policy terminations and a decrease in U.S. primary
mortgage insurance in force on monthly premium policies.
Six Months Ended June 30,
2021 2020
Amount % Amount %
Underwriting location:
United States $ 510,938 76.2 $ 593,814 83.5
Other 159,600 23.8 116,925 16.5
Total $ 670,538 100.0 $ 710,739 100.0
Six Months Ended June 30, 2021 versus 2020 Period. Net premiums earned for the
six months ended June 30, 2021 were 5.7% lower than in the 2020 period,
primarily reflecting a lower level of single premiums earned, partially offset
by an increase in earnings from Australian single premium policy terminations.
Other Underwriting Income.
Other underwriting income, which is primarily related to GSE credit risk-sharing
transactions was $4.1 million for the 2021 second quarter, compared to $6.5
million for the 2020 second quarter.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment's loss ratio:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Current year 15.9 % 61.4 % 19.1 % 41.9 %
Prior period reserve development (12.9) % (0.1) % (8.1) % (0.9) %
Loss ratio 3.0 % 61.3 % 11.0 % 41.0 %
Current Year Loss Ratio.
2021 Second Quarter versus 2020 Period. The mortgage segment's current year loss
ratio was 45.5 points lower in the 2021 second quarter than in the 2020 second
quarter. The mortgage segment's current year loss ratio was 22.8 points lower
for the six months ended June 30, 2021 than for the 2020 period. The lower
current year loss ratios for the 2021 period reflect decrease in loss
assumptions related to COVID-19 pandemic.
For the 2020 periods, the increase in incurred losses was primarily due to, the
financial stress related to the COVID-19 pandemic. Segregating estimated losses
due to COVID-19 from the overall mortgage segment estimated losses would require
the number of delinquencies specifically attributable to COVID-19. As this
analysis cannot be performed accurately, the Company is not reporting COVID-19
provisions separately from its overall loss provisions.
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Prior Period Reserve Development .
The mortgage segment's net favorable development was $43.1 million , or 12.9
points, for the 2021 second quarter, compared to $0.2 million , or 0.1 points,
for the 2020 second quarter, and $54.0 million , or 8.1 points, for the six
months ended June 30, 2021 , compared to $6.3 million , or 0.9 points, for the
2020 period. See note 5, "Reserve for Losses and Loss Adjustment Expenses,"
to our consolidated financial statements for information about the mortgage
segment's prior year reserve development.
Underwriting Expenses.
2021 Second Quarter versus 2020 Period. The underwriting expense ratio for the
mortgage segment was 23.5% in the 2021 second quarter, compared to 19.6% in the
2020 second quarter, with the increase primarily reflecting higher operating
expenses and, to a lesser extent, a decline in net premiums earned on U.S.
primary mortgage insurance business.
Six Months Ended June 30, 2021 versus 2020 period. The underwriting expense
ratio for the mortgage segment was 23.5% for the six months ended June 30, 2021 ,
compared to 21.9% for the 2020 period, with the increase primarily reflecting
higher operating expenses and, to a lesser extent, a decline in net premiums
earned on U.S. primary mortgage insurance business.
Corporate (Non-Underwriting) Segment
The corporate (non-underwriting) segment results include net investment income,
other income (loss), corporate expenses, transaction costs and other,
amortization of intangible assets, interest expense, items related to our
non-cumulative preferred shares, 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, income or loss from operating affiliates and income taxes. Such
amounts exclude the results of the 'other' segment. See note 1, "Basis of
Presentation and Recent Accounting Pronouncements," to our consolidated
financial statements for information about the change in presentation of income
or loss from operating affiliates.
Net Investment Income.
The components of net investment income were derived from the following sources:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Fixed maturities $ 77,709 $ 91,491 $ 156,726 $ 193,254
Equity securities 8,282 6,023 13,932 11,653
Short-term investments 972 897 1,616 4,282
Other (1) 21,026 17,825 36,585 38,304
Gross investment income 107,989 116,236 208,859 247,493
Investment expenses (2) (18,559) (15,205) (40,700) (33,434)
Net investment income $ 89,430 $ 101,031 $ 168,159 214,059
(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 0.30% of average invested assets for
the 2021 second quarter, compared to 0.28% for the 2020 second quarter, and
0.32% for the six months ended June 30, 2021 , compared to 0.32% for the 2020
period.
The lower level of net investment income for the 2021 second quarter primarily
related to lower yields available in the financial market. The pre-tax
investment income yield, calculated based on amortized cost and on an annualized
basis, was 1.47% for the 2021 second quarter, compared to 1.92% for the 2020
second quarter, and 1.40% for the six months ended June 30, 2021 , compared to
2.08% for the 2020 period.
Corporate Expenses.
Corporate expenses were $17.2 million for the 2021 second quarter, compared to
$16.9 million for the 2020 second quarter, and $40.6 million for the six months
ended June 30, 2021 , compared to $35.1 million for the 2020 period. The increase
in corporate expenses was primarily due to higher incentive compensation costs.
Transaction Costs and Other.
Transaction costs and other were a benefit of $1.4 million for the 2021 second
quarter, compared to an expense of $1.0 million for the 2020 second quarter, and
a benefit of $0.2 million for the six months ended June 30, 2021 , compared to an
expense of $3.6 million for the 2020 period. Amounts in the 2021 and 2020
periods are primarily related to acquisitions activity for the respective
period.
Amortization of Intangible Assets.
Amortization of intangible assets for the 2021 second quarter was $14.4 million ,
compared to $16.5 million for the 2020
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second quarter, and $28.8 million for the six months ended June 30, 2021 ,
compared to $33.1 million for the 2020 period. Amounts in 2021 and 2020
primarily related to amortization of finite-lived intangible assets. See the
consolidated financial statements contained in our 2020 Form 10-K for
disclosures on our amortization pattern.
Interest Expense.
Interest expense was $31.4 million for the 2021 second quarter, compared to the
$25.1 million for the 2020 second quarter, and $65.6 million for the six months
ended June 30, 2021 , compared to $50.4 million for the 2020 period.The higher
level of interest expense mainly resulted from the issuance of $1.0 billion of
3.635% senior notes on June 30, 2020 .
Net Realized Gains or Losses.
We recorded net realized gains of $163.4 million for the 2021 second quarter,
compared to net realized gains of $385.1 million for the 2020 second quarter,
and net realized gains of $264.7 million for the six months ended June 30, 2021 ,
compared to net realized gains of $313.0 million for the 2020 period. 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)," to our consolidated financial
statements for additional information. See note 7, "Investment
Information-Allowance for Credit Losses," to our consolidated financial
statements for additional information.
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity
Method.
We recorded $122.2 million of equity in net income related to investment funds
accounted for using the equity method in the 2021 second quarter, compared to a
loss of $65.1 million for the 2020 second quarter, and $193.9 million of income
for the six months ended June 30, 2021 , compared to a loss of $69.3 million for
the 2020 period. Such investments are generally recorded on a one to three month
lag based on the availability of reports from the investment funds. Investment
funds accounted for using the equity method totaled $2.5 billion at June 30,
2021, compared to $2.0 billion at December 31, 2020. 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 2021 second quarter were $17.9 million ,
compared to net foreign exchange losses for the 2020 second quarter of $42.4
million . Net foreign exchange gains for the six months ended June 30, 2021 were
$3.6 million , compared to net foreign exchange gains for the 2020 period of
$20.9 million . Amounts in both periods were primarily unrealized and resulted
from the effects of revaluing our net insurance liabilities required to be
settled in foreign currencies at each balance sheet date.
Income Tax Expense.
Our income tax provision on income (loss) before income taxes, including income
(loss) from operating affiliates, resulted in an expense of 7.1% for the 2021
second quarter, compared to 8.8% for the 2020 second quarter, and 7.5% for the
six months ended June 30, 2021 , compared to 10.7% for the 2020 period. Such
amounts exclude the results of the 'other' segment. Our effective tax rate,
which is based upon the expected annual effective tax rate, may fluctuate from
period to period based on the relative mix of income or loss reported by
jurisdiction and the varying tax rates in each jurisdiction.
Income (loss) from operating affiliates.
We recorded $24.5 million of net income from our operating affiliates in the
2021 second quarter, compared to a loss of $3.2 million for the 2020 second
quarter, and $99.9 million of income for the six months ended June 30, 2021 ,
compared to $5.3 million for the 2020 period. Results for the 2021 period,
primarily reflected our acquisition of 29.5% of the common equity in Coface,
which included a one-time gain of $74.5 million . As a result of equity method
accounting rules, approximately $36 million of additional gain was deferred and
will generally be recognized over the next five years.
Other Segment
Through June 30, 2021 , the 'other' segment included the results of Watford .
Pursuant to GAAP, Watford was considered a variable interest entity and we
concluded that we are the primary beneficiary of Watford . As such, we
consolidated the results of Watford in our consolidated financial statements
through June 30, 2021 , although we only owned approximately 10% of Watford's
common equity. See note 11, "Variable Interest Entities and Noncontrolling
Interests," note 4, "Segment Information," and Note 16,
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" Subsequent Event, " to our consolidated financial statements for additional information onWatford . 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 2020 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 AtJune 30, 2021 , total investable assets held by Arch were$27.3 billion , excluding the$2.9 billion included in the 'other' segment (i.e., attributable toWatford ). Investable Assets Held by Arch The following table summarizes the fair value of the investable assets held by Arch: Estimated % of Investable assets (1): Fair Value TotalJune 30, 2021 Fixed maturities (2)$ 18,022,113 66.0 Short-term investments (2) 2,380,016 8.7 Cash 884,857 3.2 Equity securities (2) 1,633,579 6.0 Other investments (2) 1,512,317 5.5 Other investable assets (3) 500,000 1.8 Investments accounted for using the equity method 2,539,124 9.3
Securities transactions entered into but not settled at the balance sheet date
(180,592) (0.7)
Total investable assets held by Arch $ 27,291,414 100.0
Average effective duration (in years) 2.31
Average S&P/Moody's credit ratings (4) AA/Aa2
Embedded book yield (5) 1.45 %
December 31, 2020
Fixed maturities (2) $ 18,771,296 69.9
Short-term investments (2) 2,063,240 7.7
Cash 694,997 2.6
Equity securities (2) 1,436,104 5.3
Other investments (2) 1,480,347 5.5
Other investable assets (3) 500,000 1.9
Investments accounted for using the equity method 2,047,889 7.6
Securities transactions entered into but not settled at the balance sheet date
(137,578) (0.5)
Total investable assets held by Arch $ 26,856,295 100.0
Average effective duration (in years) 3.01
Average S&P/Moody's credit ratings (4) AA/Aa2
Embedded book yield (5) 1.56 %
(1)In securities lending transactions, we receive collateral in excess of the
fair value of the securities pledged. For purposes of this table, we have
excluded the collateral received under securities lending, at fair value and
included the securities pledged under securities lending, at fair value.
(2)Includes investments carried as available for sale, at fair value and at fair
value under the fair value option.
(3)Represents participation interests in a receivable of a reverse repurchase
agreement.
(4)Average credit ratings on our investment portfolio on securities with ratings
by Standard & Poor's Rating Services ("S&P") and Moody's Investors Service
("Moody's").
(5)Before investment expenses.
At June 30, 2021 , approximately $18.5 billion , or 67.9%, of total investable
assets held by Arch were internally managed, compared to $19.2 billion , or
71.4%, at December 31, 2020 .
ARCH CAPITAL 57 2021 SECOND QUARTER FORM 10-Q
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The following table summarizes our fixed maturities and fixed maturities pledged
under securities lending agreements ("Fixed Maturities") by type:
Estimated % of
Fair Value Total
June 30, 2021
Corporate bonds $ 7,375,350 40.9
Residential mortgage backed securities 374,565 2.1 Municipal bonds
413,709 2.3
Commercial mortgage backed securities 267,574 1.5
2,308,403 12.8
Asset backed securities 2,426,917 13.5
Total $ 18,022,113 100.0
December 31, 2020
Corporate bonds $ 8,039,745 42.8Residential mortgage backed securities 616,619 3.3 Municipal bonds
492,734 2.6
Commercial mortgage backed securities 390,990 2.1
2,310,157 12.3
Asset backed securities 1,566,188 8.3
Total $ 18,771,296 100.0
The following table provides the credit quality distribution of our Fixed Maturities. For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody's are used, followed by ratings from Fitch Ratings.
% of
Estimated Fair Value Total
June 30, 2021
U.S. government and gov't agencies (1) $ 5,221,296 29.0
AAA 3,432,285 19.0
AA 2,004,442 11.1
A 3,268,661 18.1
BBB 2,896,453 16.1
BB 544,730 3.0
B 330,639 1.8
Lower than B 48,230 0.3
Not rated 275,377 1.5
Total $ 18,022,113 100.0
December 31, 2020
U.S. government and gov't agencies (1) $ 5,963,758 31.8
AAA 3,117,046 16.6
AA 2,063,738 11.0
A 3,760,280 20.0
BBB 2,699,201 14.4
BB 574,189 3.1
B 268,095 1.4
Lower than B 54,795 0.3
Not rated 270,194 1.4
Total $ 18,771,296 100.0
(1)Includes U.S. government-sponsored agency residential mortgage-backed
securities and agency commercial mortgage-backed securities.
The following table provides information on the severity of the unrealized loss
position as a percentage of amortized cost for all Fixed Maturities which were
in an unrealized loss position:
% of
Gross Total Gross
Unrealized Unrealized
Severity of gross unrealized losses: Estimated Fair Value Losses Losses
June 30, 2021
0-10% $ 7,387,667 $ (68,781) 92.0
10-20% 28,039 (4,166) 5.6
20-30% 1,999 (553) 0.7
Greater than 30% 1,326 (1,239) 1.7
Total $ 7,419,031 $ (74,739) 100.0
December 31, 2020
0-10% $ 3,583,981 $ (55,542) 79.4
10-20% 95,495 (12,183) 17.4
20-30% 1,061 (406) 0.6
Greater than 30% 1,249 (1,785) 2.6
Total $ 3,681,786 $ (69,916) 100.0
The following table summarizes our top ten exposures to fixed income corporate
issuers by fair value at June 30, 2021 , excluding guaranteed amounts and covered
bonds:
Credit
Estimated Fair Value Rating (1)
Bank of America Corporation $ 373,742 A-/A2
JPMorgan Chase & Co. 372,381 A-/A2
Citigroup Inc. 288,574 BBB+/A3
Morgan Stanley 253,549 BBB+/A1
Wells Fargo & Company 247,222 BBB+/A2
The Goldman Sachs Group, Inc. 185,647 BBB+/A2
Nestlé S.A. 129,191 AA-/Aa3
Amazon.com, Inc. 118,047 AA/A1
Nippon Telegraph and Telephone Corporation 95,958 A/A1
AT&T Inc. 92,795 BBB/Baa2
Total $ 2,157,106
(1)Average credit ratings as assigned by S&P and Moody's, respectively.
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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
Jun 30, 2021
RMBS $ 336,784 $ 14,716 $ 23,065 $ 374,565
CMBS 28,917 213,655 25,002 267,574
ABS - 2,206,453 220,464 2,426,917
Total $ 365,701 $ 2,434,824 $ 268,531 $ 3,069,056
Dec 31, 2020
RMBS $ 584,499 $ 4,102 $ 28,018 $ 616,619
CMBS 24,396 342,491 24,103 390,990
ABS - 1,403,137 163,051 1,566,188
Total $ 608,895 $ 1,749,730 $ 215,172 $ 2,573,797 The following table summarizes our equity securities, which include investments in exchange traded funds:
June 30, December 31,
2021 2020
Equities (1) $ 864,688 $ 676,437
Exchange traded funds
Fixed income (2) 304,723 341,139
Equity and other (3) 464,168 418,528
Total $ 1,633,579 $ 1,436,104 (1)Primarily in consumer non-cyclical, consumer cyclical, technology,
communications and financial stocks at
The following table summarizes our other investments and other investable
assets:
June 30, December 31,
2021 2020
Lending $ 638,786 $ 572,636
Term loan investments 474,859 380,193
Energy 84,891 65,813
Credit related funds 73,171 90,780
Investment grade fixed income 110,375 138,646
Infrastructure 32,109 165,516
Private equity 70,878 48,750
Real estate 27,248 18,013
Total fair value option $ 1,512,317 $ 1,480,347
Other investable assets $ 500,000 $ 500,000
Total other investments $ 2,012,317 $ 1,980,347
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.
Investable Assets in the 'Other' Segment
Investable assets in the 'other' segment are managed by Watford . The board of
directors of Watford establishes its investment policies and guidelines. A
significant amount of Watford's investments are accounted for using the fair
value option with changes in the carrying value of such investments recorded in
net realized gains or losses.
The following table summarizes investable assets in the 'other' segment:
June 30,
2021 2020
Investments accounted for using the fair value option: Other investments$ 858,155 $ 851,538 Fixed maturities 578,280 455,163 Short-term investments 478,711 418,690 Equity securities 69,773 64,994 Total 1,984,919 1,790,385 Fixed maturities available for sale, at fair value 625,422 613,503 Equity securities, at fair value 97,623 52,410 Cash 349,202 211,451 Securities sold but not yet purchased (28,068) (21,679)
Securities transactions entered into but not settled at the balance sheet date
(97,055) 11,542
Total investable assets included in 'other' segment
$ 2,657,612 ARCH CAPITAL 59 2021 SECOND QUARTER FORM 10-Q
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Reinsurance
The effects of reinsurance on written and earned premiums and losses and loss
adjustment expenses ("LAE") with unaffiliated reinsurers were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Premiums written:
Direct $ 1,909,893 $ 1,485,627 $ 3,802,138 $ 3,174,425
Assumed 1,376,398 832,065 2,881,359 1,976,097
Ceded (886,767) (649,381) (1,775,516) (1,344,965)
Net $ 2,399,524 $ 1,668,311 $ 4,907,981 $ 3,805,557
Premiums earned:
Direct $ 1,795,899 $ 1,559,222 $ 3,508,824 $ 3,105,047
Assumed 1,091,968 746,188 2,039,582 1,507,262
Ceded (766,958) (640,056) (1,479,075) (1,202,511)
Net $ 2,120,909 $ 1,665,354 $ 4,069,331 $ 3,409,798
Losses and LAE:
Direct $ 1,046,579 $ 1,162,958 $ 2,032,512 $ 2,148,041
Assumed 554,256 508,108 1,221,567 1,053,977
Ceded (441,004) (440,544) (891,148) (856,077)
Net $ 1,159,831 $ 1,230,522 $ 2,362,931 $ 2,345,941
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 various aggregate excess of loss mortgage reinsurance
agreements with various special purpose reinsurance companies domiciled in
Bermuda (the "Bellemeade Agreements"). For the respective coverage periods, we
will retain the first layer of the respective aggregate losses and the special
purpose reinsurance companies will provide second layer coverage up to the
outstanding coverage amount. We will then retain losses in excess of the
outstanding coverage limit. The aggregate excess of loss reinsurance coverage
generally decreases over a ten-year period as the underlying covered mortgages
amortize, unless provisional call options embedded within certain of the
Bellemeade Agreements are executed or if pre-defined delinquency triggering
events occur.
The following table summarizes the respective coverages and retentions at
June 30, 2021 :
June 30, 2021
Initial Coverage Remaining
at Issuance Current Coverage Retention, Net
Bellemeade 2017-1 Ltd. (1) $ 368,114 $ 145,573 $ 125,297
Bellemeade 2018-1 Ltd. (2) 374,460 250,095 123,173
Bellemeade 2018-3 Ltd. (3) 506,110 302,563 126,127
Bellemeade 2019-1 Ltd. (4) 341,790 219,256 102,017
Bellemeade 2019-2 Ltd. (5) 621,022 398,316 156,718
Bellemeade 2019-3 Ltd. (6) 700,920 528,084 176,565
Bellemeade 2019-4 Ltd. (7) 577,267 468,737 113,415
Bellemeade 2020-1 Ltd. (8) 528,540 18,843 747,799
Bellemeade 2020-2 Ltd. (9) 449,167 328,375 232,481
Bellemeade 2020-3 Ltd. (10) 451,816 451,816 163,905
Bellemeade 2020-4 Ltd. (11) 337,013 281,750 138,183
Bellemeade 2021-1 Ltd. (12) 643,577 643,577 166,199
Bellemeade 2021-2 Ltd. (13) 616,017 616,017 152,734
Total $ 6,515,813 $ 4,653,002 $ 2,524,613
(1) Issued in October 2017 , covering in-force policies issued between January
1, 2017 and June 30, 2017 .
(2) Issued in April 2018 , covering in-force policies issued between July 1,
2017 and December 31, 2017 .
(3) Issued in October 2018 , covering in-force policies issued between January
1, 2018 and June 30, 2018 .
(4) Issued in March 2019 , covering in-force policies primarily issued between
2005-2008 under United Guaranty Residential Insurance Company ("UGRIC"); as well
as policies issued through 2015 under both UGRIC and Arch Mortgage Insurance
Company .
(5) Issued in April 2019 , covering in-force policies issued between July 1,
2018 and December 31, 2018 .
(6) Issued in July 2019 , covering in-force policies issued in 2016.
(7) Issued in October 2019 , covering in-force policies issued between January
1, 2019 and June 30, 2019 .
(8) Issued in June 2020, covering in-force policies issued between July 1,
2019 and December 31, 2019 . $450 million was directly funded by Bellemeade
2020-1 Ltd. with an additional $79 million of capacity provided directly to Arch
MI U.S. by a separate panel of reinsurers.
(9) Issued in September 2020 , covering in-force policies issued between January
1, 2020 and May 31, 2020 . $423 million was directly funded by Bellemeade 2020-2
Ltd. with an additional $26 million of capacity provided directly to Arch MI
U.S. by a separate panel of reinsurers.
(10) Issued in November 2020 , covering in-force policies issued between June 1,
2020 and August 31, 2020 . $418 million was directly funded by Bellemeade 2020-3
Ltd. with an additional $34 million of capacity provided directly to Arch MI
U.S. by a separate panel of reinsurers.
(11) Issued in December 2020 , covering in-force policies issued between July 1,
2019 and December 31, 2019 . $321 million was directly funded by Bellemeade
2020-4 Ltd. with an additional $16 million of capacity provided directly to Arch
MI U.S. by a separate panel of reinsurers.
(12) Issued in March 2021 , covering in-force policies issued between September
1, 2020 and November 30, 2020 . $580 million was directly funded by Bellemeade Re
2021-1 Ltd. with an additional $64 million capacity provided directly to Arch MI
U.S. by a separate panel of reinsurers.
(13) Issued in June 2021 , covering in-force policies issued between December 1,
2020 and March 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 MI U.S. by a separate panel of reinsurers.
ARCH CAPITAL 60 2021 SECOND QUARTER FORM 10-Q
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Reserve for Losses and Loss Adjustment Expenses
We establish reserve for losses and loss adjustment expenses ("Loss Reserves")
which represent estimates involving actuarial and statistical projections, at a
given point in time, of our expectations of the ultimate settlement and
administration costs of losses incurred. Estimating Loss Reserves is inherently
difficult. We utilize actuarial models as well as available historical insurance
industry loss ratio experience and loss development patterns to assist in the
establishment of Loss Reserves. Actual losses and loss adjustment expenses paid
will deviate, perhaps substantially, from the reserve estimates reflected in our
financial statements.
At June 30, 2021 and December 31, 2020 , our Loss Reserves, net of unpaid losses
and loss adjustment expenses recoverable, by type and by operating segment were
as follows:
June 30, December 31,
2021 2020
Insurance segment:
Case reserves $ 2,100,109 $ 2,051,640
IBNR reserves 4,117,169 3,889,823
Total net reserves 6,217,278 5,941,463
Reinsurance segment:
Case reserves 1,523,486 1,560,523
Additional case reserves 432,516 280,472
IBNR reserves 2,435,575 2,253,953
Total net reserves 4,391,577 4,094,948
Mortgage segment:
Case reserves 704,314 631,921
IBNR reserves 266,690 271,702
Total net reserves 971,004 903,623
Other segment:
Case reserves 682,341 566,587
Additional case reserves 47,774 32,321
IBNR reserves 740,654 660,132
Total net reserves 1,470,769 1,259,040
Total:
Case reserves 5,010,250 4,810,671
Additional case reserves 480,290 312,793
IBNR reserves 7,560,088 7,075,610
Total net reserves $ 13,050,628 $ 12,199,074 At
June 30, December 31,
2021 2020
Insurance segment:
Professional lines (1) $ 1,516,878 $ 1,482,820 Construction and national accounts 1,470,201 1,395,067 Excess and surplus casualty (2)
859,662 816,495
Programs 748,015 699,354
Property, energy, marine and aviation 500,880 517,692
Travel, accident and health 96,345 98,910
Lenders products 64,560 48,946
Other (3) 960,737 882,179
Total net reserves $ 6,217,278 $ 5,941,463
(1)Includes professional liability, executive assurance and healthcare business.
(2)Includes casualty and contract binding business.
(3)Includes alternative markets, excess workers' compensation and surety
business.
At June 30, 2021 and December 31, 2020 , the reinsurance segment's Loss Reserves
by major line of business, net of unpaid losses and loss adjustment expenses
recoverable, were as follows:
June 30, December 31,
2021 2020
Reinsurance segment:
Casualty (1) $ 2,024,591 $ 1,995,849
Other specialty (2) 955,770 917,178
Property excluding property catastrophe 668,339 594,033
Marine and aviation 215,345 204,205
Property catastrophe 410,034 268,858
Other (3) 117,498 114,825
Total net reserves $ 4,391,577 $ 4,094,948
(1)Includes executive assurance, professional liability, workers' compensation,
excess motor, healthcare and other.
(2)Includes non-excess motor, surety, accident and health, workers' compensation
catastrophe, agriculture, trade credit and other.
(3)Includes life, casualty clash and other.
At June 30, 2021 and December 31, 2020 , the mortgage segment's Loss Reserves by
major line of business, net of unpaid losses and loss adjustment expenses
recoverable, were as follows:
June 30, December 31,
2021 2020
257,869 253,875
Total net reserves $ 971,004 $ 903,623 (1) At
ARCH CAPITAL 61 2021 SECOND QUARTER FORM 10-Q
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Mortgage Operations Supplemental Information
The mortgage segment's insurance in force ("IIF") and risk in force ("RIF") were
as follows at June 30, 2021 and December 31, 2020 :
(U.S. Dollars in millions) June 30, 2021 December 31, 2020
Amount % Amount %
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance $ 277,887 65.8 $ 280,579 66.2
Mortgage reinsurance 32,666 7.7 31,220 7.4
Other (2) 111,884 26.5 111,740 26.4
Total $ 422,437 100.0 $ 423,539 100.0
Risk In Force (RIF) (3):
U.S. primary mortgage insurance $ 69,587 90.3 $ 70,522 90.5
Mortgage reinsurance 2,245 2.9 2,226 2.9
Other (2) 5,188 6.7 5,146 6.6
Total $ 77,020 100.0 $ 77,894 100.0
(1)Represents the aggregate dollar amount of each insured mortgage loan's
current principal balance.
(2)Includes GSE credit risk-sharing transactions and international insurance
business.
(3)Represents 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 credit risk-sharing or reinsurance transactions.
The IIF and RIF for our U.S. primary mortgage insurance business by policy year
were as follows at June 30, 2021 :
(U.S. Dollars in millions) IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:
2011 and prior $ 12,591 4.5 $ 2,839 4.1 9.75 %
2012 2,261 0.8 587 0.8 3.00 %
2013 5,635 2.0 1,563 2.2 2.95 %
2014 6,288 2.3 1,729 2.5 3.52 %
2015 11,208 4.0 3,017 4.3 3.19 %
2016 18,500 6.7 4,958 7.1 4.11 %
2017 17,577 6.3 4,574 6.6 4.87 %
2018 19,044 6.9 4,827 6.9 6.25 %
2019 34,944 12.6 8,727 12.5 4.02 %
2020 95,419 34.3 23,316 33.5 0.88 %
2021 54,420 19.6 13,450 19.3 0.10 %
Total $ 277,887 100.0 $ 69,587 100.0 3.11 %
(1)Represents the ending percentage of loans in default.
The IIF and RIF for our U.S. primary mortgage insurance business by policy year
were as follows at December 31, 2020 :
(U.S. Dollars in millions) IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:
2011 and prior $ 14,588 5.2 $ 3,327 4.7 11.36 %
2012 3,651 1.3 992 1.4 2.98 %
2013 7,546 2.7 2,107 3.0 3.30 %
2014 8,261 2.9 2,273 3.2 4.06 %
2015 15,032 5.4 4,048 5.7 3.72 %
2016 24,958 8.9 6,648 9.4 4.77 %
2017 24,748 8.8 6,413 9.1 5.52 %
2018 27,304 9.7 6,918 9.8 6.76 %
2019 48,304 17.2 12,001 17.0 4.61 %
2020 106,187 37.8 25,795 36.6 0.76 %
Total $ 280,579 100.0 $ 70,522 100.0 4.19 %
(1)Represents the ending percentage of loans in default.
The following tables provide supplemental disclosures on risk in force for our
U.S. primary mortgage insurance business at June 30, 2021 and December 31, 2020 :
(U.S. Dollars in millions) June 30, 2021 December 31, 2020
Amount % Amount %
Credit quality (FICO):
>=740 $ 41,156 59.1 $ 40,774 57.8
680-739 23,663 34.0 24,498 34.7
620-679 4,401 6.3 4,837 6.9
<620 367 0.5 413 0.6
Total $ 69,587 100.0 $ 70,522 100.0
Weighted average FICO score 745 743
Loan-to-value (LTV):
95.01% and above $ 7,975 11.5 $ 8,643 12.3
90.01% to 95.00% 37,619 54.1 37,877 53.7
85.01% to 90.00% 19,784 28.4 20,013 28.4
85.00% and below 4,209 6.0 3,989 5.7
Total $ 69,587 100.0 $ 70,522 100.0
Weighted average LTV 92.8 % 92.8 %
Total RIF, net of external
reinsurance $ 55,557 $ 56,658
ARCH CAPITAL 62 2021 SECOND QUARTER FORM 10-Q
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(U.S. Dollars in millions) June 30, 2021 December 31, 2020
Amount % Amount %
Total RIF by State:
Texas $ 5,560 8.0 $ 5,636 8.0
California 5,324 7.7 5,261 7.5
Florida 3,367 4.8 3,632 5.2
Minnesota 2,973 4.3 2,520 3.6
North Carolina 2,924 4.2 2,622 3.7
Georgia 2,886 4.1 2,959 4.2
Illinois 2,832 4.1 2,762 3.9
Massachusetts 2,459 3.5 2,464 3.5
Virginia 2,372 3.4 2,526 3.6
Ohio 2,229 3.2 2,264 3.2
Other 36,661 52.7 37,876 53.7
Total $ 69,587 100.0 $ 70,522 100.0
The following table provides supplemental disclosures for our
Six Months Ended
claim count) June 30,
2021 2020
Roll-forward of insured loans in default:
Beginning delinquent number of loans 52,234 20,163
New notices 18,415 67,793
Cures (32,924) (22,205)
Paid claims (406) (1,084)
Ending delinquent number of loans (1) 37,319 64,667
Ending number of policies in force (1) 1,199,918 1,259,328
Delinquency rate (1) 3.11 % 5.14 %
Losses:
Number of claims paid 406 1,084
Total paid claims $ 15,297 $ 46,139
Average per claim $ 37.7 $ 42.6
Severity (2) 81.0 % 94.3 %
Average case reserve per default (in thousands) $ 19.5 $ 6.9
(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 8.5 to 1 at June 30, 2021 , compared to 9.3 to 1 at
December 31, 2020 .
Shareholders' Equity and Book Value per Share
The following table presents the calculation of book value per share:
(U.S. dollars in thousands, except June 30, December 31,
share data) 2021 2020
Total shareholders' equity available to Arch $ 13,986,072 $ 13,105,886
Less preferred shareholders' equity 1,280,000 780,000
Common shareholders' equity available to Arch $ 12,706,072 $ 12,325,886
Common shares and common share equivalents outstanding, net of
treasury shares (1) 396,771,251 406,720,642
Book value per share $ 32.02 $ 30.31
(1)Excludes the effects of 17,717,327 and 17,839,333 stock options and 759,926
and 1,153,784 restricted stock units outstanding at
LIQUIDITY
This section does not include information specific toWatford . We do not guarantee or provide credit support forWatford , and our financial exposure toWatford is limited to our investment inWatford's senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions withWatford . Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally,Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares. For the six months endedJune 30, 2021 ,Arch Capital received dividends of$563.7 million from Arch Re Bermuda, ourBermuda -based reinsurer and insurer, which can pay approximately$3.2 billion toArch Capital during the remainder of 2021 without providing an affidavit to theBermuda Monetary Authority ("BMA"). InJune 2021 ,Arch Capital completed a$500.0 million underwritten public offering of 20.0 million depositary shares, each of which represents a 1/1,000th interest in a share of its 4.550% Non-Cumulative Preferred Shares. See
no te 2 , " Share Transactions. "
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We expect that our liquidity needs, including our anticipated (re)insurance
obligations and operating and capital expenditure needs, for the next twelve
months, will be met by funds generated from underwriting activities and
investment income, as well as by our balance of cash, short-term investments,
proceeds on the sale or maturity of our investments, and our credit facilities.
Cash Flows
The following table summarizes our cash flows from operating, investing and
financing activities, excluding amounts related to the 'other' segment (i.e.,
Watford). See note 11, "Variable Interest Entities and Noncontrolling
Interests," for cash flows related to Watford.
Six Months Ended
June 30,
2021 2020
Total cash provided by (used for):
Operating activities $ 1,565,718 $ 1,234,383
Investing activities (1,174,033) (1,888,221)
Financing activities 8,352 824,990Effects of exchange rate changes on foreign currency cash (9,868)
(15,384)
Increase (decrease) in cash and restricted cash$ 390,169
•Cash provided by operating activities for the six months endedJune 30, 2021 reflected a higher level of premiums collected than in the 2020 period. •Cash used for investing activities for the six months endedJune 30, 2021 was lower than in the 2020 period. Activity for the six months endedJune 30, 2021 reflected our$546.3 million purchase of a 29.5% interest in Coface, while the 2020 period reflected a higher level of securities purchased, and the investing of proceeds from our issuance of the senior notes. •Cash used for financing activities for the six months endedJune 30, 2021 was lower than cash used in the 2020 period, reflecting$485.8 million inflow from issuance of preferred shares and$485.3 million of repurchases under our share repurchase program. Activity for the 2020 period primarily reflected the issuance of$1.0 billion of our senior notes and$75.5 million of repurchases under our share repurchase program. CAPITAL RESOURCES This section does not include information specific toWatford . We do not guarantee or provide credit support forWatford , and our financial exposure toWatford is limited to our investment inWatford's senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions withWatford . The following table provides an analysis of our capital structure: (U.S. dollars in thousands, except Jun 30, Dec 31, share data) 2021 2020 Senior notes$ 2,723,903 $ 2,723,423
Shareholders' equity available to Arch:
Series E non-cumulative preferred shares
330,000
Series G non-cumulative preferred shares 500,000 -
Common shareholders' equity 12,706,072 12,325,886
Total $ 13,986,072 $ 13,105,886
Total capital available to Arch $ 16,709,975 $ 15,829,309
Debt to total capital (%) 16.3 17.2
Preferred to total capital (%) 7.7 4.9
Debt and preferred to total capital (%) 24.0 22.1
Arch MI U.S. is required to maintain compliance with the GSEs requirements,
known as the Private Mortgage Insurer Eligibility Requirements or "PMIERs." The
financial requirements require an eligible mortgage insurer's available assets,
which generally include only the most liquid assets of an insurer, to meet or
exceed "minimum required assets" as of each quarter end. Minimum required assets
are calculated from PMIERs tables with several risk dimensions (including
origination year, original loan-to-value and original credit score of performing
loans, and the delinquency status of non-performing loans) and are subject to a
minimum amount. Arch MI U.S. satisfied the PMIERs' financial requirements as of
June 30, 2021 with an estimated PMIER sufficiency ratio of 196%, compared to
173% at December 31, 2020 .
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. The reinsurance agreements between our U.S. -based property casualty
insurance and reinsurance subsidiaries and Arch Re Bermuda were canceled on a
cutoff basis as of January 1 ,
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2018. In 2019, certain reinsurance agreements between our insurance subsidiaries
and Arch Re Bermuda were reinstated.
GUARANTOR INFORMATION
The below table provides a description of our senior notes payable at June 30,
2021 , excluding amounts attributable to the 'other' segment (i.e., Watford ):
Interest Principal Carrying
Issuer/Due (Fixed) Amount Amount
Arch Capital:
May 1, 2034 7.350 % $ 300,000 $ 297,426
June 30, 2050 3.635 % 1,000,000 988,609
Arch-U.S.:
Nov. 1, 2043 (1) 5.144 % 500,000 495,003
Arch Finance:
Dec. 15, 2026 (1) 4.011 % 500,000 497,420
Dec. 15, 2046 (1) 5.031 % 450,000 445,445
Total $ 2,750,000 $ 2,723,903
(1)Fully and unconditionally guaranteed by Arch Capital .
Our senior notes were issued by Arch Capital , Arch Capital Group (U.S.) Inc.
("Arch-U.S. ") and Arch Capital Finance
LLC ("Arch Finance"). Arch-U.S. is a wholly-owned subsidiary of Arch Capital and
Arch Finance is a wholly-owned finance subsidiary of Arch-U.S. Our 2034 senior
notes and 2050 senior notes issued by Arch Capital are unsecured and
unsubordinated obligations of Arch 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. and Arch Capital and rank equally and ratably with the other unsecured
and unsubordinated indebtedness of Arch-U.S. and Arch Capital . The 2026 senior
notes and 2046 senior notes issued by Arch Finance are unsecured and
unsubordinated obligations of Arch Finance and Arch Capital and rank equally and
ratably with the other unsecured and unsubordinated indebtedness of Arch Finance
and Arch Capital .
Arch-U.S. and Arch Finance depend on their available cash resources, liquid
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
June 30, 2021 December 31, 2020
Arch Capital Arch-U.S. Arch Capital Arch-U.S.
Assets
Total investments $ 508 $ 373,784 $ 172 $ 396,547
Cash 15,239 27,434 18,932 11,368
Investment in operating affiliates 7,294 - 7,731 -
Due from subsidiaries and affiliates - 225,006 - 201,515
Other assets 15,244 27,568 10,659 34,405
Total assets $ 38,285 $ 653,792 $ 37,494 $ 643,835
Liabilities
Senior notes 1,286,035 495,003 1,285,867 494,944
Due to subsidiaries and affiliates - 551,760 - 586,805
Other liabilities 20,172 42,582 23,270 41,876
Total liabilities $ 1,306,207 $ 1,089,345 $ 1,309,137 $ 1,123,625
Non-cumulative preferred shares $ 1,280,000 - $ 780,000 -
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Six Months Ended Year Ended
June 30, 2021 December 31, 2020
Arch Capital Arch-U.S. Arch Capital Arch-U.S.
Revenues
Net investment income $ 796 $ 5,007 $ 53 $ 18,084
Net realized gains (losses) - 70,522 (2,110) 26,096
Equity in net income (loss) of investments
accounted for using the equity method - 10,678 - 2,507
Total revenues 796 86,207 (2,057) 46,687
Expenses
Corporate expenses 37,021 3,007 65,566 7,227
Interest expense 29,369 23,567 40,445 47,566
Net foreign exchange (gains) losses 6 - 3 -
Total expenses 66,396 26,574 106,014 54,793
Income (loss) before income taxes and income
(loss) from operating affiliates (65,600) 59,633 (108,071) (8,106)
Income tax (expense) benefit - (14,731) - 2,689
Income (loss) from operating affiliates (317) - (437) -
Net income available to Arch (65,917) 44,902 (108,508) (5,417)
Preferred dividends (22,069) - (41,612) -
Net income available to Arch common shareholders $ (87,986) $ 44,902 $ (150,120) $ (5,417)
SHARE REPURCHASE PROGRAM
The board of directors of Arch Capital has authorized the investment in Arch
Capital's common shares through a share repurchase program. For the six months
ended June 30, 2021 , Arch Capital repurchased 13.1 million shares under the
share repurchase program with an aggregate purchase price of $485.3 million .
Since the inception of the share repurchase program through June 30, 2021 , Arch
Capital has repurchased 402.3 million common shares for an aggregate purchase
price of $4.54 billion . At June 30, 2021 , approximately $431.2 million of share
repurchases were available under the program, which may be effected from time to
time in open market or privately negotiated transactions through December 31,
2021 . 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.
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 of July 1, 2021 , our modeled peak zone
catastrophe exposure was a windstorm affecting the Northeastern U.S. , with a net
probable maximum pre-tax loss of $676 million , followed by windstorms affecting
the Florida Tri-County and the Gulf of Mexico regions with net probable maximum
pre-tax losses of $669 and $662 million , respectively. Our exposures to other
perils, such as U.S. earthquake and international events, were less than the
exposures arising from U.S. windstorms and
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hurricanes. As of July 1, 2021 , our modeled peak zone earthquake exposure (San
Francisco earthquake) represented approximately 75% 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.
Effective July 1, 2021 , our insurance operations had in effect a reinsurance
program which provided coverage for certain property-catastrophe related losses
equal to $279 million in excess of various retentions per occurrence.
We also have significant exposure to losses due to mortgage defaults resulting
from severe economic events in the future. For our U.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 of July 1, 2021 , our modeled RDS loss was approximately 6% of
tangible shareholders' equity available to Arch.
Net probable maximum loss estimates are net of expected reinsurance recoveries,
before income tax and before excess reinsurance reinstatement premiums. RDS loss
estimates are net of expected reinsurance recoveries and before income tax.
Catastrophe loss estimates are reflective of the zone indicated and not the
entire portfolio. Since hurricanes and windstorms can affect more than one zone
and make multiple landfalls, our catastrophe loss estimates include clash
estimates from other zones. Our catastrophe loss estimates and RDS loss
estimates do not represent our maximum exposures and it is highly likely that
our actual incurred losses would vary materially from the modeled estimates.
There can be no assurances that we will not suffer pre-tax losses greater than
25% of our tangible shareholders' equity from one or more catastrophic events or
severe economic events due to several factors. These factors include the
inherent uncertainties in estimating the frequency and severity of such events
and the margin of error in making such determinations resulting from potential
inaccuracies and inadequacies in the data provided by clients and brokers, the
modeling techniques and the
application of such techniques or as a result of a decision to change the
percentage of shareholders' equity exposed to a single catastrophic event or
severe economic event. In addition, actual losses may increase if our reinsurers
fail to meet their obligations to us or the reinsurance protections purchased by
us are exhausted or are otherwise unavailable. See "Risk Factors-Risks Relating
to Our Industry" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Catastrophic Events and Severe Economic
Events" in our 2020 Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our 2020
Form 10-K.
MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
In accordance with the SEC'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 of June 30, 2021 . 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. We have not included Watford in the
following analyses as we do not guarantee or provide credit support for Watford ,
and our financial exposure to Watford is limited to our investment in Watford's
senior notes, common and preferred shares and counterparty credit risk
(mitigated by collateral) arising from reinsurance transactions.
An analysis of material changes in market risk exposures at June 30, 2021 that
affect the quantitative and qualitative disclosures presented in our 2020
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, fixed maturities pledged under
securities lending agreements, 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 our Fixed Income
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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 in U.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 our Fixed Income Securities :
(U.S. dollars in Interest Rate Shift in Basis Points
billions) -100 -50 - +50 +100
Jun 30, 2021
Total fair value $ 25.83 $ 25.45 $ 25.08 $ 24.70 $ 24.33
Change from base 3.0 % 1.5 % (1.5) % (3.0) %
Change in unrealized value $ 0.75 $ 0.38 $ (0.38) $ (0.75)
Dec 31, 2020
Total fair value $ 25.82 $ 25.44 $ 25.07 $ 24.69 $ 24.31
Change from base 3.0 % 1.5 % (1.5) % (3.0) %
Change in unrealized value $ 0.75 $ 0.38 $ (0.38) $ (0.75)
In addition, we consider the effect of credit spread movements on the market
value of our Fixed Income Securities and the corresponding change in unrealized
value. As credit spreads widen, the fair value of our Fixed Income Securities
falls, and the converse is also true. In periods where the spreads on our Fixed
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 our Fixed
Income Securities :
(U.S. dollars in Credit Spread Shift in Percentage Points
billions) -100 -50 - +50 +100
Jun 30, 2021
Total fair value $ 25.55 $ 25.33 $ 25.08 $ 24.83 $ 24.60
Change from base 1.9 % 1.0 % (1.0) % (1.9) %
Change in unrealized value $ 0.48 $ 0.25 $ (0.25) $ (0.48)
Dec 31, 2020
Total fair value $ 25.54 $ 25.32 $ 25.07 $ 24.82 $ 24.59
Change from base 1.9 % 1.0 % (1.0) % (1.9) %
Change in unrealized value $ 0.48 $ 0.25 $
(0.25)
Another method that attempts to measure portfolio risk is Value-at-Risk ("VaR").
VaR measures the worst expected
loss under normal market conditions over a specific time interval at a given
confidence level. The 1-year 95th percentile parametric VaR reported herein
estimates that 95% of the time, the portfolio loss in a one-year horizon would
be less than or equal to the calculated number, stated as a percentage of the
measured portfolio's initial value. The VaR is a variance-covariance based
estimate, based on linear sensitivities of a portfolio to a broad set of
systematic market risk factors and idiosyncratic risk factors mapped to the
portfolio exposures. The relationships between the risk factors are estimated
using historical data, and the most recent data points are generally given more
weight. As of June 30, 2021 , our portfolio's VaR was estimated to be 6.1%
compared to an estimated 4.3% at December 31, 2020 . In periods where the
volatility of the risk factors mapped to our portfolio's exposures is higher due
to market conditions, the resulting VaR is higher than in other periods.
Equity Securities . At June 30, 2021 and December 31, 2020 , the fair value of our
investments in equity securities (excluding securities included in Fixed Income
Securities above) totaled $1.3 billion and $1.1 billion , respectively. These
investments are exposed to price risk, which is the potential loss arising from
decreases in fair value. An immediate hypothetical 10% decline in the value of
each position would reduce the fair value of such investments by approximately
$132.9 million and $109.5 million at June 30, 2021 and December 31, 2020 ,
respectively, and would have decreased book value per share by approximately
$0.33 and $0.27 , respectively. An immediate hypothetical 10% increase in the
value of each position would increase the fair value of such investments by
approximately $132.9 million and $109.5 million at June 30, 2021 and
December 31, 2020 , respectively, and would have increased book value per share
by approximately $0.33 and $0.27 , respectively.
Investment-Related Derivatives. At June 30, 2021 , the notional value of all
derivative instruments (excluding to-be-announced mortgage backed securities
which are included in the fixed income securities analysis above and foreign
currency forward contracts which are included in the foreign currency exchange
risk analysis below) was $7.5 billion , compared to $8.6 billion at December 31,
2020 . If the underlying exposure of each investment-related derivative held at
June 30, 2021 depreciated by 100 basis points, it would have resulted in a
reduction in net income of approximately $75.0 million , and a decrease in book
value per share of approximately $0.19 per share, compared to $85.7 million and
$0.21 per share, respectively, on investment-related derivatives held at
December 31, 2020 . If the underlying exposure of each investment-related
derivative held at June 30, 2021 appreciated by 100 basis points, it would have
resulted in an increase in net income of approximately $75.0 million , and an
increase in book value per share of approximately $0.19 per share, compared to
$85.7 million and $0.21 per share, respectively, on
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Table of Contents investment-related derivatives held atDecember 31, 2020 . 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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