Arch Capital : 2020 Solvency and Financial Condition Report

ARCH REINSURANCE EUROPE UNDERWRITING DAC 2020 SOLVENCY AND FINANCIAL CONDITION REPORT

Arch Reinsurance Europe

Underwriting dac

08 April 2021

©2021 Arch Reinsurance Europe Underwriting dac. All rights reserved.

SOLVENCY AND FINANCIAL CONDITION REPORT
Table of Contents
Summary……………………....................................................................................................................................	1
SECTION A - Business and Performance.........................................................................................................	5
A.1	Business ............................................................................................................................	5
A.2	Underwriting Performance................................................................................................	7
A.3	Investment Performance .................................................................................................	10
A.4 Performance of other activities .......................................................................................	12
A.5	Any other information.....................................................................................................	12
SECTION B - System of Governance .............................................................................................................	13
B.1	General information on the system of governance .........................................................	13
B.2	Fit and proper requirements ............................................................................................	19
B.3	Risk management system including the own risk and solvency assessment..................	20
B.4	Internal control system....................................................................................................	26
B.5	Internal audit function.....................................................................................................	27
B.6	Actuarial function ...........................................................................................................	29
B.7	Outsourcing.....................................................................................................................	30
B.8	Assessment......................................................................................................................	30
B.9	Any other information.....................................................................................................	30
SECTION C - Risk Profile ................................................................................................................................	32
C.1	Underwriting risk ............................................................................................................	32
C.2	Market risk......................................................................................................................	34
C.3	Credit risk........................................................................................................................	37
C.4	Liquidity risk...................................................................................................................	38
C.5	Operational risk...............................................................................................................	39
C.6	Other material risks.........................................................................................................	40
C.7	Any other information.....................................................................................................	41
SECTION D - Valuation for Solvency Purposes .............................................................................................	42
D.1	Assets ..............................................................................................................................	42
D.2	Technical provisions .......................................................................................................	45
D.3	Other liabilities................................................................................................................	52
D.4 Alternative methods for valuation ..................................................................................	53

D.5	Any other information.....................................................................................................	53
SECTION E - Capital Management ................................................................................................................	54
E.1	Own Funds ......................................................................................................................	54
E.2	Solvency Capital Requirement and Minimum Capital Requirement .............................	56
E.3	Use of the duration-based equity risk sub-module in the calculation of the SCR ..........	58
E.4	Differences between the standard formula and any internal model used .......................	58
E.5	Non-compliance with the MCR and non-compliance with the SCR..............................	58
E.6	Any other information.....................................................................................................	58
Appendix 1	- ARCH CAPITAL GROUP LTD Organizational Structure…………................................................. 59
Appendix 2	- Glossary ...................................................................................................................................	60
Appendix 3	- Quantitative Reporting Templates. ........................................................................................	63

SUMMARY

Arch Reinsurance Europe Underwriting dac ("ARE" or "the Company") is an Irish regulated composite reinsurance entity authorised by the Central Bank of Ireland ('CBI"). The Company's ultimate parent is Arch Capital Group Ltd. ("ACGL" and, together with its subsidiaries, the "Group" or the "Arch Group"), whose common shares are listed and traded on the NASDAQ stock market in the U.S. The Company is a property and casualty reinsurance underwriting company writing a diversified portfolio, both in terms of product mix and geography, in non-commoditised niche areas primarily.

Business, Strategy & Performance

Gross written premium ("GWP") for 2020 was €383.2m, which is 15% up compared to prior year. Net underwriting profit increased to €17.4m up from €7.2m in 2019. The increase in net underwriting profit was driven by a combination of lower losses incurred, higher net earned premium after a €5.5m (€5.3m in 2019) adjustment from the revaluation of UPR for foreign exchange movements and lower operating expenses. Pre-tax profits including investment income amounted to €31.2m which compared to €22.4m for the prior year.

The declaration by the World Health Organisation on 11th March 2020 of the outbreak of Covid-19 virus as a pandemic precipitated widespread social and economic lockdowns across the world. This situation has continued, on and off, to varying degrees in most countries throughout the year. The effect of the pandemic on the insurance markets has been mixed. The full impact of the first wave, which continues to unfold and fully crystalize, was significant in terms of directly impacting businesses that had to close (business interruption), cancel or postpone events & travel. Secondary indirect impacts are yet to meaningfully emerge and are expected in areas impacted by economic slowdowns resulting in business failures and bankruptcies that could in turn impact business lines such as credit insurance, medical malpractice, or employer's liability. On the positive side, the lockdowns have led to reduced movement and activity which has resulted in lower frequency in motor insurance. The net impact to the Company from these events was very manageable and largely limited to claims from travel and anticipated claims in trade credit and surety.

The insurance market has reacted vigorously by tightening the insurance and reinsurance conditions and clarifying which events are covered for what period. Not solely due to Covid-19, but accelerated by it, underwriting has become more disciplined in both the primary and reinsurance markets. There is a significant withdrawal of re/insurance capacity either by companies fully exiting certain businesses or partially to manage their results and/or result volatility. Consequently, pricing and conditions are tightening in property (inter alia catastrophe, per risk, engineering, and facultative), marine, professional liability, aviation, and excess liability. Business interruption claims have been minimal due to the Company's limited exposure in property.

The Company has remained faithful to its underwriting philosophy of writing business that meets our return on equity (ROE) criteria whilst taking advantage of opportunities that emerged either as a result of improved market conditions or the overall improvement in pricing in certain lines of business. The growth of the business compared to 2019 was largely a result of the retention of existing business, and the identification of those new opportunities which met our underwriting and ROE criteria.

The Company purchases reinsurance on the business it writes to protect it against adverse performance and to efficiently manage capital. The Company's external reinsurance purchases are in the form of both

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excess of loss and quota share agreements. In addition, the Company cedes 85% of its net retained premium under a quota share agreement with a related group entity, Arch Reinsurance Ltd. ("ARL"), a Bermuda domiciled company with $14.4 billion (2019: $12.4 billion) of capital, comprised of shareholders' equity and debt as at 31 December 2020. More details about the Company's business and performance can be found in Section A.

System of governance

The Company maintains an effective system of governance, which provides for sound and prudent management of its integrated operations.

The Company has designed its system of governance to achieve the following:

• Maintain an adequately transparent organizational structure that has well-defined, clear, consistent and documented lines of responsibility across the integrated operations;
• Ensure staff have the skills, knowledge and expertise necessary to properly discharge their assigned responsibilities;
• Establish and maintain processes to achieve effective internal reporting and communication of information at all relevant levels within the integrated operations;
• Maintain information systems that produce sufficient, reliable, consistent, timely and relevant information concerning all business activities, the commitments assumed and the risks to which the integrated operations are exposed;
• Safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question; and
• Ensure that outsourced responsibilities are delegated and managed appropriately, with ultimate responsibility residing with the Board.

The system of governance is based on the principle of proportionality, such that systems and controls are proportionate to the nature, scale and complexity of the integrated Company's operations.

In this regard, the Company's Board of Directors ("Board") monitors key aspects of the business and is assisted where appropriate by the Risk and Audit Committees of the Board.

It is not deemed appropriate or proportionate, given the scale of the business and the governance structure in place to appoint an Investment Committee, Nomination Committee or a Remuneration Committee. In addition, the Board reviews information that would otherwise be addressed by such committees at its meetings.

The principles and requirements of the system of governance, particularly risk management, internal control, internal audit and outsourcing, are the responsibility of the Board. While retaining these responsibilities, the Board has delegated the authority for day-to-day risk management to ARE's Executive team. The Company's Chief Risk Officer ("CRO") monitors the Risk Management Framework for operating effectiveness and reports to the Risk Committee and Board as appropriate.

The Board has approved formal policies, which are a component of the Company's Governance Structure.

The system of governance is assessed via reviews by the Head of Compliance (HOC) , together with the CRO and periodic evaluation by Internal Audit. All related findings and/or reports are presented to the Audit Committee and the Board. Section Bprovides details on the Company's governance system.

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