Arch Capital : Task Force on Climate-related Financial Disclosures 2020

ARCH CAPITAL GROUP LTD.: TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES

As a global specialty property and casualty (re)insurance provider and a mortgage (re)insurance company, Arch Capital Group Ltd. (together with its consolidated subsidiaries, Arch or the Company) delivers innovative solutions grounded in risk management expertise and a deep understanding of its markets and customer needs.

We acknowledge that climate change presents potentially far-reaching implications to our business and customers and the broader global economy. We are committed to improving our understanding of these implications and providing products and services that will be useful to our customers while appropriately addressing evolving climate-related risks.

In this report, we discuss our approach to managing the risk associated with changing climate conditions. We have aligned this inaugural climate risk report with the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, including the following disclosure categories:

1. Climate Risk Governance

1. Climate Risk Management

III. Strategy

IV. Metrics & Targets

1. Climate Risk Governance

The TCFD guidance requests that insurance companies disclose the organization's governance around climate-related risks and opportunities, including the roles of both the Board of Directors and management.

Our Approach. Our holistic approach to risk management involves analyzing risk from both a top-down and bottom-up perspective. The Company's risk management framework includes both our:

1. Risk philosophy and policies to address the material risks confronting the group; and
2. Compliance, approach and procedures to control and/or mitigate these risks.

The actions and policies implemented to meet Arch's business management and regulatory obligations form this framework's core. Climate change risk is embedded in our existing risk management framework.

Environmental Social Governance (ESG) Oversight. In 2019, we formed our ESG team to enhance our management of ESG factors and coordinate our sustainability efforts across our businesses, including the integration of climate change in our corporate strategy. At that time we also established an executive-levelESG Steering Committee made up of leaders from across the business to provide constructive and practical guidance. There is regular communication between our Chief ESG Officer and leaders throughout our operations. The Chief ESG Officer provides formal reports to the Steering Committee at least twice a year. In addition, as of February 2020, the Nominating and Governance Committee (N&G Committee) of our Board of Directors (Board) oversees our ESG activities. Our Chief ESG Officer meets with the N&G Committee at least two times per year and provides quarterly updates.

As our ESG program continues to mature, this established oversight structure will expand to incorporate subcommittees at the business and operating levels to manage specific ESG integration initiatives. For example, earlier this year, we established a subcommittee of the ESG Steering Committee to outline an approach to integrating environmentally sensitive considerations into underwriting risks associated with the thermal coal industry. This subcommittee was made up of senior underwriting officers, risk professionals and the ESG team. Recognizing that certain sensitive transactions, including thermal coal mining and thermal coal-powered plants, have heightened environmental risks, the subcommittee prepared a thermal coal underwriting risk policy, adopted by the Company in early 2021 (https:// www.archcapgroup.com/sustainability-governance/ documents/).

Risk Identification and Assessment. The Finance, Investment and Risk Committee (FI&R Committee), Audit Committee and Underwriting Oversight Committee of our Board oversee the top-downand bottom-upreview of risks. These committees consider insurance, investments and operational risks within the scope of their assessments. Our Chief Risk Officer (CRO) assists these committees in identifying and assessing all key risks.

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Risk Monitoring, Control and Reporting. Our CRO is responsible for maintaining the Company's Risk Register and continually reviewing and challenging risk assessments, including the impact of emerging risks such as climate change. In 2019, we introduced ESG factors into our Risk Register. In 2020 and 2021, we expanded the Risk Register and our risk assessment process to include climate change. Please also see the "Climate Risk Management" for additional information on the Risk Register process. Quarterly, the CRO compiles the key risk review process results into a report to the FI&R Committee. The ACGL Risk Register is presented to the FI&R Committee on an annual basis for review, followed by Board approval.

ESG Investment Governance. Our investment team is responsible for preserving and protecting over $25 billion in assets for our global affiliates (as of December 31, 2020). As stewards of Arch's capital, they manage the portfolio conservatively to secure reserves and ensure our ability to pay claims when due. We believe that by incorporating material, nonfinancial factors such as climate risk into investment selection and risk management, we will enhance our investment returns over the long-term.

In 2020, we expanded our Chief Investment Services Officer's role to include ESG oversight. We established an Investments ESG Steering Committee to set ESG strategy and focus on managing ESG-related risks in our investments with sustainability-themed investments to support Arch's effort to address climate change. Comprised of our CRO, Chief ESG Officer and key members of our investment team, the ESG Steering Committee meets quarterly.

For our internally managed assets, ESG considerations guide investment selection to reduce ESG risk in the portfolio. Our exposure to coal and fossil fuels is de minimis and we systematically seek to reduce exposure to companies with poor ESG scores and opportunistically seek to add renewables or positive ESG assets to the portfolio through all asset classes. See page 5 for more on "Impact Investments."

1. Climate Risk Management

The TCFD guidance requests that insurance companies disclose how the organization identifies, assesses and manages climate-related risks. Time frames used for risks and scenarios should include short-,medium-, and long-term milestones. Insurers should include evaluations of physical risks, transition risks and liability risks.

As previously described, one key element of our risk management framework is our Risk Register, which

includes an analysis of all risks facing Arch and details the corresponding controls and/or mitigation with respect of these risks. Material changes in the underlying risks, such as changes in business mix, reinsurance strategy and investment strategy, are evaluated for potential impact upon the Company's capital requirements. This process ensures material risks are included within the Register, feed into the analysis of capital requirements and, in some cases, trigger further investigation through stress testing.

While risks tied to climate change historically had been embedded within other risks in our Risk Register, we undertook an initiative beginning in 2020, and continuing through 2021, to identify climate-change risk components in our risk universe and articulate these more specifically in our Risk Register. This initiative was a collaborative effort among our ESG, Risk Management, Investments and business teams to embed evaluations of climate-change risk into our already mature enterprise risk management processes.

The summary of our current assessment of climate change risk is contained in the "Our Identified Climate- Related Business Risks" table that follows.

1. Strategy

The TCFD guidance requests that insurance companies disclose the actual and potential impacts of climate-related risks and opportunities on the organization's businesses, strategy, and financial planning where such information is material.

Arch has undertaken several steps to integrate climate factors and considerations across our business. Starting at the corporate level, we completed a high-level assessment to determine the climate factors most materially relevant to our worldwide business over the short, medium and long term. It incorporated direct feedback from our global risk management leadership, with our CRO's ultimate oversight.

We focused on identifying climate-related risks and opportunities across our key business units and developing strategic responses for our underwriting and investment management activities for our first year.

The "Our Identified Climate-Related Business Risks" table outlines our identified climate-related considerations along with the corresponding potential risk to our business.

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Our Identified Climate-Related Business Risks

	Time		Climate Change Risks	Business Risk
	Horizon		(Transition*/Physical*/Liability*)
	Short				Increased regulatory requirements and mandates	Underwriting and exposure selection risk
	Term				related to climate-related issues	Exposure monitoring and reporting risk
	(1-4
							Reputational risk related to reporting requirements
	years)
			Increased uncertainty and unpredictability of	Pricing risk
						frequency and severity of natural catastrophes such	Accumulation management risk
						as extreme weather events, including the
						aggregation of such events
	Medium		Shifting market dynamics tied to climate change risk	Risk profile uncertainty for carbon-intensive assets,
	Term		(e.g., risk profiles, technological innovation,	firms or sectors including revenue and/or income
(4-6					regulatory scrutiny, and evolving consumer	loss
	years)		preferences)
		Reputational risk associated with failing to meeting
								new market environment/customer expectations
								External influences impact Arch strategic plan
						Change in risk profiles of insurance product	Underwriting exposure and selection risk including:
						exposures	property, general liability, directors' and officers'
								liability and mortgage insurance
								Accumulation management risk
								Model risk from increased claims frequency and
								severity not included in historical data
						Regional economic hardship due to climate change	Underwriting exposure and selection risk
						events and regulation
						Product design and demand risk
	Long		Increased frequency and/or severity of natural	Underwriting exposure and selection risk
	Term		catastrophe and extreme weather events	Accumulation management risk
(6-50						Product design and demand risk
	years)
		Stringent regulatory mandates such as government	Revenue and or business risk due to government
						policies and sustainable reforms on climate change	policies and/or influence from external pressure
						restricting insuring/investing in carbon-intensive	groups
						sectors
						Permanent change in economic activities and risk	Product design and demand risk
						profiles due to climate change		Reduction in reinsurer financial strength and risk
								transfer appetite or capacity
						Increased capital requirements and/or reduced	Increased capital charges for climate change from
						returns on equity	ratings agencies or regulators
								Inability to execute new capital market risk transfer
								transactions
						Physical impact of climate change on business	Increased business interruption and operational
						operations	costs

*Transition Risk Factors: resulting from the global transition to a carbon-neutral or low-carbon economy

*Physical Risk Factors: resulting from the direct damages caused by climate events

*Liability Risk Factors: relating to climate-related insurance claims under liability insurance policies and direct legal claims against insurers for failing to manage climate risks

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Climate Opportunities

Climate change presents new opportunities for our business as we evolve. Below are examples of climate- related opportunities across our identified time horizons. These examples should not be construed as a characterization regarding the materiality or financial impact of these opportunities.

Climate Opportunities for Our Underwriting

We have an opportunity to earn more revenue through the demand for clean energy, renewable energy and clean technology (short-term opportunity). An increase or expansion in legislation and regulation related to the environment, including solar energy, could increase demand for insurance products relating to such regulations. For example, there could be more demand for specialized insurance products for all aspects of the renewable energy industry, including construction policies for contractors who focus on renewable energy and LEED construction, surety products that support the efficacy of renewable energy sources, excess and surplus casualty products that cover all stages of renewable energy construction, directors' and officers' liability coverage in the renewables area and professional indemnity coverage for energy consultants, property managers, architects and engineers with Leadership in Energy and Environmental Design (LEED) design certifications. If the changes result in growth in the renewable energy and clean technology sectors, we could see increased sales of specialized insurance and surety products that address renewable energy associated risks. Through our lenders products, we could see a demand for service contracts for individuals generating renewable energy mainly from solar energy.

We have an opportunity to increase our risk control offerings as a means of raising awareness of climate change risk and mitigating risk for our insureds. Our risk control staff has helped our U.S. insurance customers better understand and manage their environmental exposures. Through our risk and loss control service platform, "Arch Risk Control," we are working with insureds to improve their environmental preservation approach. We provide businesses with comprehensive services that include dedicated training, technical information and consulting solutions for reducing the risk of fire and the related carbon emissions, emergency response planning, flood emergency response plan development, hurricane preparedness and avoiding the risks commonly associated with solar panel installations.

We have an opportunity to develop products and/or services for renewable energy businesses through innovation (medium-term opportunity). Since most of our non-mortgage(re)insurance contracts are renewed annually, we can offer natural catastrophe coverage designed to help our customers cope with current climate risks. In addition, we undertake special efforts to help expand (re)insurance protection, through our sovereign lending products in underdeveloped markets and other innovative risk transfer instruments.

Arch is active in the renewable energy (re)insurance business and has focused on brokers and companies that specialize in the clean energy sector. We anticipate new opportunities will emerge that will necessitate (re)insurance protection in many of our business units including property, liability, construction and workers' compensation.

We have an opportunity to improve our operational efficiency by employing energy efficient strategies to lower our emissions. At Arch, we are working to reduce -andwhere possible eliminate-theharmful impacts our operations have on our world's natural environment. In this report we introduce our first assessment of our greenhouse gas emissions and provide an overview of our approach to not only measuring our footprint, but also aligning on a go- forward strategy to reduce and offset our carbon emissions. This data covers FY19-asour intent with our first year of reporting is to establish a reasonable baseline data set that reflects our average emissions output over time. Our 2020 numbers were highly skewed due to the global pandemic related to COVID-19,so 2020 would not be an appropriate benchmark year.

Climate Opportunities for Our Investments

We have an opportunity to invest in companies committed to positive and measurable environmental outcomes. We consider ESG factors for both our internally managed assets and those assets managed by third parties. Additionally, we measure our exposure to ESG risks, such as climate change, at both the individual asset class and total portfolio levels to make the portfolio more resilient to climate change's adverse effects. We recognize the importance of climate change factors in assessing the sustainability performance of entities in which we invest. Our ESG Aware Statement (Statement), approved by our Board and formalized in 2019, reflects our sustainable value creation approach. The Statement requires that we consider ESG factors in the investment process to the extent relevant. We expect that the integration of ESG factors in the investment process will improve the risk/ return relationship, particularly over the longer term.

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