# ARCH CAPITAL GROUP LTD. (ACGL) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ARCH CAPITAL GROUP LTD.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/947484/000094748424000020/acgl-20231231.htm
Accession: 0000947484-24-000020
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ACGL/
All MD&A years: /company/ACGL/mda/
Previous year: /company/ACGL/mda/fy2022/ (FY 2022)
Next year: /company/ACGL/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition and results of operations for the year ended December 31, 2023 and 2022. Comparisons between 2022 and 2021 have been omitted from this Form 10-K, but may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K year ended December 31, 2022 filed with the SEC. This discussion and analysis contains forward-looking statements which involve inherent risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. These statements are based on our current assessment of risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements and, therefore, undue reliance should not be placed on them. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed in this report, including the sections entitled “Cautionary Note Regarding Forward-Looking Statements,” and “Risk Factors.”

This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto presented under Item 8. All amounts are in millions, except per share amounts, unless otherwise noted.

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[["","","","Page No."],["Overview","","65"],["Current Outlook","","65"],["Financial Measures","","66"],["Comments on Non-GAAP Measures","","67"],["Results of Operations","","69"],["","Insurance Segment","","69"],["","Reinsurance Segment","","71"],["","Mortgage Segment","","72"],["","Corporate Segment","","73"],["Summary of Critical Accounting Estimates","","75"],["Financial Condition","","83"],["Liquidity","","85"],["Capital Resources","","87"],["Contractual Obligations and Commitments","","90"],["Ratings","","91"],["Catastrophic Events and Severe Economic Events","","91"],["Market Sensitive Instruments and Risk Management","","93"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","64","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

OVERVIEW

Arch Capital Group Ltd. (“Arch Capital” and, together with its subsidiaries, “we” or “us”) is a publicly listed Bermuda exempted company with approximately $21.1 billion in capital at December 31, 2023 and is part of the S&P 500 index. Through operations in Bermuda, the United States, United Kingdom, Europe, Canada and Australia, we write specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis. It is our belief that our underwriting platform, experienced management team and strong capital base enable us to establish a strong presence in the markets where we operate.

The worldwide property casualty insurance and reinsurance industry is highly competitive and has traditionally been subject to an underwriting cycle. In that cycle, a “hard” market is evidenced by high premium rates, restrictive underwriting standards, narrow terms and conditions, and strong underwriting profits for insurers. A “hard” market typically attracts new capital and new entrants to the market and is eventually followed by a “soft” market, which has characteristics of low premium rates, relaxed underwriting standards, broader terms and conditions, and lower underwriting profits for insurers. Market conditions in the property and casualty arena may affect, among other things, the demand for our products, our ability to increase premium rates, the terms and conditions of the insurance policies we write, changes in the products offered by us or changes in our business strategy.

The financial results of the property casualty insurance and reinsurance industry are influenced by factors such as the frequency and/or severity of claims and losses, including natural disasters or other catastrophic events, variations in interest rates and financial markets, changes in the legal, regulatory and judicial environments, inflationary pressures and general economic conditions. These factors influence, among other things, the demand for insurance or reinsurance, the supply of which is generally related to the total capital of competitors in the market.

Mortgage insurance and reinsurance are subject to similar cycles to property casualty except that they have historically been more dependent on macroeconomic conditions.

CURRENT OUTLOOK

As we conclude another record year and head into 2024, our objective remains the same, to deliver long term value for our shareholders. With our commitment to underwriting acumen, prudent reserving and cycle-focused capital allocation, we were able to deliver another profitable year. Our full year financial performance was excellent, with an annualized net income and operating returns on average common equity of 29.7% and 21.6%, respectively. See “Comment on Non-GAAP Financial Measures.”

We continue to execute our cycle management strategy by actively allocating capital to the segments with the best risk adjusted returns. Growth was strong all year in our property and casualty segments which wrote over $17 billion of gross premium written and over $12.4 billion of net premium written, and, while most current growth opportunities are in the property and casualty sector, it is important to recognize the steady and quality underwriting performance of our mortgage group. Although mortgage market conditions meant fewer opportunities for top line growth, the mortgage segment continued to generate significant profits totaling nearly $1.1 billion of underwriting income for the year.

At Arch, our primary focus has always been on rate adequacy, regardless of market conditions. Our underwriting culture dictates that we include a meaningful margin of safety in our pricing, especially in softer conditions and take a longer term view of inflation and rates. As underwriting opportunities arise, our reinsurance segment is able to react quickly and significantly when markets pivot. In the reinsurance property market, our overall exposure to property catastrophe risk remains well below our self imposed threshold (see “Catastrophic and Severe Economic Events”) and, because of our diversified portfolio and broad set of opportunities, we retain the flexibility to pursue the most attractive returns across lines and geographies. The hard market conditions remained elevated in several lines during the January 1, 2024 renewal cycle.

In our insurance segment, we continue to take advantage of favorable global market conditions with net premiums written up 17% in 2023. Although pricing has declined in some lines, such as large public directors and officers liability insurance, the markets in which our insurance segment operates generally continue to provide adequate returns. In 2023, the most notable gains came in property, marine, construction and national accounts.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","65","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Inflation continues to be a focus for our industry. We proactively analyze available data and we incorporate emerging trends into our pricing and reserving. We believe that this discipline, coupled with increases in future investment returns and prudent reserving, allows us to maximize the capabilities of our diversified platform.

Our mortgage segment continues to deliver a steady level of earnings for our shareholders. Higher persistency of our in force U.S. primary mortgage insurance portfolio helped offset the significant industry wide reduction in mortgage originations in 2023. The credit profile of our U.S. primary mortgage insurance portfolio remains excellent and the overall mortgage market continues to be disciplined and return focused. We continue to see meaningful opportunities for the mortgage segment outside of the U.S. and our strategic decision to diversify our mortgage operations is yielding positive results.

FINANCIAL MEASURES

Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for Arch 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 and common share equivalents 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 of Arch 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 $46.94 at December 31, 2023, a 43.9% increase from $32.62 at December 31, 2022. The increase in book value per share in 2023 reflected strong underwriting and investment results and also reflected the establishment of a net deferred income tax asset of $1.18 billion, or $3.16 per share, related to the enactment of Bermuda’s new corporate income tax.

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 average common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a “non-GAAP measure” as defined in the SEC rules, 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 investments accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes. Management uses Operating ROAE as a key measure of the return generated to Arch common shareholders. See “Comment on Non-GAAP Financial Measures.”

Our annualized net income return on average common equity was 29.7% for 2023, compared to 11.6% for 2022. Our Operating ROAE was 21.6% for 2023, compared to 14.8% for 2022, with the higher return in 2023 primarily resulting from improved underwriting results and growth in net investment income.

Total Return on Investments

Total return on investments includes investment income, equity in net income or loss of investments accounted for using the equity method, net realized gains or losses and the change in unrealized gains or losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis before investment expenses, excluding amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. Management uses total return on investments as a key measure of the return generated for Arch common shareholders on the capital held in the business, and compares the return generated by our investment portfolio against benchmark returns. See “Comment on Non-GAAP Financial Measures.”

The following table summarizes the pre-tax total return (before investment expenses) of investments held by Arch compared to the benchmark return (both based in U.S. Dollars) against which we measured our portfolio during the periods:

[[GREPCENT_TABLE]]
[["","Arch Portfolio (1)","","Benchmark Return"],["Year Ended December 31, 2023","7.57","%","","8.28","%"],["Year Ended December 31, 2022","-6.45","%","","-9.60","%"]]
[[/GREPCENT_TABLE]]

(1) Our investment expenses were approximately 0.26% and 0.28%, respectively, of average invested assets in 2023 and 2022.

Total return for 2023 reflected strong returns in fixed income, equity and alternative strategies. Actual performance trailed the benchmark return for the year, largely due to the portfolio being underweight risk assets compared to the benchmark. We continue to maintain a relatively short duration on our portfolio of 2.91 years at December 31, 2023.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","66","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

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. At December 31, 2023, the benchmark return index had an average credit quality of “A1” by Moody’s, an estimated duration of 2.64 years.

The benchmark return index included weightings to the following indices:

[[GREPCENT_TABLE]]
[["","%"],["ICE BofA 1-10 Year U.S. Corporate Index","28.50"],["Yield on 3-5 Year U.S. Treasury Index plus 6%","16.50"],["ICE BofA 1-10 Year U.S. Treasury Index","15.75"],["ICE BofA U.S. High Yield Constrained Index","8.00"],["ICE BofA 1-5 Year U.K. Gilt Index","5.50"],["JPM CLOIE Investment Grade","4.50"],["ICE BofA German Government 1-5 Year Index","2.80"],["ICE BofA German Government 5-7 Year Index","1.20"],["S&P 500 Total Return Index","4.00"],["ICE BofA 0-3 Month U.S. Treasury Index","3.00"],["ICE BofA U.S. ABS & CMBS Index","3.00"],["ICE BofA 1-5 Year Australia Government Index","2.50"],["ICE BofA U.S. Mortgage Backed Securities Index","1.50"],["ICE BofA 1-5 Year Canada Government Index","2.70"],["ICE BofA 15+ Year Canada Government Index","0.30"],["ICE BofA 1-5 Year Japan Government Index","0.25"],["Total","100.00","%"]]
[[/GREPCENT_TABLE]]

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 investments accounted for using the equity method, net foreign exchange

gains or losses, transaction costs and other, net of income taxes (which for the 2023 fourth quarter includes a one-time deferred income tax benefit related to the enactment of Bermuda’s new corporate income tax), 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 net income 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 investments 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 investments accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize these items 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 investments and the timing of the recognition of equity in net income or loss of investments 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.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","67","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

In the 2023 fourth quarter, the Company established a net deferred income tax asset, resulting in a benefit of $1.18 billion, consistent with the transition provisions specified in the Bermuda CIT Act. Due to the non-recurring nature of this one-time item, the Company believes that excluding this item from after-tax operating income or loss available to common shareholders provides the user with a better evaluation of the Company’s ongoing business performance.

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 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 that 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 segment. While these measures are presented in note 4, “Segment Information,” to our consolidated financial statements in Item 8, 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 in Item 8.

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 intangible assets, and, accordingly, investment income, income from operating affiliates and other non-underwriting related items are not allocated to each underwriting segment.

Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution from the ‘other’ segment. Through June 30, 2021, the ‘other’ segment included the results of Somers Holdings Ltd. (formerly Watford Holdings Ltd.). Somers Holdings Ltd. is the parent of Somers Re Ltd., a multi-line Bermuda reinsurance company (together with Somers Holdings Ltd., “Somers”). Pursuant to GAAP, Somers was considered a variable interest entity and we concluded that we were the primary beneficiary of Somers. As such, we consolidated the results of Somers in our consolidated financial statements through June 30, 2021. In the 2020 fourth quarter, Arch Capital, Somers, and Greysbridge Ltd., a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). Arch Capital assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Greysbridge”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Somers is wholly owned by Greysbridge, and Greysbridge is owned 40% by Arch and 30% by certain funds managed by Kelso and 30% by certain funds managed by Warburg. Based on the governing documents of Greysbridge, we concluded that, while we retain significant influence over Greysbridge, Greysbridge does not constitute a variable interest entity. Accordingly, effective July 1, 2021, we no longer consolidate the results of Somers in our consolidated financial statements and footnotes. See note 12, “Variable Interest Entities and Noncontrolling Interests” and note 4, “Segment Information,” to our consolidated financial statements for additional information on Somers.

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 investments accounted for using the equity method, net realized gains or losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains or 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

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","68","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

total return on investments as a key measure of the return generated to Arch common shareholders on the capital held in the business, and compares the return generated by our investment portfolio against benchmark returns which we measured our portfolio against during the periods.

RESULTS OF OPERATIONS

The following table summarizes our consolidated financial data, including a reconciliation of net income available to Arch common shareholders to after-tax operating income available to Arch common shareholders. See “Comment on Non-GAAP Financial Measures.”

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Net income available to Arch common shareholders","$","4,403","","","$","1,436"],["Net realized (gains) losses (1)","165","","","663"],["Equity in net (income) loss of investments accounted for using the equity method","(278)","","","(115)"],["Net foreign exchange (gains) losses","62","","","(102)"],["Transaction costs and other","6","","","\u2014"],["Income tax expense (benefit) (2)","(1,157)","","","(42)"],["After-tax operating income available to Arch common shareholders","$","3,201","","","$","1,840"],["Beginning common shareholders\u2019 equity","$","12,080","","","$","12,716"],["Ending common shareholders\u2019 equity","17,523","","","12,080"],["Average common shareholders\u2019 equity","$","14,802","","","$","12,398"],["Annualized net income return on average common equity %","29.7","","","11.6"],["Annualized operating return on average common equity %","21.6","","","14.8"]]
[[/GREPCENT_TABLE]]

(1) Net realized gains or losses include realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains and losses on derivative instruments and changes in the allowance for credit losses on financial assets.

(2) Income tax on net realized gains or losses, equity in net income or loss of investments 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. The 2023 results were impacted by the establishment of a net deferred income tax asset of $1.18 billion, or $3.10 per share, related to the enactment of Bermuda’s new corporate income tax.

Segment Information

We classify our businesses into three underwriting segments – insurance, reinsurance and mortgage – and two operating segments – corporate 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 of Arch Capital, the Chief Financial Officer and Treasurer of Arch Capital and the President and Chief Underwriting Officer of Arch 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:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","% Change"],["Gross premiums written","$","7,911","","","$","6,931","","","14.1"],["Premiums ceded","(2,049)","","","(1,910)"],["Net premiums written","5,862","","","5,021","","","16.7"],["Change in unearned premiums","(416)","","","(461)"],["Net premiums earned","5,446","","","4,560","","","19.4"],["Losses and loss adjustment expenses","(3,122)","","","(2,784)"],["Acquisition expenses","(1,055)","","","(887)"],["Other operating expenses","(819)","","","(665)"],["Underwriting income","$","450","","","$","224","","","100.9"],["Underwriting Ratios","","","","","% Point Change"],["Loss ratio","57.3","%","","61.0","%","","(3.7)"],["Acquisition expense ratio","19.4","%","","19.4","%","","\u2014"],["Other operating expense ratio","15.0","%","","14.6","%","","0.4"],["Combined ratio","91.7","%","","95.0","%","","(3.3)"]]
[[/GREPCENT_TABLE]]

The insurance segment consists of our insurance underwriting units which offer specialty product lines on a worldwide basis, as described in note 4, “Segment Information,” to our consolidated financial statements in Item 8.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","69","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Net Premiums Written.

The following tables set forth our insurance segment’s net premiums written by major line of business:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","Amount","","%","","Amount","","%"],["Professional lines","$","1,401","","","23.9","","$","1,502","","","29.9"],["Property, energy, marine and aviation","1,219","","","20.8","","878","","","17.5"],["Programs","742","","","12.7","","611","","","12.2"],["Construction and national accounts","628","","","10.7","","470","","","9.4"],["Travel, accident and health","559","","","9.5","","484","","","9.6"],["Excess and surplus casualty","540","","","9.2","","461","","","9.2"],["Warranty and lenders solutions","235","","","4.0","","139","","","2.8"],["Other","538","","","9.2","","476","","","9.5"],["Total","$","5,862","","","100.0","","$","5,021","","","100.0"]]
[[/GREPCENT_TABLE]]

Net premiums written by the insurance segment were 16.7% higher in 2023 than in 2022. The increase in net premiums written reflected growth in most lines of business, primarily due 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:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","Amount","","%","","Amount","","%"],["Professional lines","$","1,419","","","26.1","","$","1,314","","","28.8"],["Property, energy, marine and aviation","1,064","","19.5","","772","","16.9"],["Programs","658","","12.1","","590","","12.9"],["Construction and national accounts","561","","10.3","","432","","9.5"],["Travel, accident and health","557","","10.2","","492","","10.8"],["Excess and surplus casualty","486","","8.9","","393","","8.6"],["Warranty and lenders solutions","185","","3.4","","128","","2.8"],["Other","516","","9.5","","439","","9.6"],["Total","$","5,446","","","100.0","","$","4,560","","","100.0"]]
[[/GREPCENT_TABLE]]

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 by the insurance segment were 19.4% higher in 2023 than in 2022, reflecting changes in net premiums written over the previous five quarters.

Losses and Loss Adjustment Expenses.

The table below shows the components of the insurance segment’s loss ratio:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Current year","58.1","%","","61.6","%"],["Prior period reserve development","(0.8)","%","","(0.6)","%"],["Loss ratio","57.3","%","","61.0","%"]]
[[/GREPCENT_TABLE]]

Current Year Loss Ratio.

The insurance segment’s current year loss ratio was 3.5 points lower in 2023 than in 2022. The 2023 loss ratio included 2.7 points of current year catastrophic event activity, spread across series of global events, compared to 5.2 points in 2022, primarily related to Hurricane Ian and a series of global events. The balance of the change in the 2023 current year loss ratio resulted, in part, from the effect of rate increases, changes in mix of business and the level of attritional losses.

Prior Period Reserve Development.

The insurance segment’s net favorable development was $42 million, or 0.8 points, for 2023, compared to $25 million, or 0.6 points, for 2022. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements in Item 8 for information about the insurance segment’s prior year reserve development.

Underwriting Expenses.

The insurance segment’s underwriting expense ratio was 34.4% in 2023, compared to 34.0% in 2022, with the increase primarily related to higher incentive compensation costs.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","70","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Reinsurance Segment 

The following tables set forth our reinsurance segment’s underwriting results:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","% Change"],["Gross premiums written","$","9,113","","","$","6,948","","","31.2"],["Premiums ceded","(2,559)","","","(2,024)"],["Net premiums written","6,554","","","4,924","","","33.1"],["Change in unearned premiums","(718)","","","(965)"],["Net premiums earned","5,836","","","3,959","","","47.4"],["Other underwriting income (loss)","17","","","5"],["Losses and loss adjustment expenses","(3,227)","","","(2,568)"],["Acquisition expenses","(1,240)","","","(813)"],["Other operating expenses","(288)","","","(268)"],["Underwriting income","$","1,098","","","$","315","","","248.6"],["Underwriting Ratios","","","","","% Point Change"],["Loss ratio","55.3","%","","64.9","%","","(9.6)"],["Acquisition expense ratio","21.2","%","","20.5","%","","0.7"],["Other operating expense ratio","4.9","%","","6.8","%","","(1.9)"],["Combined ratio","81.4","%","","92.2","%","","(10.8)"]]
[[/GREPCENT_TABLE]]

The reinsurance segment consists of our reinsurance underwriting units which offer specialty product lines on a worldwide basis, as described in note 4, “Segment Information,” to our consolidated financial statements in Item 8.

Net Premiums Written.

The following tables set forth our reinsurance segment’s net premiums written by major line of business:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","Amount","","%","","Amount","","%"],["Other specialty","$","2,412","","","36.8","","$","1,983","","","40.3"],["Property excluding property catastrophe","1,910","","","29.1","","1,276","","","25.9"],["Casualty","1,002","","","15.3","","973","","","19.8"],["Property catastrophe","865","","","13.2","","416","","","8.4"],["Marine and aviation","250","","","3.8","","167","","","3.4"],["Other","115","","1.8","","109","","2.2"],["Total","$","6,554","","","100.0","","$","4,924","","","100.0"]]
[[/GREPCENT_TABLE]]

Net premiums written by the reinsurance segment were 33.1% higher in 2023 than in 2022. The growth in net premiums written reflected increases in all lines of business, primarily due to new business, rate increases and growth in existing accounts.

Net Premiums Earned.

The following tables set forth our reinsurance segment’s net premiums earned by major line of business:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","Amount","","%","","Amount","","%"],["Other specialty","$","2,097","","","35.9","","$","1,378","","","34.8"],["Property excluding property catastrophe","1,645","","","28.2","","1,090","","","27.5"],["Casualty","1,005","","","17.2","","855","","","21.6"],["Property catastrophe","742","","","12.7","","367","","","9.3"],["Marine and aviation","229","","","3.9","","159","","","4.0"],["Other","118","","","2.0","","110","","","2.8"],["Total","$","5,836","","","100.0","","$","3,959","","","100.0"]]
[[/GREPCENT_TABLE]]

Net premiums earned in 2023 were 47.4% higher than in 2022, reflecting changes in net premiums written over the previous five quarters, including the mix and type of business written.

Other Underwriting Income (Loss).

Other underwriting income in 2023 was $17 million, compared to $5 million in 2022.

Losses and Loss Adjustment Expenses.

The table below shows the components of the reinsurance segment’s loss ratio:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Current year","57.9","%","","69.7","%"],["Prior period reserve development","(2.6)","%","","(4.8)","%"],["Loss ratio","55.3","%","","64.9","%"]]
[[/GREPCENT_TABLE]]

Current Year Loss Ratio.

The reinsurance segment’s current year loss ratio was 11.8 points lower in 2023 than in 2022. The 2023 loss ratio included 6.8 points for current year catastrophic event activity spread across a series of global events, compared to 13.9 points in 2022, primarily related to Hurricane Ian and a series of global events. The balance of the change in the 2023 current year loss ratio resulted, in part, from the effect of rate increases, changes in mix of business and the level of attritional losses.

Prior Period Reserve Development.

The reinsurance segment’s net favorable development was $152 million, or 2.6 points, for 2023, compared to $190 million, or 4.8 points, for 2022, See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements in Item 8 for information about the reinsurance segment’s prior year reserve development.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","71","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Underwriting Expenses.

The underwriting expense ratio for the reinsurance segment was 26.1% in 2023, compared to 27.3% in 2022, with the decrease primarily due to growth in net premiums earned. The 2022 ratio also reflected a lower level of contingent commissions on ceded business, primarily due to Hurricane Ian.

Mortgage Segment

The following tables set forth our mortgage segment’s underwriting results.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","% Change"],["Gross premiums written","$","1,387","","","$","1,455","","","(4.7)"],["Premiums ceded","(335)","","","(322)"],["Net premiums written","1,052","","","1,133","","","(7.1)"],["Change in unearned premiums","106","","","27"],["Net premiums earned","1,158","","","1,160","","","(0.2)"],["Other underwriting income","14","","","8"],["Losses and loss adjustment expenses","103","","","324"],["Acquisition expenses","(17)","","","(40)"],["Other operating expenses","(194)","","","(195)"],["Underwriting income","$","1,064","","","$","1,257","","","(15.4)"],["Underwriting Ratios","","","","","% Point Change"],["Loss ratio","(8.9)","%","","(28.0)","%","","19.1"],["Acquisition expense ratio","1.4","%","","3.5","%","","(2.1)"],["Other operating expense ratio","16.8","%","","16.8","%","","\u2014"],["Combined ratio","9.3","%","","(7.7)","%","","17.0"]]
[[/GREPCENT_TABLE]]

Net Premiums Written.

The following table sets forth our mortgage segment’s net premiums written by underwriting unit:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["U.S. primary mortgage insurance","$","737","","","$","769"],["U.S. credit risk transfer (CRT) and other","220","","196"],["International mortgage insurance/reinsurance","95","","168"],["Total","$","1,052","","","$","1,133"]]
[[/GREPCENT_TABLE]]

Net premiums written for 2023 were 7.1% lower than in 2022. The reduction in net premiums written primarily reflected lower levels of mortgage originations in the Australian market and a decrease in U.S. primary mortgage insurance business, which was partially offset by a higher volume of credit risk transfer transactions. Premiums ceded for 2023 reflected $17 million of one-time payments related to the termination of eight Bellemeade agreements.

The persistency rate of the U.S. primary portfolio of mortgage loans was 83.6% at December 31, 2023 compared to 79.5% at December 31, 2022, with the increase primarily reflecting a lower level of refinancing activity due to a higher interest rate environment. The persistency rate 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.

Net Premiums Earned.

The following table sets forth our mortgage segment’s net premiums earned by underwriting unit:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["U.S. primary mortgage insurance","$","759","","","$","804"],["U.S. credit risk transfer (CRT) and other","220","","196"],["International mortgage insurance/reinsurance","179","","160"],["Total","$","1,158","","","$","1,160"]]
[[/GREPCENT_TABLE]]

Net premiums earned for 2023 were 0.2% lower than in 2022. The 2023 results were impacted by the termination of the Bellemeade agreements noted above.

Other Underwriting Income.

Other underwriting income, which is primarily related to GSE risk-sharing transactions services and our whole mortgage loan purchase and sell program, was $14 million for 2023, compared to $8 million for 2022.

Losses and Loss Adjustment Expenses.

The table below shows the components of the mortgage segment’s loss ratio:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Current year","20.8","%","","19.8","%"],["Prior period reserve development","(29.7)","%","","(47.8)","%"],["Loss ratio","(8.9)","%","","(28.0)","%"]]
[[/GREPCENT_TABLE]]

Unlike property and casualty business for which we estimate ultimate losses on premiums earned, losses on U.S. primary mortgage insurance business are only recorded at the time a borrower is delinquent on their mortgage, in accordance with primary mortgage insurance industry practice. Because our primary mortgage insurance reserving process does not take into account the impact of future losses from loans that are not delinquent, mortgage insurance loss reserves are not an estimate of ultimate losses. In addition to establishing loss reserves for delinquent loans, under GAAP, we are required to establish a premium deficiency reserve for our mortgage insurance products if the amount of expected future losses and maintenance costs exceeds expected future premiums, existing reserves and the anticipated investment income for

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","72","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

such product. We assess the need for a premium deficiency reserve on a quarterly basis and perform a full analysis annually. No such reserve was established during 2023 or 2022.

Current Year Loss Ratio.

The mortgage segment’s current year loss ratio was 1.0 point higher in 2023 compared to 2022. The higher current year loss ratio for 2023 reflected an increase in new delinquencies. The percentage of loans in default on U.S. primary mortgage insurance decreased from 1.77% at December 31, 2022 to 1.74% at December 31, 2023.

We insure mortgages for homes in areas that have been impacted by catastrophic events. Generally, mortgage insurance losses occur only when a credit event occurs and, following a physical damage event, when the home is restored to pre-storm condition. Our ultimate claims exposure will depend on the number of delinquency notices received and the ultimate claim rate related to such notices. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and flood insurance carried on a related property, and a borrower's access to aid from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas.

Prior Period Reserve Development.

The mortgage segment’s net favorable development was $344 million, or 29.7 points, for 2023, compared to $554 million, or 47.8 points, for 2022. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements in Item 8 for information about the mortgage segment’s prior year reserve development.

Underwriting Expenses.

The underwriting expense ratio for the mortgage segment was 18.2% for 2023, compared to 20.3% for 2022, with the decrease primarily due to a higher level of profit commissions on ceded U.S. primary mortgage insurance business in 2023.

Corporate Segment

The corporate segment results include net investment income, net realized gains or losses, equity in net income or loss of investments accounted for using the equity method, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income taxes items (which for 2023 reflects the establishment of a net deferred income tax asset related to the enactment of Bermuda’s new corporate income tax), income from operating affiliates and items related to our non-cumulative preferred shares.

Net Investment Income.

The components of net investment income were derived from the following sources:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Fixed maturities","$","917","","","$","469"],["Short-term investments","68","","","29"],["Equity securities","22","","","22"],["Other (1)","93","","","47"],["Gross investment income","1,100","","","567"],["Investment expenses (2)","(77)","","","(71)"],["Net investment income","$","1,023","","","$","496"]]
[[/GREPCENT_TABLE]]

(1)    Includes interest income on operating cash, distributions from investment funds and other items.

(2)    Investment expenses were approximately 0.26% of average invested assets for 2023, compared to 0.28% for 2022.

The pre-tax investment income yield was 3.53% for 2023, compared to 1.99% for 2022. The growth in net investment income for 2023 compared to 2022 primarily reflected higher yields available in the financial markets. Net cash flow from operating activities contributed $5.7 billion in 2023, which increased our invested asset base and contributed to the growth in net investment income. The pre-tax investment income yields were calculated based on amortized cost. Yields on future investment income may vary based on financial market conditions, investment allocation decisions and other factors.

Net Realized Gains or Losses.

We recorded net realized losses of $165 million for 2023, compared to net realized losses of $663 million for 2022. 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 or losses as the portfolio is 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.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","73","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

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 9, “Investment Information—Net Realized Gains (Losses),” and note 9, “Investment Information—Allowance for Credit Losses,” to our consolidated financial statements for additional information.

Equity in Net Income (Loss) of Investments Accounted for Using the Equity Method.

We recorded $278 million of equity in net income related to investments accounted for using the equity method for 2023, compared to $115 million for 2022. Investments accounted for using the equity method totaled $4.6 billion at December 31, 2023, compared to $3.8 billion at December 31, 2022. See note 9, “Investment Information—Equity in Net Income (Loss) of Investments Accounted For Using the Equity Method,” to our consolidated financial statements in Item 8 for additional information.

Other Income or Losses

Other income for the 2023 period was $27 million, compared to a loss of $27 million for the 2022 period. Amounts in both periods primarily reflect changes in the cash surrender value of our investment in corporate-owned life insurance.

Corporate Expenses.

Corporate expenses were $96 million for 2023, compared to $95 million for 2022. Such amounts primarily represent certain holding company costs necessary to support our worldwide operations and costs associated with operating as a publicly traded company.

Transaction Costs and Other.

Transaction costs and other were $6 million for 2023, compared to nil for 2022. The 2023 expenses were primarily related to acquisition activity.

Amortization of Intangible Assets.

Amortization of intangible assets for 2023 was $95 million, compared to $106 million for 2022. Amounts in 2023 and 2022 primarily related to amortization of finite-lived intangible assets. See note 2, “Acquisitions."

Interest Expense.

Interest expense was $133 million for 2023, compared to $131 million for 2022. Interest expense primarily reflects amounts related to our outstanding senior notes.

Net Foreign Exchange Gains or Losses.

Net foreign exchange losses for 2023 were $60 million, compared to net foreign exchange gains for 2022 of $102 million. Amounts in such 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 before income taxes resulted in a benefit of 24.5% for 2023, compared to an expense of 5.1% for 2022. The 2023 provision reflected the establishment of a net deferred income tax asset of $1.18 billion related to the enactment of Bermuda’s new corporate income tax. Our effective tax rate fluctuates from year to year consistent with the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.

See note 15, “Income Taxes,” to our consolidated financial statements in Item 8 for a reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average statutory tax rate for 2023 and 2022.

Income (Loss) from Operating Affiliates.

We recorded $184 million of net income from our operating affiliates in the 2023 period, compared to income of $75 million in the 2022 period and primarily reflects amounts related to the Company’s investment in Somers Group Holdings Ltd. and Coface SA. See note 9, “Investment Information—Investments in Operating Affiliates,” to our consolidated financial statements for additional information.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","74","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements in accordance with GAAP requires us to make many estimates and judgments that affect the reported amounts of assets, liabilities (including reserves), revenues and expenses, and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, allowance for current expected credit losses, investment valuations, goodwill and intangible assets, bad debts, income taxes, contingencies and litigation. We base our estimates on historical experience, where possible, and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates and such differences may be material. We believe that the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements.

Loss Reserves

We are required by applicable insurance laws and regulations and GAAP to establish reserves for losses and loss adjustment expenses, or “Loss Reserves”, that arise from the business we underwrite. Loss Reserves for our insurance, reinsurance and mortgage operations are balance sheet liabilities representing estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events which have occurred at or before the balance sheet date. Loss Reserves do not reflect contingency reserve allowances to account for future loss occurrences. Losses arising from future events will be estimated and recognized at the time the losses are incurred and could be substantial. See note 6, “Short Duration Contracts,” to our consolidated financial statements in Item 8 for additional information on our reserving process.

At December 31, 2023 and 2022, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Insurance segment:"],["Case reserves","$","2,730","","","$","2,398"],["IBNR reserves","5,626","","4,934"],["Total net reserves","8,356","","","7,332"],["Reinsurance segment:"],["Case reserves","2,447","","","1,903"],["Additional case reserves","484","","481"],["IBNR reserves","4,260","","3,403"],["Total net reserves","7,191","","","5,787"],["Mortgage segment:"],["Case reserves","323","","","447"],["IBNR reserves","192","","186"],["Total net reserves","515","","","633"],["Total:"],["Case reserves","5,500","","","4,748"],["Additional case reserves","484","","481"],["IBNR reserves","10,078","","8,523"],["Total net reserves","$","16,062","","","$","13,752"]]
[[/GREPCENT_TABLE]]

At December 31, 2023 and 2022, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Professional lines","$","2,451","","","$","2,070"],["Construction and national accounts","1,693","","1,558"],["Excess and surplus casualty","975","","786"],["Programs","929","","843"],["Property, energy, marine and aviation","836","","764"],["Travel, accident and health","144","","139"],["Warranty and lenders solutions","65","","47"],["Other","1,263","","1,125"],["Total net reserves","$","8,356","","","$","7,332"]]
[[/GREPCENT_TABLE]]

At December 31, 2023 and 2022, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Casualty","$","2,725","","","$","2,342"],["Other specialty","2,125","","1,476"],["Property excluding property catastrophe","1,243","","993"],["Property catastrophe","585","","536"],["Marine and aviation","359","","292"],["Other","154","","148"],["Total net reserves","$","7,191","","","$","5,787"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","75","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

At December 31, 2023 and 2022, the mortgage segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["U.S. primary mortgage insurance (1)","$","324","","","$","415"],["U.S. credit risk transfer (CRT) and other","100","","","109"],["International mortgage insurance/reinsurance","91","","","109"],["Total net reserves","$","515","","","$","633"]]
[[/GREPCENT_TABLE]]

(1)    At December 31, 2023, 29.5% of total net reserves represent policy years 2013 and prior and the remainder from later policy years. At December 31, 2022, 36.1% of total net reserves represent policy years 2013 and prior and the remainder from later policy years.

Potential Variability in Loss Reserves

The following tables summarize the effect of reasonably likely scenarios on the key actuarial assumptions used to estimate our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, at December 31, 2023 by underwriting segment and reserving lines. See note 6, “Short Duration Contracts,” to our consolidated financial statements in Item 8 for a description of the lines of business included in each reserving line.

The scenarios shown in the tables summarize the effect of (i) changes to the expected loss ratio selections used at December 31, 2023, which represent loss ratio point increases or decreases to the expected loss ratios used, and (ii) changes to the loss development patterns used in our reserving process at December 31, 2023, which represent claims reporting that is either slower or faster than the reporting patterns used. We believe that the illustrated sensitivities are indicative of the potential variability inherent in the estimation process of those parameters. The results show the impact of varying each key actuarial assumption using the chosen sensitivity on our IBNR reserves, on a net basis and across all accident years.

[[GREPCENT_TABLE]]
[["INSURANCE SEGMENT","Higher Expected Loss Ratios","","Slower Loss Development Patterns"],["Reserving lines selected assumptions:"],["Property, energy, marine and aviation","5 points","","3 months"],["Third party occurrence business","10","","6"],["Third party claims-made business","10","","6"],["Multi-line and other specialty","10","","6"],["Increase (decrease) in Loss Reserves:"],["Property, energy, marine and aviation","$","47","","","$","67"],["Third party occurrence business","247","","","124"],["Third party claims-made business","431","","","211"],["Multi-line and other specialty","269","","","119"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["INSURANCE SEGMENT","Lower Expected Loss Ratios","","Faster Loss Development Patterns"],["Reserving lines selected assumptions:"],["Property, energy, marine and aviation","(5) points","","(3) months"],["Third party occurrence business","(10)","","(6)"],["Third party claims-made business","(10)","","(6)"],["Multi-line and other specialty","(10)","","(6)"],["Increase (decrease) in Loss Reserves:"],["Property, energy, marine and aviation","$","(46)","","","$","(63)"],["Third party occurrence business","(250)","","","(91)"],["Third party claims-made business","(420)","","","(166)"],["Multi-line and other specialty","(213)","","","(85)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["REINSURANCE SEGMENT","Higher Expected Loss Ratios","","Slower Loss Development Patterns"],["Reserving lines selected assumptions:"],["Casualty","10 points","","6 months"],["Other specialty","5","","3"],["Property excluding property catastrophe","5","","3"],["Property catastrophe","5","","3"],["Marine and aviation","5","","3"],["Other","5","","3"],["Increase (decrease) in Loss Reserves:"],["Casualty","$","230","","","$","262"],["Other specialty","176","","","124"],["Property excluding property catastrophe","51","","","126"],["Property catastrophe","40","","","65"],["Marine and aviation","17","","","31"],["Other","8","","","7"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","76","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["REINSURANCE SEGMENT","Lower Expected Loss Ratios","","Faster Loss Development Patterns"],["Reserving lines selected assumptions:"],["Casualty","(10) points","","(6) months"],["Other specialty","(5)","","(3)"],["Property excluding property catastrophe","(5)","","(3)"],["Property catastrophe","(5)","","(3)"],["Marine and aviation","(5)","","(3)"],["Other","(5)","","(3)"],["Increase (decrease) in Loss Reserves:"],["Casualty","$","(230)","","","$","(201)"],["Other specialty","(176)","","","(174)"],["Property excluding property catastrophe","(51)","","","(125)"],["Property catastrophe","(40)","","","(40)"],["Marine and aviation","(17)","","","(32)"],["Other","(8)","","","(6)"]]
[[/GREPCENT_TABLE]]

It is not necessarily appropriate to sum the total impact for a specific factor or the total impact for a specific business category as the business categories are not perfectly correlated. In addition, the potential variability shown in the tables above are reasonably likely scenarios of changes in our key assumptions at December 31, 2023 and are not meant to be a “best case” or “worst case” series of outcomes and therefore, it is possible that future variations may be more or less than the amounts set forth above.

For our mortgage segment, we considered the sensitivity of loss reserve estimates at December 31, 2023 by assessing the potential changes resulting from a parallel shift in severity and default to claim rate. For example, assuming all other factors remain constant, for every one percentage point change in primary claim severity (which we estimate to be approximately 29% of the unpaid principal balance at December 31, 2023), we estimated that our loss reserves would change by approximately $17 million at December 31, 2023. For every one percentage point change in our primary net default to claim rate (which we estimate to be approximately 27% at December 31, 2023), we estimated a $18 million change in our loss reserves at December 31, 2023.

Simulation Results

In order to illustrate the potential volatility in our Loss Reserves, we used a Monte Carlo simulation approach to simulate a range of results based on various probabilities. Both the probabilities and related modeling are subject to inherent uncertainties. The simulation relies on a significant number of assumptions, such as the potential for multiple entities to react similarly to external events, and includes other statistical assumptions. The simulation results shown for each segment do not add to the total simulation results, as the individual segment simulation results do not reflect the diversification effects across our segments.

At December 31, 2023, our recorded Loss Reserves by underwriting segment, net of unpaid losses and loss adjustment expenses recoverable, and the results of the simulation were as follows:

[[GREPCENT_TABLE]]
[["","Insurance Segment","","Reinsurance Segment","","Mortgage Segment","","Total"],["Loss Reserves (1)","$8,356","","","$7,191","","","$515","","","$16,062"],["Simulation results:"],["90th percentile (2)","$9,826","","","$8,782","","","$616","","","$18,815"],["10th percentile (3)","$6,918","","","$5,732","","","$420","","","$13,429"]]
[[/GREPCENT_TABLE]]

(1)    Net of reinsurance recoverables.

(2)    Simulation results indicate that a 90% probability exists that the net reserves for losses and loss adjustment expenses will not exceed the indicated amount.

(3)    Simulation results indicate that a 10% probability exists that the net reserves for losses and loss adjustment expenses will be at or below the indicated amount.

For informational purposes, based on the total simulation results, a change in our Loss Reserves to the amount indicated at the 90th percentile would result in a decrease in income before income taxes of approximately $2.8 billion, or $7.27 per diluted share, while a change in our Loss Reserves to the amount indicated at the 10th percentile would result in an increase in income before income taxes of approximately $2.6 billion, or $6.95 per diluted share. The simulation results noted above are informational only, and no assurance can be given that our ultimate losses will not be significantly different than the simulation results shown above, and such differences could directly and significantly impact earnings favorably or unfavorably in the period they are determined. We do not have significant exposure to pre-2002 liabilities, such as asbestos-related illnesses and other long-tail liabilities. It is difficult to provide meaningful trend information for certain liability/casualty coverages for which the claim-tail may be especially long, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Any estimates and

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","77","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

assumptions made as part of the reserving process could prove to be inaccurate due to several factors, including the fact that for certain lines of business relatively limited historical information has been reported to us through December 31, 2023. Accordingly, the reserving for incurred losses in these lines of business could be subject to greater variability. See Item 1A, “Risk Factors – Risks Relating to Our Industry, Business & Operations – Underwriting risks and reserving for losses are based on probabilities and related modeling, which are subject to inherent uncertainties.”

Mortgage Operations Supplemental Information

The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","December 31,"],["2023","","2022"],["","Amount","","%","","Amount","","%"],["Insurance In Force (IIF) (1):"],["U.S. primary mortgage insurance","$","290,764","","","57.1","","","$","295,651","","","57.6"],["U.S. credit risk transfer (CRT) and other","149,098","","","29.3","","","145,087","","","28.3"],["International mortgage insurance/reinsurance","69,473","","","13.6","","","72,315","","","14.1"],["Total","$","509,335","","","100.0","","","$","513,053","","","100.0"],["Risk In Force (RIF) (2):"],["U.S. primary mortgage insurance","$","75,527","","","84.6","","","$","75,806","","","84.8"],["U.S. credit risk transfer (CRT) and other","6,156","","","6.9","","","6,245","","","7.0"],["International mortgage insurance/reinsurance","7,562","","","8.5","","","7,369","","","8.2"],["Total","$","89,245","","","100.0","","","$","89,420","","","100.0"]]
[[/GREPCENT_TABLE]]

(1)    Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance. Such amounts are shown before external reinsurance.

(2)    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 risk-sharing or reinsurance transactions. Such amounts are shown before external reinsurance.

The insurance in force and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2023:

[[GREPCENT_TABLE]]
[["","IIF","","RIF","","Delinquency"],["Amount","","%","","Amount","","%","","Rate (1)"],["Policy year:"],["2013 and prior","$","10,859","","","3.7","","","$","2,738","","","3.6","","","6.55","%"],["2014","2,442","","","0.8","","","649","","","0.9","","","2.89","%"],["2015","4,691","","","1.6","","","1,244","","","1.6","","","1.98","%"],["2016","7,525","","","2.6","","","2,025","","","2.7","","","2.50","%"],["2017","7,600","","","2.6","","","2,023","","","2.7","","","3.13","%"],["2018","8,512","","","2.9","","","2,207","","","2.9","","","4.04","%"],["2019","15,767","","","5.4","","","4,074","","","5.4","","","2.40","%"],["2020","51,349","","","17.7","","","13,357","","","17.7","","","1.17","%"],["2021","76,667","","","26.4","","","19,812","","","26.2","","","1.12","%"],["2022","63,899","","","22.0","","","16,755","","","22.2","","","0.89","%"],["2023","41,453","","","14.3","","","10,643","","","14.1","","","0.26","%"],["Total","$","290,764","","","100.0","","","$","75,527","","","100.0","","","1.74","%"]]
[[/GREPCENT_TABLE]]

(1)Represents the ending percentage of loans in default.

The insurance in force and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2022:

[[GREPCENT_TABLE]]
[["","IIF","","RIF","","Delinquency"],["Amount","","%","","Amount","","%","","Rate (1)"],["Policy year:"],["2013 and prior","$","12,931","","","4.4","","","$","3,222","","","4.3","","","7.07","%"],["2014","3,696","","","1.3","","","1,012","","","1.3","","","2.61","%"],["2015","6,236","","","2.1","","","1,680","","","2.2","","","2.08","%"],["2016","10,225","","","3.5","","","2,744","","","3.6","","","2.66","%"],["2017","9,508","","","3.2","","","2,521","","","3.3","","","3.06","%"],["2018","10,260","","","3.5","","","2,625","","","3.5","","","4.11","%"],["2019","19,096","","","6.5","","","4,840","","","6.4","","","2.36","%"],["2020","65,141","","","22.0","","","16,414","","","21.7","","","1.20","%"],["2021","89,621","","","30.3","","","22,740","","","30.0","","","0.95","%"],["2022","68,937","","","23.3","","","18,008","","","23.8","","","0.20","%"],["Total","$","295,651","","","100.0","","","$","75,806","","","100.0","","","1.77","%"]]
[[/GREPCENT_TABLE]]

(1)Represents the ending percentage of loans in default.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","78","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

The following tables provide supplemental disclosures on risk in force for our U.S. primary mortgage insurance business at December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","December 31,"],["2023","","2022"],["Amount","","%","","Amount","","%"],["Credit quality (FICO):"],["=740","$","46,796","","","62.0","","","$","46,812","","","61.8"],["680-739","24,990","","","33.1","","","24,945","","","32.9"],["620-679","3,497","","","4.6","","","3,772","","","5.0"],["620","244","","","0.3","","","277","","","0.4"],["Total","$","75,527","","","100.0","","","$","75,806","","","100.0"],["Weighted average FICO score","748","","","","","750"],["Loan-to-Value (LTV):"],["95.01% and above","$","7,067","","","9.4","","","$","7,289","","","9.6"],["90.01% to 95.00%","44,669","","","59.1","","","43,681","","","57.6"],["85.01% to 90.00%","20,490","","","27.1","","","20,851","","","27.5"],["85.00% and below","3,301","","","4.4","","","3,985","","","5.3"],["Total","$","75,527","","","100.0","","","$","75,806","","","100.0"],["Weighted average LTV","93.0","%","","","","92.8","%"],["Total RIF, net of external reinsurance","$","58,146","","","","","$","57,151"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31,"],["2023","","2022"],["Amount","","%","","Amount","","%"],["Total RIF by State:"],["California","$","6,162","","","8.2","","","$","6,341","","","8.4"],["Texas","5,972","","","7.9","","","6,151","","","8.1"],["North Carolina","3,248","","","4.3","","","3,160","","","4.2"],["Georgia","3,081","","","4.1","","","3,169","","","4.2"],["Minnesota","3,069","","","4.1","","","3,003","","","4.0"],["Florida","3,007","","","4.0","","","3,268","","","4.3"],["Illinois","2,986","","","4.0","","","3,081","","","4.1"],["Massachusetts","2,858","","","3.8","","","2,809","","","3.7"],["Michigan","2,773","","","3.7","","","2,618","","","3.5"],["Virginia","2,578","","","3.4","","","2,656","","","3.5"],["Others","39,793","","","52.7","","","39,550","","","52.2"],["Total","$","75,527","","","100.0","","","$","75,806","","","100.0"]]
[[/GREPCENT_TABLE]]

The following table provides supplemental disclosures for our U.S. primary mortgage insurance business related to insured loans and loss metrics for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["(U.S. Dollars in thousands, except loan and claim count)","Year Ended December 31,"],["2023","","2022"],["Rollforward of insured loans in default:"],["Beginning delinquent number of loans","20,567","","","27,645"],["New notices","39,496","","","36,396"],["Cures","(39,704)","","","(42,789)"],["Paid claims","(902)","","","(685)"],["Ending delinquent number of loans (1)","19,457","","","20,567"],["Ending number of policies in force (1)","1,117,480","","","1,160,219"],["Delinquency rate (1)","1.74","%","","1.77","%"],["Losses:"],["Number of claims paid","902","","","685"],["Total paid claims","$","26,903","","","$","21,412"],["Average per claim","$","29.8","","","$","31.3"],["Severity (2)","70.8","%","","73.2","%"],["Average reserve per default (in thousands) (1)","$","17.7","","","$","21.1"]]
[[/GREPCENT_TABLE]]

(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 7.3 to 1 at December 31, 2023, compared to 7.2 to 1 at December 31, 2022.

Ceded Reinsurance

In the normal course of business, our insurance and mortgage insurance operations cede a portion of their premium on a quota share or excess of loss basis through treaty or facultative reinsurance agreements. Our reinsurance operations also obtain reinsurance whereby another reinsurer contractually agrees to indemnify it for all or a portion of the reinsurance risks underwritten by our reinsurance operations. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as “retrocessional reinsurance” arrangements. In addition, our reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as our reinsurance operations, and the ceding company. Estimating reinsurance recoverables can be more subjective than estimating the underlying reserves for losses and loss adjustment expenses as discussed above in “—Loss Reserves.” In particular, reinsurance recoverables may be affected by deemed inuring reinsurance, industry losses

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","79","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

reported by various statistical reporting services, and other factors. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, our insurance or reinsurance operations would be liable for such defaulted amounts.

The availability and cost of reinsurance and retrocessional protection is subject to market conditions, which are beyond our control. Although we believe that our insurance and reinsurance operations have been successful in obtaining adequate reinsurance and retrocessional protection, it is not certain that they will be able to continue to obtain adequate protection at cost effective levels. As a result of such market conditions and other factors, our insurance, reinsurance and mortgage operations may not be able to successfully mitigate risk through reinsurance and retrocessional arrangements and may lead to increased volatility in our results of operations in future periods. See Item 1A, “Risk Factors—Risks Relating to Our Industry, Business and Operations—The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or results of operations.”

For purposes of managing risk, we reinsure a portion of our exposures, paying to reinsurers a part of the premiums received on the policies we write, and we may also use retrocessional protection. On a consolidated basis, ceded premiums written represented 26.8% of gross premiums written for 2023, compared to 27.7% for 2022. We monitor the financial condition of our reinsurers and attempt to place coverages only with substantial, financially sound carriers. If the financial condition of our reinsurers or retrocessionaires deteriorates, resulting in an impairment of their ability to make payments, we will be responsible for probable losses resulting from our inability to collect amounts due from such parties, as appropriate. We evaluate the credit worthiness of all the reinsurers to which we cede business. We report reinsurance recoverables net of an allowance for expected credit loss. The allowance is based upon our ongoing review of amounts outstanding, the financial condition of our reinsurers, amounts and form of collateral obtained and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit loss. See Item 1A, “Risk Factors—Risks Relating to Our Industry, Business and Operations—We are exposed to credit risk in certain of our business operations” and “Financial Condition, Liquidity and Capital Resources” for further details.

We have entered into various aggregate excess of loss reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda. These are special purpose variable interest entities that are not consolidated in our financial results because we do not have

the unilateral power to direct those activities that are significant to its economic performance. See note 12, “Variable Interest Entity and Noncontrolling Interests,” to our consolidated financial statements in Item 8 for additional information.

Premium Revenues and Related Expenses

Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Premiums written include estimates in our insurance operations’ programs, specialty lines, collateral protection business and for participation in involuntary pools. Such premium estimates are derived from multiple sources which include the historical experience of the underlying business, similar business and available industry information. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of in-force insurance policies.

Reinsurance premiums written include amounts reported by brokers and ceding companies, supplemented by our own estimates of premiums where reports have not been received. The determination of premium estimates requires a review of our experience with the ceding companies, familiarity with each market, the timing of the reported information, an analysis and understanding of the characteristics of each line of business, and management’s judgment of the impact of various factors, including premium or loss trends, on the volume of business written and ceded to us. On an ongoing basis, our underwriters review the amounts reported by these third parties for reasonableness based on their experience and knowledge of the subject class of business, taking into account our historical experience with the brokers or ceding companies. In addition, reinsurance contracts under which we assume business generally contain specific provisions which allow us to perform audits of the ceding company to ensure compliance with the terms and conditions of the contract, including accurate and timely reporting of information. Based on a review of all available information, management establishes premium estimates where reports have not been received. Premium estimates are updated when new information is received and differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined. Premiums written are recorded based on the type of contracts we write. Premiums on our excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten. For excess of loss contracts, premiums are recorded as written based on the terms of the contract. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks incept and are based on information provided by the brokers and the ceding companies. For multi-year reinsurance treaties which are payable in annual installments, generally,

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","80","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

only the initial annual installment is included as premiums written at policy inception due to the ability of the reinsured to commute or cancel coverage during the term of the policy. The remaining annual installments are included as premiums written at each successive anniversary date within the multi-year term.

Reinstatement premiums for our insurance and reinsurance operations are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. Reinstatement premiums, if obligatory, are fully earned when recognized. The accrual of reinstatement premiums is based on an estimate of losses and loss adjustment expenses, which reflects management’s judgment, as described above in “—Loss Reserves.”

The amount of reinsurance premium estimates included in premiums receivable and the amount of related acquisition expenses by type of business were as follows at December 31, 2023:

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["","Gross Amount","","Acquisition Expenses","","Net Amount"],["Other specialty","$","1,510","","","$","(450)","","","$","1,060"],["Property excluding property catastrophe","626","","","(205)","","","421"],["Casualty","463","","","(146)","","","317"],["Marine and aviation","213","","","(44)","","","169"],["Property catastrophe","14","","","(1)","","","13"],["Other","65","","","(5)","","","60"],["Total","$","2,891","","","$","(851)","","","$","2,040"]]
[[/GREPCENT_TABLE]]

Premium estimates are reviewed by management at least quarterly. Such review includes a comparison of actual reported premiums to expected ultimate premiums along with a review of the aging and collection of premium estimates. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustment to these estimates is recorded in the period in which it becomes known. Adjustments to premium estimates could be material and such adjustments could directly and significantly impact earnings favorably or unfavorably in the period they are determined because the estimated premium may be fully or substantially earned.

A significant portion of amounts included as premiums receivable, which represent estimated premiums written, net of commissions, are not currently due based on the terms of the underlying contracts. Based on currently available information, we report premiums receivable net of an allowance for expected credit loss. We monitor credit risk associated with premiums receivable through our ongoing review of amounts outstanding, aging of the receivable, historical data and counterparty financial strength measures.

Reinsurance premiums assumed, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period.

Certain of our reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well as related acquisition expenses, are recorded based upon the projected experience under such contracts.

Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and, accordingly, we bifurcate the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately where practical. Underwriting income generated in connection with retroactive reinsurance contracts is deferred and amortized into income over the settlement period while losses are charged to income immediately. Subsequent changes in estimated amount or timing of cash flows under such retroactive reinsurance contracts are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.

Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide for payment of premiums on a monthly, annual or single basis. Upon renewal, we are not able to re-underwrite or re-price our policies. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of the revenue from single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the estimated expiration of risk of the policy. If single premium policies related to insured loans are canceled for any reason and the policy is a non-refundable product, the remaining unearned

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","81","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

premium related to each canceled policy is recognized as earned premium upon notification of the cancellation.

Unearned premiums represent the portion of premiums written that is applicable to the estimated unexpired risk of insured loans. A portion of premium payments may be refundable if the insured cancels coverage, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount to trigger a lender permitted or legally required cancellation, or the value of the property has increased sufficiently in accordance with the terms of the contract. Premium refunds reduce premiums earned in the consolidated statements of income. Generally, only unearned premiums are refundable.

Acquisition costs that are directly related and incremental to the successful acquisition or renewal of business are deferred and amortized based on the type of contract. For property and casualty insurance and reinsurance contracts, deferred acquisition costs are amortized over the period in which the related premiums are earned. Consistent with mortgage insurance industry accounting practice, amortization of acquisition costs related to the mortgage insurance contracts for each underwriting year’s book of business is recorded in proportion to estimated gross profits. Estimated gross profits are comprised of earned premiums and losses and loss adjustment expenses. For each underwriting year, we estimate the rate of amortization to reflect actual experience and any changes to persistency or loss development.

Acquisition expenses and other expenses related to our underwriting operations that vary with, and are directly related to, the successful acquisition or renewal of business are deferred and amortized based on the type of contract. Our insurance and reinsurance operations capitalize incremental direct external costs that result from acquiring a contract but do not capitalize salaries, benefits and other internal underwriting costs. For our mortgage insurance operations, which include a substantial direct sales force, both external and certain internal direct costs are deferred and amortized. Deferred acquisition costs are carried at their estimated realizable value and take into account anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income.

A premium deficiency occurs if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs and anticipated investment income exceed unearned premiums. A premium deficiency reserve (“PDR”) is recorded by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency.

To assess the need for a PDR on our mortgage exposures, we develop loss projections based on modeled loan defaults related to our current policies in force. This projection is based on recent trends in default experience, severity and rates of defaulted loans moving to claim, as well as recent trends in the rate at which loans are prepaid, and incorporates anticipated interest income. Evaluating the expected profitability of our existing mortgage insurance business and the need for a PDR for our mortgage business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues. The models, assumptions and estimates we use to evaluate the need for a PDR may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty.

No premium deficiency charges were recorded by us during 2023 or 2022.

Net Deferred Income Tax Assets Measurement

On December 27, 2023 the Bermuda government enacted tax legislation referred to as the Corporate Income Tax Act 2023 (“Bermuda CIT Act”). The Bermuda CIT Act establishes a 15% corporate income tax, for in-scope businesses, for fiscal years beginning on or after January 1, 2025. The enacted legislation includes a provision referred to as the Economic Transition Adjustment, which requires Bermuda Constituent entities to establish tax basis in their assets and liabilities, excluding goodwill, based on fair value as of September 30, 2023. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Using fair value to establish tax basis in the assets and liabilities of our Bermuda entities results in deductible and taxable temporary differences which are reflected as deferred income tax assets and liabilities, respectively, in our financial statements. The enactment of Bermuda CIT Act resulted in the establishment of a $1.18 billion net deferred income tax asset. Such amount is included in “Other assets” on the Company’s balance sheet.

The most significant deferred income tax assets recognized relate to the fair value adjustments for identifiable intangible assets. We estimated the fair value of the identifiable intangible assets of our Bermuda entities using discounted cash flow (“DCF”) models. The significant assumptions utilized in the DCF models included the future revenue and profits expected to be generated by the identifiable intangible assets and the discount rates. See note 15, “Income Taxes” to our consolidated financial statements in Item 8 for disclosures concerning our Company’s deferred income tax asset.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","82","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Fair Value Measurements

We review our securities measured at fair value and discuss the proper classification of such investments with investment advisors and others. See note 10, “Fair Value,” to our consolidated financial statements in Item 8 for a summary of our financial assets and liabilities measured at fair value at December 31, 2023 by valuation hierarchy.

Reclassifications

We have reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on our net income, shareholders’ equity or cash flows.

Significant Accounting Pronouncements

For all other significant accounting policies see note 3, “Significant Accounting Policies” and note 3(t), “Recent Accounting Pronouncements” to our consolidated financial statements in Item 8 for disclosures concerning our companies significant accounting policies and recent accounting pronouncements.

FINANCIAL CONDITION

Investable Assets

At December 31, 2023, total investable assets held by Arch were $34.6 billion.

Investable Assets Held by Arch 

The Finance, Investment and Risk Committee (“FIR Committee”) of our Board of Directors (the “Board”) establishes our investment policies and sets the parameters for creating guidelines for our investment managers. The FIR reviews the implementation of the investment strategy on a regular basis. Our current approach stresses preservation of capital, market liquidity and diversification of risk. While maintaining our emphasis on preservation of capital and liquidity, we expect our portfolio to become more diversified and, as a result, we may expand into areas which are not currently part of our investment strategy. Our Chief Investment Officer administers the investment portfolio, oversees our investment managers and formulates investment strategy in conjunction with the FIR Committee. At December 31, 2023, approximately $21.9 billion, or 63%, of

total investable assets held by Arch were internally managed, compared to $18.8 billion, or 67%, at December 31, 2022.

The following table summarizes the fair value of investable assets held by Arch:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Average effective duration (in years)","2.91","","","2.89"],["Average S&P/Moody\u2019s credit ratings (1)","AA-/Aa3","","AA-/Aa3"]]
[[/GREPCENT_TABLE]]

(1)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”).

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.

[[GREPCENT_TABLE]]
[["","Estimated Fair Value","","% of Total"],["December 31, 2023"],["U.S. government and gov\u2019t agencies (1)","$","6,493","","","26.8"],["AAA","4,305","","","17.8"],["AA","2,165","","","8.9"],["A","4,629","","","19.1"],["BBB","5,058","","","20.9"],["BB","698","","","2.9"],["B","389","","","1.6"],["Lower than B","15","","","0.1"],["Not rated","484","","","2.0"],["Total","$","24,236","","","100.0"],["December 31, 2022"],["U.S. government and gov\u2019t agencies (1)","$","5,831","","","28.8"],["AAA","3,617","","","17.9"],["AA","2,214","","","10.9"],["A","3,993","","","19.7"],["BBB","3,324","","","16.4"],["BB","560","","","2.8"],["B","377","","","1.9"],["Lower than B","12","","","0.1"],["Not rated","309","","","1.5"],["Total","$","20,237","","","100.0"]]
[[/GREPCENT_TABLE]]

(1)Includes U.S. government-sponsored agency residential mortgage backed securities and agency commercial mortgage backed securities.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","83","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["Severity of gross unrealized losses:","Estimated Fair Value","","Gross Unrealized Losses","","% of Total Gross Unrealized Losses"],["December 31, 2023"],["0-10%","$","10,696","","","$","(410)","","","49.7"],["10-20%","2,282","","","(367)","","","44.5"],["20-30%","116","","","(35)","","","4.2"],["Greater than 30%","26","","","(13)","","","1.6"],["Total","$","13,120","","","$","(825)","","","100.0"],["December 31, 2022"],["0-10%","$","12,343","","","$","(580)","","","35.2"],["10-20%","5,331","","","(844)","","","51.2"],["20-30%","692","","","(199)","","","12.1"],["Greater than 30%","44","","","(24)","","","1.5"],["Total","$","18,410","","","$","(1,647)","","","100.0"]]
[[/GREPCENT_TABLE]]

The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at December 31, 2023, excluding guaranteed amounts and covered bonds:

[[GREPCENT_TABLE]]
[["","Estimated Fair Value","","Credit Rating (1)"],["Bank of America Corporation","$","383","","","A-/A1"],["JPMorgan Chase & Co.","361","","","A-/A1"],["Morgan Stanley","338","","","A-/A1"],["The Goldman Sachs Group, Inc.","230","","","BBB+/A2"],["Citigroup Inc.","229","","","BBB+/A3"],["Wells Fargo & Company","171","","","BBB+/A1"],["Blue Owl Capital Inc.","165","","","BBB-/Baa3"],["Roche Holding AG","147","","","AA/Aa2"],["Blackstone Inc.","138","","","BBB/Baa3"],["UBS Group AG","128","","","A/A2"],["Total","$","2,290"]]
[[/GREPCENT_TABLE]]

(1)Average credit ratings as assigned by S&P and Moody’s, respectively.

The following table provides information on our structured securities, which include residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset backed securities (“ABS”):

[[GREPCENT_TABLE]]
[["","Agencies","","Investment Grade","","Below Investment Grade","","Total"],["Dec. 31, 2023"],["RMBS","$","658","","","$","445","","","$","\u2014","","","$","1,103"],["CMBS","7","","","1,126","","","80","","","1,213"],["ABS","\u2014","","","2,143","","","107","","","2,250"],["Total","$","665","","","$","3,714","","","$","187","","","$","4,566"],["Dec. 31, 2022"],["RMBS","$","645","","","$","134","","","$","16","","","$","795"],["CMBS","18","","","947","","","82","","","1,047"],["ABS","\u2014","","","1,788","","","141","","","1,929"],["Total","$","663","","","$","2,869","","","$","239","","","$","3,771"]]
[[/GREPCENT_TABLE]]

The following table summarizes our equity securities, which include investments in exchange traded funds:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Equities (1)","$","739","","","$","570"],["Exchange traded funds"],["Fixed income (2)","285","","","272"],["Equity and other (3)","169","","","32"],["Total","$","1,193","","","$","874"]]
[[/GREPCENT_TABLE]]

(1)Primarily in technology, consumer non-cyclical, communications, financial and industrials at December 31, 2023.

(2)Primarily in corporate at December 31, 2023.

(3)Primarily in large cap stocks, foreign equities, healthcare, technology and consumer discretionary at December 31, 2023.

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 11, “Derivative Instruments,” to our consolidated financial statements in Item 8 for additional disclosures concerning 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 10, “Fair Value,” to our consolidated financial statements in Item 8 for a summary of our financial assets and liabilities measured at fair value at December 31, 2023 and 2022 segregated by level in the fair value hierarchy.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","84","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Reinsurance Recoverables

The following table details our reinsurance recoverables at December 31, 2023:

[[GREPCENT_TABLE]]
[["","% of Total","","A.M. Best Rating (1)"],["Somers Re (2)","18.6","","","A-"],["Hannover R\u00fcck SE","4.7","","","A+"],["Lloyd\u2019s syndicates (3)","4.3","","","A"],["Munich Reinsurance America, Inc.","3.3","","","A+"],["Swiss Reinsurance America Corporation","3.1","","","A+"],["Everest Reinsurance Company","2.9","","","A+"],["Partner Reinsurance Company of the U.S.","2.5","","","A+"],["Fortitude Reinsurance Company Ltd.","2.4","","","A"],["RenaissanceRe Holdings Ltd.","2.0","","","A+"],["AXA XL","2.0","","","A+"],["All other -- \u201cA-\u201d or better","21.0"],["All other -- rated carriers","0.1"],["All other -- not rated (4)","33.1"],["Total","100.0"]]
[[/GREPCENT_TABLE]]

(1)    The financial strength ratings are as of January 5, 2024 and were assigned by A.M. Best based on its opinion of the insurer’s financial strength as of such date. An explanation of the ratings listed in the table follows: the rating of “A+” is designated “Superior”; and the “A” and “A-” ratings are designated “Excellent.”

(2)    See note 12, “Variable Interest Entity and Noncontrolling Interests” and note 16, “Transactions with Related Parties.”

(3)    The A.M. Best group rating of “A” (Excellent) has been applied to all Lloyd’s syndicates.

(4)    Over 95% of such amount is collateralized through reinsurance trusts, funds withheld arrangements, letters of credit or other.

See note 8, “Reinsurance,” to our consolidated financial statements in Item 8 for further details.

Reserves for Losses and Loss Adjustment Expenses

We establish 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Critical Accounting Estimates—Loss Reserves” and see Item 1, “Business—Reserves” for further details.

Shareholders’ Equity and Book Value per Share

Total shareholders’ equity available to Arch was $18.4 billion at December 31, 2023, compared to $12.9 billion at December 31, 2022. The 2023 period primarily reflected strong underwriting and investment returns along with the establishment of a net deferred income tax asset of $1.18 billion, or $3.16 per share, related to the enactment of Bermuda’s new corporate income tax.

The following table presents the calculation of book value per share:

[[GREPCENT_TABLE]]
[["(U.S. dollars in millions, except per share data)","December 31,"],["2023","","2022"],["Total shareholders\u2019 equity available to Arch","$","18,353","","","$","12,910"],["Less preferred shareholders\u2019 equity","830","","","830"],["Common shareholders\u2019 equity available to Arch","$","17,523","","","$","12,080"],["Common shares and common share equivalents outstanding, net of treasury shares (1)","373.3","","370.3"],["Book value per share","$","46.94","","","$","32.62"]]
[[/GREPCENT_TABLE]]

(1)    Excludes the effects of 12.5 million and 14.4 million stock options and 0.4 million and 0.6 million restricted stock and performance units outstanding at December 31, 2023 and 2022, respectively.

LIQUIDITY

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.

In 2023, Arch Capital received dividends of $164 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda-based reinsurer and insurer. Arch Re Bermuda can pay approximately $4.8 billion to Arch Capital in 2024 without providing an affidavit to the Bermuda Monetary Authority (“BMA”).

Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. Sources of liquidity include cash flows from

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","85","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

operations, financing arrangements or routine sales of investments.

As part of our investment strategy, we seek to establish a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed by us to be adequate to meet our foreseeable payment obligations. However, due to the nature of our operations, cash flows are affected by claim payments that may comprise large payments on a limited number of claims and which can fluctuate from year to year. We believe that our liquid investments and cash flow will provide us with sufficient liquidity in order to meet our claim payment obligations. However, the timing and amounts of actual claim payments related to recorded Loss Reserves vary based on many factors, including large individual losses, changes in the legal environment, as well as general market conditions. The ultimate amount of the claim payments could differ materially from our estimated amounts. Certain lines of business written by us, such as excess casualty, have loss experience characterized as low frequency and high severity. The foregoing may result in significant variability in loss payment patterns. The impact of this variability can be exacerbated by the fact that the timing of the receipt of reinsurance recoverables owed to us may be slower than anticipated by us. Therefore, the irregular timing of claim payments can create significant variations in cash flows from operations between periods and may require us to utilize other sources of liquidity to make these payments, which may include the sale of investments or utilization of existing or new credit facilities or capital market transactions. If the source of liquidity is the sale of investments, we may be forced to sell such investments at a loss, which may be material.

We expect that our liquidity needs, including our anticipated insurance obligations and operating and capital expenditure needs, 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, for the next twelve months, at a minimum.

Dividend Restrictions 

Arch Capital has no material restrictions on its ability to make distributions to shareholders. However, the ability of our regulated insurance and reinsurance subsidiaries to pay dividends or make distributions or other payments to us is limited by the applicable local laws and relevant regulations of the various countries and states in which we operate. See note 25, “Statutory Information,” to our consolidated financial statements in Item 8 for additional information on dividend restrictions.

The payment of dividends from Arch Re Bermuda is, under certain circumstances, limited under Bermuda law, which requires our Bermuda operating subsidiary to maintain certain measures of solvency and liquidity.

Our U.S. insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. The ability of our regulated insurance subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. Each state requires prior regulatory approval of any payment of extraordinary dividends.

We also have insurance subsidiaries that are the parent company for other insurance subsidiaries, which means that dividends and other distributions will be subject to multiple layers of regulations in order for our insurance subsidiaries to be able to dividend funds to Arch Capital. The inability of the subsidiaries of Arch Capital to pay dividends and other permitted distributions could have a material adverse effect on Arch Capital’s cash requirements and our ability to make principal, interest and dividend payments on the senior notes, preferred shares and common shares.

In addition to meeting applicable regulatory standards, the ability of our insurance and reinsurance subsidiaries to pay dividends is also constrained by our dependence on the financial strength ratings of our insurance and reinsurance subsidiaries from independent rating agencies. The ratings from these agencies depend to a large extent on the capitalization levels of our insurance and reinsurance subsidiaries. We believe that Arch Capital has sufficient cash resources and available dividend capacity to service its indebtedness and other current outstanding obligations.

Restricted Assets 

Our insurance, reinsurance and mortgage insurance subsidiaries are required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support their operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. Our insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. At December 31, 2023 and 2022, such amounts approximated $9.9 billion and $8.7 billion, respectively.

Our investments in certain securities, including certain fixed income and structured securities, investments in funds

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","86","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

accounted for using the equity method, other alternative investments and investments in operating affiliates may be illiquid due to contractual provisions or investment market conditions. If we require significant amounts of cash on short notice in excess of anticipated cash requirements, then we may have difficulty selling these investments in a timely manner or may be forced to sell or terminate them at unfavorable values. Our unfunded investment commitments totaled approximately $3.6 billion at December 31, 2023 and are callable by our investment managers. The timing of the funding of investment commitments is uncertain and may require us to access cash on short notice.

Cash Flows 

The following table summarizes our cash flows from operating, investing and financing activities:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Total cash provided by (used for):"],["Operating activities","$","5,749","","","$","3,816"],["Investing activities","(5,468)","","","(3,101)"],["Financing activities","(69)","","","(706)"],["Effects of exchange rate changes on foreign currency cash","13","","","(50)"],["Increase (decrease) in cash","$","225","","","$","(41)"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities for the 2023 period was higher than in the 2022 period. Activity for the 2023 period primarily reflected a higher level of premiums collected than in the 2022 period.

Cash used for investing activities for the 2023 period reflected higher net purchases than in the 2022 period, primarily reflecting the strong operating cash flows in 2023.

Cash used for financing activities for the 2023 period was lower than in the 2022 period. Activity for the 2022 period included $586 million of share repurchases.

Investments 

At December 31, 2023, our investable assets were $34.6 billion. The primary goals of our asset liability management process are to meet our insurance liabilities, manage the interest rate risk embedded in those insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows, including debt service obligations. Generally, the expected principal and interest payments produced by our fixed income portfolio adequately fund the estimated runoff of our insurance reserves. Although this is not an exact cash flow match in each period, the substantial degree by which the fair value of the fixed income portfolio exceeds the expected present value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, provide assurance of our ability to fund the payment of claims and to service our outstanding debt without having to sell securities at distressed prices or access credit facilities. See Item 1A “Risk Factors” for a discussion of other risks relating to our business and investment portfolio.

CAPITAL RESOURCES

The following table provides an analysis of our capital structure:

[[GREPCENT_TABLE]]
[["","December 31,"],["2023","","2022"],["Senior notes","$","2,726","","","$","2,725"],["Shareholders\u2019 equity available to Arch:"],["Series F non-cumulative preferred shares","330","","","330"],["Series G non-cumulative preferred shares","500","","","500"],["Common shareholders\u2019 equity","17,523","","","12,080"],["Total","$","18,353","","","$","12,910"],["Total capital available to Arch","$","21,079","","","$","15,635"],["Senior notes to total capital (%)","12.9","","","17.4"],["Revolving credit agreement borrowings to total capital (%)","\u2014","","","\u2014"],["Debt to total capital (%)","12.9","","","17.4"],["Preferred to total capital (%)","3.9","","","5.3"],["Debt and preferred to total capital (%)","16.9","","","22.7"]]
[[/GREPCENT_TABLE]]

See note 19, “Debt and Financing Arrangements" and note 21, “Shareholders' Equity”, to our consolidated financial statements in Item 8 for additional information on capital structure.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","87","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

Capital Adequacy

We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by several ratings agencies, at a level considered necessary by management to enable our key operating subsidiaries to compete; (2) sufficient capital to enable our underwriting subsidiaries to meet the capital adequacy tests performed by statutory agencies in the U.S. and other key markets; and (3) our non-U.S. operating companies are required to post letters of credit and other forms of collateral that are necessary for them to operate as they are “non-admitted” under U.S. state insurance regulations.

In addition, AMIC and UGRIC (together, “Arch MI U.S.”) are required to maintain compliance with the GSE requirements, known as 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 December 31, 2023 with a PMIER sufficiency ratio of 213%, compared to 236% at December 31, 2022.

As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our shareholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Board and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements and such other factors as our Board deems relevant.

To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. We can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all. Any adverse developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result in realized and unrealized capital losses that could have

a material adverse effect on our results of operations, financial position and our businesses, and may also limit our access to capital required to operate our business. In addition to common share capital, we depend on external sources of finance to support our underwriting activities, which can be in the form (or any combination) of debt securities, preference shares, common equity and bank credit facilities providing loans and/or letters of credit.

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.

Except as described in the above paragraph, or where express reinsurance, guarantee or other financial support contractual arrangements are in place, each of Arch Capital’s subsidiaries or affiliates is solely responsible for its own liabilities and commitments (and no other Arch Capital subsidiary or affiliate is so responsible). Any reinsurance arrangements, guarantees or other financial support contractual arrangements that are in place are solely for the benefit of the Arch Capital subsidiary or affiliate involved and third parties (creditors or insureds of such entity) are not express beneficiaries of such arrangements.

Share Repurchase Program 

Our Board has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program through December 31, 2023, Arch Capital has repurchased approximately 433.6 million common shares for an aggregate purchase price of $5.9 billion. At December 31, 2023, $1.0 billion of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 31, 2024. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions, the development of the economy, corporate and regulatory considerations. We will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, we will consider share repurchases on an opportunistic basis.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","88","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

GUARANTOR INFORMATION

The below table provides a description of our senior notes payable at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","Interest","","Principal","","Carrying"],["Issuer/Due","","(Fixed)","","Amount","","Amount"],["Arch Capital:"],["May 1, 2034","","7.350","%","","$","300","","","$","298"],["June 30, 2050","","3.635","%","","1,000","","989"],["Arch-U.S.:"],["Nov. 1, 2043 (1)","","5.144","%","","500","","495"],["Arch Finance:"],["Dec. 15, 2026 (1)","","4.011","%","","500","","498"],["Dec. 15, 2046 (1)","","5.031","%","","450","","446"],["Total","","","","$","2,750","","","$","2,726"]]
[[/GREPCENT_TABLE]]

(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 Capital and Arch-U.S. are each holding companies and, accordingly, they conduct substantially all of their operations through their operating subsidiaries. Arch Finance is a wholly owned subsidiary of Arch U.S. MI Holdings Inc., a U.S. holding company. As a result, Arch Capital, Arch-U.S. and Arch Finance's cash flows and their ability to service their debt depends upon the earnings of their operating subsidiaries and on their ability to distribute the earnings, loans or other payments from such subsidiaries to Arch Capital, Arch-U.S. and Arch Finance, respectively.

During 2023 and 2022, we made interest payments of $127 million and $128 million, respectively, related to our senior notes and other financing arrangements. See note 19, “Debt and Financing Arrangements,” to our consolidated financial statements in Item 8 for additional disclosures concerning our senior notes and revolving credit agreement borrowings. For additional information on our preferred shares, see note 21,

“Shareholders’ Equity,” to our consolidated financial statements in Item 8.

The following tables present condensed financial information for Arch Capital (parent guarantor) and Arch-U.S. (subsidiary issuer):

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022"],["","Arch Capital","Arch-U.S.","","Arch Capital","Arch-U.S."],["Assets"],["Total investments","$","17","","$","145","","","$","7","","$","79"],["Cash","9","","5","","","11","","10"],["Investment in operating affiliates","4","","\u2014","","","5","","\u2014"],["Due from subsidiaries and affiliates","\u2014","","\u2014","","","2","","\u2014"],["Other assets","58","","56","","","18","","30"],["Total assets","$","88","","$","206","","","$","43","","$","119"],["Liabilities"],["Senior notes","1,287","","495","","","1,287","","495"],["Due to subsidiaries and affiliates","\u2014","","993","","","\u2014","","991"],["Other liabilities","38","","42","","","37","","37"],["Total liabilities","1,325","","1,530","","","1,324","","1,523"],["Non-cumulative preferred shares","$","830","","$","\u2014","","","$","830","","$","\u2014"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","December 31, 2023","","December 31, 2022"],["Year Ended","","","","","Arch Capital","","Arch-U.S.","","Arch Capital","","Arch-U.S."],["Revenues"],["Net investment income","","","","","$","2","","","$","4","","","$","2","","","$","1"],["Equity in net income (loss) of investments accounted for using the equity method","","","","","\u2014","","","(2)","","","\u2014","","","10"],["Total revenues","","","","","2","","","2","","","2","","","11"],["Expenses"],["Corporate expenses","","","","","93","","","9","","","86","","","13"],["Interest expense","","","","","59","","","26","","","59","","","26"],["Interest expense (intercompany)","","","","","\u2014","","","51","","","\u2014","","","22"],["Net foreign exchange (gains) losses","","","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total expenses","","","","","152","","","86","","","145","","","61"],["Income (loss) before income taxes","","","","","(150)","","","(84)","","","(143)","","","(50)"],["Income tax (expense) benefit","","","","","41","","","19","","","\u2014","","","10"],["Income (loss) from operating affiliates","","","","","(1)","","","\u2014","","","(1)","","","\u2014"],["Net income available to Arch","","","","","(110)","","","(65)","","","(144)","","","(40)"],["Preferred dividends","","","","","(40)","","","\u2014","","","(40)","","","\u2014"],["Net income available to Arch common shareholders","","","","","$","(150)","","","$","(65)","","","$","(184)","","","$","(40)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","89","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Contractual Obligations

The following table provides an analysis of our contractual commitments at December 31, 2023:

[[GREPCENT_TABLE]]
[["","Payment due by period"],["","Total","","2024","","2025 and 2026","","2027 and 2028","","Thereafter"],["Operating activities"],["Estimated gross payments for losses and loss adjustment expenses (1)","$","22,752","","","$","6,523","","","$","7,197","","","$","3,479","","","$","5,553"],["Contractholder payables (2)","1,817","","","208","","","363","","","274","","","972"],["Operating lease obligations","220","","","34","","","58","","","49","","","79"],["Purchase obligations","148","","","69","","","57","","","22","","","\u2014"],["Contingent and deferred consideration liabilities","23","","","7","","","8","","","4","","","4"],["Investing activities"],["Unfunded investment commitments (3)","3,587","","","3,587","","","\u2014","","","\u2014","","","\u2014"],["Financing activities"],["Senior notes (including interest payments)","5,041","","","127","","","754","","","214","","","3,946"],["Total contractual obligations and commitments","$","33,588","","","$","10,555","","","$","8,437","","","$","4,042","","","$","10,554"]]
[[/GREPCENT_TABLE]]

(1)The estimated expected contractual commitments related to the reserves for losses and loss adjustment expenses are presented on a gross basis (i.e., not reflecting any corresponding reinsurance recoverable amounts that would be due to us). It should be noted that until a claim has been presented to us, determined to be valid, quantified and settled, there is no known obligation on an individual transaction basis, and while estimable in the aggregate, the timing and amount contain significant uncertainty.

(2)Certain insurance policies written by our insurance operations feature large deductibles, primarily in construction and national accounts lines. Under such contracts, we are obligated to pay the claimant for the full amount of the claim and are subsequently reimbursed by the policyholder for the deductible amount. In the event we are unable to collect from the policyholder, we would be liable for such defaulted amounts.

(3)Unfunded investment commitments are callable by our investment managers. We have assumed that such investments will be funded in the next year but the funding may occur over a longer period of time, due to market conditions and other factors.

Letter of Credit and Revolving Credit Facilities

In the normal course of its operations, the Company enters into agreements with financial institutions to obtain secured and unsecured credit facilities. On August 23, 2023, Arch Capital and certain of its subsidiaries amended the existing credit agreement (the “Credit Facility”). The Credit Facility, as amended, consists of a $425 million secured facility for letters of credit (the “Secured Facility”) and a $500 million unsecured facility for revolving loans and letters of credit (the “Unsecured Facility”). At December 31, 2023, the Secured Facility had $273 million of letters of credit outstanding and remaining capacity of $152 million, and the Unsecured Facility had no outstanding revolving loans or letters of credit, with remaining capacity of $500 million.

The Credit Facility contains certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, consolidated tangible net worth, minimum shareholders’ equity levels and minimum financial strength ratings. Arch Capital and its subsidiaries which are party to the agreement were in compliance with all covenants contained therein at December 31, 2023.

The commitments under the Credit Facility will expire on August 23, 2028, and all loans then outstanding under the Credit Facility must be repaid at such time. Letters of credit issued under the Credit Facility will not have an expiration date later than August 23, 2029.

See note 19, “Debt and Financing Arrangements,” to our consolidated financial statements in Item 8 for additional disclosures concerning our senior notes and revolving credit agreement borrowings.

[[GREPCENT_TABLE]]
[["ARCH CAPITAL","90","2023 FORM 10-K"]]
[[/GREPCENT_TABLE]]

RATINGS

Our ability to underwrite business is affected by the quality of our claims paying ability and financial strength ratings as evaluated by independent agencies. Such ratings from third party internationally recognized statistical rating organizations or agencies are instrumental in establishing the financial security of companies in our industry. We believe that the primary users of such ratings include commercial and investment banks, policyholders, brokers, ceding companies and investors. Insurance ratings are also used by insurance and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers, and are often an important factor in the decision by an insured or intermediary of whether to place business with a particular insurance or reinsurance provider. Periodically, rating agencies evaluate us to confirm that we continue to meet their criteria for the ratings assigned to us by them. S&P, Moody’s, A.M. Best Company and Fitch Ratings are ratings agencies which have assigned financial strength ratings to one or more of Arch Capital’s subsidiaries.

If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our operating subsidiaries, which could place those operating subsidiaries at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our operating subsidiaries are able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of bank credit and letters of credit. In addition, under certain of the reinsurance agreements assumed by our reinsurance operations, upon the occurrence of a ratings downgrade or other specified triggering event with respect to our reinsurance operations, such as a reduction in surplus by specified amounts during specified periods, our ceding company clients may be provided with certain rights, including, among other things, the right to terminate the subject reinsurance agreement and/or to require that our reinsurance operations post additional collateral.

The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our website www.archgroup.com (Investor Relations-Credit Ratings) contains information about our ratings, but such information on our website is not incorporated by reference into this report.

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. 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.

We have substantial exposure to unexpected, large losses resulting from future man-made catastrophic events, such as acts of war, acts of terrorism and political instability. These risks are inherently unpredictable. It is difficult to predict the timing of such events with statistical certainty or estimate the amount of loss any given occurrence will generate. It is not possible to completely eliminate our exposure to unforecasted or unpredictable events and, to the extent that losses from such risks occur, our financial condition and results of operations could be materially adversely affected. Therefore, claims for natural and man-made catastrophic events could expose us to large losses and cause substantial volatility in our results of operations, which could cause the value of our common shares to fluctuate widely. In certain instances, we specifically insure and reinsure risks resulting from terrorism. Even in cases where we attempt to exclude losses from terrorism and certain other similar risks from some coverages written by us, we may not be successful in doing so. Moreover, irrespective of the clarity and inclusiveness of policy language, there can be no assurance that a court or arbitration panel will limit enforceability of policy language or otherwise issue a ruling adverse to us.

We seek to limit our loss exposure by writing a number of our reinsurance contracts on an excess of loss basis, adhering to maximum limitations on reinsurance written in defined geographical zones, limiting program size for each client and prudent underwriting of each program written. In the case of proportional treaties, we may seek per occurrence limitations or loss ratio caps to limit the impact of losses from any one or series of events. In our insurance operations, we seek to limit our exposure through the purchase of reinsurance. We cannot be certain that any of these loss limitation methods will be effective. We also seek to limit our loss exposure by geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and the inclusion of a particular policy within a particular zone's limits. There can

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be no assurance that various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, will be enforceable in the manner we intend. Disputes relating to coverage and choice of legal forum may also arise. Underwriting is inherently a matter of judgment, involving important assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more catastrophic or other events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition or our results of operations, possibly to the extent of eliminating our shareholders' equity.

For our natural catastrophe exposed business, we seek to limit the amount of exposure we will assume from any one insured or reinsured and the amount of the exposure to catastrophe losses from a single event in any geographic zone. We monitor our exposure to catastrophic events, including earthquake and wind and periodically reevaluate the estimated probable maximum pre-tax loss for such exposures. Our estimated probable maximum pre-tax loss is determined through the use of modeling techniques, but such estimate does not represent our total potential loss for such exposures.

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 January 1, 2024, our modeled peak zone catastrophe exposure is a windstorm affecting the Florida Tri-County, with a net probable maximum pre-tax loss of $1.6 billion, followed by windstorms affecting the Northeast U.S., and the Gulf of Mexico with net probable maximum pre-tax losses of $1.4 billion and $1.3 billion, respectively. As of January 1, 2024, our modeled peak zone earthquake exposure (San Francisco area earthquake) represented approximately 54% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (German windstorm) was substantially less than both our peak zone windstorm and earthquake exposures.

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 total 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 January 1, 2024, our modeled RDS loss was 7.0% 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, including 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 Item 1A, “Risk Factors—Risks Relating to Our Industry, Business and Operations” Depending on business opportunities and the mix of business that may comprise our insurance, reinsurance and mortgage portfolios, we may seek to adjust our self-imposed limitations on probable maximum pre-tax loss for catastrophe exposed business and mortgage default exposed business. See “—Summary of Critical Accounting Estimates—Ceded Reinsurance” for a discussion of our catastrophe reinsurance programs.

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MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

Our investment results are subject to a variety of risks, including risks related to changes in the business, financial condition or results of operations of the entities in which we invest, as well as changes in general economic conditions and overall market conditions. We are also exposed to potential loss from various market risks, including changes in equity prices, interest rates and foreign currency exchange rates.

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 December 31, 2023. Market risk represents the risk of changes in the fair value of a financial instrument and consists of several components, including liquidity, basis and price risks.

The sensitivity analysis performed as of December 31, 2023 presents hypothetical losses in cash flows, earnings and fair values of market sensitive instruments which were held by us on December 31, 2023 and are sensitive to changes in interest rates and equity security prices. This risk management discussion and the estimated amounts generated from the following sensitivity analysis represent forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis methods used by us to assess and mitigate risk should not be considered projections of future events of losses.

The focus of the SEC’s market risk rules is on price risk. For purposes of specific risk analysis, we employ 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. The financial instruments included in the following sensitivity analysis consist of all of our investments and cash.

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, 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 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 investment portfolio at December 31, 2023 and 2022:

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[["(U.S. dollars in billions)","Interest Rate Shift in Basis Points"],["-100","","-50","","-","","+50","","+100"],["Dec. 31, 2023"],["Total fair value","$","33.6","","","$","33.1","","","$","32.7","","","$","32.2","","","$","31.7"],["Change from base","3.0","%","","1.5","%","","","","(1.4)","%","","(2.8)","%"],["Change in unrealized value","$","0.98","","","$","0.49","","","","","$","(0.46)","","","$","(0.91)"],["Dec. 31, 2022"],["Total fair value","$","27.2","","","$","26.8","","","$","26.4","","","$","26.0","","","$","25.7"],["Change from base","2.9","%","","1.4","%","","","","(1.4)","%","","(2.7)","%"],["Change in unrealized value","$","0.77","","","$","0.37","","","","","$","(0.37)","","","$","(0.71)"]]
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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 the portfolio at December 31, 2023 and 2022:

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[["(U.S. dollars in billions)","Credit Spread Shift in Percentage"],["-100","","-50","","-","","+50","","+100"],["Dec. 31, 2023"],["Total fair value","$","33.8","","","$","33.2","","","$","32.7","","","$","32.1","","","$","31.5"],["Change from base","3.4","%","","1.7","%","","","","(1.7)","%","","(3.4)","%"],["Change in unrealized value","$","1.11","","","$","0.56","","","","","$","(0.56)","","","$","(1.11)"],["Dec. 31, 2022"],["Total fair value","$","27.5","","","$","26.9","","","$","26.4","","","$","25.9","","","$","25.3"],["Change from base","4.1","%","","2.0","%","","","","(2.0)","%","","(4.1)","%"],["Change in unrealized value","$","1.08","","","$","0.53","","","","","$","(0.53)","","","$","(1.08)"]]
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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 December 31, 2023, our portfolio’s 95th percentile VaR was estimated to be 7.8%, compared to an estimated 8.8% at December 31, 2022. 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 December 31, 2023 and 2022, the fair value of our investments in equity securities and certain investments accounted for using the equity method with underlying equity strategies totaled $1.0 billion and $0.8 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 $101 million and $79 million at December 31, 2023 and 2022, respectively, and would have decreased book value per share by approximately $0.27 and $0.21, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $101 million and $79 million at December 31, 2023 and 2022, respectively, and would have increased book value per share by approximately $0.27 and $0.21, respectively.

Investment-Related Derivatives. At December 31, 2023, the notional value of all derivative instruments (excluding foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $4.2 billion, compared to $6.6 billion at December 31, 2022. If the underlying exposure of each investment-related derivative held at December 31, 2023 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $42 million, and a decrease in book value per share of $0.11, compared to $66 million and $0.18, respectively, on investment-related derivatives held at December 31, 2022. If the underlying exposure of each investment-related derivative held at December 31, 2023 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $42 million, and an increase in book value per share of $0.11, compared to $66 million and $0.18, respectively, on investment-related derivatives held at December 31, 2022. See note 11, “Derivative Instruments,” to our consolidated financial statements in Item 8 for additional disclosures concerning derivatives.

For further discussion on investment activity, please refer to “—Financial Condition, Liquidity and Capital Resources—Financial Condition—Investable Assets.”

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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 the U.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 11, “Derivative Instruments,” to our consolidated financial statements in Item 8 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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[["(U.S. dollars in millions, except per share data)","December 31, 2023","","December 31, 2022"],["Net assets (liabilities), denominated in foreign currencies, excluding shareholders\u2019 equity and derivatives","$","(300)","","","$","(396)"],["Shareholders\u2019 equity denominated in foreign currencies (1)","1,158","","","1,056"],["Net foreign currency forward contracts outstanding (2)","246","","","312"],["Net exposures denominated in foreign currencies","$","1,104","","","$","972"],["Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:"],["Shareholders\u2019 equity","$","(110)","","","$","(97)"],["Book value per share","$","(0.30)","","","$","(0.26)"],["Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:"],["Shareholders\u2019 equity","$","110","","","$","97"],["Book value per share","$","0.30","","","$","0.26"]]
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(1)    Represents capital contributions held in the foreign currencies of our operating units.

(2)    Represents the net notional value of outstanding foreign currency forward contracts.

Although the Company generally attempts to match the currency of its projected liabilities with investments in the same currencies, from time to time the Company may elect to over or underweight one or more currencies, which could increase the Company’s exposure to foreign currency fluctuations and increase the volatility of the Company’s shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “—Results of Operations.”

Effects of Inflation

General economic inflation has increased in recent quarters and may continue to remain at elevated levels for an extended period of time. The potential also exists, after a catastrophe loss or pandemic events like COVID-19, for the development of inflationary pressures in a local economy. This may have a material effect on the adequacy of our reserves for losses and loss adjustment expenses, especially in longer-tailed lines of business, and on the market value of our investment portfolio through rising interest rates. The anticipated effects of inflation are considered in our pricing models, reserving processes and exposure management, across all lines of business and types of loss including natural catastrophe events. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled and will vary by the specific type of inflation affecting each line of business.