Arch Capital Update Catastrophe Loss

January 11, 2018

During the fourth quarter of 2017, a series of wildfires burned across many areas of California and a series of smaller catastrophe events occurred around the globe, and Arch Capital Group Ltd. has established a range of pre-tax losses of $60 million to $75 million, net of reinsurance recoveries and reinstatement premiums, for these 2017 fourth quarter catastrophic events.

“For clarity, this estimated range incorporates and updates the $30 million to $55 million range previously disclosed by the Company in its Quarterly Report on Form 10-Q for the 2017 third quarter,” the company said.

“The previous range reflected the first series of California wildfires only [also referred to as the Tubbs fire], whereas this current range reflects the Tubbs Fire, the second series of California wildfires [also referred to as the Thomas Fire] and other catastrophic events from around the globe. At this time, there are significant uncertainties surrounding the number of claims and scope of damage for both the Tubbs and Thomas Fires, as well as the other global events.

“The Company’s estimate for these events is based on currently available information derived from modeling techniques, industry assessment of exposure, preliminary claims information obtained from the Company’s clients and brokers to date and a review of in-force contracts. Actual losses from these events may vary materially from the estimates due to the inherent uncertainties in making such determinations.

“The Company entered into intercompany loss portfolio transfers [LPTs] effective on December 31, 2017 that transferred approximately $1.35 billion of net retained reserves for losses and allocated loss adjustment expenses between its subsidiaries. Given that these transactions involve two related parties, and in accordance with GAAP, they eliminate in consolidation. These transactions support the Company’s ongoing capital management strategies.

Arch also noted, “As a result of the reduction in the U.S. corporate tax rate from 35% to 21% effective January 1, 2018 pursuant to the Tax Cuts and Job Act of 2017, the Company anticipates that it will write down a portion of its deferred tax asset by approximately $15 million to $20 million in the 2017 fourth quarter. Such charge will be excluded from after-tax operating income available to Arch common shareholders, a non-GAAP financial measure, as it is not reflective of operations.

“Additionally, the Company estimates that the effective tax rate on pre-tax operating income for the fourth quarter of 2017 will be in a range of 17% to 20%. This estimate is based on both statutory income tax rates applied to underwriting income, expenses and investment returns by jurisdiction, as well as an amalgam of discrete items that includes, but is not limited to, the impact of vested or exercised equity compensation, changes in judgment with respect to valuation allowances and changes related to the LPTs referenced above.

“The effective tax rate for the 2017 fourth quarter reflects an increased proportion of U.S. based operating income. The losses related to the 2017 fourth quarter catastrophic occurrences emanated mostly from our non-U.S. underwriting operations. Although additional information will be provided during the Company’s earnings call scheduled for February 13, 2018, this tax rate range is subject to change as analyses of group-wide loss reserves and investment returns, among other areas, are finalized.

Arch Capital Group Ltd., a Bermuda-based company with approximately $11.04 billion in capital at September 30, 2017, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly owned subsidiaries.

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