Grade: A — Strong Financial Health
Framework: Financial-sector metrics (combined ratio, ROE, book value growth, reserve adequacy) + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-26, FY ended December 31, 2025) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Unqualified opinion (serving since 1995)
Note: Beneish M-Score and Altman Z-Score are not applicable to insurance companies due to fundamentally different financial statement structures.
One-line verdict: Arch Capital is one of the highest-quality specialty insurers in the S&P 500. The 10-K reports net income available to common shareholders of $4.4 billion, an annualized ROE of 20.1%, book value per share growth of 22.6% to $65.11, and a consolidated combined ratio of 95.2%. All three segments — insurance, reinsurance, and mortgage — contributed meaningfully. Cash and investments of $40+ billion dwarf total debt of $2.7 billion. No red flags from the screening engine; the only item worth monitoring is the slight deterioration in the combined ratio from 94.8% to 95.2%.
| Metric | Result |
|---|---|
| Combined Ratio | **95.2%** (vs. 94.8% prior year) |
| ROE (Net Income) | **20.1%** annualized |
| Operating ROE | **17.1%** annualized |
| Book Value Growth | **22.6%** YoY ($65.11 vs. $53.11) |
| Net Premiums Written | **$16.5B** (+13.4% in insurance segment) |
| Cash Covers Debt | **$11.5B cash vs. $2.7B debt** |
| Goodwill/Equity | **5%** — minimal |
Business Overview: Three-Legged Platform
Per the 10-K: "Arch Capital Group Ltd. is a publicly listed Bermuda exempted company with approximately $26.9 billion in capital at December 31, 2025." The company operates through three segments:
Insurance Segment — Net premiums written of nearly $7.8 billion, up 13.4% from 2024. Growth was "primarily driven by the U.S. MidCorp and Entertainment insurance businesses acquired from Allianz on August 1, 2024." Underwriting income was $375 million.
Reinsurance Segment — Provides property, casualty, and specialty reinsurance on a worldwide basis. The filing notes the segment contributes "meaningful" results alongside insurance.
Mortgage Segment — Provides mortgage insurance and reinsurance. The filing warns that higher risk-capital charges under the Enterprise Regulatory Capital Framework (ERCF) "could have a negative impact on our return on equity."
Underwriting Quality: Combined Ratio Analysis
The consolidated underwriting ratios from the 10-K:
| Metric | 2025 | 2024 | Change |
|---|---|---|---|
| Loss Ratio | 61.3% | 61.4% | -0.1pp |
| Acquisition Expense Ratio | 19.3% | 18.4% | +0.9pp |
| Other Operating Expense Ratio | 14.6% | 15.0% | -0.4pp |
| **Combined Ratio** | **95.2%** | **94.8%** | **+0.4pp** |
| Underwriting Income | $375M | $345M | +8.7% |
The combined ratio ticked up 0.4 points but remains solidly profitable (below 100%). The loss ratio was essentially flat, with "4.4 points of current year catastrophic event activity, compared to 4.6 points in 2024." The acquisition expense ratio increase of 0.9 points reflects the MCE Acquisition integration costs. Favorable prior year reserve development was -0.6% in 2025 vs. -0.5% in 2024 — modest and consistent, not a sign of reserve releases being used to manufacture earnings.
Capital Strength
Per the filing, Arch Capital closed 2025 with approximately $26.9 billion in capital. The balance sheet shows:
During 2025, Arch repurchased $1.9 billion of common shares while still growing book value by over 22%. This combination of buybacks and organic capital generation is a hallmark of high-quality specialty insurers.
Reserve Adequacy
The 10-K discloses favorable prior year reserve development of -0.6% of the loss ratio in 2025, compared to -0.5% in 2024. This indicates reserves established in prior years are proving slightly redundant — a positive sign that the company is not under-reserving. The filing states the current year loss ratio of 61.9% was "consistent with 2024," suggesting stable underwriting discipline without deterioration in book quality.
The 18-Point Screening
Revenue & Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 331 days (typical for reinsurance with long-tail claims), -15 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR growth 9.1% vs. revenue growth 14.0% |
| A3 | Revenue vs CFFO | WATCH | Revenue grew 14.0% but CFFO declined -7.5% |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.40 — strong cash backing |
| C2 | Free Cash Flow | PASS | FCF $6.1B, FCF/NI = 1.39 |
| C3 | Accruals Ratio | PASS | -2.2% — conservative |
| C4 | Cash vs Debt | PASS | Cash $11.5B covers debt $2.7B (4.3x coverage) |
A3 note: The CFFO decline relative to revenue growth is not alarming for an insurer in growth mode — premium collection timing and loss payment patterns create natural CFFO variability. With CFFO/NI at 1.40x, cash conversion remains excellent.
Balance Sheet & Acquisitions
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | $1.2B = 5% of equity |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill change -10% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | N/A | Not applicable to insurance companies |
| — | Altman Z-Score | N/A | Not applicable to insurance companies |
Key Risks from the 10-K
1. Catastrophe Exposure
The filing notes 4.4 points of catastrophic event activity on the current year loss ratio. As a global specialty insurer and reinsurer, Arch is inherently exposed to natural catastrophe losses. The company purchases reinsurance to manage this risk, but a single mega-catastrophe event could materially impact results.
2. MCE Acquisition Integration
The August 2024 acquisition of Allianz's MidCorp and Entertainment insurance businesses drove the 13.4% growth in insurance segment net premiums written. The 0.9-point increase in the acquisition expense ratio reflects integration costs. If the acquired book underperforms, both the combined ratio and goodwill could come under pressure.
3. Mortgage Insurance Regulatory Risk
The filing explicitly warns that ERCF changes "could be incorporated into future PMIERs amendments, thereby requiring mortgage insurers to hold higher capital levels." This could reduce ROE from the mortgage segment, which has historically been a high-return business for Arch.
4. Bermuda Domicile and Tax Reform
As a Bermuda-domiciled company, Arch benefits from favorable tax treatment. The filing discloses that the "One Big Beautiful Bill Act" (OBBBA), enacted July 4, 2025, "amended Section 59A of the Code" regarding the Base Erosion and Anti-Abuse Tax (BEAT). Changes to international tax rules could increase Arch's effective tax rate.
Financial-Sector Grade Assessment
| Financial-Sector Metric | ACGL Result | Benchmark | Assessment |
|---|---|---|---|
| Combined Ratio | 95.2% | <100% profitable | PASS |
| Loss Ratio | 61.3% | Industry-dependent | PASS |
| ROE | 20.1% | >=11% | STRONG PASS |
| Book Value Growth | 22.6% | Positive | STRONG PASS |
| Debt/Capital | ~10% | <30% | STRONG PASS |
| Reserve Development | Favorable -0.6% | Not adverse | PASS |
Grade: A. Arch Capital delivers elite insurance-sector returns with a 20.1% ROE, consistent underwriting profitability, fortress-level capital adequacy, and minimal goodwill. The 0.4-point combined ratio increase is noise, not signal. This is a well-run specialty insurer firing on all three cylinders.
**Disclaimer**: This report is based on Arch Capital Group's FY2025 10-K filed with SEC EDGAR on February 26, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, serving since 1995)
Fiscal year ended: December 31, 2025