ARCH CAPITAL GROUP LTD.ACGL
ARCH CAPITAL GROUP LTD. Income Taxes Disclosure
Arch Capital is incorporated under the laws of Bermuda and, under Bermuda law in effect prior to 2025, was not obligated to pay taxes on income or capital gains in Bermuda. Upon its formation in 2000, the Company received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 assuring that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to Arch Capital or any of its operations until March 31, 2035. However, on December 27, 2023, the Government of Bermuda enacted the Bermuda Corporate Income Tax Act (“Bermuda CIT Act”), imposing a 15% tax on certain Bermuda constituent entities of multi-national groups for tax years beginning on or after January 1, 2025. The Bermuda CIT Act was drafted to supersede the Company’s previously granted tax assurance, resulting in the Company becoming subject to Bermuda corporate income tax starting in 2025.
The Bermuda CIT Act and amendments, together with the widespread adoption of the OECD Pillar II minimum tax proposal, has resulted in an increase to the minimum effective tax rate to approximately 15% in most jurisdictions in which Arch operates.
Arch Capital has subsidiaries and branches that operate in various jurisdictions around the world. The significant jurisdictions in which Arch Capital’s subsidiaries and branches are subject to tax are the United States, Bermuda, United Kingdom, Ireland, Switzerland, Australia, Canada, and Gibraltar.
The components of income taxes attributable to operations were as follows:
Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current expense (benefit): | |||||||||||||||||
| Federal - Bermuda | $ | 211 | $ | 1 | $ | 7 | |||||||||||
| Foreign - United States | 270 | 332 | 251 | ||||||||||||||
| Foreign - Other | 105 | 64 | 30 | ||||||||||||||
| 586 | 397 | 288 | |||||||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| Federal - Bermuda | 100 | 12 | (1,179) | ||||||||||||||
| Foreign - United States | 60 | (21) | (20) | ||||||||||||||
| Foreign - Other | 14 | (26) | 38 | ||||||||||||||
| 174 | (35) | (1,161) | |||||||||||||||
| Income tax expense (benefit) | $ | 760 | $ | 362 | $ | (873) | |||||||||||
The Company’s income or loss before income taxes was earned in the following jurisdictions:
Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Income (Loss) Before Income Taxes: | |||||||||||||||||
| Domestic - Bermuda | $ | 3,121 | $ | 2,611 | $ | 2,099 | |||||||||||
| Foreign - United States | 1,660 | 1,438 | 1,239 | ||||||||||||||
| Foreign - Other | 378 | 625 | 232 | ||||||||||||||
| Total | $ | 5,159 | $ | 4,674 | $ | 3,570 | |||||||||||
The expected tax provision computed on pre-tax income or loss at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The 2025 applicable statutory tax rates by jurisdiction were as follows: Australia (30.0%), Canada (25.7%) United Kingdom (25.0%), United States (21.0%), Switzerland (19.6%), Bermuda (15.0%), Gibraltar (15.0%) and Ireland (12.5%).
The following table presents a reconciliation of the difference between the provision for income taxes and the expected tax provision at the Bermuda statutory income tax rate:
Year Ended December 31, | |||||||||||||||||
| 2025 | Rate Impact | ||||||||||||||||
| Bermuda Federal Statutory Tax Rate | $ | 774 | 15.0 | % | |||||||||||||
| Foreign tax effects | |||||||||||||||||
| United States | |||||||||||||||||
| Tax rate differential | 99 | 1.9 | % | ||||||||||||||
| Other | (17) | (0.3) | % | ||||||||||||||
| Bermuda | |||||||||||||||||
| Foreign tax credits | (56) | (1.1) | % | ||||||||||||||
| Other | 20 | 0.4 | % | ||||||||||||||
| United Kingdom | |||||||||||||||||
| Effect of cross-border tax laws | 45 | 0.9 | % | ||||||||||||||
| Other | 9 | 0.2 | % | ||||||||||||||
| Other foreign taxes | 7 | 0.1 | % | ||||||||||||||
| Effect of changes in tax laws or rates enacted in the current period | (65) | (1.3) | % | ||||||||||||||
| Nontaxable or nondeductible items / other | |||||||||||||||||
| Investment income | (54) | (1.0) | % | ||||||||||||||
| Other | (22) | (0.4) | % | ||||||||||||||
| Other | 20 | 0.3 | % | ||||||||||||||
| Total | $ | 760 | 14.7 | % | |||||||||||||
A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate follows:
Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Expected income tax expense (benefit) computed on pre-tax income at weighted average income tax rate | $ | 424 | $ | 300 | |||||||
| Addition (reduction) in income tax expense (benefit) resulting from: | |||||||||||
| Sale of subsidiaries/Bargain purchase option | (45) | — | |||||||||
| Investment income | (39) | (14) | |||||||||
| Change in tax rate | 12 | (1,179) | |||||||||
| Share based compensation | (11) | (13) | |||||||||
| Tax credits | (5) | (3) | |||||||||
| Base eroding tax/Alternative minimum tax | 5 | 9 | |||||||||
| State taxes, net of U.S. federal tax benefit | 4 | 6 | |||||||||
| Change in valuation allowance | 3 | 4 | |||||||||
| Uncertain tax position | 3 | — | |||||||||
| Dividend withholding taxes | 3 | 9 | |||||||||
| Other | 8 | 8 | |||||||||
| Income tax expense (benefit) | $ | 362 | $ | (873) | |||||||
The effect of a change in tax laws or rates on deferred income tax assets and liabilities is recognized in income in the period in which such change is enacted.
Deferred income tax assets and liabilities reflect temporary differences based on enacted tax rates between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred income tax assets: | |||||||||||
| Net operating loss | $ | 72 | $ | 77 | |||||||
| Discounting of net loss reserves | 116 | 203 | |||||||||
| Net unearned premium reserve | 243 | 190 | |||||||||
| Compensation liabilities | 99 | 75 | |||||||||
| Foreign tax credit carryforward | 54 | 22 | |||||||||
| Goodwill and intangible assets | 835 | 1,034 | |||||||||
| Bad debt reserves | 18 | 15 | |||||||||
| Depreciation and amortization | 137 | 151 | |||||||||
| Lease liability | 31 | 32 | |||||||||
| Net unrealized decline of investments | 41 | 77 | |||||||||
| Fair value adjustment to senior notes | 47 | 41 | |||||||||
| Advance claim payments | 59 | — | |||||||||
| Other, net | 10 | — | |||||||||
| Deferred income tax assets before valuation allowance | 1,762 | 1,917 | |||||||||
| Valuation allowance | (46) | (18) | |||||||||
| Deferred income tax assets net of valuation allowance | 1,716 | 1,899 | |||||||||
| Deferred income tax liabilities: | |||||||||||
| Lloyds year of account deferral | (18) | (19) | |||||||||
| Contingency reserve | (104) | (27) | |||||||||
| Deferred policy acquisition costs | (77) | (143) | |||||||||
| Investment related | (78) | (43) | |||||||||
| Right-of-use asset | (23) | (25) | |||||||||
| Other | — | (6) | |||||||||
| Total deferred income tax liabilities | (300) | (263) | |||||||||
| Net deferred income tax assets | $ | 1,416 | $ | 1,636 | |||||||
The Company provides a valuation allowance to reduce the net value of certain deferred income tax assets to an amount which management expects to more likely than not be realized. As of December 31, 2025, the Company’s valuation allowance was $46 million, compared to $18 million at December 31, 2024. The valuation allowance at December 31, 2025, was primarily attributable to Foreign Tax Credits generated by the Company’s branch in Switzerland, and Net Operating Losses related to the Company’s operations in Australia, Gibraltar and Hong Kong.
At December 31, 2025, the Company’s net operating loss carryforwards and tax credits were as follows:
Year Ended December 31, | |||||||||||
| 2025 | Expiration | ||||||||||
| Operating Loss Carryforwards | |||||||||||
| United Kingdom | $ | 118 | No expiration | ||||||||
| United States (1) | 70 | 2029 - 2038 | |||||||||
| Australia | 44 | No expiration | |||||||||
| Hong Kong | 39 | No expiration | |||||||||
| Gibraltar | 31 | No expiration | |||||||||
| Ireland | 30 | No expiration | |||||||||
| Cyprus | 1 | No expiration | |||||||||
| Netherlands | 1 | No expiration | |||||||||
| Tax Credits | |||||||||||
| Ireland foreign tax credits | 27 | No expiration | |||||||||
| U.K. foreign tax credits | 20 | No expiration | |||||||||
| U.S. foreign tax credits | 9 | 2031 - 2035 | |||||||||
(1) The Company’s U.S. operations have recorded $70 million of net operating loss (“NOL”) carryforwards that are subject to annual usage limitations under Section 382 of the Internal Revenue Code (“the Code”).
The Company’s U.S. mortgage operations are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the Code for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that the Company purchases non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the U.S. Treasury Department in an amount equal to the tax benefit derived from deducting any portion of the statutory contingency reserves. T&L Bonds are reflected in ‘other assets’ on the Company’s balance sheet and totaled approximately $107 million at December 31, 2025, compared to $47 million at December 31, 2024.
Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of the Company's U.S., U.K., Ireland, and Canadian subsidiaries because Management has concluded that all such earnings will either be indefinitely reinvested or can be distributed in a tax-free manner. Earnings that can be distributed free of tax will not attract dividend withholding taxes in the paying jurisdiction, nor will the dividend receipts be taxable in the recipient jurisdiction. Potential tax implications of repatriation from the Company’s unremitted earnings that are indefinitely reinvested are driven by facts at the time of distribution. Therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such earnings were remitted.
The Company recognizes interest and penalties relating to unrecognized tax benefits in the provision for income taxes. As of December 31, 2025, the Company’s total unrecognized tax benefits, including interest and penalties, were $6 million. If recognized, the full amount of the unrecognized tax benefit would impact the consolidated effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Balance at beginning of year | $ | 5 | $ | 2 | |||||||
| Additions based on tax positions related to the current year | 1 | 1 | |||||||||
| Additions for tax positions of prior years | — | 2 | |||||||||
| Reductions for tax positions of prior years | — | — | |||||||||
| Settlements | — | — | |||||||||
| Balance at end of year | $ | 6 | $ | 5 | |||||||
The Company, its subsidiaries and branches file income tax returns in various federal, state and local jurisdictions. The following table details open tax years that are potentially subject to examination by local tax authorities, in the following major jurisdictions:
| Jurisdiction | Tax Years | |||||||
| United States | 2019-2025 | |||||||
| United Kingdom | 2022-2025 | |||||||
| Ireland | 2021-2025 | |||||||
| Switzerland | 2021-2025 | |||||||
| Australia | 2020-2025 | |||||||
| Canada | 2021-2025 | |||||||
| Gibraltar | 2020-2025 | |||||||
As of December 31, 2025, the Company’s current income tax payable (included in “Other liabilities”) was $75 million. The Company’s taxes paid by jurisdiction were as follows:
December 31, | |||||||||||
| 2025 | |||||||||||
| Federal Bermuda taxes paid | $ | 131 | |||||||||
| Foreign taxes paid | |||||||||||
| United States - federal taxes paid | 227 | ||||||||||
| United States - other taxes paid | 19 | ||||||||||
| Australia | 26 | ||||||||||
| Other | 55 | ||||||||||
| Total Foreign taxes paid | 327 | ||||||||||
| Total | $ | 458 | |||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2023 | Feb 23, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2020 | Feb 26, 2021 | |
| 2019 | Feb 28, 2020 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Mar 1, 2017 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.