Document
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
September 30, 2016
 
Or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-26456

 archnewlogo11a11.jpg
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)

Bermuda
(State or other jurisdiction of incorporation or organization)
 
Not Applicable
(I.R.S. Employer Identification No.)
 
Waterloo House, Ground Floor
100 Pitts Bay Road, Pembroke HM 08
(Address of principal executive offices)
 
(441) 278-9250
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
As of October 31, 2016, there were 122,694,041 common shares, $0.0033 par value per share, of the registrant outstanding.



Table of Contents

ARCH CAPITAL GROUP LTD.
 
INDEX TO FORM 10-Q
 
 
 
 
Page No.
 
PART I.
 
 
 
 
 2
Item 1.
 
 4
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
79 
Item 1.
 
Item 1A.
 
79 
Item 2.
 
Item 5.
 
Item 6.
 
 
 

 
 
1

Table of Contents

PART I.  FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements 
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:
our ability to successfully implement our business strategy during “soft” as well as “hard” markets;
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;
the integration of United Guaranty and any other businesses we have acquired or may acquire into our existing operations;
our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;
general economic and market conditions (including inflation, interest rates, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate;
competition, including increased competition, on the basis of pricing, capacity (including alternative forms of capital), coverage terms or other factors;
developments in the world’s financial and capital markets and our access to such markets;
our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;
the loss of key personnel;
accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through September 30, 2016;
greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries;
severity and/or frequency of losses;
claims for natural or man-made catastrophic events in our insurance or reinsurance business could cause large losses and substantial volatility in our results of operations;
acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;
the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;

 
 
2

Table of Contents

changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations;
the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies;
losses relating to aviation business and business produced by a certain managing underwriting agency for which we may be liable to the purchaser of our prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in our periodic reports filed with the SEC;
changes in accounting principles or policies or in our application of such accounting principles or policies;
changes in the political environment of certain countries in which we operate or underwrite business;
statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers; and
the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.
 
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 


 
 
3

Table of Contents


ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
September 30, 2016 (unaudited) and December 31, 2015
 
 
 
 
 
 
For the three and nine month periods ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the nine month periods ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the nine month periods ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the nine month periods ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
4

Table of Contents

Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of
Arch Capital Group Ltd.:
 
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of September 30, 2016, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015, and the consolidated statements of changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2016 and September 30, 2015. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2015, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
/s/ PricewaterhouseCoopers LLP
 
November 4, 2016

 
 
5

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
September 30,
2016
 
December 31,
2015
Assets
 

 
 

Investments:
 

 
 

Fixed maturities available for sale, at fair value (amortized cost: $10,897,965 and $10,515,440)
$
11,026,929

 
$
10,459,353

Short-term investments available for sale, at fair value (amortized cost: $1,185,811 and $591,141)
1,184,408

 
587,904

Collateral received under securities lending, at fair value (amortized cost: $466,047 and $385,984)
466,055

 
389,336

Equity securities available for sale, at fair value (cost: $454,319 and $543,767)
521,587

 
618,405

Other investments available for sale, at fair value (cost: $151,430 and $261,343)
168,243

 
300,476

Investments accounted for using the fair value option
3,389,573

 
2,894,494

Investments accounted for using the equity method
797,542

 
592,973

Total investments
17,554,337

 
15,842,941

 
 
 
 
Cash
578,816

 
553,326

Accrued investment income
81,907

 
87,206

Securities pledged under securities lending, at fair value (amortized cost: $449,026 and $386,411)
453,757

 
384,081

Premiums receivable
1,182,708

 
983,443

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
2,076,248

 
1,867,373

Contractholder receivables
1,649,441

 
1,486,296

Prepaid reinsurance premiums
541,238

 
427,609

Deferred acquisition costs, net
469,466

 
433,477

Receivable for securities sold
285,112

 
45,505

Goodwill and intangible assets
90,941

 
97,531

Other assets
679,260

 
968,482

Total assets
$
25,643,231

 
$
23,177,270

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
9,610,189

 
$
9,125,250

Unearned premiums
2,671,121

 
2,333,932

Reinsurance balances payable
271,688

 
224,120

Contractholder payables
1,649,441

 
1,486,296

Collateral held for insured obligations
277,463

 
248,982

Deposit accounting liabilities
22,281

 
260,364

Senior notes
791,437

 
791,306

Revolving credit agreement borrowings
398,100

 
530,434

Securities lending payable
466,047

 
393,844

Payable for securities purchased
474,041

 
64,996

Other liabilities
618,834

 
568,852

Total liabilities
17,250,642

 
16,028,376

 
 
 
 
Commitments and Contingencies


 


Redeemable noncontrolling interests
205,459

 
205,182

 
 
 
 
Shareholders' Equity
 
 
 
Non-cumulative preferred shares
775,000

 
325,000

Common shares ($0.0033 par, shares issued: 174,499,023 and 173,107,849)
582

 
577

Additional paid-in capital
516,204

 
467,339

Retained earnings
7,972,643

 
7,370,371

Accumulated other comprehensive income (loss), net of deferred income tax
119,752

 
(16,502
)
Common shares held in treasury, at cost (shares: 51,823,826 and 50,480,066)
(2,031,859
)
 
(1,941,904
)
Total shareholders' equity available to Arch
7,352,322

 
6,204,881

Non-redeemable noncontrolling interests
834,808

 
738,831

Total shareholders' equity
8,187,130

 
6,943,712

Total liabilities, noncontrolling interests and shareholders' equity
$
25,643,231

 
$
23,177,270




See Notes to Consolidated Financial Statements
6

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 

 
 

Net premiums written
$
1,014,278

 
$
971,972

 
$
3,159,076

 
$
2,982,547

Change in unearned premiums
(55,875
)
 
(35,289
)
 
(243,109
)
 
(192,162
)
Net premiums earned
958,403

 
936,683

 
2,915,967

 
2,790,385

Net investment income
93,618

 
86,233

 
275,691

 
252,190

Net realized gains (losses)
125,105

 
(89,698
)
 
230,647

 
(42,075
)
 
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(3,867
)
 
(8,901
)
 
(16,999
)
 
(17,274
)
Less investment impairments recognized in other comprehensive income, before taxes

 
3,033

 
150

 
4,494

Net impairment losses recognized in earnings
(3,867
)
 
(5,868
)
 
(16,849
)
 
(12,780
)
 
 
 
 
 
 
 
 
Other underwriting income
7,980

 
7,623

 
38,251

 
26,876

Equity in net income (loss) of investment funds accounted for using the equity method
16,662

 
(2,118
)
 
32,054

 
19,938

Other income (loss)
(400
)
 
(265
)
 
(432
)
 
52

Total revenues
1,197,501

 
932,590

 
3,475,329

 
3,034,586

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses
524,183

 
531,741

 
1,631,724

 
1,544,883

Acquisition expenses
163,861

 
171,566

 
509,607

 
510,067

Other operating expenses
155,557

 
146,220

 
467,416

 
445,947

Corporate expenses
18,485

 
10,739

 
45,068

 
37,502

Interest expense
15,943

 
13,300

 
47,713

 
30,047

Net foreign exchange (gains) losses
2,621

 
(14,680
)
 
1,525

 
(61,598
)
Total expenses
880,650

 
858,886

 
2,703,053

 
2,506,848

 
 
 
 
 
 
 
 
Income before income taxes
316,851

 
73,704

 
772,276

 
527,738

Income tax expense
(13,231
)
 
(9,704
)
 
(43,672
)
 
(29,162
)
Net income
$
303,620

 
$
64,000

 
$
728,604

 
$
498,576

Net (income) loss attributable to noncontrolling interests
(50,748
)
 
16,033

 
(109,879
)
 
(19,417
)
Net income available to Arch
252,872

 
80,033

 
618,725

 
479,159

Preferred dividends
(5,484
)
 
(5,484
)
 
(16,453
)
 
(16,453
)
Net income available to Arch common shareholders
$
247,388

 
$
74,549

 
$
602,272

 
$
462,706

 
 
 
 
 
 
 
 
Net income per common share
 

 
 

 
 

 
 

Basic
$
2.05

 
$
0.62

 
$
4.99

 
$
3.79

Diluted
$
1.98

 
$
0.60

 
$
4.84

 
$
3.66

 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 

 
 

Basic
120,938,916

 
120,567,410

 
120,656,420

 
122,151,971

Diluted
124,931,653

 
125,011,773

 
124,528,174

 
126,354,759





See Notes to Consolidated Financial Statements
7

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Comprehensive Income
 
 
 
 
 

 
 

Net income
$
303,620

 
$
64,000

 
$
728,604

 
$
498,576

Other comprehensive income (loss), net of deferred income tax
 
 
 
 
 
 
 
Unrealized appreciation (decline) in value of available-for-sale investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
16,281

 
(53,891
)
 
251,722

 
(51,522
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax

 
(3,033
)
 
(150
)
 
(4,494
)
Reclassification of net realized (gains) losses, net of income taxes, included in net income
(54,992
)
 
12,278

 
(109,309
)
 
(39,868
)
Foreign currency translation adjustments
(5,312
)
 
(12,083
)
 
(6,150
)
 
(23,260
)
Comprehensive income
259,597

 
7,271

 
864,717

 
379,432

Net (income) loss attributable to noncontrolling interests
(50,748
)
 
16,033

 
(109,879
)
 
(19,417
)
Foreign currency translation adjustments attributable to noncontrolling interests
(59
)
 
96

 
141

 
96

Comprehensive income available to Arch
$
208,790

 
$
23,400

 
$
754,979

 
$
360,111





See Notes to Consolidated Financial Statements
8

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
Non-cumulative preferred shares
 

 
 

Balance at beginning of period
$
325,000

 
$
325,000

Series E Preferred shares issued
450,000

 

Balance at end of period
775,000

 
325,000

 
 
 
 
Common shares
 
 
 
Balance at beginning of year
577

 
572

Common shares issued, net
5

 
4

Balance at end of period
582

 
576

 
 
 
 
Additional paid-in capital
 

 
 

Balance at beginning of year
467,339

 
383,073

Common shares issued, net
8,406

 
7,440

Exercise of stock options
7,738

 
12,363

Amortization of share-based compensation
46,311

 
46,575

Issue costs on Series E preferred shares
(15,101
)
 

Other
1,511

 
1,497

Balance at end of period
516,204

 
450,948

 
 
 
 
Retained earnings
 

 
 

Balance at beginning of year
7,370,371

 
6,854,571

Net income
728,604

 
498,576

Net (income) loss attributable to noncontrolling interests
(109,879
)
 
(19,417
)
Preferred share dividends
(16,453
)
 
(16,453
)
Balance at end of period
7,972,643

 
7,317,277

 
 
 
 
Accumulated other comprehensive income (loss), net of deferred income tax
 
 
 
Balance at beginning of year
(16,502
)
 
128,856

Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
 
 
 
Balance at beginning of year
50,085

 
161,598

Unrealized holding gains (losses) arising during period, net of reclassification adjustment
142,413

 
(91,390
)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
(150
)
 
(4,494
)
Balance at end of period
192,348

 
65,714

Foreign currency translation adjustments:
 
 
 
Balance at beginning of year
(66,587
)
 
(32,742
)
Foreign currency translation adjustments
(6,150
)
 
(23,260
)
Foreign currency translation adjustments attributable to noncontrolling interests
141

 
97

Balance at end of period
(72,596
)
 
(55,905
)
Balance at end of period
119,752

 
9,809

 
 
 
 
Common shares held in treasury, at cost
 
 
 
Balance at beginning of year
(1,941,904
)
 
(1,562,019
)
Shares repurchased for treasury
(89,955
)
 
(378,776
)
Balance at end of period
(2,031,859
)
 
(1,940,795
)
 
 
 
 
Total shareholders’ equity available to Arch
7,352,322

 
6,162,815

Non-redeemable noncontrolling interests
834,808

 
774,162

Total shareholders’ equity
$
8,187,130

 
$
6,936,977




 

See Notes to Consolidated Financial Statements
9

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
Operating Activities
 

 
 

Net income
$
728,604

 
$
498,576

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized (gains) losses
(262,112
)
 
21,980

Net impairment losses recognized in earnings
16,849

 
12,780

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
8,157

 
3,983

Share-based compensation
46,311

 
46,575

Changes in:
 
 
 
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable
277,277

 
139,577

Unearned premiums, net of prepaid reinsurance premiums
243,109

 
192,162

Premiums receivable
(198,909
)
 
(108,741
)
Deferred acquisition costs, net
(40,906
)
 
(41,722
)
Reinsurance balances payable
49,198

 
4,242

Other liabilities
139,596

 
6,638

Other items
29,965

 
31,529

Net Cash Provided By Operating Activities
1,037,139

 
807,579

Investing Activities
 

 
 

Purchases of fixed maturity investments
(27,840,555
)
 
(22,382,104
)
Purchases of equity securities
(377,767
)
 
(485,526
)
Purchases of other investments
(1,008,774
)
 
(1,320,250
)
Proceeds from sales of fixed maturity investments
26,731,924

 
21,411,554

Proceeds from sales of equity securities
464,904

 
509,008

Proceeds from sales, redemptions and maturities of other investments
879,330

 
858,368

Proceeds from redemptions and maturities of fixed maturity investments
540,823

 
630,397

Net settlements of derivative instruments
23,396

 
81,114

Proceeds from investment in joint venture

 
40,000

Net (purchases) sales of short-term investments
(604,162
)
 
181,741

Change in cash collateral related to securities lending
(27,935
)
 
28,685

Acquisitions, net of cash
(20,911
)
 
818

Purchases of fixed assets
(11,565
)
 
(10,901
)
Change in other assets
(3,816
)
 
(43,654
)
Net Cash Provided By (Used For) Investing Activities
(1,255,108
)
 
(500,750
)
Financing Activities
 

 
 

Proceeds from issuance of preferred shares, net
434,899

 

Purchases of common shares under share repurchase program
(75,256
)
 
(365,383
)
Proceeds from common shares issued, net
(3,785
)
 
697

Proceeds from borrowings
46,000

 
239,077

Repayments of borrowings
(179,171
)
 

Change in cash collateral related to securities lending
27,935

 
(28,685
)
Dividends paid to redeemable noncontrolling interests
(13,491
)
 
(13,810
)
Other
33,113

 
50,463

Preferred dividends paid
(16,453
)
 
(16,453
)
Net Cash Provided By (Used For) Financing Activities
253,791

 
(134,094
)
 
 
 
 
Effects of exchange rate changes on foreign currency cash
(10,332
)
 
(8,658
)
 
 
 
 
Increase (decrease) in cash
25,490

 
164,077

Cash beginning of year
553,326

 
485,702

Cash end of period
$
578,816

 
$
649,779

 
 
 
 
Income taxes paid
$
40,742

 
$
35,460

Interest paid
$
35,234

 
$
25,195


See Notes to Consolidated Financial Statements
10

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.    General

Arch Capital Group Ltd. (“ACGL”) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means ACGL and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries. See Note 3.
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2.    Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted
The Company adopted a new accounting standard in the 2016 first quarter that provided targeted improvements to consolidation guidance for limited partnerships and other similarly structured entities. The adoption of this standard resulted in the Company concluding that it no longer had a
 
variable interest in Alternative Re Ltd. and, as a result, no longer is required to consolidate Alternative Re Ltd. in its financial statements. Alternative Re Ltd. is a Bermuda-domiciled company that provides collateralized segregated accounts to its clients. The Company applied this new standard on a modified retrospective basis as of January 1, 2016. Such adoption did not impact the Company’s shareholders’ equity or net income.
The adoption of the new standard also resulted in a review of certain funds within the Company’s investment portfolio where the Company has a limited partnership interest. See Note 6 for disclosures on limited partnership interests.
The Company also adopted new accounting guidance pertaining to hybrid instruments. The new guidance clarified the evaluation of whether the nature of a host contract within a hybrid instrument issued in the form of a share is more akin to debt or equity. The Company has adopted this new guidance on a modified retrospective basis as of January 1, 2016. Based on a review of hybrid instruments issued in the form of a share (both held in its investment portfolio and issued as part of capital raising), the Company determined the new accounting guidance had no impact on the classification or accounting for its existing hybrid instruments.
Recently Issued Accounting Standards Not Yet Adopted
An accounting standard was issued in the 2015 second quarter requiring new disclosures about the reserve for losses and loss adjustment expenses for short-duration insurance contracts. These disclosures will provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. This accounting guidance is effective for the 2016 annual reporting period and interim periods thereafter and should be applied retrospectively. The Company is assessing the impact the implementation of this standard will have on the disclosures included in its consolidated financial statements.
An accounting standard was issued in the 2016 first quarter to improve and simplify the accounting for employee share-based payment transactions. The new standard provides simplifications with respect to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows for these types of transactions. The standard is effective in the 2017 first quarter and early adoption is permitted. The application of the new standard is dependent on the specific area that is amended. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.
New accounting guidance was issued in the 2016 first quarter pertaining to the accounting for leases by a lessee. The new accounting guidance requires that the lessee recognize an


 
 
11

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

asset and a liability for leases with a lease term greater than 12 months regardless of whether the lease is classified as operating or financing. Under current accounting, operating leases are not reflected in the balance sheet. This accounting guidance is effective for the 2019 first quarter, though early application is permitted, and should be applied on a modified retrospective basis. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.
An accounting standard was issued in the 2016 second quarter that changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. This accounting guidance is effective for the 2020 first quarter, though early application is permitted in the 2019 first quarter, and should be applied on a modified retrospective basis for the majority of the provisions. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.
An accounting standard was issued in the 2016 third quarter addressing several clarifications on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. Among several other cash flow issues, the new guidance specifically addresses the classification of debt prepayment or debt issuance costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The new guidance also provides a broader principle on identifying the type of activity of the cash flow item by focusing on the cash flow item’s nature and the predominant source or use of that item. This accounting guidance is effective in the 2018 first quarter and should be applied retrospectively. Early adoption is permitted. The Company is assessing the impact the implementation of this standard will have on the classification and presentation of its statement of cash flows.
3.
Variable Interest Entities and Noncontrolling Interests

A variable interest entity (“VIE”) refers to an entity that has characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have characteristics of a controlling financial interest. The primary beneficiary of a VIE is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from
 
the VIE that could potentially be significant to the VIE. If a company is determined to be the primary beneficiary, it is required to consolidate the VIE in its financial statements.
Watford Holdings Ltd.
In March 2014, the Company invested $100.0 million and acquired approximately 11% of Watford Holdings Ltd.’s common equity and a warrant to purchase additional common equity. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford Re”). Watford Re is considered a VIE and the Company concluded that it is the primary beneficiary of Watford Re. As such, the results of Watford Re are included in the Company’s consolidated financial statements.
The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.
The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford Re are reported:
 
September 30,
 
December 31,

 
2016
 
2015
Assets
 
 
 
Investments accounted for using the fair value option
$
1,872,342

 
$
1,617,107

Cash
67,032

 
108,550

Accrued investment income
16,891

 
19,249

Premiums receivable
211,444

 
162,263

Reinsurance recoverable on unpaid and paid losses and LAE
25,822

 
14,135

Prepaid reinsurance premiums
11,556

 
11,129

Deferred acquisition costs, net
87,490

 
75,443

Receivable for securities sold
94,965

 
34,095

Goodwill and intangible assets
7,650

 

Other assets
122,641

 
80,361

Total assets of consolidated VIE
$
2,517,833

 
$
2,122,332

 
 
 
 
Liabilities
 
 
 
Reserves for losses and loss adjustment expenses
$
460,600

 
$
290,997

Unearned premiums
308,063

 
249,980

Reinsurance balances payable
12,315

 
14,005

Revolving credit agreement borrowings
298,100

 
430,434

Payable for securities purchased
145,135

 
33,062

Other liabilities
135,248

 
53,624

Total liabilities of consolidated VIE
$
1,359,461

 
$
1,072,102

 
 
 
 
Redeemable noncontrolling interests
$
220,159

 
$
219,882

For the nine months ended September 30, 2016, Watford Re generated $207.0 million of cash provided by operating activities, $124.0 million of cash used for investing activities and $119.6 million of cash used for financing activities,


12

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

compared to $204.3 million of cash provided by operating activities, $354.5 million of cash used for investing activities and $268.3 million of cash provided by financing activities for the nine months ended September 30, 2015.
Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford Re’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford Re’s common shares was approximately 89% at September 30, 2016. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable noncontrolling interests:
 
September 30,
 
2016
 
2015
Three Months Ended
 
 
 
Balance, beginning of period
$
788,589

 
$
794,880

Amounts attributable to noncontrolling interests
46,160

 
(20,621
)
Foreign currency translation adjustments attributable to noncontrolling interests
59

 
(97
)
Balance, end of period
$
834,808

 
$
774,162

 
 
 
 
Nine Months Ended
 
 
 
Balance, beginning of year
$
738,831

 
$
769,081

Amounts attributable to noncontrolling interests
96,118

 
5,178

Foreign currency translation adjustments attributable to noncontrolling interests
(141
)
 
(97
)
Balance, end of period
$
834,808

 
$
774,162

Redeemable noncontrolling interests
The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests relate to the 9,065,200 cumulative redeemable preference shares (“Watford Preference Shares”) issued in March 2014 with a
 
par value of $0.01 per share and a liquidation preference of $25.00 per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
The following table sets forth activity in the redeemable non-controlling interests:
 
September 30,
 
2016
 
2015
Three Months Ended
 
 
 
Balance, beginning of period
$
205,366

 
$
204,996

Shares acquired by the Company

 

Accretion of preference share issuance costs
93

 
93

Balance, end of period
$
205,459

 
$
205,089

 
 
 
 
Nine Months Ended
 
 
 
Balance, beginning of year
$
205,182

 
$
219,512

Shares acquired by the Company

 
(14,700
)
Accretion of preference share issuance costs
277

 
277

Balance, end of period
$
205,459

 
$
205,089

The portion of Watford Re’s income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
 
September 30,
 
2016
 
2015
Three Months Ended
 
 
 
Amounts attributable to non-redeemable noncontrolling interests
$
(46,160
)
 
$
20,621

Dividends attributable to redeemable noncontrolling interests
(4,588
)
 
(4,588
)
Net (income) loss attributable to noncontrolling interests
$
(50,748
)
 
$
16,033

 
 
 
 
Nine Months Ended
 
 
 
Amounts attributable to non-redeemable noncontrolling interests
$
(96,118
)
 
$
(5,178
)
Dividends attributable to redeemable noncontrolling interests
(13,761
)
 
(14,239
)
Net (income) loss attributable to noncontrolling interests
$
(109,879
)
 
$
(19,417
)


 
 
13

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.    Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
303,620

 
$
64,000

 
$
728,604

 
$
498,576

Net (income) loss attributable to noncontrolling interests
(50,748
)
 
16,033

 
(109,879
)
 
(19,417
)
Net income available to Arch
252,872

 
80,033

 
618,725

 
479,159

Preferred dividends
(5,484
)
 
(5,484
)
 
(16,453
)
 
(16,453
)
Net income available to Arch common shareholders
$
247,388

 
$
74,549

 
$
602,272

 
$
462,706

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic
120,938,916

 
120,567,410

 
120,656,420

 
122,151,971

Effect of dilutive common share equivalents:
 
 
 
 
 
 
 
Nonvested restricted shares
1,313,025

 
1,322,053

 
1,295,825

 
1,260,247

Stock options (1)
2,679,712

 
3,122,310

 
2,575,929

 
2,942,541

Weighted average common shares and common share equivalents outstanding — diluted
124,931,653

 
125,011,773

 
124,528,174

 
126,354,759

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
2.05

 
$
0.62

 
$
4.99

 
$
3.79

Diluted
$
1.98

 
$
0.60

 
$
4.84

 
$
3.66

(1)
Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2016 third quarter and 2015 third quarter, the number of stock options excluded were 334,203 and 390,406, respectively. For the nine months ended September 30, 2016 and 2015, the number of stock options excluded were 842,105 and 957,838, respectively.

 
 
14

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.    Segment Information

The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its 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 the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s 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 the Company’s chief operating decision makers, the Chairman and Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer of ACGL. 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 its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the results of Arch Mortgage Insurance Company (“Arch MI U.S.”) and Arch Mortgage Insurance Designated Activity Company, leading providers of mortgage insurance products and services to the U.S. and European markets, respectively. Arch MI U.S. is approved as an eligible mortgage insurer by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a government sponsored enterprise, or “GSE.” The mortgage segment also includes GSE credit risk-sharing transactions and mortgage reinsurance for the U.S. and Australian markets.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, interest expense, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, income taxes and items related to the Company’s non-cumulative preferred shares. Such amounts exclude the results of the ‘other’ segment.
The ‘other’ segment includes the results of Watford Re (see Note 3). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.

 
 
15

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:
 
Three Months Ended
 
September 30, 2016
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
758,934

 
$
324,361

 
$
131,726

 
$
1,214,765

 
$
163,736

 
$
1,278,765

Premiums ceded
(217,446
)
 
(89,551
)
 
(51,182
)
 
(357,923
)
 
(6,300
)
 
(264,487
)
Net premiums written
541,488

 
234,810

 
80,544

 
856,842

 
157,436

 
1,014,278

Change in unearned premiums
(22,410
)
 
17,117

 
(3,582
)
 
(8,875
)
 
(47,000
)
 
(55,875
)
Net premiums earned
519,078

 
251,927

 
76,962

 
847,967

 
110,436

 
958,403

Other underwriting income

 
2,216

 
4,740

 
6,956

 
1,024

 
7,980

Losses and loss adjustment expenses
(332,845
)
 
(105,924
)
 
(11,107
)
 
(449,876
)
 
(74,307
)
 
(524,183
)
Acquisition expenses, net
(77,148
)
 
(50,217
)
 
(7,757
)
 
(135,122
)
 
(28,739
)
 
(163,861
)
Other operating expenses
(87,517
)
 
(35,589
)
 
(25,416
)
 
(148,522
)
 
(7,035
)
 
(155,557
)
Underwriting income (loss)
$
21,568

 
$
62,413

 
$
37,422

 
121,403

 
1,379

 
122,782

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
66,282

 
27,336

 
93,618

Net realized gains (losses)
 
 
 
 
 
 
95,946

 
29,159

 
125,105

Net impairment losses recognized in earnings
 
 
 
 
 
 
(3,867
)
 

 
(3,867
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
16,662

 

 
16,662

Other income (loss)
 
 
 
 
 
 
(400
)
 

 
(400
)
Corporate expenses
 
 
 
 
 
 
(18,485
)
 

 
(18,485
)
Interest expense
 
 
 
 
 
 
(12,924
)
 
(3,019
)
 
(15,943
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
(4,232
)
 
1,611

 
(2,621
)
Income (loss) before income taxes
 
 
 
 
 
 
260,385

 
56,466

 
316,851

Income tax expense
 
 
 
 
 
 
(13,232
)
 
1

 
(13,231
)
Net income (loss)
 
 
 
 
 
 
247,153

 
56,467

 
303,620

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(4,588
)
 
(4,588
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 

 
(46,160
)
 
(46,160
)
Net income (loss) available to Arch
 
 
 
 
 
 
247,153

 
5,719

 
252,872

Preferred dividends
 
 
 
 
 
 
(5,484
)
 

 
(5,484
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
$
241,669

 
$
5,719

 
$
247,388

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
64.1
%
 
42.0
%
 
14.4
%
 
53.1
%
 
67.3
%
 
54.7
%
Acquisition expense ratio
14.9
%
 
19.9
%
 
10.1
%
 
15.9
%
 
26.0
%
 
17.1
%
Other operating expense ratio
16.9
%
 
14.1
%
 
33.0
%
 
17.5
%
 
6.4
%
 
16.2
%
Combined ratio
95.9
%
 
76.0
%
 
57.5
%
 
86.5
%
 
99.7
%
 
88.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
26,367

 
$
1,228

 
$
55,696

 
$
83,291

 
$
7,650

 
$
90,941


(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.


 
 
16

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Three Months Ended
 
September 30, 2015
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
752,438

 
$
329,327

 
$
74,657

 
$
1,158,451

 
$
131,165

 
$
1,189,192

Premiums ceded
(209,443
)
 
(92,182
)
 
(7,832
)
 
(311,486
)
 
(6,158
)
 
(217,220
)
Net premiums written
542,995

 
237,145

 
66,825

 
846,965

 
125,007

 
971,972

Change in unearned premiums
(20,451
)
 
23,286

 
(12,277
)
 
(9,442
)
 
(25,847
)
 
(35,289
)
Net premiums earned
522,544

 
260,431

 
54,548

 
837,523

 
99,160

 
936,683

Other underwriting income
519

 
2,783

 
3,565

 
6,867

 
756

 
7,623

Losses and loss adjustment expenses
(339,859
)
 
(115,780
)
 
(9,562
)
 
(465,201
)
 
(66,540
)
 
(531,741
)
Acquisition expenses, net
(77,076
)
 
(55,416
)
 
(10,428
)
 
(142,920
)
 
(28,646
)
 
(171,566
)
Other operating expenses
(84,620
)
 
(37,131
)
 
(21,048
)
 
(142,799
)
 
(3,421
)
 
(146,220
)
Underwriting income (loss)
$
21,508

 
$
54,887

 
$
17,075

 
93,470

 
1,309

 
94,779

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
67,251

 
18,982

 
86,233

Net realized gains (losses)
 
 
 
 
 
 
(53,480
)
 
(36,218
)
 
(89,698
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
(5,868
)
 

 
(5,868
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
(2,118
)
 

 
(2,118
)
Other income (loss)
 
 
 
 
 
 
(265
)
 

 
(265
)
Corporate expenses
 
 
 
 
 
 
(10,739
)
 

 
(10,739
)
Interest expense
 
 
 
 
 
 
(12,014
)
 
(1,286
)
 
(13,300
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
16,056

 
(1,376
)
 
14,680

Income (loss) before income taxes
 
 
 
 
 
 
92,293

 
(18,589
)
 
73,704

Income tax expense
 
 
 
 
 
 
(9,704
)
 

 
(9,704
)
Net income (loss)
 
 
 
 
 
 
82,589

 
(18,589
)
 
64,000

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(4,588
)
 
(4,588
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 

 
20,621

 
20,621

Net income (loss) available to Arch
 
 
 
 
 
 
82,589

 
(2,556
)
 
80,033

Preferred dividends
 
 
 
 
 
 
(5,484
)
 

 
(5,484
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
$
77,105

 
$
(2,556
)
 
$
74,549

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
65.0
%
 
44.5
%
 
17.5
%
 
55.5
%
 
67.1
%
 
56.8
%
Acquisition expense ratio
14.8
%
 
21.3
%
 
19.1
%
 
17.1
%
 
28.9
%
 
18.3
%
Other operating expense ratio
16.2
%
 
14.3
%
 
38.6
%
 
17.1
%
 
3.4
%
 
15.6
%
Combined ratio
96.0
%
 
80.1
%
 
75.2
%
 
89.7
%
 
99.4
%
 
90.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
29,834

 
$
2,149

 
$
71,637

 
$
103,620

 
$

 
$
103,620


(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.

 
 
17

Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Nine Months Ended
 
September 30, 2016
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
2,319,530

 
$
1,217,804

 
$
361,440

 
$
3,898,025

 
$
421,627

 
$
4,046,667

Premiums ceded
(713,110
)
 
(370,068
)
 
(62,918
)
 
(1,145,347
)
 
(15,229
)
 
(887,591
)
Net premiums written
1,606,420

 
847,736

 
298,522

 
2,752,678

 
406,398

 
3,159,076

Change in unearned premiums
(46,603
)
 
(43,345
)
 
(93,283
)
 
(183,231
)
 
(59,878
)
 
(243,109
)
Net premiums earned
1,559,817

 
804,391

 
205,239

 
2,569,447

 
346,520

 
2,915,967

Other underwriting income

 
22,659

 
12,670

 
35,329

 
2,922

 
38,251

Losses and loss adjustment expenses
(1,011,087
)
 
(363,613
)
 
(20,102
)
 
(1,394,802
)
 
(236,922
)
 
(1,631,724
)
Acquisition expenses, net
(228,819
)
 
(160,800
)
 
(24,665
)
 
(414,284
)
 
(95,323
)
 
(509,607
)
Other operating expenses
(265,749
)
 
(109,159
)
 
(74,022
)
 
(448,930
)
 
(18,486
)
 
(467,416
)
Underwriting income (loss)
$
54,162

 
$
193,478

 
$
99,120

 
346,760

 
(1,289
)
 
345,471

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
207,088

 
68,603

 
275,691

Net realized gains (losses)
 
 
 
 
 
 
168,735

 
61,912

 
230,647

Net impairment losses recognized in earnings
 
 
 
 
 
 
(16,849
)
 

 
(16,849
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
32,054

 

 
32,054

Other income (loss)
 
 
 
 
 
 
(432
)
 

 
(432
)
Corporate expenses
 
 
 
 
 
 
(45,068
)
 

 
(45,068
)
Interest expense
 
 
 
 
 
 
(37,983
)
 
(9,730
)
 
(47,713
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
(3,812
)
 
2,287

 
(1,525
)
Income (loss) before income taxes
 
 
 
 
 
 
650,493

 
121,783

 
772,276

Income tax expense
 
 
 
 
 
 
(43,673
)
 
1

 
(43,672
)
Net income (loss)
 
 
 
 
 
 
606,820

 
121,784

 
728,604

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(13,761
)
 
(13,761
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 

 
(96,118
)
 
(96,118
)
Net income (loss) available to Arch
 
 
 
 
 
 
606,820

 
11,905

 
618,725

Preferred dividends
 
 
 
 
 
 
(16,453
)
 

 
(16,453
)
Net income (loss) available to Arch common shareholders