EX-99.2 3 ex-992supplement93018.htm EX 99.2 SUPPLEMENT Exhibit


EXHIBIT 99.2
 
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Arch Capital Group Ltd.
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08 Bermuda
 
 
 
 
 
 

Financial Supplement

Financial Information
as of September 30, 2018
 
The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).
 
This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q.  Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.


Contacts
 
Arch Capital Group Ltd.
Investor Relations
François Morin: (441) 278-9250
Donald Watson: (914) 872-3616; dwatson@archcapservices.com



Arch Capital Group Ltd. and Subsidiaries
Table of Contents


 
 
Page
 
 
 
I.
Financial Highlights
 
 
 
II.
Consolidated Financial Statements
 
 
a.
Consolidated Statements of Income
 
b.
Consolidated Balance Sheets
 
c.
Consolidated Statements of Changes in Shareholders’ Equity
 
d.
Consolidated Statements of Cash Flows
 
 
 
III.
Segment Information
 
 
a.
Overview
 
b.
Consolidated Results
 
c.
Insurance Segment Results
 
d.
Reinsurance Segment Results
 
e.
Mortgage Segment Results
 
f.
Consolidated Results Excluding ‘Other’ Segment
 
g.
Selected Information on Losses and Loss Adjustment Expenses
 
 
 
IV.
Investment Information
 
 
a.
Investable Asset Summary and Investment Portfolio Metrics
 
b.
Composition of Net Investment Income, Yield and Total Return
 
c.
Composition of Fixed Maturities
 
d.
Credit Quality Distribution and Maturity Profile
 
e.
Analysis of Corporate Exposures
 
f.
Structured Securities and Eurozone Investments
 
 
 
V.
Other
 
 
a.
Comments on Regulation G
 
b.
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
 
c.
Operating Income and Effective Tax Rate Calculations
 
d.
Capital Structure and Share Repurchase Activity


 
1
 
Arch Capital Group Ltd. and Subsidiaries
Basis of Presentation


Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2017 is derived from or agrees to audited financial information. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

In March 2014, the Company invested $100.0 million to acquire 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”). In accordance with GAAP, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, 100% of the results of Watford Re are included in the Company’s consolidated financial statements. The portion of Watford Re’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford Re’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford Re.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s 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 can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.
 
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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 
2
 
Arch Capital Group Ltd. and Subsidiaries
Financial Highlights

The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
1,622,532

 
$
1,557,179

 
4.2
 %
 
$
4,935,339

 
$
4,697,007

 
5.1
 %
Net premiums written
 
1,181,876

 
1,171,676

 
0.9
 %
 
3,573,178

 
3,412,542

 
4.7
 %
Net premiums earned
 
1,155,255

 
1,133,256

 
1.9
 %
 
3,430,651

 
3,218,396

 
6.6
 %
Underwriting income (loss) (2)
 
234,790

 
(107,617
)
 
n/m

 
708,130

 
304,812

 
132.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
52.1
%
 
81.4
 %
 
(29.3
)
 
51.0
 %
 
61.2
%
 
(10.2
)
Acquisition expense ratio
 
14.9
%
 
14.3
 %
 
0.6

 
14.6
 %
 
14.5
%
 
0.1

Other operating expense ratio
 
13.1
%
 
14.3
 %
 
(1.2
)
 
14.1
 %
 
15.2
%
 
(1.1
)
Combined ratio
 
80.1
%
 
110.0
 %
 
(29.9
)
 
79.7
 %
 
90.9
%
 
(11.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
$
114,328

 
$
94,127

 
21.5
 %
 
$
322,332

 
$
282,459

 
14.1
 %
Per diluted share
 
$
0.28

 
$
0.23

 
21.7
 %
 
$
0.78

 
$
0.68

 
14.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) available to Arch common shareholders
 
$
217,006

 
$
(52,760
)
 
(511.3
)%
 
$
587,525

 
$
362,967

 
61.9
 %
Per diluted share
 
$
0.53

 
$
(0.13
)
 
n/m

 
$
1.42

 
$
0.87

 
63.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
After-tax operating income (loss) available to Arch common shareholders (2)
 
$
242,280

 
$
(107,133
)
 
n/m

 
$
720,019

 
$
259,751

 
177.2
 %
Per diluted share
 
$
0.59

 
$
(0.26
)
 
n/m

 
$
1.74

 
$
0.62

 
180.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
200,524

 
$
17,585

 
1,040.3
 %
 
$
432,186

 
$
648,861

 
(33.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
543,205

 
$
440,028

 
23.4
 %
 
$
947,656

 
$
839,783

 
12.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding — diluted
 
411,721,214

 
404,656,353

 
1.7
 %
 
413,993,192

 
417,666,972

 
(0.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial measures:
 
 

 
 

 
 

 
 

 
 

 
 

Change in book value per common share during period
 
2.3
%
 
—
 %
 
2.3

 
4.2
 %
 
8.0
%
 
(3.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
10.2
%
 
(2.6
)%
 
12.8

 
9.3
 %
 
6.2
%
 
3.1

Annualized operating return on average common equity (2)
 
11.4
%
 
(5.3
)%
 
16.7

 
11.4
 %
 
4.4
%
 
7.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (3)
 
 

 
 

 
 

 
 

 
 

 
 

Including effects of foreign exchange
 
0.31
%
 
1.60
 %
 
-129 bps

 
(0.19
)%
 
5.05
%
 
-524 bps

Excluding effects of foreign exchange
 
0.37
%
 
1.26
 %
 
-89 bps

 
0.29
 %
 
4.24
%
 
-395 bps

 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.
(3)
Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses.

 
3
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Income

(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net premiums written
 
$
1,333,553

 
$
1,298,896

 
$
1,412,544

 
$
1,111,015

 
$
1,325,403

 
$
4,044,993

 
$
3,850,358

Change in unearned premiums
 
(42,675
)
 
37,867

 
(177,645
)
 
113,740

 
(63,517
)
 
(182,453
)
 
(230,581
)
Net premiums earned
 
1,290,878

 
1,336,763

 
1,234,899

 
1,224,755

 
1,261,886

 
3,862,540

 
3,619,777

Net investment income
 
144,024

 
135,668

 
126,724

 
125,415

 
116,459

 
406,416

 
345,457

Net realized gains (losses)
 
(51,705
)
 
(76,611
)
 
(110,998
)
 
26,978

 
66,275

 
(239,314
)
 
122,163

Net impairment losses recognized in earnings
 
(492
)
 
(470
)
 
(162
)
 
(1,723
)
 
(1,878
)
 
(1,124
)
 
(5,415
)
Other underwriting income
 
5,823

 
3,874

 
5,349

 
14,734

 
6,064

 
15,046

 
15,519

Equity in net income (loss) of investment funds accounted for using the equity method
 
15,982

 
8,472

 
28,069

 
30,402

 
31,090

 
52,523

 
111,884

Other income (loss)
 
(726
)
 
3,113

 
74

 
547

 
(342
)
 
2,461

 
(3,118
)
Total revenues
 
1,403,784

 
1,410,809

 
1,283,955

 
1,421,108

 
1,479,554

 
4,098,548

 
4,206,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
(699,420
)
 
(726,153
)
 
(636,860
)
 
(678,875
)
 
(1,046,141
)
 
(2,062,433
)
 
(2,288,571
)
Acquisition expenses
 
(201,602
)
 
(202,838
)
 
(191,376
)
 
(208,879
)
 
(193,854
)
 
(595,816
)
 
(566,579
)
Other operating expenses
 
(161,098
)
 
(176,181
)
 
(175,015
)
 
(169,624
)
 
(170,127
)
 
(512,294
)
 
(514,827
)
Corporate expenses
 
(14,335
)
 
(22,512
)
 
(15,312
)
 
(13,986
)
 
(17,098
)
 
(52,159
)
 
(69,766
)
Amortization of intangible assets
 
(26,315
)
 
(26,472
)
 
(26,736
)
 
(31,836
)
 
(31,824
)
 
(79,523
)
 
(93,942
)
Interest expense
 
(29,730
)
 
(30,344
)
 
(30,636
)
 
(30,496
)
 
(29,510
)
 
(90,710
)
 
(86,935
)
Net foreign exchange gains (losses)
 
10,838

 
53,706

 
(19,721
)
 
(28,807
)
 
(28,028
)
 
44,823

 
(86,975
)
Total expenses
 
(1,121,662
)
 
(1,130,794
)
 
(1,095,656
)
 
(1,162,503
)
 
(1,516,582
)
 
(3,348,112
)
 
(3,707,595
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
282,122

 
280,015

 
188,299

 
258,605

 
(37,028
)
 
750,436

 
498,672

Income tax expense
 
(33,356
)
 
(23,668
)
 
(21,915
)
 
(56,813
)
 
(8,189
)
 
(78,939
)
 
(70,755
)
Net income (loss)
 
248,766

 
256,347

 
166,384

 
201,792

 
(45,217
)
 
671,497

 
427,917

Net (income) loss attributable to noncontrolling interests
 
(21,358
)
 
(12,701
)
 
(15,961
)
 
12,848

 
11,561

 
(50,020
)
 
(23,279
)
Net income (loss) attributable to Arch
 
227,408

 
243,646

 
150,423

 
214,640

 
(33,656
)
 
621,477

 
404,638

Preferred dividends
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Loss on redemption of preferred shares
 
—

 
—

 
(2,710
)
 
—

 
(6,735
)
 
(2,710
)
 
(6,735
)
Net income (loss) available to Arch common shareholders
 
$
217,006

 
$
233,243

 
$
137,276

 
$
203,535

 
$
(52,760
)
 
$
587,525

 
$
362,967

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
200,524

 
$
183,500

 
$
48,162

 
$
203,002

 
$
17,585

 
$
432,186

 
$
648,861

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share and common share equivalent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.54

 
$
0.58

 
$
0.34

 
$
0.50

 
$
(0.13
)
 
$
1.45

 
$
0.90

Diluted (1)
 
$
0.53

 
$
0.56

 
$
0.33

 
$
0.49

 
$
(0.13
)
 
$
1.42

 
$
0.87

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
402,939,092

 
404,800,421

 
407,539,728

 
406,280,748

 
404,656,353

 
405,076,228

 
403,416,387

Diluted (1)
 
411,721,214

 
413,111,205

 
417,893,802

 
418,735,890

 
404,656,353

 
413,993,192

 
417,666,972


(1)
Due to the net loss recorded in the 2017 third quarter, diluted weighted average common shares and common share equivalents outstanding for such period do not include the effect of dilutive securities since the inclusion of such securities is anti-dilutive to per share results.


 
4
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets


(U.S. Dollars in thousands, except share data)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
Assets
 
 

 
 

 
 

 
 

 
 

Investments:
 
 

 
 

 
 

 
 

 
 

Fixed maturities available for sale, at fair value
 
$
14,331,641

 
$
14,128,989

 
$
14,348,941

 
$
13,876,003

 
$
13,792,903

Short-term investments available for sale, at fair value
 
961,799

 
1,096,798

 
967,389

 
1,469,042

 
1,646,036

Collateral received under securities lending, at fair value
 
306,893

 
236,956

 
367,043

 
476,615

 
543,252

Equity securities, at fair value
 
444,118

 
534,482

 
543,650

 
495,804

 
477,143

Other investments available for sale, at fair value
 
—

 
—

 
—

 
264,989

 
260,339

Investments accounted for using the fair value option
 
4,097,735

 
4,111,611

 
4,119,139

 
4,216,237

 
4,249,634

Investments accounted for using the equity method
 
1,524,242

 
1,428,582

 
1,394,548

 
1,041,322

 
962,574

Total investments
 
21,666,428

 
21,537,418

 
21,740,710

 
21,840,012

 
21,931,881

Cash
 
651,037

 
526,628

 
680,891

 
606,199

 
862,361

Accrued investment income
 
106,543

 
114,307

 
106,114

 
113,133

 
101,104

Securities pledged under securities lending, at fair value
 
299,409

 
230,064

 
358,152

 
464,917

 
528,212

Premiums receivable
 
1,307,466

 
1,351,310

 
1,375,080

 
1,135,249

 
1,269,678

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
 
2,749,785

 
2,727,303

 
2,510,119

 
2,540,143

 
2,506,015

Contractholder receivables
 
2,067,268

 
2,044,322

 
2,002,469

 
1,978,414

 
1,864,348

Ceded unearned premiums
 
1,011,850

 
1,014,663

 
996,772

 
926,611

 
947,135

Deferred acquisition costs
 
572,987

 
569,817

 
596,264

 
535,824

 
531,196

Receivable for securities sold
 
278,753

 
143,809

 
217,224

 
205,536

 
385,952

Goodwill and intangible assets
 
566,662

 
593,008

 
626,004

 
652,611

 
684,405

Other assets
 
974,346

 
1,000,471

 
922,156

 
1,053,009

 
1,012,510

Total assets
 
$
32,252,534

 
$
31,853,120

 
$
32,131,955

 
$
32,051,658

 
$
32,624,797

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Reserve for losses and loss adjustment expenses
 
$
11,554,321

 
$
11,424,337

 
$
11,496,205

 
$
11,383,792

 
$
11,351,267

Unearned premiums
 
3,868,379

 
3,833,540

 
3,885,297

 
3,622,314

 
3,751,550

Reinsurance balances payable
 
404,936

 
411,082

 
379,728

 
323,496

 
352,006

Contractholder payables
 
2,067,268

 
2,044,322

 
2,002,469

 
1,978,414

 
1,864,348

Collateral held for insured obligations
 
249,723

 
257,396

 
253,709

 
240,183

 
345,726

Senior notes
 
1,733,364

 
1,733,211

 
1,733,043

 
1,732,884

 
1,732,726

Revolving credit agreement borrowings
 
554,756

 
572,289

 
755,294

 
816,132

 
826,242

Securities lending payable
 
306,886

 
236,948

 
367,034

 
476,605

 
543,243

Payable for securities purchased
 
255,427

 
356,583

 
282,731

 
449,186

 
1,091,464

Other liabilities
 
819,373

 
752,399

 
765,948

 
782,717

 
788,354

Total liabilities
 
21,814,433

 
21,622,107

 
21,921,458

 
21,805,723

 
22,646,926

 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
206,199

 
206,105

 
206,013

 
205,922

 
205,829

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Non-cumulative preferred shares
 
780,000

 
780,000

 
780,000

 
872,555

 
772,555

Convertible non-voting common equivalent preferred shares
 
—

 
—

 
—

 
489,627

 
489,627

Common shares
 
633

 
633

 
630

 
611

 
610

Additional paid-in capital
 
1,775,499

 
1,760,606

 
1,737,978

 
1,230,617

 
1,212,960

Retained earnings
 
9,300,208

 
9,083,202

 
8,849,959

 
8,562,889

 
8,359,354

Accumulated other comprehensive income (loss), net of deferred income tax
 
(221,041
)
 
(194,157
)
 
(134,009
)
 
118,044

 
129,682

Common shares held in treasury, at cost
 
(2,280,151
)
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
 
(2,053,644
)
Total shareholders’ equity available to Arch
 
9,355,148

 
9,163,755

 
9,150,372

 
9,196,602

 
8,911,144

Non-redeemable noncontrolling interests
 
876,754

 
861,153

 
854,112

 
843,411

 
860,898

Total shareholders’ equity
 
10,231,902

 
10,024,908

 
10,004,484

 
10,040,013

 
9,772,042

Total liabilities, noncontrolling interests and shareholders’ equity
 
$
32,252,534

 
$
31,853,120

 
$
32,131,955

 
$
32,051,658

 
$
32,624,797

 
 
 
 
 
 
 
 
 
 
 
Common shares and common share equivalents outstanding, net of treasury shares
 
405,524,360

 
405,436,637

 
410,047,266

 
409,956,417

 
409,621,719

Book value per common share (1)
 
$
21.15

 
$
20.68

 
$
20.41

 
$
20.30

 
$
19.87


(1)
Excludes the effects of stock options and restricted stock units outstanding.

 
5
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Non-cumulative preferred shares
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning of period
 
$
780,000

 
$
780,000

 
$
872,555

 
$
772,555

 
$
772,555

 
$
872,555

 
$
772,555

Preferred shares issued
 
—

 
—

 
—

 
100,000

 
230,000

 
—

 
230,000

Preferred shares redeemed
 
—

 
—

 
(92,555
)
 
—

 
(230,000
)
 
(92,555
)
 
(230,000
)
Balance at end of period
 
$
780,000

 
$
780,000

 
$
780,000

 
$
872,555

 
$
772,555

 
$
780,000

 
$
772,555

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible non-voting common equivalent preferred shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
—

 
—

 
489,627

 
489,627

 
489,627

 
489,627

 
1,101,304

Preferred shares converted to common shares
 
—

 
—

 
(489,627
)
 
—

 
—

 
(489,627
)
 
(611,677
)
Balance at end of period
 
—

 
—

 
—

 
489,627

 
489,627

 
—

 
489,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
633

 
630

 
611

 
610

 
609

 
611

 
582

Common shares issued, net
 
—

 
3

 
19

 
1

 
1

 
22

 
28

Balance at end of period
 
633

 
633

 
630

 
611

 
610

 
633

 
610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
1,760,606

 
1,737,978

 
1,230,617

 
1,212,960

 
1,196,884

 
1,230,617

 
531,687

Preferred shares converted to common shares
 
—

 
—

 
489,608

 
—

 
—

 
489,608

 
611,653

Issue costs on preferred shares
 
—

 
—

 
—

 
(2,360
)
 
(7,946
)
 
—

 
(7,946
)
Reversal of original issue costs on redeemed preferred shares
 
—

 
—

 
2,710

 
—

 
6,735

 
2,710

 
6,735

All other
 
14,893

 
22,628

 
15,043

 
20,017

 
17,287

 
52,564

 
70,831

Balance at end of period
 
1,775,499

 
1,760,606

 
1,737,978

 
1,230,617

 
1,212,960

 
1,775,499

 
1,212,960

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
9,083,202

 
8,849,959

 
8,562,889

 
8,359,354

 
8,412,114

 
8,562,889

 
7,996,701

Cumulative effect of an accounting change
 
—

 
—

 
149,794

 
—

 
—

 
149,794

 
(314
)
Balance at beginning of period, as adjusted
 
9,083,202

 
8,849,959

 
8,712,683

 
8,359,354

 
8,412,114

 
8,712,683

 
7,996,387

Net income (loss)
 
248,766

 
256,347

 
166,384

 
201,792

 
(45,217
)
 
671,497

 
427,917

Amounts attributable to noncontrolling interests
 
(21,358
)
 
(12,701
)
 
(15,961
)
 
12,848

 
11,561

 
(50,020
)
 
(23,279
)
Preferred share dividends
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Loss on redemption of preferred shares
 
—

 
—

 
(2,710
)
 
—

 
(6,735
)
 
(2,710
)
 
(6,735
)
Balance at end of period
 
9,300,208

 
9,083,202

 
8,849,959

 
8,562,889

 
8,359,354

 
9,300,208

 
8,359,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(194,157
)
 
(134,009
)
 
118,044

 
129,682

 
78,441

 
118,044

 
(114,541
)
Cumulative effect adjustment of an accounting change
 
—

 
—

 
(149,794
)
 
—

 
—

 
(149,794
)
 
—

Change in unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax
 
(28,867
)
 
(47,115
)
 
(103,844
)
 
(29,002
)
 
42,550

 
(179,826
)
 
214,043

Change in foreign currency translation adjustments
 
1,983

 
(13,033
)
 
1,585

 
17,364

 
8,691

 
(9,465
)
 
30,180

Balance at end of period
 
(221,041
)
 
(194,157
)
 
(134,009
)
 
118,044

 
129,682

 
(221,041
)
 
129,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
 
(2,053,644
)
 
(2,051,343
)
 
(2,077,741
)
 
(2,034,570
)
Shares repurchased for treasury
 
(13,622
)
 
(182,343
)
 
(6,445
)
 
(24,097
)
 
(2,301
)
 
(202,410
)
 
(19,074
)
Balance at end of period
 
(2,280,151
)
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
 
(2,053,644
)
 
(2,280,151
)
 
(2,053,644
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity available to Arch
 
9,355,148

 
9,163,755

 
9,150,372

 
9,196,602

 
8,911,144

 
9,355,148

 
8,911,144

Non-redeemable noncontrolling interests
 
876,754

 
861,153

 
854,112

 
843,411

 
860,898

 
876,754

 
860,898

Total shareholders’ equity
 
$
10,231,902

 
$
10,024,908

 
$
10,004,484

 
$
10,040,013

 
$
9,772,042

 
$
10,231,902

 
$
9,772,042



 
6
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Operating Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
 
$
248,766

 
$
256,347

 
$
166,384

 
$
201,792

 
$
(45,217
)
 
$
671,497

 
$
427,917

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (gains) losses
 
47,315

 
75,447

 
101,995

 
(32,573
)
 
(66,959
)
 
224,757

 
(141,944
)
Net impairment losses included in earnings
 
492

 
470

 
162

 
1,723

 
1,878

 
1,124

 
5,415

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
 
19,900

 
5,840

 
(19,383
)
 
(15,756
)
 
(16,255
)
 
6,357

 
(63,784
)
Amortization of intangible assets
 
26,315

 
26,472

 
26,736

 
31,836

 
31,824

 
79,523

 
93,942

Share-based compensation
 
10,387

 
20,755

 
14,664

 
9,490

 
15,569

 
45,806

 
58,308

Changes in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for losses and loss adjustment expenses, net
 
146,136

 
(164,210
)
 
86,319

 
11,882

 
422,310

 
68,245

 
602,652

Unearned premiums, net
 
42,675

 
(37,867
)
 
177,645

 
(113,740
)
 
63,517

 
182,453

 
230,581

Premiums receivable
 
33,703

 
(3,178
)
 
(233,772
)
 
135,738

 
55,355

 
(203,247
)
 
(167,143
)
Deferred acquisition costs
 
(963
)
 
(4,764
)
 
(30,347
)
 
(4,747
)
 
(20,078
)
 
(36,074
)
 
(73,631
)
Reinsurance balances payable
 
(5,265
)
 
35,327

 
53,634

 
(28,999
)
 
(12,584
)
 
83,696

 
37,528

Other items, net
 
54,640

 
(113,933
)
 
56,143

 
(162,477
)
 
97,814

 
(3,150
)
 
50,868

Net cash provided by operating activities
 
624,101

 
96,706

 
400,180

 
34,169

 
527,174

 
1,120,987

 
1,060,709

Investing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchases of fixed maturity investments
 
(7,970,347
)
 
(7,186,303
)
 
(9,681,267
)
 
(8,727,784
)
 
(8,179,803
)
 
(24,837,917
)
 
(28,079,129
)
Purchases of equity securities
 
(139,679
)
 
(302,663
)
 
(377,000
)
 
(353,881
)
 
(266,980
)
 
(819,342
)
 
(667,135
)
Purchases of other investments
 
(526,185
)
 
(494,693
)
 
(522,454
)
 
(614,096
)
 
(522,824
)
 
(1,543,332
)
 
(1,406,528
)
Proceeds from sales of fixed maturity investments
 
7,219,660

 
7,411,396

 
8,679,147

 
8,057,305

 
8,017,794

 
23,310,203

 
27,629,474

Proceeds from sales of equity securities
 
244,851

 
330,757

 
291,311

 
304,528

 
278,809

 
866,919

 
751,873

Proceeds from sales, redemptions and maturities of other investments
 
404,737

 
336,732

 
436,566

 
590,036

 
324,087

 
1,178,035

 
938,581

Proceeds from redemptions and maturities of fixed maturity investments
 
212,573

 
224,417

 
287,031

 
159,796

 
299,680

 
724,021

 
747,621

Net settlements of derivative instruments
 
(3,733
)
 
(31,572
)
 
36,070

 
(7,611
)
 
(14,968
)
 
765

 
(20,952
)
Net (purchases) sales of short-term investments
 
102,414

 
(143,417
)
 
595,318

 
230,099

 
(519,450
)
 
554,315

 
(964,653
)
Change in cash collateral related to securities lending
 
(39,231
)
 
14,737

 
161,567

 
(136,152
)
 
(27,001
)
 
137,073

 
148,692

Acquisitions, net of cash
 
—

 
—

 
—

 
—

 
(27,709
)
 
—

 
(27,709
)
Purchases of fixed assets
 
(5,808
)
 
(9,002
)
 
(4,240
)
 
(5,979
)
 
(5,759
)
 
(19,050
)
 
(16,862
)
Other
 
8,266

 
9,924

 
40,037

 
24,495

 
60,601

 
58,227

 
94,089

Net cash provided by (used for) investing activities
 
(492,482
)
 
160,313

 
(57,914
)
 
(479,244
)
 
(583,523
)
 
(390,083
)
 
(872,638
)
Financing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from issuance of preferred shares, net
 
—

 
—

 
—

 
97,640

 
222,054

 
—

 
222,054

Redemption of preferred shares
 
—

 
—

 
(92,555
)
 
—

 
(230,000
)
 
(92,555
)
 
(230,000
)
Purchases of common shares under share repurchase program
 
(10,954
)
 
(170,276
)
 
(3,299
)
 
—

 
—

 
(184,529
)
 
—

Proceeds from common shares issued, net
 
1,822

 
(11,072
)
 
(2,779
)
 
(13,564
)
 
(646
)
 
(12,029
)
 
(7,484
)
Proceeds from borrowings
 
36,680

 
90,994

 
39,585

 
14,500

 
238,915

 
167,259

 
238,915

Repayments of borrowings
 
(54,000
)
 
(272,000
)
 
(101,000
)
 
(25,000
)
 
(100,000
)
 
(427,000
)
 
(172,000
)
Change in cash collateral related to securities lending
 
39,231

 
(14,737
)
 
(161,567
)
 
136,152

 
27,001

 
(137,073
)
 
(148,692
)
Dividends paid to redeemable noncontrolling interests
 
(4,497
)
 
(4,497
)
 
(4,497
)
 
(4,498
)
 
(4,497
)
 
(13,491
)
 
(13,491
)
Other
 
(1,595
)
 
(2,133
)
 
(2,356
)
 
(2,616
)
 
(7,582
)
 
(6,084
)
 
(49,280
)
Preferred dividends paid
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Net cash provided by (used for) financing activities
 
(3,715
)
 
(394,124
)
 
(338,905
)
 
191,509

 
132,876

 
(736,744
)
 
(194,914
)
Effects of exchange rate changes on foreign currency cash and restricted cash
 
(1,194
)
 
(12,042
)
 
1,611

 
236

 
8,272

 
(11,625
)
 
17,888

Increase (decrease) in cash and restricted cash
 
126,710

 
(149,147
)
 
4,972

 
(253,330
)
 
84,799

 
(17,465
)
 
11,045

Cash and restricted cash, beginning of period
 
583,109

 
732,256

 
727,284

 
980,614

 
895,815

 
727,284

 
969,569

Cash and restricted cash, end of period
 
$
709,819

 
$
583,109

 
$
732,256

 
$
727,284

 
$
980,614

 
$
709,819

 
$
980,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
12,499

 
$
3,346

 
$
(49,857
)
 
$
3,874

 
$
43,972

 
$
(34,012
)
 
$
47,907

Interest paid
 
$
6,748

 
$
52,996

 
$
7,861

 
$
52,761

 
$
6,578

 
$
67,605

 
$
64,613

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities, excluding the ‘other’ segment
 
$
543,205

 
$
34,190

 
$
370,261

 
$
30,190

 
$
440,028

 
$
947,656

 
$
839,783


 
7
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview



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’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 President and Chief Executive Officer of Arch Capital and the Chief Financial 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 its three core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

The Company determined its reportable operating 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.

Insurance 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: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
•
Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
•
Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
•
Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.
•
Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
•
Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
•
Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
•
Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.

 
8
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview


Reinsurance Segment
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•
Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
•
Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
•
Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
•
Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
•
Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
•
Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.
Mortgage Segment

The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, 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 and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

The ‘other’ segment includes the results of Watford Holdings Ltd. and its subsidiary Watford Re Ltd., a multi-line Bermuda reinsurance company, which was launched in March 2014. Subsidiaries of the Company act as Watford Re’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford Re’s non-investment grade credit portfolios and the Company manages Watford Re’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, the Company consolidates the results of Watford Re in its consolidated financial statements, although it only owns approximately 11% of Watford Re’s common equity. Watford Re has its own management and board of directors that is responsible for its overall profitability. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.


 
9
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Three Months Ended
 
 
September 30, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
836,820

 
$
435,396

 
$
350,559

 
$
1,622,532

 
$
185,033

 
$
1,731,328

Premiums ceded
 
(259,968
)
 
(123,705
)
 
(57,226
)
 
(440,656
)
 
(33,356
)
 
(397,775
)
Net premiums written
 
576,852

 
311,691

 
293,333

 
1,181,876

 
151,677

 
1,333,553

Change in unearned premiums
 
(15,794
)
 
(18,418
)
 
7,591

 
(26,621
)
 
(16,054
)
 
(42,675
)
Net premiums earned
 
561,058

 
293,273

 
300,924

 
1,155,255

 
135,623

 
1,290,878

Other underwriting income (loss)
 
—

 
1,387

 
3,733

 
5,120

 
703

 
5,823

Losses and loss adjustment expenses
 
(409,435
)
 
(183,413
)
 
(9,615
)
 
(602,463
)
 
(96,957
)
 
(699,420
)
Acquisition expenses
 
(88,255
)
 
(50,367
)
 
(33,361
)
 
(171,983
)
 
(29,619
)
 
(201,602
)
Other operating expenses
 
(90,081
)
 
(29,936
)
 
(31,122
)
 
(151,139
)
 
(9,959
)
 
(161,098
)
Underwriting income (loss)
 
$
(26,713
)
 
$
30,944

 
$
230,559

 
234,790

 
(209
)
 
234,581

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
114,328

 
29,696

 
144,024

Net realized gains (losses)
 
 
 
 
 
 
 
(47,010
)
 
(4,695
)
 
(51,705
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(492
)
 
—

 
(492
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
15,982

 
—

 
15,982

Other income (loss)
 
 
 
 
 
 
 
(726
)
 
—

 
(726
)
Corporate expenses (2)
 
 
 
 
 
 
 
(13,244
)
 
—

 
(13,244
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(1,091
)
 
—

 
(1,091
)
Amortization of intangible assets
 
 
 
 
 
 
 
(26,315
)
 
—

 
(26,315
)
Interest expense
 
 
 
 
 
 
 
(24,666
)
 
(5,064
)
 
(29,730
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
7,130

 
3,708

 
10,838

Income before income taxes
 
 
 
 
 
 
 
258,686

 
23,436

 
282,122

Income tax expense
 
 
 
 
 
 
 
(33,356
)
 
—

 
(33,356
)
Net income
 
 
 
 
 
 
 
225,330

 
23,436

 
248,766

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(4,599
)
 
(4,599
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(16,759
)
 
(16,759
)
Net income available to Arch
 
 
 
 
 
 
 
225,330

 
2,078

 
227,408

Preferred dividends
 
 
 
 
 
 
 
(10,402
)
 
—

 
(10,402
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
214,928

 
$
2,078

 
$
217,006

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.0
%
 
62.5
%
 
3.2
%
 
52.1
%
 
71.5
%
 
54.2
%
Acquisition expense ratio
 
15.7
%
 
17.2
%
 
11.1
%
 
14.9
%
 
21.8
%
 
15.6
%
Other operating expense ratio
 
16.1
%
 
10.2
%
 
10.3
%
 
13.1
%
 
7.3
%
 
12.5
%
Combined ratio
 
104.8
%
 
89.9
%
 
24.6
%
 
80.1
%
 
100.6
%
 
82.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.9
%
 
71.6
%
 
83.7
%
 
72.8
%
 
82.0
%
 
77.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
19,592,182

 
$
2,732,060

 
$
22,324,242

Total assets
 
 
 
 
 
 
 
28,833,083

 
3,419,451

 
32,252,534

Total liabilities
 
 
 
 
 
 
 
19,601,237

 
2,213,196

 
21,814,433

 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
10
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Three Months Ended
 
 
September 30, 2017
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
787,447

 
$
422,083

 
$
347,951

 
$
1,557,179

 
$
166,198

 
$
1,648,246

Premiums ceded
 
(222,516
)
 
(105,389
)
 
(57,900
)
 
(385,503
)
 
(12,471
)
 
(322,843
)
Net premiums written
 
564,931

 
316,694

 
290,051

 
1,171,676

 
153,727

 
1,325,403

Change in unearned premiums
 
(29,766
)
 
6,879

 
(15,533
)
 
(38,420
)
 
(25,097
)
 
(63,517
)
Net premiums earned
 
535,165

 
323,573

 
274,518

 
1,133,256

 
128,630

 
1,261,886

Other underwriting income (loss)
 
—

 
1,728

 
3,599

 
5,327

 
737

 
6,064

Losses and loss adjustment expenses
 
(568,795
)
 
(318,609
)
 
(35,156
)
 
(922,560
)
 
(123,581
)
 
(1,046,141
)
Acquisition expenses
 
(82,638
)
 
(57,340
)
 
(21,803
)
 
(161,781
)
 
(32,073
)
 
(193,854
)
Other operating expenses
 
(90,875
)
 
(36,214
)
 
(34,770
)
 
(161,859
)
 
(8,268
)
 
(170,127
)
Underwriting income (loss)
 
$
(207,143
)
 
$
(86,862
)
 
$
186,388

 
(107,617
)
 
(34,555
)
 
(142,172
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
94,127

 
22,332

 
116,459

Net realized gains (losses)
 
 
 
 
 
 
 
64,104

 
2,171

 
66,275

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,878
)
 
—

 
(1,878
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
31,090

 
—

 
31,090

Other income (loss)
 
 
 
 
 
 
 
(342
)
 
—

 
(342
)
Corporate expenses (2)
 
 
 
 
 
 
 
(14,108
)
 
—

 
(14,108
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(2,990
)
 
—

 
(2,990
)
Amortization of intangible assets
 
 
 
 
 
 
 
(31,824
)
 
—

 
(31,824
)
Interest expense
 
 
 
 
 
 
 
(26,264
)
 
(3,246
)
 
(29,510
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(27,785
)
 
(243
)
 
(28,028
)
Income (loss) before income taxes
 
 
 
 
 
 
 
(23,487
)
 
(13,541
)
 
(37,028
)
Income tax expense
 
 
 
 
 
 
 
(8,168
)
 
(21
)
 
(8,189
)
Net income (loss)
 
 
 
 
 
 
 
(31,655
)
 
(13,562
)
 
(45,217
)
Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(4,586
)
 
(4,586
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
16,147

 
16,147

Net income (loss) available to Arch
 
 
 
 
 
 
 
(31,655
)
 
(2,001
)
 
(33,656
)
Preferred dividends
 
 
 
 
 
 
 
(12,369
)
 
—

 
(12,369
)
Loss on repurchase of preferred shares
 
 
 
 
 
 
 
(6,735
)
 
—

 
(6,735
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
(50,759
)
 
$
(2,001
)
 
$
(52,760
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
106.3
%
 
98.5
%
 
12.8
%
 
81.4
%
 
96.1
%
 
82.9
%
Acquisition expense ratio
 
15.4
%
 
17.7
%
 
7.9
%
 
14.3
%
 
24.9
%
 
15.4
%
Other operating expense ratio
 
17.0
%
 
11.2
%
 
12.7
%
 
14.3
%
 
6.4
%
 
13.5
%
Combined ratio
 
138.7
%
 
127.4
%
 
33.4
%
 
110.0
%
 
127.4
%
 
111.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
71.7
%
 
75.0
%
 
83.4
%
 
75.2
%
 
92.5
%
 
80.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
19,696,187

 
$
2,304,821

 
$
22,001,008

Total assets
 
 
 
 
 
 
 
29,523,275

 
3,101,522

 
32,624,797

Total liabilities
 
 
 
 
 
 
 
20,733,468

 
1,913,458

 
22,646,926

 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
11
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
2,429,570

 
$
1,503,206

 
$
1,002,727

 
$
4,935,339

 
$
574,078

 
$
5,266,086

Premiums ceded
 
(752,413
)
 
(455,682
)
 
(154,230
)
 
(1,362,161
)
 
(102,263
)
 
(1,221,093
)
Net premiums written
 
1,677,157

 
1,047,524

 
848,497

 
3,573,178

 
471,815

 
4,044,993

Change in unearned premiums
 
(30,913
)
 
(134,761
)
 
23,147

 
(142,527
)
 
(39,926
)
 
(182,453
)
Net premiums earned
 
1,646,244

 
912,763

 
871,644

 
3,430,651

 
431,889

 
3,862,540

Other underwriting income (loss)
 
—

 
2,490

 
10,464

 
12,954

 
2,092

 
15,046

Losses and loss adjustment expenses
 
(1,120,630
)
 
(555,044
)
 
(74,672
)
 
(1,750,346
)
 
(312,087
)
 
(2,062,433
)
Acquisition expenses
 
(264,094
)
 
(148,828
)
 
(87,665
)
 
(500,587
)
 
(95,229
)
 
(595,816
)
Other operating expenses
 
(274,735
)
 
(101,185
)
 
(108,622
)
 
(484,542
)
 
(27,752
)
 
(512,294
)
Underwriting income (loss)
 
$
(13,215
)
 
$
110,196

 
$
611,149

 
708,130

 
(1,087
)
 
707,043

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
322,332

 
84,084

 
406,416

Net realized gains (losses)
 
 
 
 
 
 
 
(218,414
)
 
(20,900
)
 
(239,314
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,124
)
 
—

 
(1,124
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
52,523

 
—

 
52,523

Other income (loss)
 
 
 
 
 
 
 
2,461

 
—

 
2,461

Corporate expenses (2)
 
 
 
 
 
 
 
(43,330
)
 
—

 
(43,330
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(8,829
)
 
—

 
(8,829
)
Amortization of intangible assets
 
 
 
 
 
 
 
(79,523
)
 
—

 
(79,523
)
Interest expense
 
 
 
 
 
 
 
(76,631
)
 
(14,079
)
 
(90,710
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
38,302

 
6,521

 
44,823

Income before income taxes
 
 
 
 
 
 
 
695,897

 
54,539

 
750,436

Income tax (expense) benefit
 
 
 
 
 
 
 
(78,912
)
 
(27
)
 
(78,939
)
Net income
 
 
 
 
 
 
 
616,985

 
54,512

 
671,497

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(13,769
)
 
(13,769
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(36,251
)
 
(36,251
)
Net income available to Arch
 
 
 
 
 
 
 
616,985

 
4,492

 
621,477

Preferred dividends
 
 
 
 
 
 
 
(31,242
)
 
—

 
(31,242
)
Loss on redemption of preferred shares
 
 
 
 
 
 
 
(2,710
)
 
—

 
(2,710
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
583,033

 
$
4,492

 
$
587,525

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
68.1
%
 
60.8
%
 
8.6
%
 
51.0
%
 
72.3
%
 
53.4
%
Acquisition expense ratio
 
16.0
%
 
16.3
%
 
10.1
%
 
14.6
%
 
22.0
%
 
15.4
%
Other operating expense ratio
 
16.7
%
 
11.1
%
 
12.5
%
 
14.1
%
 
6.4
%
 
13.3
%
Combined ratio
 
100.8
%
 
88.2
%
 
31.2
%
 
79.7
%
 
100.7
%
 
82.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
69.0
%
 
69.7
%
 
84.6
%
 
72.4
%
 
82.2
%
 
76.8
%
 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
12
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2017
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
2,313,630

 
$
1,351,051

 
$
1,032,800

 
$
4,697,007

 
$
473,131

 
$
4,915,895

Premiums ceded
 
(704,057
)
 
(386,743
)
 
(194,139
)
 
(1,284,465
)
 
(35,315
)
 
(1,065,537
)
Net premiums written
 
1,609,573

 
964,308

 
838,661

 
3,412,542

 
437,816

 
3,850,358

Change in unearned premiums
 
(51,188
)
 
(81,182
)
 
(61,776
)
 
(194,146
)
 
(36,435
)
 
(230,581
)
Net premiums earned
 
1,558,385

 
883,126

 
776,885

 
3,218,396

 
401,381

 
3,619,777

Other underwriting income (loss)
 
—

 
1,143

 
11,999

 
13,142

 
2,377

 
15,519

Losses and loss adjustment expenses
 
(1,252,375
)
 
(631,669
)
 
(84,915
)
 
(1,968,959
)
 
(319,612
)
 
(2,288,571
)
Acquisition expenses
 
(236,378
)
 
(154,638
)
 
(76,235
)
 
(467,251
)
 
(99,328
)
 
(566,579
)
Other operating expenses
 
(271,268
)
 
(110,458
)
 
(108,790
)
 
(490,516
)
 
(24,311
)
 
(514,827
)
Underwriting income (loss)
 
$
(201,636
)
 
$
(12,496
)
 
$
518,944

 
304,812

 
(39,493
)
 
265,319

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
282,459

 
62,998

 
345,457

Net realized gains (losses)
 
 
 
 
 
 
 
110,662

 
11,501

 
122,163

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(5,415
)
 
—

 
(5,415
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
111,884

 
—

 
111,884

Other income (loss)
 
 
 
 
 
 
 
(3,118
)
 
—

 
(3,118
)
Corporate expenses (2)
 
 
 
 
 
 
 
(48,517
)
 
—

 
(48,517
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(21,249
)
 
—

 
(21,249
)
Amortization of intangible assets
 
 
 
 
 
 
 
(93,942
)
 
—

 
(93,942
)
Interest expense
 
 
 
 
 
 
 
(77,932
)
 
(9,003
)
 
(86,935
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(85,451
)
 
(1,524
)
 
(86,975
)
Income before income taxes
 
 
 
 
 
 
 
474,193

 
24,479

 
498,672

Income tax (expense) benefit
 
 
 
 
 
 
 
(70,734
)
 
(21
)
 
(70,755
)
Net income
 
 
 
 
 
 
 
403,459

 
24,458

 
427,917

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(13,756
)
 
(13,756
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(9,523
)
 
(9,523
)
Net income available to Arch
 
 
 
 
 
 
 
403,459

 
1,179

 
404,638

Preferred dividends
 
 
 
 
 
 
 
(34,936
)
 
—

 
(34,936
)
Loss on repurchase of preferred shares
 
 
 
 
 
 
 
(6,735
)
 
—

 
(6,735
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
361,788

 
$
1,179

 
$
362,967

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
80.4
%
 
71.5
%
 
10.9
%
 
61.2
%
 
79.6
%
 
63.2
%
Acquisition expense ratio
 
15.2
%
 
17.5
%
 
9.8
%
 
14.5
%
 
24.7
%
 
15.7
%
Other operating expense ratio
 
17.4
%
 
12.5
%
 
14.0
%
 
15.2
%
 
6.1
%
 
14.2
%
Combined ratio
 
113.0
%
 
101.5
%
 
34.7
%
 
90.9
%
 
110.4
%
 
93.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
69.6
%
 
71.4
%
 
81.2
%
 
72.7
%
 
92.5
%
 
78.3
%
 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.


 
13
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Gross premiums written
 
$
836,820

 
$
769,372

 
$
823,378

 
$
767,456

 
$
787,447

 
$
2,429,570

 
$
2,313,630

Premiums ceded
 
(259,968
)
 
(245,265
)
 
(247,180
)
 
(254,589
)
 
(222,516
)
 
(752,413
)
 
(704,057
)
Net premiums written
 
576,852

 
524,107

 
576,198

 
512,867

 
564,931

 
1,677,157

 
1,609,573

Change in unearned premiums
 
(15,794
)
 
22,342

 
(37,461
)
 
41,766

 
(29,766
)
 
(30,913
)
 
(51,188
)
Net premiums earned
 
561,058

 
546,449

 
538,737

 
554,633

 
535,165

 
1,646,244

 
1,558,385

Losses and loss adjustment expenses
 
(409,435
)
 
(357,465
)
 
(353,730
)
 
(370,069
)
 
(568,795
)
 
(1,120,630
)
 
(1,252,375
)
Acquisition expenses
 
(88,255
)
 
(90,670
)
 
(85,169
)
 
(87,261
)
 
(82,638
)
 
(264,094
)
 
(236,378
)
Other operating expenses
 
(90,081
)
 
(92,680
)
 
(91,974
)
 
(88,256
)
 
(90,875
)
 
(274,735
)
 
(271,268
)
Underwriting income (loss)
 
$
(26,713
)
 
$
5,634

 
$
7,864

 
$
9,047

 
$
(207,143
)
 
$
(13,215
)
 
$
(201,636
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.0
 %
 
65.4
 %
 
65.7
 %
 
66.7
 %
 
106.3
 %
 
68.1
 %
 
80.4
 %
Acquisition expense ratio
 
15.7
 %
 
16.6
 %
 
15.8
 %
 
15.7
 %
 
15.4
 %
 
16.0
 %
 
15.2
 %
Other operating expense ratio
 
16.1
 %
 
17.0
 %
 
17.1
 %
 
15.9
 %
 
17.0
 %
 
16.7
 %
 
17.4
 %
Combined ratio
 
104.8
 %
 
99.0
 %
 
98.6
 %
 
98.3
 %
 
138.7
 %
 
100.8
 %
 
113.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
5.8
 %
 
1.4
 %
 
0.2
 %
 
(1.3
)%
 
40.1
 %
 
2.5
 %
 
14.5
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(1.2
)%
 
(0.9
)%
 
(0.3
)%
 
(0.1
)%
 
(0.3
)%
 
(0.8
)%
 
(0.2
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
100.2
 %
 
98.5
 %
 
98.7
 %
 
99.7
 %
 
98.9
 %
 
99.1
 %
 
98.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.9
 %
 
68.1
 %
 
70.0
 %
 
66.8
 %
 
71.7
 %
 
69.0
 %
 
69.6
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.


 
14
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
113,100

 
19.6
%
 
$
108,298

 
20.7
%
 
$
119,789

 
20.8
%
 
$
112,987

 
22.0
%
 
$
120,509

 
21.3
%
 
$
341,187

 
20.3
%
 
$
339,761

 
21.1
%
Programs
 
103,928

 
18.0
%
 
100,178

 
19.1
%
 
96,556

 
16.8
%
 
83,428

 
16.3
%
 
109,805

 
19.4
%
 
300,662

 
17.9
%
 
303,190

 
18.8
%
Construction and national accounts
 
71,888

 
12.5
%
 
66,384

 
12.7
%
 
98,428

 
17.1
%
 
88,144

 
17.2
%
 
66,053

 
11.7
%
 
236,700

 
14.1
%
 
239,504

 
14.9
%
Travel, accident and health
 
79,450

 
13.8
%
 
63,222

 
12.1
%
 
80,524

 
14.0
%
 
58,134

 
11.3
%
 
71,386

 
12.6
%
 
223,196

 
13.3
%
 
189,604

 
11.8
%
Property, energy, marine and aviation
 
60,909

 
10.6
%
 
62,121

 
11.9
%
 
52,127

 
9.0
%
 
37,709

 
7.4
%
 
48,396

 
8.6
%
 
175,157

 
10.4
%
 
134,531

 
8.4
%
Excess and surplus casualty (2)
 
44,829

 
7.8
%
 
40,042

 
7.6
%
 
41,922

 
7.3
%
 
44,604

 
8.7
%
 
43,853

 
7.8
%
 
126,793

 
7.6
%
 
134,907

 
8.4
%
Lenders products
 
25,995

 
4.5
%
 
22,290

 
4.3
%
 
21,984

 
3.8
%
 
24,971

 
4.9
%
 
25,732

 
4.6
%
 
70,269

 
4.2
%
 
71,896

 
4.5
%
Other (3)
 
76,753

 
13.3
%
 
61,572

 
11.7
%
 
64,868

 
11.3
%
 
62,890

 
12.3
%
 
79,197

 
14.0
%
 
203,193

 
12.1
%
 
196,180

 
12.2
%
Total
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
564,931

 
100.0
%
 
$
1,677,157

 
100.0
%
 
$
1,609,573

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
454,337

 
78.8
%
 
$
426,145

 
81.3
%
 
$
456,759

 
79.3
%
 
$
417,731

 
81.5
%
 
$
456,713

 
80.8
%
 
$
1,337,241

 
79.7
%
 
$
1,326,829

 
82.4
%
Europe
 
44,696

 
7.7
%
 
46,364

 
8.8
%
 
75,306

 
13.1
%
 
44,737

 
8.7
%
 
43,984

 
7.8
%
 
166,366

 
9.9
%
 
140,628

 
8.7
%
Asia and Pacific
 
41,599

 
7.2
%
 
22,268

 
4.2
%
 
21,500

 
3.7
%
 
28,510

 
5.6
%
 
33,406

 
5.9
%
 
85,367

 
5.1
%
 
71,552

 
4.4
%
Other
 
36,220

 
6.3
%
 
29,330

 
5.6
%
 
22,633

 
3.9
%
 
21,889

 
4.3
%
 
30,828

 
5.5
%
 
88,183

 
5.3
%
 
70,564

 
4.4
%
Total
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
564,931

 
100.0
%
 
$
1,677,157

 
100.0
%
 
$
1,609,573

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
448,910

 
77.8
%
 
$
415,375

 
79.3
%
 
$
449,994

 
78.1
%
 
$
408,440

 
79.6
%
 
$
454,274

 
80.4
%
 
$
1,314,279

 
78.4
%
 
$
1,307,027

 
81.2
%
Europe
 
110,557

 
19.2
%
 
87,783

 
16.7
%
 
110,976

 
19.3
%
 
86,526

 
16.9
%
 
94,711

 
16.8
%
 
309,316

 
18.4
%
 
258,310

 
16.0
%
Other
 
17,385

 
3.0
%
 
20,949

 
4.0
%
 
15,228

 
2.6
%
 
17,901

 
3.5
%
 
15,946

 
2.8
%
 
53,562

 
3.2
%
 
44,236

 
2.7
%
Total
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
564,931

 
100.0
%
 
$
1,677,157

 
100.0
%
 
$
1,609,573

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
115,271

 
20.5
%
 
$
112,226

 
20.5
%
 
$
116,018

 
21.5
%
 
$
113,978

 
20.6
%
 
$
113,146

 
21.1
%
 
$
343,515

 
20.9
%
 
$
330,159

 
21.2
%
Programs
 
96,509

 
17.2
%
 
97,333

 
17.8
%
 
95,011

 
17.6
%
 
97,524

 
17.6
%
 
94,353

 
17.6
%
 
288,853

 
17.5
%
 
267,115

 
17.1
%
Construction and national accounts
 
80,381

 
14.3
%
 
81,784

 
15.0
%
 
77,212

 
14.3
%
 
88,467

 
16.0
%
 
77,779

 
14.5
%
 
239,377

 
14.5
%
 
236,050

 
15.1
%
Travel, accident and health
 
81,405

 
14.5
%
 
74,754

 
13.7
%
 
66,835

 
12.4
%
 
69,305

 
12.5
%
 
66,136

 
12.4
%
 
222,994

 
13.5
%
 
188,053

 
12.1
%
Property, energy, marine and aviation
 
53,857

 
9.6
%
 
50,840

 
9.3
%
 
48,603

 
9.0
%
 
47,372

 
8.5
%
 
46,906

 
8.8
%
 
153,300

 
9.3
%
 
126,407

 
8.1
%
Excess and surplus casualty (2)
 
43,401

 
7.7
%
 
40,049

 
7.3
%
 
46,544

 
8.6
%
 
47,445

 
8.6
%
 
47,852

 
8.9
%
 
129,994

 
7.9
%
 
147,709

 
9.5
%
Lenders products
 
24,254

 
4.3
%
 
23,161

 
4.2
%
 
22,816

 
4.2
%
 
24,883

 
4.5
%
 
23,499

 
4.4
%
 
70,231

 
4.3
%
 
72,160

 
4.6
%
Other (3)
 
65,980

 
11.8
%
 
66,302

 
12.1
%
 
65,698

 
12.2
%
 
65,659

 
11.8
%
 
65,494

 
12.2
%
 
197,980

 
12.0
%
 
190,732

 
12.2
%
Total
 
$
561,058

 
100.0
%
 
$
546,449

 
100.0
%
 
$
538,737

 
100.0
%
 
$
554,633

 
100.0
%
 
$
535,165

 
100.0
%
 
$
1,646,244

 
100.0
%
 
$
1,558,385

 
100.0
%

(1)    Includes professional liability, executive assurance and healthcare business.
(2)    Includes casualty and contract binding business.
(3)    Includes alternative markets, excess workers’ compensation and surety business.

 
15
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Gross premiums written
 
$
435,396

 
$
490,327

 
$
577,483

 
$
289,348

 
$
422,083

 
$
1,503,206

 
$
1,351,051

Premiums ceded
 
(123,705
)
 
(136,247
)
 
(195,730
)
 
(79,182
)
 
(105,389
)
 
(455,682
)
 
(386,743
)
Net premiums written
 
311,691

 
354,080

 
381,753

 
210,166

 
316,694

 
1,047,524

 
964,308

Change in unearned premiums
 
(18,418
)
 
(13,762
)
 
(102,581
)
 
49,329

 
6,879

 
(134,761
)
 
(81,182
)
Net premiums earned
 
293,273

 
340,318

 
279,172

 
259,495

 
323,573

 
912,763

 
883,126

Other underwriting income
 
1,387

 
(129
)
 
1,232

 
10,193

 
1,728

 
2,490

 
1,143

Losses and loss adjustment expenses
 
(183,413
)
 
(229,956
)
 
(141,675
)
 
(142,254
)
 
(318,609
)
 
(555,044
)
 
(631,669
)
Acquisition expenses
 
(50,367
)
 
(50,142
)
 
(48,319
)
 
(66,612
)
 
(57,340
)
 
(148,828
)
 
(154,638
)
Other operating expenses
 
(29,936
)
 
(35,678
)
 
(35,571
)
 
(36,205
)
 
(36,214
)
 
(101,185
)
 
(110,458
)
Underwriting income (loss)
 
$
30,944

 
$
24,413

 
$
54,839

 
$
24,617

 
$
(86,862
)
 
$
110,196

 
$
(12,496
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
62.5
 %
 
67.6
 %
 
50.7
 %
 
54.8
 %
 
98.5
 %
 
60.8
 %
 
71.5
 %
Acquisition expense ratio
 
17.2
 %
 
14.7
 %
 
17.3
 %
 
25.7
 %
 
17.7
 %
 
16.3
 %
 
17.5
 %
Other operating expense ratio
 
10.2
 %
 
10.5
 %
 
12.7
 %
 
14.0
 %
 
11.2
 %
 
11.1
 %
 
12.5
 %
Combined ratio
 
89.9
 %
 
92.8
 %
 
80.7
 %
 
94.5
 %
 
127.4
 %
 
88.2
 %
 
101.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
8.7
 %
 
2.2
 %
 
0.3
 %
 
3.0
 %
 
41.2
 %
 
3.7
 %
 
18.1
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(11.3
)%
 
(9.4
)%
 
(13.0
)%
 
(11.7
)%
 
(10.7
)%
 
(11.1
)%
 
(15.1
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
92.5
 %
 
100.0
 %
 
93.4
 %
 
103.2
 %
 
96.9
 %
 
95.6
 %
 
98.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
71.6
 %
 
72.2
 %
 
66.1
 %
 
72.6
 %
 
75.0
 %
 
69.7
 %
 
71.4
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.





 
16
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other specialty (1)
 
$
105,535

 
33.9
%
 
$
155,081

 
43.8
%
 
$
138,992

 
36.4
%
 
$
88,067

 
41.9
%
 
$
101,400

 
32.0
%
 
$
399,608

 
38.1
%
 
$
371,146

 
38.5
%
Casualty (2)
 
98,788

 
31.7
%
 
68,113

 
19.2
%
 
130,176

 
34.1
%
 
53,309

 
25.4
%
 
113,446

 
35.8
%
 
297,077

 
28.4
%
 
287,120

 
29.8
%
Property excluding property catastrophe (3)
 
83,222

 
26.7
%
 
77,876

 
22.0
%
 
85,170

 
22.3
%
 
35,248

 
16.8
%
 
63,943

 
20.2
%
 
246,268

 
23.5
%
 
208,445

 
21.6
%
Property catastrophe
 
9,053

 
2.9
%
 
35,045

 
9.9
%
 
7,632

 
2.0
%
 
12,382

 
5.9
%
 
28,123

 
8.9
%
 
51,730

 
4.9
%
 
57,773

 
6.0
%
Marine and aviation
 
6,011

 
1.9
%
 
10,061

 
2.8
%
 
10,012

 
2.6
%
 
12,249

 
5.8
%
 
2,037

 
0.6
%
 
26,084

 
2.5
%
 
20,510

 
2.1
%
Other (4)
 
9,082

 
2.9
%
 
7,904

 
2.2
%
 
9,771

 
2.6
%
 
8,911

 
4.2
%
 
7,745

 
2.4
%
 
26,757

 
2.6
%
 
19,314

 
2.0
%
Total
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
316,694

 
100.0
%
 
$
1,047,524

 
100.0
%
 
$
964,308

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata
 
$
197,431

 
63.3
%
 
$
212,858

 
60.1
%
 
$
152,165

 
39.9
%
 
$
171,837

 
81.8
%
 
$
206,948

 
65.3
%
 
$
562,454

 
53.7
%
 
$
536,857

 
55.7
%
Excess of loss
 
114,260

 
36.7
%
 
141,222

 
39.9
%
 
229,588

 
60.1
%
 
38,329

 
18.2
%
 
109,746

 
34.7
%
 
485,070

 
46.3
%
 
427,451

 
44.3
%
Total
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
316,694

 
100.0
%
 
$
1,047,524

 
100.0
%
 
$
964,308

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
141,209

 
45.3
%
 
$
136,249

 
38.5
%
 
$
123,638

 
32.4
%
 
$
88,626

 
42.2
%
 
$
122,863

 
38.8
%
 
$
401,096

 
38.3
%
 
$
350,603

 
36.4
%
Europe
 
107,826

 
34.6
%
 
142,667

 
40.3
%
 
201,175

 
52.7
%
 
89,122

 
42.4
%
 
95,197

 
30.1
%
 
451,668

 
43.1
%
 
377,628

 
39.2
%
Bermuda
 
11,659

 
3.7
%
 
13,903

 
3.9
%
 
15,150

 
4.0
%
 
1,044

 
0.5
%
 
49,982

 
15.8
%
 
40,712

 
3.9
%
 
87,960

 
9.1
%
Asia and Pacific
 
31,665

 
10.2
%
 
37,635

 
10.6
%
 
18,445

 
4.8
%
 
5,938

 
2.8
%
 
30,531

 
9.6
%
 
87,745

 
8.4
%
 
80,195

 
8.3
%
Other
 
19,332

 
6.2
%
 
23,626

 
6.7
%
 
23,345

 
6.1
%
 
25,436

 
12.1
%
 
18,121

 
5.7
%
 
66,303

 
6.3
%
 
67,922

 
7.0
%
Total
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
316,694

 
100.0
%
 
$
1,047,524

 
100.0
%
 
$
964,308

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bermuda
 
$
117,228

 
37.6
%
 
$
145,568

 
41.1
%
 
$
78,714

 
20.6
%
 
$
61,474

 
29.3
%
 
$
111,422

 
35.2
%
 
$
341,510

 
32.6
%
 
$
289,207

 
30.0
%
United States
 
103,006

 
33.0
%
 
100,271

 
28.3
%
 
115,612

 
30.3
%
 
76,611

 
36.5
%
 
102,504

 
32.4
%
 
318,889

 
30.4
%
 
322,768

 
33.5
%
Europe and other
 
91,457

 
29.3
%
 
108,241

 
30.6
%
 
187,427

 
49.1
%
 
72,081

 
34.3
%
 
102,768

 
32.5
%
 
387,125

 
37.0
%
 
352,333

 
36.5
%
Total
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
316,694

 
100.0
%
 
$
1,047,524

 
100.0
%
 
$
964,308

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other specialty (1)
 
$
108,311

 
36.9
%
 
$
149,648

 
44.0
%
 
$
103,717

 
37.2
%
 
$
100,946

 
38.9
%
 
$
96,090

 
29.7
%
 
$
361,676

 
39.6
%
 
$
307,620

 
34.8
%
Casualty (2)
 
77,496

 
26.4
%
 
85,009

 
25.0
%
 
69,372

 
24.8
%
 
70,996

 
27.4
%
 
117,255

 
36.2
%
 
231,877

 
25.4
%
 
270,126

 
30.6
%
Property excluding property catastrophe (3)
 
71,358

 
24.3
%
 
70,849

 
20.8
%
 
68,754

 
24.6
%
 
57,668

 
22.2
%
 
65,049

 
20.1
%
 
210,961

 
23.1
%
 
197,785

 
22.4
%
Property catastrophe
 
18,190

 
6.2
%
 
15,716

 
4.6
%
 
18,387

 
6.6
%
 
11,325

 
4.4
%
 
30,039

 
9.3
%
 
52,293

 
5.7
%
 
61,975

 
7.0
%
Marine and aviation
 
8,672

 
3.0
%
 
10,089

 
3.0
%
 
9,389

 
3.4
%
 
9,937

 
3.8
%
 
6,801

 
2.1
%
 
28,150

 
3.1
%
 
26,277

 
3.0
%
Other (4)
 
9,246

 
3.2
%
 
9,007

 
2.6
%
 
9,553

 
3.4
%
 
8,623

 
3.3
%
 
8,339

 
2.6
%
 
27,806

 
3.0
%
 
19,343

 
2.2
%
Total
 
$
293,273

 
100.0
%
 
$
340,318

 
100.0
%
 
$
279,172

 
100.0
%
 
$
259,495

 
100.0
%
 
$
323,573

 
100.0
%
 
$
912,763

 
100.0
%
 
$
883,126

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata
 
$
168,865

 
57.6
%
 
$
203,632

 
59.8
%
 
$
163,996

 
58.7
%
 
$
153,536

 
59.2
%
 
$
188,874

 
58.4
%
 
$
536,493

 
58.8
%
 
$
503,954

 
57.1
%
Excess of loss
 
124,408

 
42.4
%
 
136,686

 
40.2
%
 
115,176

 
41.3
%
 
105,959

 
40.8
%
 
134,699

 
41.6
%
 
376,270

 
41.2
%
 
379,172

 
42.9
%
Total
 
$
293,273

 
100.0
%
 
$
340,318

 
100.0
%
 
$
279,172

 
100.0
%
 
$
259,495

 
100.0
%
 
$
323,573

 
100.0
%
 
$
912,763

 
100.0
%
 
$
883,126

 
100.0
%

(1)    Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.        (3)  Includes facultative business.    
(2)      Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.                (4) Includes life, casualty clash and other.

 
17
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Gross premiums written
 
$
350,559

 
$
330,990

 
$
321,178

 
$
335,338

 
$
347,951

 
$
1,002,727

 
$
1,032,800

Premiums ceded
 
(57,226
)
 
(50,867
)
 
(46,137
)
 
(62,657
)
 
(57,900
)
 
(154,230
)
 
(194,139
)
Net premiums written
 
293,333

 
280,123

 
275,041

 
272,681

 
290,051

 
848,497

 
838,661

Change in unearned premiums
 
7,591

 
10,355

 
5,201

 
7,600

 
(15,533
)
 
23,147

 
(61,776
)
Net premiums earned
 
300,924

 
290,478

 
280,242

 
280,281

 
274,518

 
871,644

 
776,885

Other underwriting income (1)
 
3,733

 
3,315

 
3,416

 
3,738

 
3,599

 
10,464

 
11,999

Losses and loss adjustment expenses
 
(9,615
)
 
(21,591
)
 
(43,466
)
 
(49,762
)
 
(35,156
)
 
(74,672
)
 
(84,915
)
Acquisition expenses
 
(33,361
)
 
(27,737
)
 
(26,567
)
 
(24,363
)
 
(21,803
)
 
(87,665
)
 
(76,235
)
Other operating expenses
 
(31,122
)
 
(38,729
)
 
(38,771
)
 
(37,546
)
 
(34,770
)
 
(108,622
)
 
(108,790
)
Underwriting income
 
$
230,559

 
$
205,736

 
$
174,854

 
$
172,348

 
$
186,388

 
$
611,149

 
$
518,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
3.2
 %
 
7.4
 %
 
15.5
 %
 
17.8
 %
 
12.8
 %
 
8.6
 %
 
10.9
 %
Acquisition expense ratio
 
11.1
 %
 
9.5
 %
 
9.5
 %
 
8.7
 %
 
7.9
 %
 
10.1
 %
 
9.8
 %
Other operating expense ratio
 
10.3
 %
 
13.3
 %
 
13.8
 %
 
13.4
 %
 
12.7
 %
 
12.5
 %
 
14.0
 %
Combined ratio
 
24.6
 %
 
30.2
 %
 
38.8
 %
 
39.9
 %
 
33.4
 %
 
31.2
 %
 
34.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(12.5
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(7.8
)%
 
(8.5
)%
 
(9.6
)%
Combined ratio excluding prior year development (2)
 
37.1
 %
 
38.2
 %
 
43.4
 %
 
47.1
 %
 
41.2
 %
 
39.7
 %
 
44.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
83.7
 %
 
84.6
 %
 
85.6
 %
 
81.3
 %
 
83.4
 %
 
84.6
 %
 
81.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
267,234

 
$
254,966

 
$
246,548

 
$
248,817

 
$
262,028

 
$
768,748

 
$
756,620

Other
 
26,099

 
25,157

 
28,493

 
23,864

 
28,023

 
79,749

 
82,041

Total
 
$
293,333

 
$
280,123

 
$
275,041

 
$
272,681

 
$
290,051

 
$
848,497

 
$
838,661

United States %
 
91.1
 %
 
91.0
 %
 
89.6
 %
 
91.2
 %
 
90.3
 %
 
90.6
 %
 
90.2
 %
Other %
 
8.9
 %
 
9.0
 %
 
10.4
 %
 
8.8
 %
 
9.7
 %
 
9.4
 %
 
9.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
240,959

 
$
229,715

 
$
221,177

 
$
223,887

 
$
235,447

 
$
691,851

 
$
679,442

Other
 
52,374

 
50,408

 
53,864

 
48,794

 
54,604

 
156,646

 
159,219

Total
 
$
293,333

 
$
280,123

 
$
275,041

 
$
272,681

 
$
290,051

 
$
848,497

 
$
838,661

United States %
 
82.1
 %
 
82.0
 %
 
80.4
 %
 
82.1
 %
 
81.2
 %
 
81.5
 %
 
81.0
 %
Other %
 
17.9
 %
 
18.0
 %
 
19.6
 %
 
17.9
 %
 
18.8
 %
 
18.5
 %
 
19.0
 %

(1)     Primarily related to income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.
(2)    See ‘Comments on Regulation G’ for further discussion.

 
18
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in millions)
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
Insurance In Force (IIF) (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
272,409

 
73.1
%
 
$
262,889

 
73.1
%
 
$
255,092

 
72.9
%
 
$
253,914

 
72.2
%
 
$
250,375

 
72.3
%
Mortgage reinsurance
 
26,500

 
7.1
%
 
26,302

 
7.3
%
 
27,531

 
7.9
%
 
28,017

 
8.0
%
 
26,869

 
7.8
%
Other (2)
 
73,903

 
19.8
%
 
70,677

 
19.6
%
 
67,252

 
19.2
%
 
69,905

 
19.9
%
 
68,925

 
19.9
%
Total
 
$
372,812

 
100.0
%
 
$
359,868

 
100.0
%
 
$
349,875

 
100.0
%
 
$
351,836

 
100.0
%
 
$
346,169

 
100.0
%
Risk In Force (RIF) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
69,764

 
92.5
%
 
$
67,271

 
92.4
%
 
$
65,235

 
92.2
%
 
$
64,904

 
92.3
%
 
$
64,005

 
92.5
%
Mortgage reinsurance
 
2,264

 
3.0
%
 
2,282

 
3.1
%
 
2,383

 
3.4
%
 
2,473

 
3.5
%
 
2,433

 
3.5
%
Other (2)
 
3,425

 
4.5
%
 
3,237

 
4.4
%
 
3,117

 
4.4
%
 
2,921

 
4.2
%
 
2,742

 
4.0
%
Total
 
$
75,453

 
100.0
%
 
$
72,790

 
100.0
%
 
$
70,735

 
100.0
%
 
$
70,298

 
100.0
%
 
$
69,180

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
40,466

 
58.0
%
 
$
39,038

 
58.0
%
 
$
37,974

 
58.2
%
 
$
37,794

 
58.2
%
 
$
37,297

 
58.3
%
680-739
 
23,371

 
33.5
%
 
22,325

 
33.2
%
 
21,438

 
32.9
%
 
21,213

 
32.7
%
 
20,822

 
32.5
%
620-679
 
5,413

 
7.8
%
 
5,235

 
7.8
%
 
5,117

 
7.8
%
 
5,159

 
7.9
%
 
5,178

 
8.1
%
<620
 
514

 
0.7
%
 
673

 
1.0
%
 
706

 
1.1
%
 
738

 
1.1
%
 
708

 
1.1
%
Total
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
 
$
64,005

 
100.0
%
Weighted average FICO score
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by Loan-To-Value (LTV):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
7,506

 
10.8
%
 
$
6,915

 
10.3
%
 
$
6,441

 
9.9
%
 
$
6,337

 
9.8
%
 
$
6,175

 
9.6
%
90.01% to 95.00%
 
38,748

 
55.5
%
 
37,488

 
55.7
%
 
36,387

 
55.8
%
 
36,174

 
55.7
%
 
35,703

 
55.8
%
85.01% to 90.00%
 
20,464

 
29.3
%
 
19,904

 
29.6
%
 
19,490

 
29.9
%
 
19,482

 
30.0
%
 
19,247

 
30.1
%
85.00% and below
 
3,046

 
4.4
%
 
2,964

 
4.4
%
 
2,917

 
4.5
%
 
2,911

 
4.5
%
 
2,880

 
4.5
%
Total
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
 
$
64,005

 
100.0
%
Weighted average LTV
 
93.0
%
 
 
 
92.9
%
 
 
 
92.9
%
 
 
 
92.9
%
 
 
 
92.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by State:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
$
5,406

 
7.7
%
 
$
5,260

 
7.8
%
 
$
5,164

 
7.9
%
 
$
5,151

 
7.9
%
 
$
5,120

 
8.0
%
California
 
4,310

 
6.2
%
 
4,066

 
6.0
%
 
3,859

 
5.9
%
 
3,803

 
5.9
%
 
3,671

 
5.7
%
Florida
 
3,395

 
4.9
%
 
3,186

 
4.7
%
 
2,977

 
4.6
%
 
2,881

 
4.4
%
 
2,764

 
4.3
%
Virginia
 
2,914

 
4.2
%
 
2,844

 
4.2
%
 
2,786

 
4.3
%
 
2,773

 
4.3
%
 
2,743

 
4.3
%
Georgia
 
2,542

 
3.6
%
 
2,453

 
3.6
%
 
2,358

 
3.6
%
 
2,331

 
3.6
%
 
2,293

 
3.6
%
North Carolina
 
2,500

 
3.6
%
 
2,456

 
3.7
%
 
2,420

 
3.7
%
 
2,410

 
3.7
%
 
2,378

 
3.7
%
Illinois
 
2,442

 
3.5
%
 
2,351

 
3.5
%
 
2,252

 
3.5
%
 
2,229

 
3.4
%
 
2,200

 
3.4
%
Washington
 
2,370

 
3.4
%
 
2,297

 
3.4
%
 
2,261

 
3.5
%
 
2,294

 
3.5
%
 
2,312

 
3.6
%
Maryland
 
2,369

 
3.4
%
 
2,298

 
3.4
%
 
2,244

 
3.4
%
 
2,234

 
3.4
%
 
2,209

 
3.5
%
Minnesota
 
2,365

 
3.4
%
 
2,268

 
3.4
%
 
2,172

 
3.3
%
 
2,165

 
3.3
%
 
2,138

 
3.3
%
Others
 
39,151

 
56.1
%
 
37,792

 
56.2
%
 
36,742

 
56.3
%
 
36,633

 
56.4
%
 
36,177

 
56.5
%
Total
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
 
$
64,005

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average coverage (end of period RIF divided by IIF)
 
25.6
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
U.S. mortgage insurance total RIF, net of reinsurance (4)
 
$
54,558

 
 
 
$
52,167

 
 
 
$
49,921

 
 
 
$
49,100

 
 
 
$
47,980

 
 
Analysts’ persistency (5)
 
82.0
%
 
 
 
81.7
%
 
 
 
81.7
%
 
 
 
81.8
%
 
 
 
80.2
%
 
 
Risk-to-capital ratio -- Arch MI U.S. (6)
 
11.4:1

 
 
 
11.6:1

 
 
 
10.5:1

 
 
 
10.8:1

 
 
 
11.7:1

 
 
PMIER sufficiency ratio -- Arch MI U.S. (7)
 
151
%
 
 
 
134
%
 
 
 
133
%
 
 
 
129
%
 
 
 
122
%
 
 

(1)    The aggregate dollar amount of each insured mortgage loan’s current principal balance.         (4)    Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.
(2)
Includes GSE credit risk-sharing transactions and international insurance business.        (5)    Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.
(3)
The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied    (6)    Represents total current (non-delinquent) RIF, net of reinsurance, divided by total statutory capital        
by the insurance coverage percentage specified in the policy for insurance policies issued and        (estimate for September 30, 2018).
after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.        (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for September 30, 2018).

 
19
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in millions, except policy/loan/claim count)
 
Three Months Ended
 
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total new insurance written (NIW) (1)
 
$
21,425

 
 
 
$
19,944

 
 
 
$
11,373

 
 
 
$
14,391

 
 
 
$
17,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
12,013

 
56.1
%
 
$
11,308

 
56.7
%
 
$
6,612

 
58.1
%
 
$
8,278

 
57.5
%
 
$
10,063

 
56.9
%
680-739
 
7,728

 
36.1
%
 
7,182

 
36.0
%
 
4,042

 
35.5
%
 
5,148

 
35.8
%
 
6,357

 
35.9
%
620-679
 
1,684

 
7.9
%
 
1,454

 
7.3
%
 
719

 
6.3
%
 
965

 
6.7
%
 
1,263

 
7.1
%
  Total
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
$
17,683

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by LTV:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
3,231

 
15.1
%
 
$
2,835

 
14.2
%
 
$
1,262

 
11.1
%
 
$
1,525

 
10.6
%
 
$
1,757

 
9.9
%
90.01% to 95.00%
 
9,689

 
45.2
%
 
9,205

 
46.2
%
 
5,136

 
45.2
%
 
6,488

 
45.1
%
 
8,406

 
47.5
%
85.01% to 90.00%
 
6,264

 
29.2
%
 
5,910

 
29.6
%
 
3,643

 
32.0
%
 
4,633

 
32.2
%
 
5,668

 
32.1
%
85.01% and below
 
2,241

 
10.5
%
 
1,994

 
10.0
%
 
1,332

 
11.7
%
 
1,745

 
12.1
%
 
1,852

 
10.5
%
  Total
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
$
17,683

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW monthly vs. single:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly
 
$
19,842

 
92.6
%
 
$
18,814

 
94.3
%
 
$
10,390

 
91.4
%
 
$
12,763

 
88.7
%
 
$
15,392

 
87.0
%
Single
 
1,583

 
7.4
%
 
1,130

 
5.7
%
 
983

 
8.6
%
 
1,628

 
11.3
%
 
2,291

 
13.0
%
  Total
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
$
17,683

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW purchase vs. refinance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
20,397

 
95.2
%
 
$
18,871

 
94.6
%
 
$
10,288

 
90.5
%
 
$
13,007

 
90.4
%
 
$
16,460

 
93.1
%
Refinance
 
1,028

 
4.8
%
 
1,073

 
5.4
%
 
1,085

 
9.5
%
 
1,384

 
9.6
%
 
1,223

 
6.9
%
  Total
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
$
17,683

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending number of policies in force (PIF) (3)
 
1,270,728

 
 
 
1,239,565

 
 
 
1,214,539

 
 
 
1,213,382

 
 
 
1,202,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rollforward of insured loans in default:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning delinquent number of loans
 
21,037

 
 
 
24,062

 
 
 
27,068

 
 
 
23,770

 
 
 
23,903

 
 
Plus: new notices (4)
 
9,466

 
 
 
8,152

 
 
 
9,640

 
 
 
14,097

 
 
 
9,028

 
 
Less: cures
 
(9,246
)
 
 
 
(10,273
)
 
 
 
(11,592
)
 
 
 
(9,737
)
 
 
 
(7,891
)
 
 
Less: paid claims
 
(896
)
 
 
 
(904
)
 
 
 
(1,054
)
 
 
 
(1,062
)
 
 
 
(1,270
)
 
 
Ending delinquent number of loans (3) (4)
 
20,361

 
 
 
21,037

 
 
 
24,062

 
 
 
27,068

 
 
 
23,770

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending percentage of loans in default (3) (4)
 
1.60
%
 
 
 
1.70
%
 
 
 
1.98
%
 
 
 
2.23
%
 
 
 
1.98
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of claims paid
 
896

 
 
 
904

 
 
 
1,054

 
 
 
1,062

 
 
 
1,270

 
 
Total paid claims (in thousands)
 
$
34,958

 
 
 
$
35,889

 
 
 
$
47,645

 
 
 
$
49,769

 
 
 
$
59,832

 
 
Average per claim (in thousands)
 
$
39.0

 
 
 
$
39.7

 
 
 
$
45.2

 
 
 
$
46.9

 
 
 
$
47.1

 
 
Severity (2)
 
102.9
%
 
 
 
97.9
%
 
 
 
105.2
%
 
 
 
103.2
%
 
 
 
103.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average reserve per default (in thousands)
 
$
18.1

 
 
 
$
19.3

 
 
 
$
18.3

 
 
 
$
16.5

 
 
 
$
19.3

 
 

(1)    The original principal balance of all loans that received coverage during the period.        
(2)    Represents total paid claims divided by RIF of loans for which claims were paid.
(3)    Includes first lien primary and pool policies.
(4)
There were no incremental new notices in the 2018 third quarter and 450 ending delinquent loans at September 30, 2018 from areas impacted by the 2017 third quarter hurricanes.


 
20
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

Supplemental disclosures for U.S. primary mortgage insurance:
(U.S. Dollars in millions)
 
September 30, 2018
 
December 31, 2017
 
 
Loss Reserves, Net (1)
 
Primary IIF (2)
 
Primary RIF (3)
 
Delinquency Rate
 
Loss Reserves, Net (1)
 
Primary IIF (2)
 
Primary RIF (3)
 
Delinquency Rate
 
 
% of Total
 
Total
 
% of Total
 
Total
 
% of Total
 
 
% of Total
 
Total
 
% of Total
 
Total
 
% of Total
 
Policy year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2008 and prior
 
75.2
%
 
$
22,238

 
8.2
%
 
5,041

 
7.2
%
 
8.84
%
 
79.8
%
 
$
26,140

 
10.3
%
 
6,003

 
9.2
%
 
10.24
%
2009
 
0.5
%
 
807

 
0.3
%
 
187

 
0.3
%
 
2.88
%
 
0.7
%
 
1,072

 
0.4
%
 
253

 
0.4
%
 
2.94
%
2010
 
0.5
%
 
721

 
0.3
%
 
196

 
0.3
%
 
2.51
%
 
0.6
%
 
1,089

 
0.4
%
 
295

 
0.5
%
 
2.31
%
2011
 
1.0
%
 
2,875

 
1.1
%
 
792

 
1.1
%
 
1.49
%
 
1.0
%
 
3,828

 
1.5
%
 
1,046

 
1.6
%
 
1.37
%
2012
 
1.7
%
 
10,534

 
3.9
%
 
2,901

 
4.2
%
 
0.73
%
 
1.7
%
 
13,247

 
5.2
%
 
3,629

 
5.6
%
 
0.75
%
2013
 
3.6
%
 
17,913

 
6.6
%
 
4,968

 
7.1
%
 
0.84
%
 
3.7
%
 
21,840

 
8.6
%
 
5,996

 
9.2
%
 
0.95
%
2014
 
2.7
%
 
19,258

 
7.1
%
 
5,193

 
7.4
%
 
0.90
%
 
2.7
%
 
22,884

 
9.0
%
 
6,112

 
9.4
%
 
1.10
%
2015
 
3.4
%
 
35,608

 
13.1
%
 
9,290

 
13.3
%
 
0.62
%
 
3.2
%
 
41,991

 
16.5
%
 
10,828

 
16.7
%
 
0.77
%
2016
 
6.2
%
 
55,043

 
20.2
%
 
14,040

 
20.1
%
 
0.64
%
 
4.8
%
 
62,020

 
24.4
%
 
15,643

 
24.1
%
 
0.80
%
2017
 
4.9
%
 
55,876

 
20.5
%
 
14,162

 
20.3
%
 
0.44
%
 
1.7
%
 
59,803

 
23.6
%
 
15,099

 
23.3
%
 
0.35
%
2018
 
0.4
%
 
51,536

 
18.9
%
 
12,994

 
18.6
%
 
0.07
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
100.0
%
 
$
272,409

 
100.0
%
 
$
69,764

 
100.0
%
 
1.60
%
 
100.0
%
 
$
253,914

 
100.0
%
 
$
64,904

 
100.0
%
 
2.23
%

(1)
Total reserves for losses and loss adjustment expenses, net of recoverables, was $417.3 million at September 30, 2018, compared to $477.1 million at December 31, 2017.
(2)
The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(3)
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 transactions.

 
21
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Gross premiums written
 
$
1,622,532

 
$
1,591,202

 
$
1,721,605

 
$
1,391,247

 
$
1,557,179

 
$
4,935,339

 
$
4,697,007

Premiums ceded
 
(440,656
)
 
(432,892
)
 
(488,613
)
 
(395,533
)
 
(385,503
)
 
(1,362,161
)
 
(1,284,465
)
Net premiums written
 
1,181,876

 
1,158,310

 
1,232,992

 
995,714

 
1,171,676

 
3,573,178

 
3,412,542

Change in unearned premiums
 
(26,621
)
 
18,935

 
(134,841
)
 
98,695

 
(38,420
)
 
(142,527
)
 
(194,146
)
Net premiums earned
 
1,155,255

 
1,177,245

 
1,098,151

 
1,094,409

 
1,133,256

 
3,430,651

 
3,218,396

Other underwriting income
 
5,120

 
3,186

 
4,648

 
13,931

 
5,327

 
12,954

 
13,142

Losses and loss adjustment expenses
 
(602,463
)
 
(609,012
)
 
(538,871
)
 
(562,085
)
 
(922,560
)
 
(1,750,346
)
 
(1,968,959
)
Acquisition expenses
 
(171,983
)
 
(168,549
)
 
(160,055
)
 
(178,236
)
 
(161,781
)
 
(500,587
)
 
(467,251
)
Other operating expenses
 
(151,139
)
 
(167,087
)
 
(166,316
)
 
(162,007
)
 
(161,859
)
 
(484,542
)
 
(490,516
)
Underwriting income (loss)
 
$
234,790

 
$
235,783

 
$
237,557

 
$
206,012

 
$
(107,617
)
 
$
708,130

 
$
304,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
52.1
 %
 
51.7
 %
 
49.1
 %
 
51.4
 %
 
81.4
 %
 
51.0
 %
 
61.2
 %
Acquisition expense ratio
 
14.9
 %
 
14.3
 %
 
14.6
 %
 
16.3
 %
 
14.3
 %
 
14.6
 %
 
14.5
 %
Other operating expense ratio
 
13.1
 %
 
14.2
 %
 
15.1
 %
 
14.8
 %
 
14.3
 %
 
14.1
 %
 
15.2
 %
Combined ratio
 
80.1
 %
 
80.2
 %
 
78.8
 %
 
82.5
 %
 
110.0
 %
 
79.7
 %
 
90.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
5.0
 %
 
1.3
 %
 
0.2
 %
 
0.1
 %
 
30.7
 %
 
2.2
 %
 
12.0
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(6.7
)%
 
(5.1
)%
 
(4.6
)%
 
(4.6
)%
 
(5.1
)%
 
(5.5
)%
 
(6.6
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
81.8
 %
 
84.0
 %
 
83.2
 %
 
87.0
 %
 
84.4
 %
 
83.0
 %
 
85.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
72.8
 %
 
72.8
 %
 
71.6
 %
 
71.6
 %
 
75.2
 %
 
72.4
 %
 
72.7
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.


 
22
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Selected Information on Losses and Loss Adjustment Expenses


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Components of losses and loss adjustment expenses incurred (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid losses and loss adjustment expenses
 
$
503,245

 
$
403,161

 
$
496,445

 
$
606,662

 
$
577,726

 
$
1,402,851

 
$
1,564,131

Change in unpaid losses and loss adjustment expenses
 
99,218

 
205,851

 
42,426

 
(44,577
)
 
344,834

 
347,495

 
404,828

Total losses and loss adjustment expenses
 
$
602,463

 
$
609,012

 
$
538,871

 
$
562,085

 
$
922,560

 
$
1,750,346

 
$
1,968,959

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impact on underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(6,830
)
 
$
(5,104
)
 
$
(1,506
)
 
$
(334
)
 
$
(1,631
)
 
$
(13,440
)
 
$
(3,689
)
Reinsurance
 
(33,162
)
 
(31,882
)
 
(36,158
)
 
(30,452
)
 
(34,731
)
 
(101,202
)
 
(133,159
)
Mortgage
 
(37,631
)
 
(23,314
)
 
(12,977
)
 
(20,102
)
 
(21,518
)
 
(73,922
)
 
(74,858
)
Total
 
$
(77,623
)
 
$
(60,300
)
 
$
(50,641
)
 
$
(50,888
)
 
$
(57,880
)
 
$
(188,564
)
 
$
(211,706
)
Impact on losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(5,949
)
 
$
(6,058
)
 
$
(2,110
)
 
$
(1,474
)
 
$
(3,041
)
 
$
(14,117
)
 
$
(7,158
)
Reinsurance
 
(34,315
)
 
(33,022
)
 
(36,541
)
 
(32,136
)
 
(36,521
)
 
(103,878
)
 
(133,304
)
Mortgage
 
(38,638
)
 
(23,333
)
 
(12,977
)
 
(20,102
)
 
(21,514
)
 
(74,948
)
 
(74,873
)
Total
 
$
(78,902
)
 
$
(62,413
)
 
$
(51,628
)
 
$
(53,712
)
 
$
(61,076
)
 
$
(192,943
)
 
$
(215,335
)
Impact on acquisition expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(881
)
 
$
954

 
$
604

 
$
1,140

 
$
1,410

 
$
677

 
$
3,469

Reinsurance
 
1,153

 
1,140

 
383

 
1,684

 
1,790

 
2,676

 
145

Mortgage
 
1,007

 
19

 
—

 
—

 
(4
)
 
1,026

 
15

Total
 
$
1,279

 
$
2,113

 
$
987

 
$
2,824

 
$
3,196

 
$
4,379

 
$
3,629

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(1.2
)%
 
(0.9
)%
 
(0.3
)%
 
(0.1
)%
 
(0.3
)%
 
(0.8
)%
 
(0.2
)%
Reinsurance
 
(11.3
)%
 
(9.4
)%
 
(13.0
)%
 
(11.7
)%
 
(10.7
)%
 
(11.1
)%
 
(15.1
)%
Mortgage
 
(12.5
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(7.8
)%
 
(8.5
)%
 
(9.6
)%
Total
 
(6.7
)%
 
(5.1
)%
 
(4.6
)%
 
(4.6
)%
 
(5.1
)%
 
(5.5
)%
 
(6.6
)%
Impact on loss ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(1.1
)%
 
(1.1
)%
 
(0.4
)%
 
(0.3
)%
 
(0.6
)%
 
(0.9
)%
 
(0.5
)%
Reinsurance
 
(11.7
)%
 
(9.7
)%
 
(13.1
)%
 
(12.4
)%
 
(11.3
)%
 
(11.4
)%
 
(15.1
)%
Mortgage
 
(12.8
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(7.8
)%
 
(8.6
)%
 
(9.6
)%
Total
 
(6.8
)%
 
(5.3
)%
 
(4.7
)%
 
(4.9
)%
 
(5.4
)%
 
(5.6
)%
 
(6.7
)%
Impact on acquisition expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(0.1
)%
 
0.2
 %
 
0.1
 %
 
0.2
 %
 
0.3
 %
 
0.1
 %
 
0.3
 %
Reinsurance
 
0.4
 %
 
0.3
 %
 
0.1
 %
 
0.7
 %
 
0.6
 %
 
0.3
 %
 
0.0
 %
Mortgage
 
0.3
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.1
 %
 
0.0
 %
Total
 
0.1
 %
 
0.2
 %
 
0.1
 %
 
0.3
 %
 
0.3
 %
 
0.1
 %
 
0.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net losses incurred from current accident year catastrophic events (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
32,691

 
$
7,558

 
$
1,029

 
$
(7,025
)
 
$
214,462

 
$
41,278

 
$
225,431

Reinsurance
 
25,469

 
7,388

 
975

 
7,790

 
133,355

 
33,832

 
159,574

Total
 
$
58,160

 
$
14,946

 
$
2,004

 
$
765

 
$
347,817

 
$
75,110

 
$
385,005

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
5.8
 %
 
1.4
 %
 
0.2
 %
 
(1.3
)%
 
40.1
 %
 
2.5
 %
 
14.5
 %
Reinsurance
 
8.7
 %
 
2.2
 %
 
0.3
 %
 
3.0
 %
 
41.2
 %
 
3.7
 %
 
18.1
 %
Total
 
5.0
 %
 
1.3
 %
 
0.2
 %
 
0.1
 %
 
30.7
 %
 
2.2
 %
 
12.0
 %
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Equals estimated losses from catastrophic events occurring in the current accident year, net of reinsurance and reinstatement premiums. Amounts shown for the insurance segment are for named catastrophic events only. Amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.

 
23
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Investable Asset Summary and Investment Portfolio Metrics


The following table summarizes the Company’s investable assets and portfolio metrics (1):
(U.S. Dollars in thousands)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
Investable assets (1) (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale, at fair value
 
$
14,026,253

 
71.6
%
 
$
13,849,812

 
72.2
 %
 
$
14,145,765

 
71.5
 %
 
$
13,876,003

 
70.4
 %
 
$
13,792,903

 
70.0
 %
Fixed maturities—fair value option (3)
 
353,321

 
1.8
%
 
374,708

 
2.0
 %
 
457,317

 
2.3
 %
 
465,822

 
2.4
 %
 
413,611

 
2.1
 %
Fixed maturities pledged under securities lending agreements, at fair value
 
286,691

 
1.5
%
 
218,471

 
1.1
 %
 
350,365

 
1.8
 %
 
456,388

 
2.3
 %
 
524,748

 
2.7
 %
Total fixed maturities
 
14,666,265

 
74.9
%
 
14,442,991

 
75.3
 %
 
14,953,447

 
75.6
 %
 
14,798,213

 
75.1
 %
 
14,731,262

 
74.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
397,537

 
2.0
%
 
471,473

 
2.5
 %
 
543,650

 
2.7
 %
 
495,804

 
2.5
 %
 
477,143

 
2.4
 %
Equity securities—fair value option (3)
 
62,816

 
0.3
%
 
62,080

 
0.3
 %
 
69,267

 
0.3
 %
 
71,707

 
0.4
 %
 
65,420

 
0.3
 %
Equity securities pledged under securities lending agreements, at fair value
 
12,718

 
0.1
%
 
11,593

 
0.1
 %
 
7,787

 
0.0
 %
 
8,529

 
0.0
 %
 
3,464

 
0.0
 %
Total equity securities
 
473,071

 
2.4
%
 
545,146

 
2.8
 %
 
620,704

 
3.1
 %
 
576,040

 
2.9
 %
 
546,027

 
2.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments available for sale, at fair value
 
—

 
0.0
%
 
—

 
0.0
 %
 
—

 
0.0
 %
 
264,989

 
1.3
 %
 
260,339

 
1.3
 %
Other investments—fair value option (3)
 
1,233,280

 
6.3
%
 
1,266,327

 
6.6
 %
 
1,239,063

 
6.3
 %
 
1,211,971

 
6.1
 %
 
1,236,192

 
6.3
 %
Total other investments
 
1,233,280

 
6.3
%
 
1,266,327

 
6.6
 %
 
1,239,063

 
6.3
 %
 
1,476,960

 
7.5
 %
 
1,496,531

 
7.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments accounted for using the equity method (4)
 
1,524,242

 
7.8
%
 
1,428,582

 
7.5
 %
 
1,394,548

 
7.0
 %
 
1,041,322

 
5.3
 %
 
962,574

 
4.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments available for sale, at fair value
 
961,799

 
4.9
%
 
1,096,798

 
5.7
 %
 
967,389

 
4.9
 %
 
1,469,042

 
7.5
 %
 
1,646,036

 
8.4
 %
Short-term investments—fair value option (3)
 
24,309

 
0.1
%
 
23,179

 
0.1
 %
 
22,098

 
0.1
 %
 
40,671

 
0.2
 %
 
77,045

 
0.4
 %
Total short-term investments
 
986,108

 
5.0
%
 
1,119,977

 
5.8
 %
 
989,487

 
5.0
 %
 
1,509,713

 
7.7
 %
 
1,723,081

 
8.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
586,353

 
3.0
%
 
480,984

 
2.5
 %
 
626,838

 
3.2
 %
 
551,696

 
2.8
 %
 
805,210

 
4.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities transactions entered into but not settled at the balance sheet date
 
122,863

 
0.6
%
 
(111,997
)
 
(0.6
)%
 
(33,289
)
 
(0.2
)%
 
(237,523
)
 
(1.2
)%
 
(568,498
)
 
(2.9
)%
Total investable assets held by the Company
 
$
19,592,182

 
100.0
%
 
$
19,172,010

 
100.0
 %
 
$
19,790,798

 
100.0
 %
 
$
19,716,421

 
100.0
 %
 
$
19,696,187

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average effective duration (in years)
 
2.94

 
 
 
2.89

 
 
 
2.60

 
 
 
2.83

 
 
 
3.14

 
 

Average S&P/Moody’s credit ratings (5)
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA-/Aa3

 
 
 
 AA-/Aa2

 
 
 
 AA/Aa2

 
 

Embedded book yield (before investment expenses)
 
2.78
%
 
 
 
2.64
%
 
 
 
2.50
%
 
 
 
2.32
%
 
 
 
2.20
%
 
 


(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:
Investable assets in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
64,684

 
 
 
$
45,644

 
 
 
$
54,053

 
 
 
$
54,503

 
 
 
$
57,151

 
 
Investments accounted for using the fair value option
 
2,424,009

 
 
 
2,385,317

 
 
 
2,331,394

 
 
 
2,426,066

 
 
 
2,457,366

 
 
Fixed maturities available for sale, at fair value
 
305,388

 
 
 
279,177

 
 
 
203,176

 
 
 
—

 
 
 
—

 
 
Equity securities, at fair value
 
46,581

 
 
 
63,009

 
 
 
—

 
 
 
—

 
 
 
—

 
 
Securities sold but not yet purchased
 
(9,065
)
 
 
 
(24,529
)
 
 
 
(63,110
)
 
 
 
(34,375
)
 
 
 
(72,682
)
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(99,537
)
 
 
 
(100,777
)
 
 
 
(32,218
)
 
 
 
(6,127
)
 
 
 
(137,014
)
 
 
Total investable assets included in ‘other’ segment
 
$
2,732,060

 
 
 
$
2,647,841

 
 
 
$
2,493,295

 
 
 
$
2,440,067

 
 
 
$
2,304,821

 
 

(2)    This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.
(3)    Represents investments which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on the balance sheet.
(4)
Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.
(5)    Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).


 
24
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Net Investment Income, Yield and Total Return


The following table summarizes the Company’s net investment income, yield and total return:
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Composition of net investment income (1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities
 
$
103,252

 
$
98,968

 
$
92,438

 
$
85,855

 
$
84,602

 
$
294,658

 
$
251,039

Equity securities (dividends)
 
3,426

 
4,232

 
2,750

 
2,551

 
3,210

 
10,408

 
10,152

Short-term investments
 
4,417

 
4,225

 
3,949

 
3,719

 
2,514

 
12,591

 
5,624

Other (2)
 
18,030

 
19,242

 
19,229

 
22,019

 
18,238

 
56,501

 
57,770

Gross investment income
 
129,125

 
126,667

 
118,366

 
114,144

 
108,564

 
374,158

 
324,585

Investment expenses
 
(14,797
)
 
(18,906
)
 
(18,123
)
 
(14,531
)
 
(14,437
)
 
(51,826
)
 
(42,126
)
Net investment income
 
$
114,328

 
$
107,761

 
$
100,243

 
$
99,613

 
$
94,127

 
$
322,332

 
$
282,459

Per share
 
$
0.28

 
$
0.26

 
$
0.24

 
$
0.24

 
$
0.23

 
$
0.78

 
$
0.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income yield, at amortized cost (1) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax
 
2.45
%
 
2.32
 %
 
2.13
 %
 
2.08
%
 
2.00
%
 
2.31
 %
 
2.04
%
After-tax
 
2.22
%
 
2.12
 %
 
1.94
 %
 
1.89
%
 
1.74
%
 
2.10
 %
 
1.80
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total return (1) (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Including effects of foreign exchange
 
0.31
%
 
(0.19
)%
 
(0.32
)%
 
0.79
%
 
1.60
%
 
(0.19
)%
 
5.05
%
Excluding effects of foreign exchange
 
0.37
%
 
0.33
 %
 
(0.40
)%
 
0.71
%
 
1.26
%
 
0.29
 %
 
4.24
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Amounts include dividends and other distributions on investment funds, term loan investments funds held balances, cash balances and other.
(3)
Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.
(4)
Includes net investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains or losses generated by the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses.


 
25
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Fixed Maturities

 
The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains (Losses)
 
Amortized
Cost
 
Fair Value /
Amortized Cost
 
Fair Value
% of Total
At September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
5,853,112

 
$
7,302

 
$
(94,573
)
 
$
(87,271
)
 
$
5,940,383

 
98.5
%
 
39.9
%
U.S. government and government agencies
 
3,133,301

 
1,497

 
(28,128
)
 
(26,631
)
 
3,159,932

 
99.2
%
 
21.4
%
Municipal bonds
 
1,221,893

 
4,236

 
(26,458
)
 
(22,222
)
 
1,244,115

 
98.2
%
 
8.3
%
Non-U.S. government securities
 
1,690,982

 
13,873

 
(38,294
)
 
(24,421
)
 
1,715,403

 
98.6
%
 
11.5
%
Asset-backed securities
 
1,606,914

 
2,747

 
(13,420
)
 
(10,673
)
 
1,617,587

 
99.3
%
 
11.0
%
Commercial mortgage-backed securities
 
682,516

 
578

 
(15,062
)
 
(14,484
)
 
697,000

 
97.9
%
 
4.7
%
Residential mortgage-backed securities
 
477,547

 
1,412

 
(7,772
)
 
(6,360
)
 
483,907

 
98.7
%
 
3.3
%
Total
 
$
14,666,265

 
$
31,645

 
$
(223,707
)
 
$
(192,062
)
 
$
14,858,327

 
98.7
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
4,787,272

 
$
30,943

 
$
(32,340
)
 
$
(1,397
)
 
$
4,788,669

 
100.0
%
 
32.4
%
U.S. government and government agencies
 
3,484,257

 
2,188

 
(28,769
)
 
(26,581
)
 
3,510,838

 
99.2
%
 
23.5
%
Municipal bonds
 
2,158,840

 
20,285

 
(12,308
)
 
7,977

 
2,150,863

 
100.4
%
 
14.6
%
Non-U.S. government securities
 
1,704,337

 
48,764

 
(17,321
)
 
31,443

 
1,672,894

 
101.9
%
 
11.5
%
Asset-backed securities
 
1,788,766

 
5,147

 
(8,614
)
 
(3,467
)
 
1,792,233

 
99.8
%
 
12.1
%
Commercial mortgage-backed securities
 
545,817

 
2,131

 
(4,268
)
 
(2,137
)
 
547,954

 
99.6
%
 
3.7
%
Residential mortgage-backed securities
 
328,924

 
1,640

 
(2,561
)
 
(921
)
 
329,845

 
99.7
%
 
2.2
%
Total
 
$
14,798,213

 
$
111,098

 
$
(106,181
)
 
$
4,917

 
$
14,793,296

 
100.0
%
 
100.0
%
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.



 
26
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Credit Quality Distribution and Maturity Profile


The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
Credit quality distribution of total fixed maturities (2) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies (4)
 
$
3,672,429

 
25.0
%
 
$
3,196,856

 
22.1
%
 
$
3,280,853

 
21.9
%
 
$
3,771,835

 
25.5
%
 
$
4,040,392

 
27.4
%
AAA
 
3,691,522

 
25.2
%
 
3,897,441

 
27.0
%
 
4,076,660

 
27.3
%
 
4,080,808

 
27.6
%
 
4,048,800

 
27.5
%
AA
 
2,047,332

 
14.0
%
 
2,139,794

 
14.8
%
 
2,211,254

 
14.8
%
 
2,440,864

 
16.5
%
 
2,406,692

 
16.3
%
A
 
3,163,536

 
21.6
%
 
3,114,115

 
21.6
%
 
3,079,753

 
20.6
%
 
2,470,936

 
16.7
%
 
2,285,336

 
15.5
%
BBB
 
1,317,999

 
9.0
%
 
1,373,644

 
9.5
%
 
1,426,818

 
9.5
%
 
1,157,136

 
7.8
%
 
1,110,089

 
7.5
%
BB
 
288,178

 
2.0
%
 
240,114

 
1.7
%
 
312,169

 
2.1
%
 
313,286

 
2.1
%
 
291,798

 
2.0
%
B
 
219,667

 
1.5
%
 
185,066

 
1.3
%
 
249,346

 
1.7
%
 
254,011

 
1.7
%
 
231,880

 
1.6
%
Lower than B
 
61,001

 
0.4
%
 
64,858

 
0.4
%
 
71,922

 
0.5
%
 
77,543

 
0.5
%
 
90,947

 
0.6
%
Not rated
 
204,601

 
1.4
%
 
231,103

 
1.6
%
 
244,672

 
1.6
%
 
231,794

 
1.6
%
 
225,328

 
1.5
%
Total fixed maturities, at fair value
 
$
14,666,265

 
100.0
%
 
$
14,442,991

 
100.0
%
 
$
14,953,447

 
100.0
%
 
$
14,798,213

 
100.0
%
 
$
14,731,262

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity profile of total fixed maturities (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
374,027

 
2.6
%
 
$
387,178

 
2.7
%
 
$
615,987

 
4.1
%
 
$
585,093

 
4.0
%
 
$
564,970

 
3.8
%
Due after one year through five years
 
8,287,813

 
56.5
%
 
8,131,505

 
56.3
%
 
8,089,071

 
54.1
%
 
7,695,940

 
52.0
%
 
7,783,422

 
52.8
%
Due after five years through ten years
 
2,929,793

 
20.0
%
 
2,737,358

 
19.0
%
 
2,888,717

 
19.3
%
 
3,455,653

 
23.4
%
 
3,579,082

 
24.3
%
Due after 10 years
 
307,655

 
2.1
%
 
276,245

 
1.9
%
 
326,547

 
2.2
%
 
398,020

 
2.7
%
 
331,086

 
2.2
%
 
 
11,899,288

 
81.1
%
 
11,532,286

 
79.8
%
 
11,920,322

 
79.7
%
 
12,134,706

 
82.0
%
 
12,258,560

 
83.2
%
Mortgage-backed securities
 
477,547

 
3.3
%
 
498,759

 
3.5
%
 
351,059

 
2.3
%
 
328,924

 
2.2
%
 
337,478

 
2.3
%
Commercial mortgage-backed securities
 
682,516

 
4.7
%
 
590,198

 
4.1
%
 
561,543

 
3.8
%
 
545,817

 
3.7
%
 
584,730

 
4.0
%
Asset-backed securities
 
1,606,914

 
11.0
%
 
1,821,748

 
12.6
%
 
2,120,523

 
14.2
%
 
1,788,766

 
12.1
%
 
1,550,494

 
10.5
%
Total fixed maturities, at fair value
 
$
14,666,265

 
100.0
%
 
$
14,442,991

 
100.0
%
 
$
14,953,447

 
100.0
%
 
$
14,798,213

 
100.0
%
 
$
14,731,262

 
100.0
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.
(3)     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.
(4)     Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.



 
27
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Analysis of Corporate Exposures


The following table summarizes the Company’s corporate bonds by sector (1):
(U.S. Dollars in thousands)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
Sector:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
 
$
3,137,412

 
53.6
%
 
$
2,979,178

 
51.8
%
 
$
2,958,018

 
51.8
%
 
$
2,491,090

 
52.0
%
 
$
2,336,468

 
50.9
%
Financials
 
2,312,600

 
39.5
%
 
2,373,628

 
41.3
%
 
2,299,239

 
40.3
%
 
1,831,017

 
38.2
%
 
1,651,416

 
36.0
%
Utilities
 
274,062

 
4.7
%
 
238,343

 
4.1
%
 
227,110

 
4.0
%
 
234,172

 
4.9
%
 
260,491

 
5.7
%
Covered bonds
 
24,662

 
0.4
%
 
44,267

 
0.8
%
 
87,513

 
1.5
%
 
98,752

 
2.1
%
 
116,864

 
2.5
%
All other (2)
 
104,376

 
1.8
%
 
115,616

 
2.0
%
 
133,277

 
2.3
%
 
132,241

 
2.8
%
 
223,519

 
4.9
%
Total fixed maturities, at fair value
 
$
5,853,112

 
100.0
%
 
$
5,751,032

 
100.0
%
 
$
5,705,157

 
100.0
%
 
$
4,787,272

 
100.0
%
 
$
4,588,758

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit quality distribution (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
$
194,408

 
3.3
%
 
$
216,636

 
3.8
%
 
$
283,752

 
5.0
%
 
$
329,573

 
6.9
%
 
$
460,374

 
10.0
%
AA
 
1,197,710

 
20.5
%
 
1,170,565

 
20.4
%
 
1,125,628

 
19.7
%
 
1,107,946

 
23.1
%
 
988,435

 
21.5
%
A
 
2,696,128

 
46.1
%
 
2,609,642

 
45.4
%
 
2,508,184

 
44.0
%
 
1,904,528

 
39.8
%
 
1,745,690

 
38.0
%
BBB
 
1,163,210

 
19.9
%
 
1,203,104

 
20.9
%
 
1,168,268

 
20.5
%
 
877,962

 
18.3
%
 
855,066

 
18.6
%
BB
 
257,785

 
4.4
%
 
203,978

 
3.5
%
 
239,291

 
4.2
%
 
237,227

 
5.0
%
 
217,495

 
4.7
%
B
 
200,116

 
3.4
%
 
156,646

 
2.7
%
 
170,393

 
3.0
%
 
165,846

 
3.5
%
 
155,985

 
3.4
%
Lower than B
 
22,578

 
0.4
%
 
22,152

 
0.4
%
 
26,948

 
0.5
%
 
30,376

 
0.6
%
 
27,571

 
0.6
%
Not rated
 
121,177

 
2.1
%
 
168,309

 
2.9
%
 
182,693

 
3.2
%
 
133,814

 
2.8
%
 
138,142

 
3.0
%
Total fixed maturities, at fair value
 
$
5,853,112

 
100.0
%
 
$
5,751,032

 
100.0
%
 
$
5,705,157

 
100.0
%
 
$
4,787,272

 
100.0
%
 
$
4,588,758

 
100.0
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Includes sovereign securities, supranational securities and other.
(3)    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.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at September 30, 2018 (1):
(U.S. Dollars in thousands)
 
Fair
Value
 
% of Asset Class
 
% of Investable Assets
 
Credit Quality (2)
Issuer:
 
 
 
 
 
 
 
 
Bank of America Corporation
 
$
196,274

 
3.4
%
 
1.0
%
 
A-/A3
JPMorgan Chase & Co.
 
192,109

 
3.3
%
 
1.0
%
 
A-/A2
Apple Inc.
 
170,850

 
2.9
%
 
0.9
%
 
AA+/Aa1
Citigroup Inc.
 
154,844

 
2.6
%
 
0.8
%
 
A/A2
Wells Fargo & Company
 
142,121

 
2.4
%
 
0.7
%
 
A/A1
Nestle S.A.
 
120,486

 
2.1
%
 
0.6
%
 
AA-/Aa2
Daimler AG
 
98,702

 
1.7
%
 
0.5
%
 
A/A2
Philip Morris International Inc.
 
97,997

 
1.7
%
 
0.5
%
 
A/A2
Morgan Stanley
 
95,361

 
1.6
%
 
0.5
%
 
BBB+/A3
Toyota Motor Corporation
 
91,527

 
1.6
%
 
0.5
%
 
AA-/Aa3
Total
 
$
1,360,271

 
23.2
%
 
6.9
%
 
 
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Average credit ratings assigned by S&P and Moody’s, respectively.


 
28
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Structured Securities and Eurozone Investments


The following table provides the composition of the Company’s structured securities at September 30, 2018 (1):

(U.S. Dollars in thousands)
 
Agencies
 
AAA
 
AA
 
A
 
BBB
 
Non-Investment Grade
 
Total
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
435,294

 
$
14,067

 
$
2,117

 
$
91

 
$
428

 
$
25,550

 
$
477,547

Commercial mortgage-backed securities
 
103,834

 
519,809

 
7,564

 
10,597

 
19,531

 
21,181

 
682,516

Asset-backed securities
 
—

 
1,285,957

 
25,288

 
150,736

 
68,835

 
76,098

 
1,606,914

Total
 
$
539,128

 
$
1,819,833

 
$
34,969

 
$
161,424

 
$
88,794

 
$
122,829

 
$
2,766,977


(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


The fair value of the Company’s Eurozone investments are as follows at September 30, 2018 (1):
(U.S. Dollars in thousands)
 
 
 
Financial
 
Other
 
Bank
 
Equities
 
 
 
 
Sovereign (3)
 
Corporates
 
Corporates
 
Loans
 
and Other
 
Total
Country (2):
 
 

 
 

 
 

 
 

 
 

 
 

Germany
 
$
283,727

 
$
2,362

 
$
957

 
$
37,745

 
$
10,449

 
$
335,240

Netherlands
 
106,070

 
78,142

 
65,293

 
18,340

 
8,240

 
276,085

France
 
20,013

 
8,677

 
28,312

 
14,386

 
18,228

 
89,616

Luxembourg
 
—

 
10,010

 
1,657

 
7,824

 
—

 
19,491

Ireland
 
—

 
7,805

 
1,544

 
2,023

 
1,862

 
13,234

Spain
 
—

 
597

 
1,833

 
—

 
8,949

 
11,379

Austria
 
3,955

 
—

 
—

 
—

 
—

 
3,955

Belgium
 
—

 
—

 
—

 
3,345

 
—

 
3,345

Finland
 
—

 
198

 
—

 
1,878

 
—

 
2,076

Portugal
 
—

 
—

 
—

 
—

 
1,558

 
1,558

Italy
 
—

 
—

 
—

 
793

 
566

 
1,359

Greece
 
75

 
—

 
—

 
—

 
733

 
808

Total
 
$
413,840

 
$
107,791

 
$
99,596

 
$
86,334

 
$
50,585

 
$
758,146

 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
The country allocations set forth in the table are based on various assumptions made by the Company in assessing the country in which the underlying credit risk resides, including a review of the jurisdiction of organization, business operations and other factors. Based on such analysis, the Company does not believe that it has any other Eurozone investments at September 30, 2018.
(3)
Sovereign includes securities issued and/or guaranteed by Eurozone governments.


 
29
 
Arch Capital Group Ltd. and Subsidiaries
Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the 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, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares, net of income taxes, 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 return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on the following page.
The Company believes that net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, Transaction costs and other and loss on redemption of preferred shares in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, 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 the Company’s 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 the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds 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 the UGC acquisition. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. The loss on redemption of preferred shares related to the redemption of the Company's Series C preferred shares in January 2018 and had no impact on shareholders' equity or cash flows. Due to these reasons, the Company excludes net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares from the calculation of after-tax operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, the Company consolidates the results of Watford Re in its consolidated financial statements, although it only owns approximately 11% of Watford Re’s common equity. Watford Re has its own management and board of directors that is responsible for its overall profitability. In addition, the Company does not guarantee or provide credit support for Watford Re. Because Watford Re is an independent company, the assets of Watford Re can be used only to settle obligations of Watford Re and Watford Re is solely responsible for its own liabilities and commitments. 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 the reinsurance transactions. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.
The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s 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 the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s Consolidated Financial Statements, 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 ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 13.
The Company’s segment information includes the use of a combined ratio excluding catastrophic activity (if applicable for the segment) and prior year development. These ratios are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown on the individual segment pages. The Company’s management utilizes the adjusted combined ratio excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the core underwriting performance of each of its underwriting segments.
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and 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. Management uses total return on investments as a key measure of the return generated to Arch common shareholders on the capital held in its business, and compares the return generated by the Company’s investment portfolio against benchmark returns which it measures portfolio returns against during the periods presented.

 
30
 
Arch Capital Group Ltd. and Subsidiaries
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity

The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income (loss) available to Arch common shareholders to after-tax operating income (loss) available to Arch common shareholders and related diluted per share results. Each line item reflects the impact of the Company’s approximate 11% ownership of Watford Re’s common equity:
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Net income (loss) available to Arch common shareholders
 
$
217,006

 
$
233,243

 
$
137,276

 
$
203,535

 
$
(52,760
)
 
$
587,525

 
$
362,967

Net realized (gains) losses
 
47,528

 
61,426

 
111,764

 
(36,906
)
 
(64,344
)
 
220,718

 
(111,930
)
Net impairment losses recognized in earnings
 
492

 
470

 
162

 
1,723

 
1,878

 
1,124

 
5,415

Equity in net (income) loss of investment funds accounted for using the equity method
 
(15,982
)
 
(8,472
)
 
(28,069
)
 
(30,402
)
 
(31,090
)
 
(52,523
)
 
(111,884
)
Net foreign exchange (gains) losses
 
(7,539
)
 
(47,038
)
 
15,556

 
27,994

 
27,811

 
(39,021
)
 
85,619

Transaction costs and other
 
1,091

 
6,908

 
830

 
901

 
2,990

 
8,829

 
21,249

Loss on redemption of preferred shares
 
—

 
—

 
2,710

 
—

 
6,735

 
2,710

 
6,735

Income tax expense (benefit) (1)
 
(316
)
 
(3,941
)
 
(5,086
)
 
20,559

 
1,647

 
(9,343
)
 
1,580

After-tax operating income (loss) available to Arch common shareholders
 
$
242,280

 
$
242,596

 
$
235,143

 
$
187,404

 
$
(107,133
)
 
$
720,019

 
$
259,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per common share results (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) available to Arch common shareholders
 
$
0.53

 
$
0.56

 
$
0.33

 
$
0.49

 
$
(0.13
)
 
$
1.42

 
$
0.87

Net realized (gains) losses
 
0.12

 
0.15

 
0.26

 
(0.09
)
 
(0.15
)
 
0.53

 
(0.26
)
Net impairment losses recognized in earnings
 
0.00

 
0.00

 
0.00

 
0.00

 
0.00

 
0.00

 
0.01

Equity in net (income) loss of investment funds accounted for using the equity method
 
(0.04
)
 
(0.02
)
 
(0.07
)
 
(0.07
)
 
(0.08
)
 
(0.13
)
 
(0.27
)
Net foreign exchange (gains) losses
 
(0.02
)
 
(0.11
)
 
0.04

 
0.07

 
0.07

 
(0.09
)
 
0.20

Transaction costs and other
 
0.00

 
0.02

 
0.00

 
0.00

 
0.01

 
0.02

 
0.05

Loss on redemption of preferred shares
 
0.00

 
0.00

 
0.01

 
0.00

 
0.02

 
0.01

 
0.02

Income tax expense (benefit) (1)
 
0.00

 
(0.01
)
 
(0.01
)
 
0.05

 
0.00

 
(0.02
)
 
0.00

After-tax operating income (loss) available to Arch common shareholders
 
$
0.59

 
$
0.59

 
$
0.56

 
$
0.45

 
$
(0.26
)
 
$
1.74

 
$
0.62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding - diluted (2)
 
411,721,214

 
413,111,205

 
417,893,802

 
418,735,890

 
404,656,353

 
413,993,192

 
417,666,972

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning common shareholders’ equity
 
$
8,383,755

 
$
8,370,372

 
$
8,324,047

 
$
8,138,589

 
$
8,126,332

 
$
8,324,047

 
$
7,481,163

Ending common shareholders’ equity
 
8,575,148

 
8,383,755

 
8,370,372

 
8,324,047

 
8,138,589

 
8,575,148

 
8,138,589

Average common shareholders’ equity
 
$
8,479,452

 
$
8,377,064

 
$
8,347,210

 
$
8,231,318

 
$
8,132,461

 
$
8,449,598

 
$
7,809,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
10.2
%
 
11.1
%
 
6.6
%
 
9.9
%
 
(2.6
)%
 
9.3
%
 
6.2
%
Annualized operating return on average common equity
 
11.4
%
 
11.6
%
 
11.3
%
 
9.1
%
 
(5.3
)%
 
11.4
%
 
4.4
%

(1)
Income tax expense on net realized gains or losses, net impairment losses recognized in earnings, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.
(2)
Due to the net loss recorded in the 2017 third quarter, weighted average common shares and common share equivalents outstanding for such period do not include the effect of dilutive securities since the inclusion of such securities is anti-dilutive to per share results.


 
31
 
Arch Capital Group Ltd. and Subsidiaries
Operating Income and Effective Tax Rate Calculations

The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:
(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Arch Operating Income Components (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
258,686

 
$
266,283

 
$
170,928

 
$
273,611

 
$
(23,487
)
 
$
695,897

 
$
474,193

Net realized (gains) losses
 
47,010

 
59,545

 
111,859

 
(38,136
)
 
(64,104
)
 
218,414

 
(110,662
)
Net impairment losses recognized in earnings
 
492

 
470

 
162

 
1,723

 
1,878

 
1,124

 
5,415

Equity in net (income) loss of investment funds accounted for using the equity method
 
(15,982
)
 
(8,472
)
 
(28,069
)
 
(30,402
)
 
(31,090
)
 
(52,523
)
 
(111,884
)
Net foreign exchange (gains) losses
 
(7,130
)
 
(46,211
)
 
15,039

 
27,894

 
27,785

 
(38,302
)
 
85,451

Transaction costs and other
 
1,091

 
6,908

 
830

 
901

 
2,990

 
8,829

 
21,249

Pre-tax operating income (loss)
 
284,167

 
278,523

 
270,749

 
235,591

 
(86,028
)
 
833,439

 
363,762

Arch share of ‘other’ segment operating income (loss) (2)
 
2,187

 
2,062

 
1,831

 
(829
)
 
(2,210
)
 
6,080

 
82

Pre-tax operating income (loss) available to Arch (b)
 
286,354

 
280,585

 
272,580

 
234,762

 
(88,238
)
 
839,519

 
363,844

Income tax expense (a)
 
(33,672
)
 
(27,586
)
 
(27,000
)
 
(36,253
)
 
(6,526
)
 
(88,258
)
 
(69,157
)
After-tax operating income (loss) available to Arch
 
252,682

 
252,999

 
245,580

 
198,509

 
(94,764
)
 
751,261

 
294,687

Preferred dividends
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
After-tax operating income (loss) available to Arch common shareholders
 
$
242,280

 
$
242,596

 
$
235,143

 
$
187,404

 
$
(107,133
)
 
$
720,019

 
$
259,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
 
11.8
%
 
9.8
%
 
9.9
%
 
15.4
%
 
(7.4
)%
 
10.5
%
 
19.0
%

(1)
Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income (loss) is as follows:
(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
 
2017
Balances in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
(209
)
 
$
(318
)
 
$
(560
)
 
$
(23,901
)
 
$
(34,555
)
 
$
(1,087
)
 
$
(39,493
)
Net investment income
 
29,696

 
27,907

 
26,481

 
25,802

 
22,332

 
84,084

 
62,998

Interest expense
 
(5,064
)
 
(4,286
)
 
(4,729
)
 
(4,836
)
 
(3,246
)
 
(14,079
)
 
(9,003
)
Preferred dividends
 
(4,599
)
 
(4,585
)
 
(4,585
)
 
(4,588
)
 
(4,586
)
 
(13,769
)
 
(13,756
)
Pre-tax operating income (loss) available to common shareholders
 
19,824

 
18,718

 
16,607

 
(7,523
)
 
(20,055
)
 
55,149

 
746

Arch ownership
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
Arch share of ‘Other’ segment operating income (loss) (3)
 
$
2,187

 
$
2,062

 
$
1,831

 
$
(829
)
 
$
(2,210
)
 
$
6,080

 
$
82


(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).

 
32
 
Arch Capital Group Ltd. and Subsidiaries
Capital Structure and Share Repurchase Activity

The following table provides an analysis of the Company’s capital structure (1):
(U.S. Dollars in thousands, except share data)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
Debt:
 
 
 
 
 
 
 
 
 
 
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)
 
$
297,125

 
$
297,101

 
$
297,076

 
$
297,053

 
$
297,030

Arch-U.S. senior notes, due Nov. 1, 2043 ($500,000 principal, 5.144%) (2)
 
494,697

 
494,671

 
494,646

 
494,621

 
494,596

Arch Finance senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)
 
496,319

 
496,229

 
496,135

 
496,043

 
495,955

Arch Finance senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)
 
445,223

 
445,210

 
445,186

 
445,167

 
445,145

Revolving credit agreement borrowings, due October 26, 2021 (variable)
 
125,000

 
125,000

 
375,000

 
375,000

 
400,000

Total debt
 
$
1,858,364

 
$
1,858,211

 
$
2,108,043

 
$
2,107,884

 
$
2,132,726

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity available to Arch:
 
 
 
 
 
 
 
 
 
 
Series C non-cumulative preferred shares (6.75%)
 
$
—

 
$
—

 
$
—

 
$
92,555

 
$
92,555

Series E non-cumulative preferred shares (5.25%)
 
450,000

 
450,000

 
450,000

 
450,000

 
450,000

Series F non-cumulative preferred shares (5.45%)
 
330,000

 
330,000

 
330,000

 
330,000

 
230,000

Common shareholders’ equity (a)
 
8,575,148

 
8,383,755

 
8,370,372

 
8,324,047

 
8,138,589

Total shareholders’ equity available to Arch
 
$
9,355,148

 
$
9,163,755

 
$
9,150,372

 
$
9,196,602

 
$
8,911,144

 
 
 
 
 
 
 
 
 
 
 
Total capital available to Arch
 
$
11,213,512

 
$
11,021,966

 
$
11,258,415

 
$
11,304,486

 
$
11,043,870

 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, net of treasury shares (b)
 
405,524,360

 
405,436,637

 
410,047,266

 
409,956,417

 
409,621,719

 
 
 
 
 
 
 
 
 
 
 
Book value per common share (4) (a)/(b)
 
$
21.15

 
$
20.68

 
$
20.41

 
$
20.30

 
$
19.87

 
 
 
 
 
 
 
 
 
 
 
Leverage ratios:
 
 
 
 
 
 
 
 
 
 
Senior notes/total capital available to Arch
 
15.5
%
 
15.7
%
 
15.4
%
 
15.3
%
 
15.7
%
Revolving credit agreement borrowings/total capital available to Arch
 
1.1
%
 
1.1
%
 
3.3
%
 
3.3
%
 
3.6
%
Debt/total capital available to Arch
 
16.6
%
 
16.9
%
 
18.7
%
 
18.6
%
 
19.3
%
Preferred/total capital available to Arch
 
7.0
%
 
7.1
%
 
6.9
%
 
7.7
%
 
7.0
%
Debt and preferred/total capital available to Arch
 
23.5
%
 
23.9
%
 
25.7
%
 
26.4
%
 
26.3
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.), a wholly owned subsidiary of Arch Capital, and fully and unconditionally guaranteed by Arch Capital.
(3)
Issued by Arch Capital Finance LLC (“Arch Finance”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by Arch Capital.
(4)
Excludes the effects of stock options and restricted stock units outstanding.

The following table provides the impact of share repurchases under the Company’s share repurchase program:
(U.S. Dollars in thousands except share data)
 
Three Months Ended
 
Cumulative
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2018
 
2017
 
2017
 
2018
Effect of share repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate cost of shares repurchased
 
$
10,954

 
$
170,276

 
$
3,299

 
$
—

 
$
—

 
$
3,867,190

Shares repurchased
 
413,671

 
6,404,430

 
118,215

 
—

 
—

 
382,607,848

Average price per share repurchased
 
$
26.48

 
$
26.59

 
$
27.91

 
$
—

 
$
—

 
$
10.11

 
 
 
 
 
 
 
 
 
 
 
 
 
Remaining share repurchase authorization (1)
 
 
 
 
 
 
 
 
 
 
 
$
261,972

 
(1)
Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 2019.

 
33