EX-99.2 3 ex-992supplement123118.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 December 31, 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
 
Years Ended
 
 
December 31,
 
December 31,
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
1,599,085

 
$
1,391,247

 
14.9
 %
 
$
6,534,423

 
$
6,088,254

 
7.3
 %
Net premiums written
 
1,169,394

 
995,714

 
17.4
 %
 
4,742,572

 
4,408,256

 
7.6
 %
Net premiums earned
 
1,222,462

 
1,094,409

 
11.7
 %
 
4,653,113

 
4,312,805

 
7.9
 %
Underwriting income (2)
 
188,986

 
206,012

 
(8.3
)%
 
897,116

 
510,824

 
75.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
57.1
%
 
51.4
%
 
5.7

 
52.6
%
 
58.7
%
 
(6.1
)
Acquisition expense ratio
 
14.6
%
 
16.3
%
 
(1.7
)
 
14.6
%
 
15.0
%
 
(0.4
)
Other operating expense ratio
 
12.7
%
 
14.8
%
 
(2.1
)
 
13.8
%
 
15.1
%
 
(1.3
)
Combined ratio
 
84.4
%
 
82.5
%
 
1.9

 
81.0
%
 
88.8
%
 
(7.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
$
115,626

 
$
99,613

 
16.1
 %
 
$
437,958

 
$
382,072

 
14.6
 %
Per diluted share
 
$
0.28

 
$
0.24

 
16.7
 %
 
$
1.06

 
$
0.91

 
16.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
126,091

 
$
203,535

 
(38.0
)%
 
$
713,616

 
$
566,502

 
26.0
 %
Per diluted share
 
$
0.31

 
$
0.49

 
(36.7
)%
 
$
1.73

 
$
1.36

 
27.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
After-tax operating income available to Arch common shareholders (2)
 
$
189,171

 
$
187,404

 
0.9
 %
 
$
909,190

 
$
447,155

 
103.3
 %
Per diluted share
 
$
0.46

 
$
0.45

 
2.2
 %
 
$
2.20

 
$
1.07

 
105.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
178,817

 
$
203,002

 
(11.9
)%
 
$
611,003

 
$
851,863

 
(28.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
383,622

 
$
(30,190
)
 
n/m

 
$
1,331,278

 
$
809,593

 
64.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding — diluted
 
410,112,097

 
418,735,890

 
(2.1
)%
 
412,906,478

 
417,785,025

 
(1.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial measures:
 
 

 
 

 
 

 
 

 
 

 
 

Change in book value per common share during period
 
1.7
%
 
2.2
%
 
(0.5
)
 
6.0
%
 
10.4
%
 
(4.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
5.9
%
 
9.9
%
 
(4.0
)
 
8.4
%
 
7.2
%
 
1.2

Annualized operating return on average common equity (2)
 
8.8
%
 
9.1
%
 
(0.3
)
 
10.7
%
 
5.7
%
 
5.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (3)
 
 

 
 

 
 

 
 

 
 

 
 

Including effects of foreign exchange
 
0.51
%
 
0.79
%
 
-28 bps

 
0.33
%
 
5.87
%
 
-554 bps

Excluding effects of foreign exchange
 
0.83
%
 
0.71
%
 
12 bps

 
1.13
%
 
4.98
%
 
-385 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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net premiums written
 
$
1,301,754

 
$
1,333,553

 
$
1,298,896

 
$
1,412,544

 
$
1,111,015

 
$
5,346,747

 
$
4,961,373

Change in unearned premiums
 
67,681

 
(42,675
)
 
37,867

 
(177,645
)
 
113,740

 
(114,772
)
 
(116,841
)
Net premiums earned
 
1,369,435

 
1,290,878

 
1,336,763

 
1,234,899

 
1,224,755

 
5,231,975

 
4,844,532

Net investment income
 
157,217

 
144,024

 
135,668

 
126,724

 
125,415

 
563,633

 
470,872

Net realized gains (losses)
 
(166,030
)
 
(51,705
)
 
(76,611
)
 
(110,998
)
 
26,978

 
(405,344
)
 
149,141

Net impairment losses recognized in earnings
 
(1,705
)
 
(492
)
 
(470
)
 
(162
)
 
(1,723
)
 
(2,829
)
 
(7,138
)
Other underwriting income
 
27

 
5,823

 
3,874

 
5,349

 
14,734

 
15,073

 
30,253

Equity in net income (loss) of investment funds accounted for using the equity method
 
(6,882
)
 
15,982

 
8,472

 
28,069

 
30,402

 
45,641

 
142,286

Other income (loss)
 
(42
)
 
(726
)
 
3,113

 
74

 
547

 
2,419

 
(2,571
)
Total revenues
 
1,352,020

 
1,403,784

 
1,410,809

 
1,283,955

 
1,421,108

 
5,450,568

 
5,627,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
(827,673
)
 
(699,420
)
 
(726,153
)
 
(636,860
)
 
(678,875
)
 
(2,890,106
)
 
(2,967,446
)
Acquisition expenses
 
(209,319
)
 
(201,602
)
 
(202,838
)
 
(191,376
)
 
(208,879
)
 
(805,135
)
 
(775,458
)
Other operating expenses
 
(165,515
)
 
(161,098
)
 
(176,181
)
 
(175,015
)
 
(169,624
)
 
(677,809
)
 
(684,451
)
Corporate expenses
 
(26,835
)
 
(14,335
)
 
(22,512
)
 
(15,312
)
 
(13,986
)
 
(78,994
)
 
(83,752
)
Amortization of intangible assets
 
(26,147
)
 
(26,315
)
 
(26,472
)
 
(26,736
)
 
(31,836
)
 
(105,670
)
 
(125,778
)
Interest expense
 
(29,774
)
 
(29,730
)
 
(30,344
)
 
(30,636
)
 
(30,496
)
 
(120,484
)
 
(117,431
)
Net foreign exchange gains (losses)
 
24,579

 
10,838

 
53,706

 
(19,721
)
 
(28,807
)
 
69,402

 
(115,782
)
Total expenses
 
(1,260,684
)
 
(1,121,662
)
 
(1,130,794
)
 
(1,095,656
)
 
(1,162,503
)
 
(4,608,796
)
 
(4,870,098
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
91,336

 
282,122

 
280,015

 
188,299

 
258,605

 
841,772

 
757,277

Income tax expense
 
(35,012
)
 
(33,356
)
 
(23,668
)
 
(21,915
)
 
(56,813
)
 
(113,951
)
 
(127,568
)
Net income
 
56,324

 
248,766

 
256,347

 
166,384

 
201,792

 
727,821

 
629,709

Net (income) loss attributable to noncontrolling interests
 
80,170

 
(21,358
)
 
(12,701
)
 
(15,961
)
 
12,848

 
30,150

 
(10,431
)
Net income attributable to Arch
 
136,494

 
227,408

 
243,646

 
150,423

 
214,640

 
757,971

 
619,278

Preferred dividends
 
(10,403
)
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(41,645
)
 
(46,041
)
Loss on redemption of preferred shares
 
—

 
—

 
—

 
(2,710
)
 
—

 
(2,710
)
 
(6,735
)
Net income available to Arch common shareholders
 
$
126,091

 
$
217,006

 
$
233,243

 
$
137,276

 
$
203,535

 
$
713,616

 
$
566,502

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
178,817

 
$
200,524

 
$
183,500

 
$
48,162

 
$
203,002

 
$
611,003

 
$
851,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share and common share equivalent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.31

 
$
0.54

 
$
0.58

 
$
0.34

 
$
0.50

 
$
1.76

 
$
1.40

Diluted
 
$
0.31

 
$
0.53

 
$
0.56

 
$
0.33

 
$
0.49

 
$
1.73

 
$
1.36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
402,185,557

 
402,939,092

 
404,800,421

 
407,539,728

 
406,280,748

 
404,347,621

 
404,138,364

Diluted
 
410,112,097

 
411,721,214

 
413,111,205

 
417,893,802

 
418,735,890

 
412,906,478

 
417,785,025





 
4
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets


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

 
 

 
 

 
 

 
 

Investments:
 
 

 
 

 
 

 
 

 
 

Fixed maturities available for sale, at fair value
 
$
14,699,010

 
$
14,331,641

 
$
14,128,989

 
$
14,348,941

 
$
13,876,003

Short-term investments available for sale, at fair value
 
955,880

 
961,799

 
1,096,798

 
967,389

 
1,469,042

Collateral received under securities lending, at fair value
 
274,133

 
306,893

 
236,956

 
367,043

 
476,615

Equity securities, at fair value
 
338,899

 
444,118

 
534,482

 
543,650

 
495,804

Other investments available for sale, at fair value
 
—

 
—

 
—

 
—

 
264,989

Investments accounted for using the fair value option
 
3,983,571

 
4,097,735

 
4,111,611

 
4,119,139

 
4,216,237

Investments accounted for using the equity method
 
1,493,791

 
1,524,242

 
1,428,582

 
1,394,548

 
1,041,322

Total investments
 
21,745,284

 
21,666,428

 
21,537,418

 
21,740,710

 
21,840,012

Cash
 
646,556

 
651,037

 
526,628

 
680,891

 
606,199

Accrued investment income
 
114,641

 
106,543

 
114,307

 
106,114

 
113,133

Securities pledged under securities lending, at fair value
 
268,395

 
299,409

 
230,064

 
358,152

 
464,917

Premiums receivable
 
1,299,150

 
1,307,466

 
1,351,310

 
1,375,080

 
1,135,249

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
 
2,919,372

 
2,749,785

 
2,727,303

 
2,510,119

 
2,540,143

Contractholder receivables
 
2,079,111

 
2,067,268

 
2,044,322

 
2,002,469

 
1,978,414

Ceded unearned premiums
 
975,469

 
1,011,850

 
1,014,663

 
996,772

 
926,611

Deferred acquisition costs
 
569,574

 
572,987

 
569,817

 
596,264

 
535,824

Receivable for securities sold
 
36,246

 
278,753

 
143,809

 
217,224

 
205,536

Goodwill and intangible assets
 
634,920

 
566,662

 
593,008

 
626,004

 
652,611

Other assets
 
929,611

 
974,346

 
1,000,471

 
922,156

 
1,053,009

Total assets
 
$
32,218,329

 
$
32,252,534

 
$
31,853,120

 
$
32,131,955

 
$
32,051,658

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Reserve for losses and loss adjustment expenses
 
$
11,853,297

 
$
11,554,321

 
$
11,424,337

 
$
11,496,205

 
$
11,383,792

Unearned premiums
 
3,753,636

 
3,868,379

 
3,833,540

 
3,885,297

 
3,622,314

Reinsurance balances payable
 
393,107

 
404,936

 
411,082

 
379,728

 
323,496

Contractholder payables
 
2,079,111

 
2,067,268

 
2,044,322

 
2,002,469

 
1,978,414

Collateral held for insured obligations
 
236,630

 
249,723

 
257,396

 
253,709

 
240,183

Senior notes
 
1,733,528

 
1,733,364

 
1,733,211

 
1,733,043

 
1,732,884

Revolving credit agreement borrowings
 
455,682

 
554,756

 
572,289

 
755,294

 
816,132

Securities lending payable
 
274,125

 
306,886

 
236,948

 
367,034

 
476,605

Payable for securities purchased
 
90,034

 
255,427

 
356,583

 
282,731

 
449,186

Other liabilities
 
911,500

 
819,373

 
752,399

 
765,948

 
782,717

Total liabilities
 
21,780,650

 
21,814,433

 
21,622,107

 
21,921,458

 
21,805,723

 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
206,292

 
206,199

 
206,105

 
206,013

 
205,922

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Non-cumulative preferred shares
 
780,000

 
780,000

 
780,000

 
780,000

 
872,555

Convertible non-voting common equivalent preferred shares
 
—

 
—

 
—

 
—

 
489,627

Common shares
 
634

 
633

 
633

 
630

 
611

Additional paid-in capital
 
1,793,781

 
1,775,499

 
1,760,606

 
1,737,978

 
1,230,617

Retained earnings
 
9,426,299

 
9,300,208

 
9,083,202

 
8,849,959

 
8,562,889

Accumulated other comprehensive income (loss), net of deferred income tax
 
(178,720
)
 
(221,041
)
 
(194,157
)
 
(134,009
)
 
118,044

Common shares held in treasury, at cost
 
(2,382,167
)
 
(2,280,151
)
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
Total shareholders’ equity available to Arch
 
9,439,827

 
9,355,148

 
9,163,755

 
9,150,372

 
9,196,602

Non-redeemable noncontrolling interests
 
791,560

 
876,754

 
861,153

 
854,112

 
843,411

Total shareholders’ equity
 
10,231,387

 
10,231,902

 
10,024,908

 
10,004,484

 
10,040,013

Total liabilities, noncontrolling interests and shareholders’ equity
 
$
32,218,329

 
$
32,252,534

 
$
31,853,120

 
$
32,131,955

 
$
32,051,658

 
 
 
 
 
 
 
 
 
 
 
Common shares and common share equivalents outstanding, net of treasury shares
 
402,454,834

 
405,524,360

 
405,436,637

 
410,047,266

 
409,956,417

Book value per common share (1)
 
$
21.52

 
$
21.15

 
$
20.68

 
$
20.41

 
$
20.30


(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Non-cumulative preferred shares
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning of period
 
$
780,000

 
$
780,000

 
$
780,000

 
$
872,555

 
$
772,555

 
$
872,555

 
$
772,555

Preferred shares issued
 
—

 
—

 
—

 
—

 
100,000

 
—

 
330,000

Preferred shares redeemed
 
—

 
—

 
—

 
(92,555
)
 
—

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

 
$
780,000

 
$
780,000

 
$
780,000

 
$
872,555

 
$
780,000

 
$
872,555

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

 
—

 
—

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
633

 
633

 
630

 
611

 
610

 
611

 
582

Common shares issued, net
 
1

 
—

 
3

 
19

 
1

 
23

 
29

Balance at end of period
 
634

 
633

 
633

 
630

 
611

 
634

 
611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
1,775,499

 
1,760,606

 
1,737,978

 
1,230,617

 
1,212,960

 
1,230,617

 
531,687

Preferred shares converted to common shares
 
—

 
—

 
—

 
489,608

 
—

 
489,608

 
611,653

Issue costs on preferred shares
 
—

 
—

 
—

 
—

 
(2,360
)
 
—

 
(10,306
)
Reversal of original issue costs on redeemed preferred shares
 
—

 
—

 
—

 
2,710

 
—

 
2,710

 
6,735

All other
 
18,282

 
14,893

 
22,628

 
15,043

 
20,017

 
70,846

 
90,848

Balance at end of period
 
1,793,781

 
1,775,499

 
1,760,606

 
1,737,978

 
1,230,617

 
1,793,781

 
1,230,617

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
9,300,208

 
9,083,202

 
8,849,959

 
8,562,889

 
8,359,354

 
8,562,889

 
7,996,701

Cumulative effect of an accounting change
 
—

 
—

 
—

 
149,794

 
—

 
149,794

 
(314
)
Balance at beginning of period, as adjusted
 
9,300,208

 
9,083,202

 
8,849,959

 
8,712,683

 
8,359,354

 
8,712,683

 
7,996,387

Net income
 
56,324

 
248,766

 
256,347

 
166,384

 
201,792

 
727,821

 
629,709

Amounts attributable to noncontrolling interests
 
80,170

 
(21,358
)
 
(12,701
)
 
(15,961
)
 
12,848

 
30,150

 
(10,431
)
Preferred share dividends
 
(10,403
)
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(41,645
)
 
(46,041
)
Loss on redemption of preferred shares
 
—

 
—

 
—

 
(2,710
)
 
—

 
(2,710
)
 
(6,735
)
Balance at end of period
 
9,426,299

 
9,300,208

 
9,083,202

 
8,849,959

 
8,562,889

 
9,426,299

 
8,562,889

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(221,041
)
 
(194,157
)
 
(134,009
)
 
118,044

 
129,682

 
118,044

 
(114,541
)
Cumulative effect 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
 
58,042

 
(28,867
)
 
(47,115
)
 
(103,844
)
 
(29,002
)
 
(121,784
)
 
185,041

Change in foreign currency translation adjustments
 
(15,721
)
 
1,983

 
(13,033
)
 
1,585

 
17,364

 
(25,186
)
 
47,544

Balance at end of period
 
(178,720
)
 
(221,041
)
 
(194,157
)
 
(134,009
)
 
118,044

 
(178,720
)
 
118,044

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(2,280,151
)
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
 
(2,053,644
)
 
(2,077,741
)
 
(2,034,570
)
Shares repurchased for treasury
 
(102,016
)
 
(13,622
)
 
(182,343
)
 
(6,445
)
 
(24,097
)
 
(304,426
)
 
(43,171
)
Balance at end of period
 
(2,382,167
)
 
(2,280,151
)
 
(2,266,529
)
 
(2,084,186
)
 
(2,077,741
)
 
(2,382,167
)
 
(2,077,741
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity available to Arch
 
9,439,827

 
9,355,148

 
9,163,755

 
9,150,372

 
9,196,602

 
9,439,827

 
9,196,602

Non-redeemable noncontrolling interests
 
791,560

 
876,754

 
861,153

 
854,112

 
843,411

 
791,560

 
843,411

Total shareholders’ equity
 
$
10,231,387

 
$
10,231,902

 
$
10,024,908

 
$
10,004,484

 
$
10,040,013

 
$
10,231,387

 
$
10,040,013



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

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

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
$
56,324

 
$
248,766

 
$
256,347

 
$
166,384

 
$
201,792

 
$
727,821

 
$
629,709

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (gains) losses
 
162,793

 
47,315

 
75,447

 
101,995

 
(32,573
)
 
387,550

 
(174,517
)
Net impairment losses included in earnings
 
1,705

 
492

 
470

 
162

 
1,723

 
2,829

 
7,138

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
 
30,337

 
19,900

 
5,840

 
(19,383
)
 
(15,756
)
 
36,694

 
(79,540
)
Amortization of intangible assets
 
26,147

 
26,315

 
26,472

 
26,736

 
31,836

 
105,670

 
125,778

Share-based compensation
 
9,970

 
10,387

 
20,755

 
14,664

 
9,490

 
55,776

 
67,798

Changes in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for losses and loss adjustment expenses, net
 
175,489

 
146,136

 
(164,210
)
 
86,319

 
11,882

 
243,734

 
614,534

Unearned premiums, net
 
(67,681
)
 
42,675

 
(37,867
)
 
177,645

 
(113,740
)
 
114,772

 
116,841

Premiums receivable
 
(8,049
)
 
33,703

 
(3,178
)
 
(233,772
)
 
135,738

 
(211,296
)
 
(31,405
)
Deferred acquisition costs
 
(1,773
)
 
(963
)
 
(4,764
)
 
(30,347
)
 
(4,747
)
 
(37,847
)
 
(78,378
)
Reinsurance balances payable
 
(10,258
)
 
(5,265
)
 
35,327

 
53,634

 
(28,999
)
 
73,438

 
8,529

Other items, net
 
63,331

 
54,640

 
(113,933
)
 
56,143

 
(162,477
)
 
60,181

 
(111,609
)
Net cash provided by operating activities
 
438,335

 
624,101

 
96,706

 
400,180

 
34,169

 
1,559,322

 
1,094,878

Investing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchases of fixed maturity investments
 
(8,489,743
)
 
(7,970,347
)
 
(7,186,303
)
 
(9,681,267
)
 
(8,727,784
)
 
(33,327,660
)
 
(36,806,913
)
Purchases of equity securities
 
(181,807
)
 
(139,679
)
 
(302,663
)
 
(377,000
)
 
(353,881
)
 
(1,001,149
)
 
(1,021,016
)
Purchases of other investments
 
(471,290
)
 
(526,185
)
 
(494,693
)
 
(522,454
)
 
(614,096
)
 
(2,014,622
)
 
(2,020,624
)
Proceeds from sales of fixed maturity investments
 
8,203,068

 
7,219,660

 
7,411,396

 
8,679,147

 
8,057,305

 
31,513,271

 
35,686,779

Proceeds from sales of equity securities
 
251,526

 
244,851

 
330,757

 
291,311

 
304,528

 
1,118,445

 
1,056,401

Proceeds from sales, redemptions and maturities of other investments
 
383,923

 
404,737

 
336,732

 
436,566

 
590,036

 
1,561,958

 
1,528,617

Proceeds from redemptions and maturities of fixed maturity investments
 
168,734

 
212,573

 
224,417

 
287,031

 
159,796

 
892,755

 
907,417

Net settlements of derivative instruments
 
43,934

 
(3,733
)
 
(31,572
)
 
36,070

 
(7,611
)
 
44,699

 
(28,563
)
Net (purchases) sales of short-term investments
 
(68,842
)
 
102,414

 
(143,417
)
 
595,318

 
230,099

 
485,473

 
(734,554
)
Change in cash collateral related to securities lending
 
43,810

 
(39,231
)
 
14,737

 
161,567

 
(136,152
)
 
180,883

 
12,540

Purchases of fixed assets
 
(10,759
)
 
(5,808
)
 
(9,002
)
 
(4,240
)
 
(5,979
)
 
(29,809
)
 
(22,841
)
Other
 
(36,491
)
 
8,266

 
9,924

 
40,037

 
24,495

 
21,736

 
90,875

Net cash provided by (used for) investing activities
 
(163,937
)
 
(492,482
)
 
160,313

 
(57,914
)
 
(479,244
)
 
(554,020
)
 
(1,351,882
)
Financing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from issuance of preferred shares, net
 
—

 
—

 
—

 
—

 
97,640

 
—

 
319,694

Redemption of preferred shares
 
—

 
—

 
—

 
(92,555
)
 
—

 
(92,555
)
 
(230,000
)
Purchases of common shares under share repurchase program
 
(98,233
)
 
(10,954
)
 
(170,276
)
 
(3,299
)
 
—

 
(282,762
)
 
—

Proceeds from common shares issued, net
 
4,421

 
1,822

 
(11,072
)
 
(2,779
)
 
(13,564
)
 
(7,608
)
 
(21,048
)
Proceeds from borrowings
 
51,000

 
36,680

 
90,994

 
39,585

 
14,500

 
218,259

 
253,415

Repayments of borrowings
 
(149,401
)
 
(54,000
)
 
(272,000
)
 
(101,000
)
 
(25,000
)
 
(576,401
)
 
(197,000
)
Change in cash collateral related to securities lending
 
(43,810
)
 
39,231

 
(14,737
)
 
(161,567
)
 
136,152

 
(180,883
)
 
(12,540
)
Dividends paid to redeemable noncontrolling interests
 
(4,498
)
 
(4,497
)
 
(4,497
)
 
(4,497
)
 
(4,498
)
 
(17,989
)
 
(17,989
)
Other
 
(1,142
)
 
(1,595
)
 
(2,133
)
 
(2,356
)
 
(2,616
)
 
(7,226
)
 
(51,896
)
Preferred dividends paid
 
(10,403
)
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(41,645
)
 
(46,041
)
Net cash provided by (used for) financing activities
 
(252,066
)
 
(3,715
)
 
(394,124
)
 
(338,905
)
 
191,509

 
(988,810
)
 
(3,405
)
Effects of exchange rate changes on foreign currency cash and restricted cash
 
(7,508
)
 
(1,194
)
 
(12,042
)
 
1,611

 
236

 
(19,133
)
 
18,124

Increase (decrease) in cash and restricted cash
 
14,824

 
126,710

 
(149,147
)
 
4,972

 
(253,330
)
 
(2,641
)
 
(242,285
)
Cash and restricted cash, beginning of period
 
709,819

 
583,109

 
732,256

 
727,284

 
980,614

 
727,284

 
969,569

Cash and restricted cash, end of period
 
$
724,643

 
$
709,819

 
$
583,109

 
$
732,256

 
$
727,284

 
$
724,643

 
$
727,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
33,032

 
$
12,499

 
$
3,346

 
$
(49,857
)
 
$
3,874

 
$
(980
)
 
$
51,781

Interest paid
 
$
52,170

 
$
6,748

 
$
52,996

 
$
7,861

 
$
52,761

 
$
119,775

 
$
117,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities, excluding the ‘other’ segment
 
$
383,622

 
$
543,205

 
$
34,190

 
$
370,261

 
$
(30,190
)
 
$
1,331,278

 
$
809,593


 
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
 
 
December 31, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
832,762

 
$
409,316

 
$
357,981

 
$
1,599,085

 
$
160,937

 
$
1,694,918

Premiums ceded
 
(297,794
)
 
(84,268
)
 
(48,603
)
 
(429,691
)
 
(28,577
)
 
(393,164
)
Net premiums written
 
534,968

 
325,048

 
309,378

 
1,169,394

 
132,360

 
1,301,754

Change in unearned premiums
 
24,449

 
23,405

 
5,214

 
53,068

 
14,613

 
67,681

Net premiums earned
 
559,417

 
348,453

 
314,592

 
1,222,462

 
146,973

 
1,369,435

Other underwriting income (loss)
 
—

 
(3,172
)
 
2,569

 
(603
)
 
630

 
27

Losses and loss adjustment expenses
 
(400,050
)
 
(291,838
)
 
(6,617
)
 
(698,505
)
 
(129,168
)
 
(827,673
)
Acquisition expenses
 
(85,608
)
 
(62,452
)
 
(30,930
)
 
(178,990
)
 
(30,329
)
 
(209,319
)
Other operating expenses
 
(89,403
)
 
(32,165
)
 
(33,810
)
 
(155,378
)
 
(10,137
)
 
(165,515
)
Underwriting income (loss)
 
$
(15,644
)
 
$
(41,174
)
 
$
245,804

 
188,986

 
(22,031
)
 
166,955

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
115,626

 
41,591

 
157,217

Net realized gains (losses)
 
 
 
 
 
 
 
(66,015
)
 
(100,015
)
 
(166,030
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,705
)
 
—

 
(1,705
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
(6,882
)
 
—

 
(6,882
)
Other income (loss)
 
 
 
 
 
 
 
(42
)
 
—

 
(42
)
Corporate expenses (2)
 
 
 
 
 
 
 
(15,278
)
 
—

 
(15,278
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(2,557
)
 
(9,000
)
 
(11,557
)
Amortization of intangible assets
 
 
 
 
 
 
 
(26,147
)
 
—

 
(26,147
)
Interest expense
 
 
 
 
 
 
 
(24,388
)
 
(5,386
)
 
(29,774
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
20,409

 
4,170

 
24,579

Income (loss) before income taxes
 
 
 
 
 
 
 
182,007

 
(90,671
)
 
91,336

Income tax expense
 
 
 
 
 
 
 
(35,012
)
 
—

 
(35,012
)
Net income (loss)
 
 
 
 
 
 
 
146,995

 
(90,671
)
 
56,324

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

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

 
84,758

 
84,758

Net income (loss) available to Arch
 
 
 
 
 
 
 
146,995

 
(10,501
)
 
136,494

Preferred dividends
 
 
 
 
 
 
 
(10,403
)
 
—

 
(10,403
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
136,592

 
$
(10,501
)
 
$
126,091

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
71.5
%
 
83.8
%
 
2.1
%
 
57.1
%
 
87.9
%
 
60.4
%
Acquisition expense ratio
 
15.3
%
 
17.9
%
 
9.8
%
 
14.6
%
 
20.6
%
 
15.3
%
Other operating expense ratio
 
16.0
%
 
9.2
%
 
10.7
%
 
12.7
%
 
6.9
%
 
12.1
%
Combined ratio
 
102.8
%
 
110.9
%
 
22.6
%
 
84.4
%
 
115.4
%
 
87.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
64.2
%
 
79.4
%
 
86.4
%
 
73.1
%
 
82.2
%
 
76.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
19,566,861

 
$
2,757,663

 
$
22,324,524

Total assets
 
 
 
 
 
 
 
28,845,473

 
3,372,856

 
32,218,329

Total liabilities
 
 
 
 
 
 
 
19,518,395

 
2,262,255

 
21,780,650

 
(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
 
 
December 31, 2017
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
767,456

 
$
289,348

 
$
335,338

 
$
1,391,247

 
$
127,173

 
$
1,452,530

Premiums ceded
 
(254,589
)
 
(79,182
)
 
(62,657
)
 
(395,533
)
 
(11,872
)
 
(341,515
)
Net premiums written
 
512,867

 
210,166

 
272,681

 
995,714

 
115,301

 
1,111,015

Change in unearned premiums
 
41,766

 
49,329

 
7,600

 
98,695

 
15,045

 
113,740

Net premiums earned
 
554,633

 
259,495

 
280,281

 
1,094,409

 
130,346

 
1,224,755

Other underwriting income (loss)
 
—

 
10,193

 
3,738

 
13,931

 
803

 
14,734

Losses and loss adjustment expenses
 
(370,069
)
 
(142,254
)
 
(49,762
)
 
(562,085
)
 
(116,790
)
 
(678,875
)
Acquisition expenses
 
(87,261
)
 
(66,612
)
 
(24,363
)
 
(178,236
)
 
(30,643
)
 
(208,879
)
Other operating expenses
 
(88,256
)
 
(36,205
)
 
(37,546
)
 
(162,007
)
 
(7,617
)
 
(169,624
)
Underwriting income (loss)
 
$
9,047

 
$
24,617

 
$
172,348

 
206,012

 
(23,901
)
 
182,111

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
99,613

 
25,802

 
125,415

Net realized gains (losses)
 
 
 
 
 
 
 
38,136

 
(11,158
)
 
26,978

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,723
)
 
—

 
(1,723
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
30,402

 
—

 
30,402

Other income (loss)
 
 
 
 
 
 
 
547

 
—

 
547

Corporate expenses (2)
 
 
 
 
 
 
 
(13,085
)
 
—

 
(13,085
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(901
)
 
—

 
(901
)
Amortization of intangible assets
 
 
 
 
 
 
 
(31,836
)
 
—

 
(31,836
)
Interest expense
 
 
 
 
 
 
 
(25,660
)
 
(4,836
)
 
(30,496
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(27,894
)
 
(913
)
 
(28,807
)
Income (loss) before income taxes
 
 
 
 
 
 
 
273,611

 
(15,006
)
 
258,605

Income tax expense
 
 
 
 
 
 
 
(56,813
)
 
—

 
(56,813
)
Net income (loss)
 
 
 
 
 
 
 
216,798

 
(15,006
)
 
201,792

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

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

 
17,436

 
17,436

Net income (loss) available to Arch
 
 
 
 
 
 
 
216,798

 
(2,158
)
 
214,640

Preferred dividends
 
 
 
 
 
 
 
(11,105
)
 
—

 
(11,105
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
205,693

 
$
(2,158
)
 
$
203,535

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
66.7
%
 
54.8
%
 
17.8
%
 
51.4
%
 
89.6
%
 
55.4
%
Acquisition expense ratio
 
15.7
%
 
25.7
%
 
8.7
%
 
16.3
%
 
23.5
%
 
17.1
%
Other operating expense ratio
 
15.9
%
 
14.0
%
 
13.4
%
 
14.8
%
 
5.8
%
 
13.8
%
Combined ratio
 
98.3
%
 
94.5
%
 
39.9
%
 
82.5
%
 
118.9
%
 
86.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
66.8
%
 
72.6
%
 
81.3
%
 
71.6
%
 
90.7
%
 
76.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
19,716,421

 
$
2,440,067

 
$
22,156,488

Total assets
 
 
 
 
 
 
 
29,037,004

 
3,014,654

 
32,051,658

Total liabilities
 
 
 
 
 
 
 
19,959,574

 
1,846,149

 
21,805,723

 
(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)
 
Years Ended
 
 
December 31, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
3,262,332

 
$
1,912,522

 
$
1,360,708

 
$
6,534,423

 
$
735,015

 
$
6,961,004

Premiums ceded
 
(1,050,207
)
 
(539,950
)
 
(202,833
)
 
(1,791,851
)
 
(130,840
)
 
(1,614,257
)
Net premiums written
 
2,212,125

 
1,372,572

 
1,157,875

 
4,742,572

 
604,175

 
5,346,747

Change in unearned premiums
 
(6,464
)
 
(111,356
)
 
28,361

 
(89,459
)
 
(25,313
)
 
(114,772
)
Net premiums earned
 
2,205,661

 
1,261,216

 
1,186,236

 
4,653,113

 
578,862

 
5,231,975

Other underwriting income (loss)
 
—

 
(682
)
 
13,033

 
12,351

 
2,722

 
15,073

Losses and loss adjustment expenses
 
(1,520,680
)
 
(846,882
)
 
(81,289
)
 
(2,448,851
)
 
(441,255
)
 
(2,890,106
)
Acquisition expenses
 
(349,702
)
 
(211,280
)
 
(118,595
)
 
(679,577
)
 
(125,558
)
 
(805,135
)
Other operating expenses
 
(364,138
)
 
(133,350
)
 
(142,432
)
 
(639,920
)
 
(37,889
)
 
(677,809
)
Underwriting income (loss)
 
$
(28,859
)
 
$
69,022

 
$
856,953

 
897,116

 
(23,118
)
 
873,998

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
437,958

 
125,675

 
563,633

Net realized gains (losses)
 
 
 
 
 
 
 
(284,429
)
 
(120,915
)
 
(405,344
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(2,829
)
 
—

 
(2,829
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
45,641

 
—

 
45,641

Other income (loss)
 
 
 
 
 
 
 
2,419

 
—

 
2,419

Corporate expenses (2)
 
 
 
 
 
 
 
(58,608
)
 
—

 
(58,608
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(11,386
)
 
(9,000
)
 
(20,386
)
Amortization of intangible assets
 
 
 
 
 
 
 
(105,670
)
 
—

 
(105,670
)
Interest expense
 
 
 
 
 
 
 
(101,019
)
 
(19,465
)
 
(120,484
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
58,711

 
10,691

 
69,402

Income (loss) before income taxes
 
 
 
 
 
 
 
877,904

 
(36,132
)
 
841,772

Income tax (expense) benefit
 
 
 
 
 
 
 
(113,924
)
 
(27
)
 
(113,951
)
Net income (loss)
 
 
 
 
 
 
 
763,980

 
(36,159
)
 
727,821

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(18,357
)
 
(18,357
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
48,507

 
48,507

Net income (loss) available to Arch
 
 
 
 
 
 
 
763,980

 
(6,009
)
 
757,971

Preferred dividends
 
 
 
 
 
 
 
(41,645
)
 
—

 
(41,645
)
Loss on redemption of preferred shares
 
 
 
 
 
 
 
(2,710
)
 
—

 
(2,710
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
719,625

 
$
(6,009
)
 
$
713,616

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
68.9
%
 
67.1
%
 
6.9
%
 
52.6
%
 
76.2
%
 
55.2
%
Acquisition expense ratio
 
15.9
%
 
16.8
%
 
10.0
%
 
14.6
%
 
21.7
%
 
15.4
%
Other operating expense ratio
 
16.5
%
 
10.6
%
 
12.0
%
 
13.8
%
 
6.5
%
 
13.0
%
Combined ratio
 
101.3
%
 
94.5
%
 
28.9
%
 
81.0
%
 
104.4
%
 
83.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
67.8
%
 
71.8
%
 
85.1
%
 
72.6
%
 
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)
 
Years Ended
 
 
December 31, 2017
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
3,081,086

 
$
1,640,399

 
$
1,368,138

 
$
6,088,254

 
$
600,304

 
$
6,368,425

Premiums ceded
 
(958,646
)
 
(465,925
)
 
(256,796
)
 
(1,679,998
)
 
(47,187
)
 
(1,407,052
)
Net premiums written
 
2,122,440

 
1,174,474

 
1,111,342

 
4,408,256

 
553,117

 
4,961,373

Change in unearned premiums
 
(9,422
)
 
(31,853
)
 
(54,176
)
 
(95,451
)
 
(21,390
)
 
(116,841
)
Net premiums earned
 
2,113,018

 
1,142,621

 
1,057,166

 
4,312,805

 
531,727

 
4,844,532

Other underwriting income (loss)
 
—

 
11,336

 
15,737

 
27,073

 
3,180

 
30,253

Losses and loss adjustment expenses
 
(1,622,444
)
 
(773,923
)
 
(134,677
)
 
(2,531,044
)
 
(436,402
)
 
(2,967,446
)
Acquisition expenses
 
(323,639
)
 
(221,250
)
 
(100,598
)
 
(645,487
)
 
(129,971
)
 
(775,458
)
Other operating expenses
 
(359,524
)
 
(146,663
)
 
(146,336
)
 
(652,523
)
 
(31,928
)
 
(684,451
)
Underwriting income (loss)
 
$
(192,589
)
 
$
12,121

 
$
691,292

 
510,824

 
(63,394
)
 
447,430

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
382,072

 
88,800

 
470,872

Net realized gains (losses)
 
 
 
 
 
 
 
148,798

 
343

 
149,141

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(7,138
)
 
—

 
(7,138
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
142,286

 
—

 
142,286

Other income (loss)
 
 
 
 
 
 
 
(2,571
)
 
—

 
(2,571
)
Corporate expenses (2)
 
 
 
 
 
 
 
(61,602
)
 
—

 
(61,602
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(22,150
)
 
—

 
(22,150
)
Amortization of intangible assets
 
 
 
 
 
 
 
(125,778
)
 
—

 
(125,778
)
Interest expense
 
 
 
 
 
 
 
(103,592
)
 
(13,839
)
 
(117,431
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(113,345
)
 
(2,437
)
 
(115,782
)
Income before income taxes
 
 
 
 
 
 
 
747,804

 
9,473

 
757,277

Income tax (expense) benefit
 
 
 
 
 
 
 
(127,547
)
 
(21
)
 
(127,568
)
Net income
 
 
 
 
 
 
 
620,257

 
9,452

 
629,709

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(18,344
)
 
(18,344
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
7,913

 
7,913

Net income (loss) available to Arch
 
 
 
 
 
 
 
620,257

 
(979
)
 
619,278

Preferred dividends
 
 
 
 
 
 
 
(46,041
)
 
—

 
(46,041
)
Loss on redemption of preferred shares
 
 
 
 
 
 
 
(6,735
)
 
—

 
(6,735
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
567,481

 
$
(979
)
 
$
566,502

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
76.8
%
 
67.7
%
 
12.7
%
 
58.7
%
 
82.1
%
 
61.3
%
Acquisition expense ratio
 
15.3
%
 
19.4
%
 
9.5
%
 
15.0
%
 
24.4
%
 
16.0
%
Other operating expense ratio
 
17.0
%
 
12.8
%
 
13.8
%
 
15.1
%
 
6.0
%
 
14.1
%
Combined ratio
 
109.1
%
 
99.9
%
 
36.0
%
 
88.8
%
 
112.5
%
 
91.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.9
%
 
71.6
%
 
81.2
%
 
72.4
%
 
92.1
%
 
77.9
%
 
(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Gross premiums written
 
$
832,762

 
$
836,820

 
$
769,372

 
$
823,378

 
$
767,456

 
$
3,262,332

 
$
3,081,086

Premiums ceded
 
(297,794
)
 
(259,968
)
 
(245,265
)
 
(247,180
)
 
(254,589
)
 
(1,050,207
)
 
(958,646
)
Net premiums written
 
534,968

 
576,852

 
524,107

 
576,198

 
512,867

 
2,212,125

 
2,122,440

Change in unearned premiums
 
24,449

 
(15,794
)
 
22,342

 
(37,461
)
 
41,766

 
(6,464
)
 
(9,422
)
Net premiums earned
 
559,417

 
561,058

 
546,449

 
538,737

 
554,633

 
2,205,661

 
2,113,018

Losses and loss adjustment expenses
 
(400,050
)
 
(409,435
)
 
(357,465
)
 
(353,730
)
 
(370,069
)
 
(1,520,680
)
 
(1,622,444
)
Acquisition expenses
 
(85,608
)
 
(88,255
)
 
(90,670
)
 
(85,169
)
 
(87,261
)
 
(349,702
)
 
(323,639
)
Other operating expenses
 
(89,403
)
 
(90,081
)
 
(92,680
)
 
(91,974
)
 
(88,256
)
 
(364,138
)
 
(359,524
)
Underwriting income (loss)
 
$
(15,644
)
 
$
(26,713
)
 
$
5,634

 
$
7,864

 
$
9,047

 
$
(28,859
)
 
$
(192,589
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
71.5
 %
 
73.0
 %
 
65.4
 %
 
65.7
 %
 
66.7
 %
 
68.9
 %
 
76.8
 %
Acquisition expense ratio
 
15.3
 %
 
15.7
 %
 
16.6
 %
 
15.8
 %
 
15.7
 %
 
15.9
 %
 
15.3
 %
Other operating expense ratio
 
16.0
 %
 
16.1
 %
 
17.0
 %
 
17.1
 %
 
15.9
 %
 
16.5
 %
 
17.0
 %
Combined ratio
 
102.8
 %
 
104.8
 %
 
99.0
 %
 
98.6
 %
 
98.3
 %
 
101.3
 %
 
109.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
6.0
 %
 
5.8
 %
 
1.4
 %
 
0.2
 %
 
(1.3
)%
 
3.4
 %
 
10.3
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(1.5
)%
 
(1.2
)%
 
(0.9
)%
 
(0.3
)%
 
(0.1
)%
 
(1.0
)%
 
(0.2
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
98.3
 %
 
100.2
 %
 
98.5
 %
 
98.7
 %
 
99.7
 %
 
98.9
 %
 
99.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
64.2
 %
 
68.9
 %
 
68.1
 %
 
70.0
 %
 
66.8
 %
 
67.8
 %
 
68.9
 %
 
(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
109,219

 
20.4
%
 
$
113,100

 
19.6
%
 
$
108,298

 
20.7
%
 
$
119,789

 
20.8
%
 
$
112,987

 
22.0
%
 
$
450,406

 
20.4
%
 
$
452,748

 
21.3
%
Programs
 
92,601

 
17.3
%
 
103,928

 
18.0
%
 
100,178

 
19.1
%
 
96,556

 
16.8
%
 
83,428

 
16.3
%
 
393,263

 
17.8
%
 
386,618

 
18.2
%
Construction and national accounts
 
84,237

 
15.7
%
 
71,888

 
12.5
%
 
66,384

 
12.7
%
 
98,428

 
17.1
%
 
88,144

 
17.2
%
 
320,937

 
14.5
%
 
327,648

 
15.4
%
Travel, accident and health
 
67,205

 
12.6
%
 
79,450

 
13.8
%
 
63,222

 
12.1
%
 
80,524

 
14.0
%
 
58,134

 
11.3
%
 
290,401

 
13.1
%
 
247,738

 
11.7
%
Property, energy, marine and aviation
 
44,017

 
8.2
%
 
60,909

 
10.6
%
 
62,121

 
11.9
%
 
52,127

 
9.0
%
 
37,709

 
7.4
%
 
219,174

 
9.9
%
 
172,240

 
8.1
%
Excess and surplus casualty (2)
 
41,674

 
7.8
%
 
44,829

 
7.8
%
 
40,042

 
7.6
%
 
41,922

 
7.3
%
 
44,604

 
8.7
%
 
168,467

 
7.6
%
 
179,511

 
8.5
%
Lenders products
 
25,825

 
4.8
%
 
25,995

 
4.5
%
 
22,290

 
4.3
%
 
21,984

 
3.8
%
 
24,971

 
4.9
%
 
96,094

 
4.3
%
 
96,867

 
4.6
%
Other (3)
 
70,190

 
13.1
%
 
76,753

 
13.3
%
 
61,572

 
11.7
%
 
64,868

 
11.3
%
 
62,890

 
12.3
%
 
273,383

 
12.4
%
 
259,070

 
12.2
%
Total
 
$
534,968

 
100.0
%
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
2,212,125

 
100.0
%
 
$
2,122,440

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
429,714

 
80.3
%
 
$
454,337

 
78.8
%
 
$
426,145

 
81.3
%
 
$
456,759

 
79.3
%
 
$
417,731

 
81.5
%
 
$
1,766,955

 
79.9
%
 
$
1,744,560

 
82.2
%
Europe
 
48,057

 
9.0
%
 
44,696

 
7.7
%
 
46,364

 
8.8
%
 
75,306

 
13.1
%
 
44,737

 
8.7
%
 
214,423

 
9.7
%
 
185,365

 
8.7
%
Asia and Pacific
 
32,604

 
6.1
%
 
41,599

 
7.2
%
 
22,268

 
4.2
%
 
21,500

 
3.7
%
 
28,510

 
5.6
%
 
117,971

 
5.3
%
 
100,062

 
4.7
%
Other
 
24,593

 
4.6
%
 
36,220

 
6.3
%
 
29,330

 
5.6
%
 
22,633

 
3.9
%
 
21,889

 
4.3
%
 
112,776

 
5.1
%
 
92,453

 
4.4
%
Total
 
$
534,968

 
100.0
%
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
2,212,125

 
100.0
%
 
$
2,122,440

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
422,372

 
79.0
%
 
$
448,910

 
77.8
%
 
$
415,375

 
79.3
%
 
$
449,994

 
78.1
%
 
$
408,440

 
79.6
%
 
$
1,736,651

 
78.5
%
 
$
1,715,467

 
80.8
%
Europe
 
92,658

 
17.3
%
 
110,557

 
19.2
%
 
87,783

 
16.7
%
 
110,976

 
19.3
%
 
86,526

 
16.9
%
 
401,974

 
18.2
%
 
344,836

 
16.2
%
Other
 
19,938

 
3.7
%
 
17,385

 
3.0
%
 
20,949

 
4.0
%
 
15,228

 
2.6
%
 
17,901

 
3.5
%
 
73,500

 
3.3
%
 
62,137

 
2.9
%
Total
 
$
534,968

 
100.0
%
 
$
576,852

 
100.0
%
 
$
524,107

 
100.0
%
 
$
576,198

 
100.0
%
 
$
512,867

 
100.0
%
 
$
2,212,125

 
100.0
%
 
$
2,122,440

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
114,910

 
20.5
%
 
$
115,271

 
20.5
%
 
$
112,226

 
20.5
%
 
$
116,018

 
21.5
%
 
$
113,978

 
20.6
%
 
$
458,425

 
20.8
%
 
$
444,137

 
21.0
%
Programs
 
100,333

 
17.9
%
 
96,509

 
17.2
%
 
97,333

 
17.8
%
 
95,011

 
17.6
%
 
97,524

 
17.6
%
 
389,186

 
17.6
%
 
364,639

 
17.3
%
Construction and national accounts
 
83,063

 
14.8
%
 
80,381

 
14.3
%
 
81,784

 
15.0
%
 
77,212

 
14.3
%
 
88,467

 
16.0
%
 
322,440

 
14.6
%
 
324,517

 
15.4
%
Travel, accident and health
 
74,153

 
13.3
%
 
81,405

 
14.5
%
 
74,754

 
13.7
%
 
66,835

 
12.4
%
 
69,305

 
12.5
%
 
297,147

 
13.5
%
 
257,358

 
12.2
%
Property, energy, marine and aviation
 
51,769

 
9.3
%
 
53,857

 
9.6
%
 
50,840

 
9.3
%
 
48,603

 
9.0
%
 
47,372

 
8.5
%
 
205,069

 
9.3
%
 
173,779

 
8.2
%
Excess and surplus casualty (2)
 
42,430

 
7.6
%
 
43,401

 
7.7
%
 
40,049

 
7.3
%
 
46,544

 
8.6
%
 
47,445

 
8.6
%
 
172,424

 
7.8
%
 
195,154

 
9.2
%
Lenders products
 
24,017

 
4.3
%
 
24,254

 
4.3
%
 
23,161

 
4.2
%
 
22,816

 
4.2
%
 
24,883

 
4.5
%
 
94,248

 
4.3
%
 
97,043

 
4.6
%
Other (3)
 
68,742

 
12.3
%
 
65,980

 
11.8
%
 
66,302

 
12.1
%
 
65,698

 
12.2
%
 
65,659

 
11.8
%
 
266,722

 
12.1
%
 
256,391

 
12.1
%
Total
 
$
559,417

 
100.0
%
 
$
561,058

 
100.0
%
 
$
546,449

 
100.0
%
 
$
538,737

 
100.0
%
 
$
554,633

 
100.0
%
 
$
2,205,661

 
100.0
%
 
$
2,113,018

 
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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Gross premiums written
 
$
409,316

 
$
435,396

 
$
490,327

 
$
577,483

 
$
289,348

 
$
1,912,522

 
$
1,640,399

Premiums ceded
 
(84,268
)
 
(123,705
)
 
(136,247
)
 
(195,730
)
 
(79,182
)
 
(539,950
)
 
(465,925
)
Net premiums written
 
325,048

 
311,691

 
354,080

 
381,753

 
210,166

 
1,372,572

 
1,174,474

Change in unearned premiums
 
23,405

 
(18,418
)
 
(13,762
)
 
(102,581
)
 
49,329

 
(111,356
)
 
(31,853
)
Net premiums earned
 
348,453

 
293,273

 
340,318

 
279,172

 
259,495

 
1,261,216

 
1,142,621

Other underwriting income (loss)
 
(3,172
)
 
1,387

 
(129
)
 
1,232

 
10,193

 
(682
)
 
11,336

Losses and loss adjustment expenses
 
(291,838
)
 
(183,413
)
 
(229,956
)
 
(141,675
)
 
(142,254
)
 
(846,882
)
 
(773,923
)
Acquisition expenses
 
(62,452
)
 
(50,367
)
 
(50,142
)
 
(48,319
)
 
(66,612
)
 
(211,280
)
 
(221,250
)
Other operating expenses
 
(32,165
)
 
(29,936
)
 
(35,678
)
 
(35,571
)
 
(36,205
)
 
(133,350
)
 
(146,663
)
Underwriting income (loss)
 
$
(41,174
)
 
$
30,944

 
$
24,413

 
$
54,839

 
$
24,617

 
$
69,022

 
$
12,121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
83.8
 %
 
62.5
 %
 
67.6
 %
 
50.7
 %
 
54.8
 %
 
67.1
 %
 
67.7
 %
Acquisition expense ratio
 
17.9
 %
 
17.2
 %
 
14.7
 %
 
17.3
 %
 
25.7
 %
 
16.8
 %
 
19.4
 %
Other operating expense ratio
 
9.2
 %
 
10.2
 %
 
10.5
 %
 
12.7
 %
 
14.0
 %
 
10.6
 %
 
12.8
 %
Combined ratio
 
110.9
 %
 
89.9
 %
 
92.8
 %
 
80.7
 %
 
94.5
 %
 
94.5
 %
 
99.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
24.3
 %
 
8.7
 %
 
2.2
 %
 
0.3
 %
 
3.0
 %
 
9.4
 %
 
14.6
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(9.6
)%
 
(11.3
)%
 
(9.4
)%
 
(13.0
)%
 
(11.7
)%
 
(10.7
)%
 
(14.3
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
96.2
 %
 
92.5
 %
 
100.0
 %
 
93.4
 %
 
103.2
 %
 
95.8
 %
 
99.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
79.4
 %
 
71.6
 %
 
72.2
 %
 
66.1
 %
 
72.6
 %
 
71.8
 %
 
71.6
 %
 
(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other specialty (1)
 
$
108,363

 
33.3
%
 
$
105,535

 
33.9
%
 
$
155,081

 
43.8
%
 
$
138,992

 
36.4
%
 
$
88,067

 
41.9
%
 
$
507,971

 
37.0
%
 
$
459,213

 
39.1
%
Casualty (2)
 
103,101

 
31.7
%
 
98,788

 
31.7
%
 
68,113

 
19.2
%
 
130,176

 
34.1
%
 
53,309

 
25.4
%
 
400,178

 
29.2
%
 
340,429

 
29.0
%
Property excluding property catastrophe
 
64,025

 
19.7
%
 
83,222

 
26.7
%
 
77,876

 
22.0
%
 
85,170

 
22.3
%
 
35,248

 
16.8
%
 
310,293

 
22.6
%
 
243,693

 
20.7
%
Property catastrophe
 
27,894

 
8.6
%
 
9,053

 
2.9
%
 
35,045

 
9.9
%
 
7,632

 
2.0
%
 
12,382

 
5.9
%
 
79,624

 
5.8
%
 
70,155

 
6.0
%
Marine and aviation
 
11,929

 
3.7
%
 
6,011

 
1.9
%
 
10,061

 
2.8
%
 
10,012

 
2.6
%
 
12,249

 
5.8
%
 
38,013

 
2.8
%
 
32,759

 
2.8
%
Other (3)
 
9,736

 
3.0
%
 
9,082

 
2.9
%
 
7,904

 
2.2
%
 
9,771

 
2.6
%
 
8,911

 
4.2
%
 
36,493

 
2.7
%
 
28,225

 
2.4
%
Total
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
1,372,572

 
100.0
%
 
$
1,174,474

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata
 
$
219,814

 
67.6
%
 
$
197,431

 
63.3
%
 
$
212,858

 
60.1
%
 
$
152,165

 
39.9
%
 
$
171,837

 
81.8
%
 
$
782,268

 
57.0
%
 
$
708,694

 
60.3
%
Excess of loss
 
105,234

 
32.4
%
 
114,260

 
36.7
%
 
141,222

 
39.9
%
 
229,588

 
60.1
%
 
38,329

 
18.2
%
 
590,304

 
43.0
%
 
465,780

 
39.7
%
Total
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
1,372,572

 
100.0
%
 
$
1,174,474

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
130,229

 
40.1
%
 
$
141,209

 
45.3
%
 
$
136,249

 
38.5
%
 
$
123,638

 
32.4
%
 
$
88,626

 
42.2
%
 
$
531,325

 
38.7
%
 
$
439,229

 
37.4
%
Europe
 
124,047

 
38.2
%
 
107,826

 
34.6
%
 
142,667

 
40.3
%
 
201,175

 
52.7
%
 
89,122

 
42.4
%
 
575,715

 
41.9
%
 
466,750

 
39.7
%
Bermuda
 
20,976

 
6.5
%
 
11,659

 
3.7
%
 
13,903

 
3.9
%
 
15,150

 
4.0
%
 
1,044

 
0.5
%
 
61,688

 
4.5
%
 
89,004

 
7.6
%
Asia and Pacific
 
23,695

 
7.3
%
 
31,665

 
10.2
%
 
37,635

 
10.6
%
 
18,445

 
4.8
%
 
5,938

 
2.8
%
 
111,440

 
8.1
%
 
86,133

 
7.3
%
Other
 
26,101

 
8.0
%
 
19,332

 
6.2
%
 
23,626

 
6.7
%
 
23,345

 
6.1
%
 
25,436

 
12.1
%
 
92,404

 
6.7
%
 
93,358

 
7.9
%
Total
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
1,372,572

 
100.0
%
 
$
1,174,474

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bermuda
 
$
146,013

 
44.9
%
 
$
117,228

 
37.6
%
 
$
145,568

 
41.1
%
 
$
78,714

 
20.6
%
 
$
61,474

 
29.3
%
 
$
487,523

 
35.5
%
 
$
350,681

 
29.9
%
United States
 
94,661

 
29.1
%
 
103,006

 
33.0
%
 
100,271

 
28.3
%
 
115,612

 
30.3
%
 
76,611

 
36.5
%
 
413,550

 
30.1
%
 
399,379

 
34.0
%
Europe and other
 
84,374

 
26.0
%
 
91,457

 
29.3
%
 
108,241

 
30.6
%
 
187,427

 
49.1
%
 
72,081

 
34.3
%
 
471,499

 
34.4
%
 
424,414

 
36.1
%
Total
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
354,080

 
100.0
%
 
$
381,753

 
100.0
%
 
$
210,166

 
100.0
%
 
$
1,372,572

 
100.0
%
 
$
1,174,474

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other specialty (1)
 
$
112,892

 
32.4
%
 
$
108,311

 
36.9
%
 
$
149,648

 
44.0
%
 
$
103,717

 
37.2
%
 
$
100,946

 
38.9
%
 
$
474,568

 
37.6
%
 
$
408,566

 
35.8
%
Casualty (2)
 
115,157

 
33.0
%
 
77,496

 
26.4
%
 
85,009

 
25.0
%
 
69,372

 
24.8
%
 
70,996

 
27.4
%
 
347,034

 
27.5
%
 
341,122

 
29.9
%
Property excluding property catastrophe
 
76,827

 
22.0
%
 
71,358

 
24.3
%
 
70,849

 
20.8
%
 
68,754

 
24.6
%
 
57,668

 
22.2
%
 
287,788

 
22.8
%
 
255,453

 
22.4
%
Property catastrophe
 
22,956

 
6.6
%
 
18,190

 
6.2
%
 
15,716

 
4.6
%
 
18,387

 
6.6
%
 
11,325

 
4.4
%
 
75,249

 
6.0
%
 
73,300

 
6.4
%
Marine and aviation
 
11,088

 
3.2
%
 
8,672

 
3.0
%
 
10,089

 
3.0
%
 
9,389

 
3.4
%
 
9,937

 
3.8
%
 
39,238

 
3.1
%
 
36,214

 
3.2
%
Other (3)
 
9,533

 
2.7
%
 
9,246

 
3.2
%
 
9,007

 
2.6
%
 
9,553

 
3.4
%
 
8,623

 
3.3
%
 
37,339

 
3.0
%
 
27,966

 
2.4
%
Total
 
$
348,453

 
100.0
%
 
$
293,273

 
100.0
%
 
$
340,318

 
100.0
%
 
$
279,172

 
100.0
%
 
$
259,495

 
100.0
%
 
$
1,261,216

 
100.0
%
 
$
1,142,621

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata
 
$
183,367

 
52.6
%
 
$
168,865

 
57.6
%
 
$
203,632

 
59.8
%
 
$
163,996

 
58.7
%
 
$
153,536

 
59.2
%
 
$
719,860

 
57.1
%
 
$
657,490

 
57.5
%
Excess of loss
 
165,086

 
47.4
%
 
124,408

 
42.4
%
 
136,686

 
40.2
%
 
115,176

 
41.3
%
 
105,959

 
40.8
%
 
541,356

 
42.9
%
 
485,131

 
42.5
%
Total
 
$
348,453

 
100.0
%
 
$
293,273

 
100.0
%
 
$
340,318

 
100.0
%
 
$
279,172

 
100.0
%
 
$
259,495

 
100.0
%
 
$
1,261,216

 
100.0
%
 
$
1,142,621

 
100.0
%

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

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

(U.S. Dollars in thousands)
 
Three Months Ended
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Gross premiums written
 
$
357,981

 
$
350,559

 
$
330,990

 
$
321,178

 
$
335,338

 
$
1,360,708

 
$
1,368,138

Premiums ceded
 
(48,603
)
 
(57,226
)
 
(50,867
)
 
(46,137
)
 
(62,657
)
 
(202,833
)
 
(256,796
)
Net premiums written
 
309,378

 
293,333

 
280,123

 
275,041

 
272,681

 
1,157,875

 
1,111,342

Change in unearned premiums
 
5,214

 
7,591

 
10,355

 
5,201

 
7,600

 
28,361

 
(54,176
)
Net premiums earned
 
314,592

 
300,924

 
290,478

 
280,242

 
280,281

 
1,186,236

 
1,057,166

Other underwriting income (1)
 
2,569

 
3,733

 
3,315

 
3,416

 
3,738

 
13,033

 
15,737

Losses and loss adjustment expenses
 
(6,617
)
 
(9,615
)
 
(21,591
)
 
(43,466
)
 
(49,762
)
 
(81,289
)
 
(134,677
)
Acquisition expenses
 
(30,930
)
 
(33,361
)
 
(27,737
)
 
(26,567
)
 
(24,363
)
 
(118,595
)
 
(100,598
)
Other operating expenses
 
(33,810
)
 
(31,122
)
 
(38,729
)
 
(38,771
)
 
(37,546
)
 
(142,432
)
 
(146,336
)
Underwriting income
 
$
245,804

 
$
230,559

 
$
205,736

 
$
174,854

 
$
172,348

 
$
856,953

 
$
691,292

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
2.1
 %
 
3.2
 %
 
7.4
 %
 
15.5
 %
 
17.8
 %
 
6.9
 %
 
12.7
 %
Acquisition expense ratio
 
9.8
 %
 
11.1
 %
 
9.5
 %
 
9.5
 %
 
8.7
 %
 
10.0
 %
 
9.5
 %
Other operating expense ratio
 
10.7
 %
 
10.3
 %
 
13.3
 %
 
13.8
 %
 
13.4
 %
 
12.0
 %
 
13.8
 %
Combined ratio
 
22.6
 %
 
24.6
 %
 
30.2
 %
 
38.8
 %
 
39.9
 %
 
28.9
 %
 
36.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(10.4
)%
 
(12.5
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(9.0
)%
 
(9.0
)%
Combined ratio excluding prior year development (2)
 
33.0
 %
 
37.1
 %
 
38.2
 %
 
43.4
 %
 
47.1
 %
 
37.9
 %
 
45.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
86.4
 %
 
83.7
 %
 
84.6
 %
 
85.6
 %
 
81.3
 %
 
85.1
 %
 
81.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by client location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
282,627

 
$
267,234

 
$
254,966

 
$
246,548

 
$
248,817

 
$
1,051,375

 
$
1,005,437

Other
 
26,751

 
26,099

 
25,157

 
28,493

 
23,864

 
106,500

 
105,905

Total
 
$
309,378

 
$
293,333

 
$
280,123

 
$
275,041

 
$
272,681

 
$
1,157,875

 
$
1,111,342

United States %
 
91.4
 %
 
91.1
 %
 
91.0
 %
 
89.6
 %
 
91.2
 %
 
90.8
 %
 
90.5
 %
Other %
 
8.6
 %
 
8.9
 %
 
9.0
 %
 
10.4
 %
 
8.8
 %
 
9.2
 %
 
9.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
256,472

 
$
240,959

 
$
229,715

 
$
221,177

 
$
223,887

 
$
948,323

 
$
903,329

Other
 
52,906

 
52,374

 
50,408

 
53,864

 
48,794

 
209,552

 
208,013

Total
 
$
309,378

 
$
293,333

 
$
280,123

 
$
275,041

 
$
272,681

 
$
1,157,875

 
$
1,111,342

United States %
 
82.9
 %
 
82.1
 %
 
82.0
 %
 
80.4
 %
 
82.1
 %
 
81.9
 %
 
81.3
 %
Other %
 
17.1
 %
 
17.9
 %
 
18.0
 %
 
19.6
 %
 
17.9
 %
 
18.1
 %
 
18.7
 %

(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)
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
Insurance In Force (IIF) (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
276,538

 
72.1
%
 
$
272,409

 
73.1
%
 
$
262,889

 
73.1
%
 
$
255,092

 
72.9
%
 
$
253,914

 
72.2
%
Mortgage reinsurance
 
25,975

 
6.8
%
 
26,500

 
7.1
%
 
26,302

 
7.3
%
 
27,531

 
7.9
%
 
28,017

 
8.0
%
Other (2)
 
81,147

 
21.2
%
 
73,903

 
19.8
%
 
70,677

 
19.6
%
 
67,252

 
19.2
%
 
69,905

 
19.9
%
Total
 
$
383,660

 
100.0
%
 
$
372,812

 
100.0
%
 
$
359,868

 
100.0
%
 
$
349,875

 
100.0
%
 
$
351,836

 
100.0
%
Risk In Force (RIF) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
70,995

 
92.3
%
 
$
69,764

 
92.5
%
 
$
67,271

 
92.4
%
 
$
65,235

 
92.2
%
 
$
64,904

 
92.3
%
Mortgage reinsurance
 
2,217

 
2.9
%
 
2,264

 
3.0
%
 
2,282

 
3.1
%
 
2,383

 
3.4
%
 
2,473

 
3.5
%
Other (2)
 
3,728

 
4.8
%
 
3,425

 
4.5
%
 
3,237

 
4.4
%
 
3,117

 
4.4
%
 
2,921

 
4.2
%
Total
 
$
76,940

 
100.0
%
 
$
75,453

 
100.0
%
 
$
72,790

 
100.0
%
 
$
70,735

 
100.0
%
 
$
70,298

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
41,066

 
57.8
%
 
$
40,466

 
58.0
%
 
$
39,038

 
58.0
%
 
$
37,974

 
58.2
%
 
$
37,794

 
58.2
%
680-739
 
23,954

 
33.7
%
 
23,371

 
33.5
%
 
22,325

 
33.2
%
 
21,438

 
32.9
%
 
21,213

 
32.7
%
620-679
 
5,485

 
7.7
%
 
5,413

 
7.8
%
 
5,235

 
7.8
%
 
5,117

 
7.8
%
 
5,159

 
7.9
%
<620
 
490

 
0.7
%
 
514

 
0.7
%
 
673

 
1.0
%
 
706

 
1.1
%
 
738

 
1.1
%
Total
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
Weighted average FICO score
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by Loan-To-Value (LTV):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
7,918

 
11.2
%
 
$
7,506

 
10.8
%
 
$
6,915

 
10.3
%
 
$
6,441

 
9.9
%
 
$
6,337

 
9.8
%
90.01% to 95.00%
 
39,370

 
55.5
%
 
38,748

 
55.5
%
 
37,488

 
55.7
%
 
36,387

 
55.8
%
 
36,174

 
55.7
%
85.01% to 90.00%
 
20,643

 
29.1
%
 
20,464

 
29.3
%
 
19,904

 
29.6
%
 
19,490

 
29.9
%
 
19,482

 
30.0
%
85.00% and below
 
3,064

 
4.3
%
 
3,046

 
4.4
%
 
2,964

 
4.4
%
 
2,917

 
4.5
%
 
2,911

 
4.5
%
Total
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
Weighted average LTV
 
93.0
%
 
 
 
93.0
%
 
 
 
92.9
%
 
 
 
92.9
%
 
 
 
92.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by State:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
$
5,491

 
7.7
%
 
$
5,406

 
7.7
%
 
$
5,260

 
7.8
%
 
$
5,164

 
7.9
%
 
$
5,151

 
7.9
%
California
 
4,505

 
6.3
%
 
4,310

 
6.2
%
 
4,066

 
6.0
%
 
3,859

 
5.9
%
 
3,803

 
5.9
%
Florida
 
3,541

 
5.0
%
 
3,395

 
4.9
%
 
3,186

 
4.7
%
 
2,977

 
4.6
%
 
2,881

 
4.4
%
Virginia
 
2,931

 
4.1
%
 
2,914

 
4.2
%
 
2,844

 
4.2
%
 
2,786

 
4.3
%
 
2,773

 
4.3
%
Georgia
 
2,573

 
3.6
%
 
2,542

 
3.6
%
 
2,453

 
3.6
%
 
2,358

 
3.6
%
 
2,331

 
3.6
%
North Carolina
 
2,505

 
3.5
%
 
2,500

 
3.6
%
 
2,456

 
3.7
%
 
2,420

 
3.7
%
 
2,410

 
3.7
%
Illinois
 
2,482

 
3.5
%
 
2,442

 
3.5
%
 
2,351

 
3.5
%
 
2,252

 
3.5
%
 
2,229

 
3.4
%
Washington
 
2,408

 
3.4
%
 
2,370

 
3.4
%
 
2,297

 
3.4
%
 
2,261

 
3.5
%
 
2,294

 
3.5
%
Maryland
 
2,407

 
3.4
%
 
2,369

 
3.4
%
 
2,298

 
3.4
%
 
2,244

 
3.4
%
 
2,234

 
3.4
%
Minnesota
 
2,400

 
3.4
%
 
2,365

 
3.4
%
 
2,268

 
3.4
%
 
2,172

 
3.3
%
 
2,165

 
3.3
%
Others
 
39,752

 
56.0
%
 
39,151

 
56.1
%
 
37,792

 
56.2
%
 
36,742

 
56.3
%
 
36,633

 
56.4
%
Total
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
 
$
67,271

 
100.0
%
 
$
65,235

 
100.0
%
 
$
64,904

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average coverage (end of period RIF divided by IIF)
 
25.7
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
U.S. mortgage insurance total RIF, net of reinsurance (4)
 
$
55,755

 
 
 
$
54,558

 
 
 
$
52,167

 
 
 
$
49,921

 
 
 
$
49,100

 
 
Analysts’ persistency (5)
 
81.5
%
 
 
 
82.0
%
 
 
 
81.7
%
 
 
 
81.7
%
 
 
 
81.8
%
 
 
Risk-to-capital ratio -- Arch MI U.S. (6)
 
13.0:1

 
 
 
11.4:1

 
 
 
11.6:1

 
 
 
10.5:1

 
 
 
10.8:1

 
 
PMIER sufficiency ratio -- Arch MI U.S. (7)
 
141
%
 
 
 
151
%
 
 
 
134
%
 
 
 
133
%
 
 
 
129
%
 
 

(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 December 31, 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 December 31, 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
 
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total new insurance written (NIW) (1)
 
$
16,741

 
 
 
$
21,425

 
 
 
$
19,944

 
 
 
$
11,373

 
 
 
$
14,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
9,358

 
55.9
%
 
$
12,013

 
56.1
%
 
$
11,308

 
56.7
%
 
$
6,612

 
58.1
%
 
$
8,278

 
57.5
%
680-739
 
6,080

 
36.3
%
 
7,728

 
36.1
%
 
7,182

 
36.0
%
 
4,042

 
35.5
%
 
5,148

 
35.8
%
620-679
 
1,303

 
7.8
%
 
1,684

 
7.9
%
 
1,454

 
7.3
%
 
719

 
6.3
%
 
965

 
6.7
%
  Total
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by LTV:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
2,672

 
16.0
%
 
$
3,231

 
15.1
%
 
$
2,835

 
14.2
%
 
$
1,262

 
11.1
%
 
$
1,525

 
10.6
%
90.01% to 95.00%
 
7,452

 
44.5
%
 
9,689

 
45.2
%
 
9,205

 
46.2
%
 
5,136

 
45.2
%
 
6,488

 
45.1
%
85.01% to 90.00%
 
4,841

 
28.9
%
 
6,264

 
29.2
%
 
5,910

 
29.6
%
 
3,643

 
32.0
%
 
4,633

 
32.2
%
85.00% and below
 
1,776

 
10.6
%
 
2,241

 
10.5
%
 
1,994

 
10.0
%
 
1,332

 
11.7
%
 
1,745

 
12.1
%
  Total
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW monthly vs. single:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly
 
$
15,299

 
91.4
%
 
$
19,842

 
92.6
%
 
$
18,814

 
94.3
%
 
$
10,390

 
91.4
%
 
$
12,763

 
88.7
%
Single
 
1,442

 
8.6
%
 
1,583

 
7.4
%
 
1,130

 
5.7
%
 
983

 
8.6
%
 
1,628

 
11.3
%
  Total
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW purchase vs. refinance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
15,868

 
94.8
%
 
$
20,397

 
95.2
%
 
$
18,871

 
94.6
%
 
$
10,288

 
90.5
%
 
$
13,007

 
90.4
%
Refinance
 
873

 
5.2
%
 
1,028

 
4.8
%
 
1,073

 
5.4
%
 
1,085

 
9.5
%
 
1,384

 
9.6
%
  Total
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
$
19,944

 
100.0
%
 
$
11,373

 
100.0
%
 
$
14,391

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending number of policies in force (PIF) (3)
 
1,289,295

 
 
 
1,270,728

 
 
 
1,239,565

 
 
 
1,214,539

 
 
 
1,213,382

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rollforward of insured loans in default:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning delinquent number of loans
 
20,361

 
 
 
21,037

 
 
 
24,062

 
 
 
27,068

 
 
 
23,770

 
 
Plus: new notices (4)
 
10,052

 
 
 
9,466

 
 
 
8,152

 
 
 
9,640

 
 
 
14,097

 
 
Less: cures
 
(8,785
)
 
 
 
(9,246
)
 
 
 
(10,273
)
 
 
 
(11,592
)
 
 
 
(9,737
)
 
 
Less: paid claims
 
(963
)
 
 
 
(896
)
 
 
 
(904
)
 
 
 
(1,054
)
 
 
 
(1,062
)
 
 
Ending delinquent number of loans (3) (4)
 
20,665

 
 
 
20,361

 
 
 
21,037

 
 
 
24,062

 
 
 
27,068

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending percentage of loans in default (3) (4)
 
1.60
%
 
 
 
1.60
%
 
 
 
1.70
%
 
 
 
1.98
%
 
 
 
2.23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of claims paid
 
963

 
 
 
896

 
 
 
904

 
 
 
1,054

 
 
 
1,062

 
 
Total paid claims (in thousands)
 
$
40,982

 
 
 
$
34,958

 
 
 
$
35,889

 
 
 
$
47,645

 
 
 
$
49,769

 
 
Average per claim (in thousands)
 
$
42.6

 
 
 
$
39.0

 
 
 
$
39.7

 
 
 
$
45.2

 
 
 
$
46.9

 
 
Severity (2)
 
101.9
%
 
 
 
102.9
%
 
 
 
97.9
%
 
 
 
105.2
%
 
 
 
103.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average reserve per default (in thousands)
 
$
17.4

 
 
 
$
18.1

 
 
 
$
19.3

 
 
 
$
18.3

 
 
 
$
16.5

 
 

(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 fourth quarter and approximately 200 ending delinquent loans at December 31, 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)
 
December 31, 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
 
72.8
%
 
$
20,501

 
7.4
%
 
4,738

 
6.7
%
 
9.07
%
 
79.8
%
 
$
26,140

 
10.3
%
 
6,003

 
9.2
%
 
10.24
%
2009
 
0.6
%
 
709

 
0.3
%
 
162

 
0.2
%
 
3.25
%
 
0.7
%
 
1,072

 
0.4
%
 
253

 
0.4
%
 
2.94
%
2010
 
0.5
%
 
646

 
0.2
%
 
175

 
0.2
%
 
2.62
%
 
0.6
%
 
1,089

 
0.4
%
 
295

 
0.5
%
 
2.31
%
2011
 
0.9
%
 
2,530

 
0.9
%
 
701

 
1.0
%
 
1.57
%
 
1.0
%
 
3,828

 
1.5
%
 
1,046

 
1.6
%
 
1.37
%
2012
 
1.5
%
 
9,650

 
3.5
%
 
2,664

 
3.8
%
 
0.78
%
 
1.7
%
 
13,247

 
5.2
%
 
3,629

 
5.6
%
 
0.75
%
2013
 
3.5
%
 
16,823

 
6.1
%
 
4,676

 
6.6
%
 
0.89
%
 
3.7
%
 
21,840

 
8.6
%
 
5,996

 
9.2
%
 
0.95
%
2014
 
2.6
%
 
18,274

 
6.6
%
 
4,947

 
7.0
%
 
0.97
%
 
2.7
%
 
22,884

 
9.0
%
 
6,112

 
9.4
%
 
1.10
%
2015
 
3.3
%
 
33,781

 
12.2
%
 
8,849

 
12.5
%
 
0.69
%
 
3.2
%
 
41,991

 
16.5
%
 
10,828

 
16.7
%
 
0.77
%
2016
 
7.0
%
 
52,324

 
18.9
%
 
13,407

 
18.9
%
 
0.77
%
 
4.8
%
 
62,020

 
24.4
%
 
15,643

 
24.1
%
 
0.80
%
2017
 
6.0
%
 
54,287

 
19.6
%
 
13,793

 
19.4
%
 
0.55
%
 
1.7
%
 
59,803

 
23.6
%
 
15,099

 
23.3
%
 
0.35
%
2018
 
1.1
%
 
67,013

 
24.2
%
 
16,883

 
23.8
%
 
0.15
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
100.0
%
 
$
276,538

 
100.0
%
 
$
70,995

 
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 $375.8 million at December 31, 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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Gross premiums written
 
$
1,599,085

 
$
1,622,532

 
$
1,591,202

 
$
1,721,605

 
$
1,391,247

 
$
6,534,423

 
$
6,088,254

Premiums ceded
 
(429,691
)
 
(440,656
)
 
(432,892
)
 
(488,613
)
 
(395,533
)
 
(1,791,851
)
 
(1,679,998
)
Net premiums written
 
1,169,394

 
1,181,876

 
1,158,310

 
1,232,992

 
995,714

 
4,742,572

 
4,408,256

Change in unearned premiums
 
53,068

 
(26,621
)
 
18,935

 
(134,841
)
 
98,695

 
(89,459
)
 
(95,451
)
Net premiums earned
 
1,222,462

 
1,155,255

 
1,177,245

 
1,098,151

 
1,094,409

 
4,653,113

 
4,312,805

Other underwriting income (loss)
 
(603
)
 
5,120

 
3,186

 
4,648

 
13,931

 
12,351

 
27,073

Losses and loss adjustment expenses
 
(698,505
)
 
(602,463
)
 
(609,012
)
 
(538,871
)
 
(562,085
)
 
(2,448,851
)
 
(2,531,044
)
Acquisition expenses
 
(178,990
)
 
(171,983
)
 
(168,549
)
 
(160,055
)
 
(178,236
)
 
(679,577
)
 
(645,487
)
Other operating expenses
 
(155,378
)
 
(151,139
)
 
(167,087
)
 
(166,316
)
 
(162,007
)
 
(639,920
)
 
(652,523
)
Underwriting income
 
$
188,986

 
$
234,790

 
$
235,783

 
$
237,557

 
$
206,012

 
$
897,116

 
$
510,824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
57.1
 %
 
52.1
 %
 
51.7
 %
 
49.1
 %
 
51.4
 %
 
52.6
 %
 
58.7
 %
Acquisition expense ratio
 
14.6
 %
 
14.9
 %
 
14.3
 %
 
14.6
 %
 
16.3
 %
 
14.6
 %
 
15.0
 %
Other operating expense ratio
 
12.7
 %
 
13.1
 %
 
14.2
 %
 
15.1
 %
 
14.8
 %
 
13.8
 %
 
15.1
 %
Combined ratio
 
84.4
 %
 
80.1
 %
 
80.2
 %
 
78.8
 %
 
82.5
 %
 
81.0
 %
 
88.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
9.7
 %
 
5.0
 %
 
1.3
 %
 
0.2
 %
 
0.1
 %
 
4.2
 %
 
8.9
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(6.1
)%
 
(6.7
)%
 
(5.1
)%
 
(4.6
)%
 
(4.6
)%
 
(5.7
)%
 
(6.1
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
80.8
 %
 
81.8
 %
 
84.0
 %
 
83.2
 %
 
87.0
 %
 
82.5
 %
 
86.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
73.1
 %
 
72.8
 %
 
72.8
 %
 
71.6
 %
 
71.6
 %
 
72.6
 %
 
72.4
 %
 
(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Components of losses and loss adjustment expenses incurred (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid losses and loss adjustment expenses
 
$
579,106

 
$
503,245

 
$
403,161

 
$
496,445

 
$
606,662

 
$
1,981,957

 
$
2,170,793

Change in unpaid losses and loss adjustment expenses
 
119,399

 
99,218

 
205,851

 
42,426

 
(44,577
)
 
466,894

 
360,251

Total losses and loss adjustment expenses
 
$
698,505

 
$
602,463

 
$
609,012

 
$
538,871

 
$
562,085

 
$
2,448,851

 
$
2,531,044

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impact on underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(8,303
)
 
$
(6,830
)
 
$
(5,104
)
 
$
(1,506
)
 
$
(334
)
 
$
(21,743
)
 
$
(4,023
)
Reinsurance
 
(33,479
)
 
(33,162
)
 
(31,882
)
 
(36,158
)
 
(30,452
)
 
(134,681
)
 
(163,611
)
Mortgage
 
(32,667
)
 
(37,631
)
 
(23,314
)
 
(12,977
)
 
(20,102
)
 
(106,589
)
 
(94,960
)
Total
 
$
(74,449
)
 
$
(77,623
)
 
$
(60,300
)
 
$
(50,641
)
 
$
(50,888
)
 
$
(263,013
)
 
$
(262,594
)
Impact on losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(10,278
)
 
$
(5,949
)
 
$
(6,058
)
 
$
(2,110
)
 
$
(1,474
)
 
$
(24,395
)
 
$
(8,632
)
Reinsurance
 
(34,596
)
 
(34,315
)
 
(33,022
)
 
(36,541
)
 
(32,136
)
 
(138,474
)
 
(165,440
)
Mortgage
 
(32,667
)
 
(38,638
)
 
(23,333
)
 
(12,977
)
 
(20,102
)
 
(107,615
)
 
(94,975
)
Total
 
$
(77,541
)
 
$
(78,902
)
 
$
(62,413
)
 
$
(51,628
)
 
$
(53,712
)
 
$
(270,484
)
 
$
(269,047
)
Impact on acquisition expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
1,975

 
$
(881
)
 
$
954

 
$
604

 
$
1,140

 
$
2,652

 
$
4,609

Reinsurance
 
1,117

 
1,153

 
1,140

 
383

 
1,684

 
3,793

 
1,829

Mortgage
 
—

 
1,007

 
19

 
—

 
—

 
1,026

 
15

Total
 
$
3,092

 
$
1,279

 
$
2,113

 
$
987

 
$
2,824

 
$
7,471

 
$
6,453

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(1.5
)%
 
(1.2
)%
 
(0.9
)%
 
(0.3
)%
 
(0.1
)%
 
(1.0
)%
 
(0.2
)%
Reinsurance
 
(9.6
)%
 
(11.3
)%
 
(9.4
)%
 
(13.0
)%
 
(11.7
)%
 
(10.7
)%
 
(14.3
)%
Mortgage
 
(10.4
)%
 
(12.5
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(9.0
)%
 
(9.0
)%
Total
 
(6.1
)%
 
(6.7
)%
 
(5.1
)%
 
(4.6
)%
 
(4.6
)%
 
(5.7
)%
 
(6.1
)%
Impact on loss ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(1.8
)%
 
(1.1
)%
 
(1.1
)%
 
(0.4
)%
 
(0.3
)%
 
(1.1
)%
 
(0.4
)%
Reinsurance
 
(9.9
)%
 
(11.7
)%
 
(9.7
)%
 
(13.1
)%
 
(12.4
)%
 
(11.0
)%
 
(14.5
)%
Mortgage
 
(10.4
)%
 
(12.8
)%
 
(8.0
)%
 
(4.6
)%
 
(7.2
)%
 
(9.1
)%
 
(9.0
)%
Total
 
(6.3
)%
 
(6.8
)%
 
(5.3
)%
 
(4.7
)%
 
(4.9
)%
 
(5.8
)%
 
(6.2
)%
Impact on acquisition expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
0.3
 %
 
(0.1
)%
 
0.2
 %
 
0.1
 %
 
0.2
 %
 
0.1
 %
 
0.2
 %
Reinsurance
 
0.3
 %
 
0.4
 %
 
0.3
 %
 
0.1
 %
 
0.7
 %
 
0.3
 %
 
0.2
 %
Mortgage
 
0.0
 %
 
0.3
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.1
 %
 
0.0
 %
Total
 
0.2
 %
 
0.1
 %
 
0.2
 %
 
0.1
 %
 
0.3
 %
 
0.1
 %
 
0.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net losses incurred from current accident year catastrophic events (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
33,320

 
$
32,691

 
$
7,558

 
$
1,029

 
$
(7,025
)
 
$
74,598

 
$
218,406

Reinsurance
 
84,846

 
25,469

 
7,388

 
975

 
7,790

 
118,678

 
167,364

Total
 
$
118,166

 
$
58,160

 
$
14,946

 
$
2,004

 
$
765

 
$
193,276

 
$
385,770

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
6.0
 %
 
5.8
 %
 
1.4
 %
 
0.2
 %
 
(1.3
)%
 
3.4
 %
 
10.3
 %
Reinsurance
 
24.3
 %
 
8.7
 %
 
2.2
 %
 
0.3
 %
 
3.0
 %
 
9.4
 %
 
14.6
 %
Total
 
9.7
 %
 
5.0
 %
 
1.3
 %
 
0.2
 %
 
0.1
 %
 
4.2
 %
 
8.9
 %
 
(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)
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)
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
Investable assets (1) (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale, at fair value
 
$
14,305,659

 
73.1
 %
 
$
14,026,253

 
71.6
%
 
$
13,849,812

 
72.2
 %
 
$
14,145,765

 
71.5
 %
 
$
13,876,003

 
70.4
 %
Fixed maturities—fair value option (3)
 
322,743

 
1.6
 %
 
353,321

 
1.8
%
 
374,708

 
2.0
 %
 
457,317

 
2.3
 %
 
465,822

 
2.4
 %
Fixed maturities pledged under securities lending agreements, at fair value
 
253,500

 
1.3
 %
 
286,691

 
1.5
%
 
218,471

 
1.1
 %
 
350,365

 
1.8
 %
 
456,388

 
2.3
 %
Total fixed maturities
 
14,881,902

 
76.1
 %
 
14,666,265

 
74.9
%
 
14,442,991

 
75.3
 %
 
14,953,447

 
75.6
 %
 
14,798,213

 
75.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
306,693

 
1.6
 %
 
397,537

 
2.0
%
 
471,473

 
2.5
 %
 
543,650

 
2.7
 %
 
495,804

 
2.5
 %
Equity securities—fair value option (3)
 
47,255

 
0.2
 %
 
62,816

 
0.3
%
 
62,080

 
0.3
 %
 
69,267

 
0.3
 %
 
71,707

 
0.4
 %
Equity securities pledged under securities lending agreements, at fair value
 
14,895

 
0.1
 %
 
12,718

 
0.1
%
 
11,593

 
0.1
 %
 
7,787

 
0.0
 %
 
8,529

 
0.0
 %
Total equity securities
 
368,843

 
1.9
 %
 
473,071

 
2.4
%
 
545,146

 
2.8
 %
 
620,704

 
3.1
 %
 
576,040

 
2.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments available for sale, at fair value
 
—

 
0.0
 %
 
—

 
0.0
%
 
—

 
0.0
 %
 
—

 
0.0
 %
 
264,989

 
1.3
 %
Other investments—fair value option (3)
 
1,261,525

 
6.4
 %
 
1,233,280

 
6.3
%
 
1,266,327

 
6.6
 %
 
1,239,063

 
6.3
 %
 
1,211,971

 
6.1
 %
Total other investments
 
1,261,525

 
6.4
 %
 
1,233,280

 
6.3
%
 
1,266,327

 
6.6
 %
 
1,239,063

 
6.3
 %
 
1,476,960

 
7.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments accounted for using the equity method (4)
 
1,493,791

 
7.6
 %
 
1,524,242

 
7.8
%
 
1,428,582

 
7.5
 %
 
1,394,548

 
7.0
 %
 
1,041,322

 
5.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments available for sale, at fair value
 
955,880

 
4.9
 %
 
961,799

 
4.9
%
 
1,096,798

 
5.7
 %
 
967,389

 
4.9
 %
 
1,469,042

 
7.5
 %
Short-term investments—fair value option (3)
 
40,046

 
0.2
 %
 
24,309

 
0.1
%
 
23,179

 
0.1
 %
 
22,098

 
0.1
 %
 
40,671

 
0.2
 %
Total short-term investments
 
995,926

 
5.1
 %
 
986,108

 
5.0
%
 
1,119,977

 
5.8
 %
 
989,487

 
5.0
 %
 
1,509,713

 
7.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
583,027

 
3.0
 %
 
586,353

 
3.0
%
 
480,984

 
2.5
 %
 
626,838

 
3.2
 %
 
551,696

 
2.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(18,153
)
 
(0.1
)%
 
122,863

 
0.6
%
 
(111,997
)
 
(0.6
)%
 
(33,289
)
 
(0.2
)%
 
(237,523
)
 
(1.2
)%
Total investable assets held by the Company
 
$
19,566,861

 
100.0
 %
 
$
19,592,182

 
100.0
%
 
$
19,172,010

 
100.0
 %
 
$
19,790,798

 
100.0
 %
 
$
19,716,421

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average effective duration (in years)
 
3.38

 
 
 
2.94

 
 
 
2.89

 
 
 
2.60

 
 
 
2.83

 
 

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

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA-/Aa3

 
 
 
 AA-/Aa2

 
 

Embedded book yield (before investment expenses)
 
2.89
%
 
 
 
2.78
%
 
 
 
2.64
%
 
 
 
2.50
%
 
 
 
2.32
%
 
 


(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
 
$
63,529

 
 
 
$
64,684

 
 
 
$
45,644

 
 
 
$
54,053

 
 
 
$
54,503

 
 
Investments accounted for using the fair value option
 
2,312,002

 
 
 
2,424,009

 
 
 
2,385,317

 
 
 
2,331,394

 
 
 
2,426,066

 
 
Fixed maturities available for sale, at fair value
 
393,351

 
 
 
305,388

 
 
 
279,177

 
 
 
203,176

 
 
 
—

 
 
Equity securities, at fair value
 
32,206

 
 
 
46,581

 
 
 
63,009

 
 
 
—

 
 
 
—

 
 
Securities sold but not yet purchased
 
(7,790
)
 
 
 
(9,065
)
 
 
 
(24,529
)
 
 
 
(63,110
)
 
 
 
(34,375
)
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(35,635
)
 
 
 
(99,537
)
 
 
 
(100,777
)
 
 
 
(32,218
)
 
 
 
(6,127
)
 
 
Total investable assets included in ‘other’ segment
 
$
2,757,663

 
 
 
$
2,732,060

 
 
 
$
2,647,841

 
 
 
$
2,493,295

 
 
 
$
2,440,067

 
 

(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Composition of net investment income (1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities
 
$
108,791

 
$
103,252

 
$
98,968

 
$
92,438

 
$
85,855

 
$
403,449

 
$
336,894

Equity securities (dividends)
 
2,242

 
3,426

 
4,232

 
2,750

 
2,551

 
12,650

 
12,703

Short-term investments
 
5,211

 
4,417

 
4,225

 
3,949

 
3,719

 
17,802

 
9,343

Other (2)
 
14,445

 
18,030

 
19,242

 
19,229

 
22,019

 
70,946

 
79,789

Gross investment income
 
130,689

 
129,125

 
126,667

 
118,366

 
114,144

 
504,847

 
438,729

Investment expenses
 
(15,063
)
 
(14,797
)
 
(18,906
)
 
(18,123
)
 
(14,531
)
 
(66,889
)
 
(56,657
)
Net investment income
 
$
115,626

 
$
114,328

 
$
107,761

 
$
100,243

 
$
99,613

 
$
437,958

 
$
382,072

Per share
 
$
0.28

 
$
0.28

 
$
0.26

 
$
0.24

 
$
0.24

 
$
1.06

 
$
0.91

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income yield, at amortized cost (1) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax
 
2.49
%
 
2.45
%
 
2.32
 %
 
2.13
 %
 
2.08
%
 
2.36
%
 
2.06
%
After-tax
 
2.21
%
 
2.22
%
 
2.12
 %
 
1.94
 %
 
1.89
%
 
2.14
%
 
1.83
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total return (1) (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Including effects of foreign exchange
 
0.51
%
 
0.31
%
 
(0.19
)%
 
(0.32
)%
 
0.79
%
 
0.33
%
 
5.87
%
Excluding effects of foreign exchange
 
0.83
%
 
0.37
%
 
0.33
 %
 
(0.40
)%
 
0.71
%
 
1.13
%
 
4.98
%

(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 December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
5,735,526

 
$
14,457

 
$
(104,223
)
 
$
(89,766
)
 
$
5,825,292

 
98.5
%
 
38.5
%
U.S. government and government agencies
 
3,601,269

 
26,517

 
(8,347
)
 
18,170

 
3,583,099

 
100.5
%
 
24.2
%
Municipal bonds
 
1,012,308

 
5,366

 
(11,891
)
 
(6,525
)
 
1,018,833

 
99.4
%
 
6.8
%
Non-U.S. government securities
 
1,713,891

 
13,807

 
(48,089
)
 
(34,282
)
 
1,748,173

 
98.0
%
 
11.5
%
Asset-backed securities
 
1,553,703

 
7,988

 
(13,447
)
 
(5,459
)
 
1,559,162

 
99.6
%
 
10.4
%
Commercial mortgage-backed securities
 
729,442

 
2,650

 
(10,751
)
 
(8,101
)
 
737,543

 
98.9
%
 
4.9
%
Residential mortgage-backed securities
 
535,763

 
3,974

 
(3,134
)
 
840

 
534,923

 
100.2
%
 
3.6
%
Total
 
$
14,881,902

 
$
74,759

 
$
(199,882
)
 
$
(125,123
)
 
$
15,007,025

 
99.2
%
 
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)
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
Credit quality distribution of total fixed maturities (2) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies (4)
 
$
4,194,676

 
28.2
%
 
$
3,672,429

 
25.0
%
 
$
3,196,856

 
22.1
%
 
$
3,280,853

 
21.9
%
 
$
3,771,835

 
25.5
%
AAA
 
3,551,039

 
23.9
%
 
3,691,522

 
25.2
%
 
3,897,441

 
27.0
%
 
4,076,660

 
27.3
%
 
4,080,808

 
27.6
%
AA
 
2,129,336

 
14.3
%
 
2,047,332

 
14.0
%
 
2,139,794

 
14.8
%
 
2,211,254

 
14.8
%
 
2,440,864

 
16.5
%
A
 
3,069,656

 
20.6
%
 
3,163,536

 
21.6
%
 
3,114,115

 
21.6
%
 
3,079,753

 
20.6
%
 
2,470,936

 
16.7
%
BBB
 
1,251,205

 
8.4
%
 
1,317,999

 
9.0
%
 
1,373,644

 
9.5
%
 
1,426,818

 
9.5
%
 
1,157,136

 
7.8
%
BB
 
275,201

 
1.8
%
 
288,178

 
2.0
%
 
240,114

 
1.7
%
 
312,169

 
2.1
%
 
313,286

 
2.1
%
B
 
183,614

 
1.2
%
 
219,667

 
1.5
%
 
185,066

 
1.3
%
 
249,346

 
1.7
%
 
254,011

 
1.7
%
Lower than B
 
61,271

 
0.4
%
 
61,001

 
0.4
%
 
64,858

 
0.4
%
 
71,922

 
0.5
%
 
77,543

 
0.5
%
Not rated
 
165,904

 
1.1
%
 
204,601

 
1.4
%
 
231,103

 
1.6
%
 
244,672

 
1.6
%
 
231,794

 
1.6
%
Total fixed maturities, at fair value
 
$
14,881,902

 
100.0
%
 
$
14,666,265

 
100.0
%
 
$
14,442,991

 
100.0
%
 
$
14,953,447

 
100.0
%
 
$
14,798,213

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity profile of total fixed maturities (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
328,296

 
2.2
%
 
$
374,027

 
2.6
%
 
$
387,178

 
2.7
%
 
$
615,987

 
4.1
%
 
$
585,093

 
4.0
%
Due after one year through five years
 
8,553,446

 
57.5
%
 
8,287,813

 
56.5
%
 
8,131,505

 
56.3
%
 
8,089,071

 
54.1
%
 
7,695,940

 
52.0
%
Due after five years through ten years
 
2,937,729

 
19.7
%
 
2,929,793

 
20.0
%
 
2,737,358

 
19.0
%
 
2,888,717

 
19.3
%
 
3,455,653

 
23.4
%
Due after 10 years
 
243,523

 
1.6
%
 
307,655

 
2.1
%
 
276,245

 
1.9
%
 
326,547

 
2.2
%
 
398,020

 
2.7
%
 
 
12,062,994

 
81.1
%
 
11,899,288

 
81.1
%
 
11,532,286

 
79.8
%
 
11,920,322

 
79.7
%
 
12,134,706

 
82.0
%
Mortgage-backed securities
 
535,763

 
3.6
%
 
477,547

 
3.3
%
 
498,759

 
3.5
%
 
351,059

 
2.3
%
 
328,924

 
2.2
%
Commercial mortgage-backed securities
 
729,442

 
4.9
%
 
682,516

 
4.7
%
 
590,198

 
4.1
%
 
561,543

 
3.8
%
 
545,817

 
3.7
%
Asset-backed securities
 
1,553,703

 
10.4
%
 
1,606,914

 
11.0
%
 
1,821,748

 
12.6
%
 
2,120,523

 
14.2
%
 
1,788,766

 
12.1
%
Total fixed maturities, at fair value
 
$
14,881,902

 
100.0
%
 
$
14,666,265

 
100.0
%
 
$
14,442,991

 
100.0
%
 
$
14,953,447

 
100.0
%
 
$
14,798,213

 
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)
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
Sector:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
 
$
3,125,524

 
54.5
%
 
$
3,137,412

 
53.6
%
 
$
2,979,178

 
51.8
%
 
$
2,958,018

 
51.8
%
 
$
2,491,090

 
52.0
%
Financials
 
2,269,651

 
39.6
%
 
2,312,600

 
39.5
%
 
2,373,628

 
41.3
%
 
2,299,239

 
40.3
%
 
1,831,017

 
38.2
%
Utilities
 
228,676

 
4.0
%
 
274,062

 
4.7
%
 
238,343

 
4.1
%
 
227,110

 
4.0
%
 
234,172

 
4.9
%
Covered bonds
 
21,301

 
0.4
%
 
24,662

 
0.4
%
 
44,267

 
0.8
%
 
87,513

 
1.5
%
 
98,752

 
2.1
%
All other (2)
 
90,374

 
1.6
%
 
104,376

 
1.8
%
 
115,616

 
2.0
%
 
133,277

 
2.3
%
 
132,241

 
2.8
%
Total fixed maturities, at fair value
 
$
5,735,526

 
100.0
%
 
$
5,853,112

 
100.0
%
 
$
5,751,032

 
100.0
%
 
$
5,705,157

 
100.0
%
 
$
4,787,272

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit quality distribution (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
$
166,052

 
2.9
%
 
$
194,408

 
3.3
%
 
$
216,636

 
3.8
%
 
$
283,752

 
5.0
%
 
$
329,573

 
6.9
%
AA
 
1,248,479

 
21.8
%
 
1,197,710

 
20.5
%
 
1,170,565

 
20.4
%
 
1,125,628

 
19.7
%
 
1,107,946

 
23.1
%
A
 
2,685,973

 
46.8
%
 
2,696,128

 
46.1
%
 
2,609,642

 
45.4
%
 
2,508,184

 
44.0
%
 
1,904,528

 
39.8
%
BBB
 
1,101,579

 
19.2
%
 
1,163,210

 
19.9
%
 
1,203,104

 
20.9
%
 
1,168,268

 
20.5
%
 
877,962

 
18.3
%
BB
 
253,253

 
4.4
%
 
257,785

 
4.4
%
 
203,978

 
3.5
%
 
239,291

 
4.2
%
 
237,227

 
5.0
%
B
 
167,205

 
2.9
%
 
200,116

 
3.4
%
 
156,646

 
2.7
%
 
170,393

 
3.0
%
 
165,846

 
3.5
%
Lower than B
 
26,645

 
0.5
%
 
22,578

 
0.4
%
 
22,152

 
0.4
%
 
26,948

 
0.5
%
 
30,376

 
0.6
%
Not rated
 
86,340

 
1.5
%
 
121,177

 
2.1
%
 
168,309

 
2.9
%
 
182,693

 
3.2
%
 
133,814

 
2.8
%
Total fixed maturities, at fair value
 
$
5,735,526

 
100.0
%
 
$
5,853,112

 
100.0
%
 
$
5,751,032

 
100.0
%
 
$
5,705,157

 
100.0
%
 
$
4,787,272

 
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 December 31, 2018 (1):
(U.S. Dollars in thousands)
 
Fair
Value
 
% of Asset Class
 
% of Investable Assets
 
Credit Quality (2)
Issuer:
 
 
 
 
 
 
 
 
JPMorgan Chase & Co.
 
$
203,200

 
3.5
%
 
1.0
%
 
A-/A1
Bank of America Corporation
 
190,088

 
3.3
%
 
1.0
%
 
A-/A3
Wells Fargo & Company
 
171,886

 
3.0
%
 
0.9
%
 
A/Aa3
Apple Inc.
 
164,486

 
2.9
%
 
0.8
%
 
AA+/Aa1
Citigroup Inc.
 
152,321

 
2.7
%
 
0.8
%
 
A/A2
Nestle S.A.
 
114,889

 
2.0
%
 
0.6
%
 
AA-/Aa2
Daimler AG
 
108,692

 
1.9
%
 
0.6
%
 
A/A2
Morgan Stanley
 
102,420

 
1.8
%
 
0.5
%
 
BBB+/A3
The Goldman Sachs Group, Inc.
 
94,379

 
1.6
%
 
0.5
%
 
BBB+/A3
Deere & Company
 
91,792

 
1.6
%
 
0.5
%
 
A/A2
Total
 
$
1,394,153

 
24.3
%
 
7.1
%
 
 
 
(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 December 31, 2018 (1):

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

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
488,862

 
$
13,313

 
$
1,830

 
$
89

 
$
178

 
$
31,491

 
$
535,763

Commercial mortgage-backed securities
 
104,547

 
563,541

 
7,264

 
11,113

 
20,947

 
22,030

 
729,442

Asset-backed securities
 
—

 
1,251,517

 
26,108

 
145,066

 
62,459

 
68,553

 
1,553,703

Total
 
$
593,409

 
$
1,828,371

 
$
35,202

 
$
156,268

 
$
83,584

 
$
122,074

 
$
2,818,908


(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 December 31, 2018 (1):
(U.S. Dollars in thousands)
 
 
 
Financial
 
Other
 
Bank
 
Equities
 
 
 
 
Sovereign (3)
 
Corporates
 
Corporates
 
Loans
 
and Other
 
Total
Country (2):
 
 

 
 

 
 

 
 

 
 

 
 

Germany
 
$
338,409

 
$
2,160

 
$
959

 
$
37,129

 
$
8,705

 
$
387,362

Netherlands
 
77,088

 
56,381

 
86,927

 
17,154

 
6,266

 
243,816

France
 
—

 
5,043

 
28,037

 
14,012

 
17,430

 
64,522

Luxembourg
 
—

 
9,591

 
1,267

 
12,555

 
—

 
23,413

Spain
 
—

 
196

 
1,128

 
—

 
8,144

 
9,468

Ireland
 
—

 
3,267

 
1,460

 
—

 
1,482

 
6,209

Finland
 
—

 
4,349

 
—

 
1,821

 
—

 
6,170

Italy
 
—

 
—

 
—

 
769

 
979

 
1,748

Austria
 
—

 
—

 
—

 
1,122

 
—

 
1,122

Portugal
 
—

 
—

 
—

 
—

 
897

 
897

Greece
 
74

 
—

 
—

 
—

 
496

 
570

Total
 
$
415,571

 
$
80,987

 
$
119,778

 
$
84,562

 
$
44,399

 
$
745,297

 
(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 December 31, 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 acquisitions and Watford Re’s non-recurring listing expenses. 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 September 2017 and 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. In addition, for the 2017 fourth quarter and year ended December 31, 2017, income tax expense included $21.5 million charge due to the revaluation of the Company’s net deferred tax asset resulting from the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Due to the non-recurring nature of this item, the Company excluded it from after-tax operating income 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 outstanding 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 outstanding common equity:
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Net income available to Arch common shareholders
 
$
126,091

 
$
217,006

 
$
233,243

 
$
137,276

 
$
203,535

 
$
713,616

 
$
566,502

Net realized (gains) losses
 
77,037

 
47,528

 
61,426

 
111,764

 
(36,906
)
 
297,755

 
(148,836
)
Net impairment losses recognized in earnings
 
1,705

 
492

 
470

 
162

 
1,723

 
2,829

 
7,138

Equity in net (income) loss of investment funds accounted for using the equity method
 
6,882

 
(15,982
)
 
(8,472
)
 
(28,069
)
 
(30,402
)
 
(45,641
)
 
(142,286
)
Net foreign exchange (gains) losses
 
(20,869
)
 
(7,539
)
 
(47,038
)
 
15,556

 
27,994

 
(59,890
)
 
113,613

Transaction costs and other
 
3,548

 
1,091

 
6,908

 
830

 
901

 
12,377

 
22,150

Loss on redemption of preferred shares
 
—

 
—

 
—

 
2,710

 
—

 
2,710

 
6,735

Income tax expense (benefit) (1)
 
(5,223
)
 
(316
)
 
(3,941
)
 
(5,086
)
 
20,559

 
(14,566
)
 
22,139

After-tax operating income available to Arch common shareholders
 
$
189,171

 
$
242,280

 
$
242,596

 
$
235,143

 
$
187,404

 
$
909,190

 
$
447,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per common share results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
0.31

 
$
0.53

 
$
0.56

 
$
0.33

 
$
0.49

 
$
1.73

 
$
1.36

Net realized (gains) losses
 
0.18

 
0.12

 
0.15

 
0.26

 
(0.09
)
 
0.72

 
(0.36
)
Net impairment losses recognized in earnings
 
0.00

 
0.00

 
0.00

 
0.00

 
0.00

 
0.01

 
0.02

Equity in net (income) loss of investment funds accounted for using the equity method
 
0.02

 
(0.04
)
 
(0.02
)
 
(0.07
)
 
(0.07
)
 
(0.11
)
 
(0.34
)
Net foreign exchange (gains) losses
 
(0.05
)
 
(0.02
)
 
(0.11
)
 
0.04

 
0.07

 
(0.15
)
 
0.27

Transaction costs and other
 
0.01

 
0.00

 
0.02

 
0.00

 
0.00

 
0.03

 
0.05

Loss on redemption of preferred shares
 
0.00

 
0.00

 
0.00

 
0.01

 
0.00

 
0.01

 
0.02

Income tax expense (benefit) (1)
 
(0.01
)
 
0.00

 
(0.01
)
 
(0.01
)
 
0.05

 
(0.04
)
 
0.05

After-tax operating income available to Arch common shareholders
 
$
0.46

 
$
0.59

 
$
0.59

 
$
0.56

 
$
0.45

 
$
2.20

 
$
1.07

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding - diluted
 
410,112,097

 
411,721,214

 
413,111,205

 
417,893,802

 
418,735,890

 
412,906,478

 
417,785,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning common shareholders’ equity
 
$
8,575,148

 
$
8,383,755

 
$
8,370,372

 
$
8,324,047

 
$
8,138,589

 
$
8,324,047

 
$
7,481,163

Ending common shareholders’ equity
 
8,659,827

 
8,575,148

 
8,383,755

 
8,370,372

 
8,324,047

 
8,659,827

 
8,324,047

Average common shareholders’ equity
 
$
8,617,488

 
$
8,479,452

 
$
8,377,064

 
$
8,347,210

 
$
8,231,318

 
$
8,491,937

 
$
7,902,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
5.9
%
 
10.2
%
 
11.1
%
 
6.6
%
 
9.9
%
 
8.4
%
 
7.2
%
Annualized operating return on average common equity
 
8.8
%
 
11.4
%
 
11.6
%
 
11.3
%
 
9.1
%
 
10.7
%
 
5.7
%

(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.



 
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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Arch Operating Income Components (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
182,007

 
$
258,686

 
$
266,283

 
$
170,928

 
$
273,611

 
$
877,904

 
$
747,804

Net realized (gains) losses
 
66,015

 
47,010

 
59,545

 
111,859

 
(38,136
)
 
284,429

 
(148,798
)
Net impairment losses recognized in earnings
 
1,705

 
492

 
470

 
162

 
1,723

 
2,829

 
7,138

Equity in net (income) loss of investment funds accounted for using the equity method
 
6,882

 
(15,982
)
 
(8,472
)
 
(28,069
)
 
(30,402
)
 
(45,641
)
 
(142,286
)
Net foreign exchange (gains) losses
 
(20,409
)
 
(7,130
)
 
(46,211
)
 
15,039

 
27,894

 
(58,711
)
 
113,345

Transaction costs and other
 
2,557

 
1,091

 
6,908

 
830

 
901

 
11,386

 
22,150

Pre-tax operating income
 
238,757

 
284,167

 
278,523

 
270,749

 
235,591

 
1,072,196

 
599,353

Arch share of ‘other’ segment operating income (loss) (2)
 
1,053

 
2,187

 
2,062

 
1,831

 
(829
)
 
7,133

 
(747
)
Pre-tax operating income available to Arch (b)
 
239,810

 
286,354

 
280,585

 
272,580

 
234,762

 
1,079,329

 
598,606

Income tax expense (a)
 
(40,236
)
 
(33,672
)
 
(27,586
)
 
(27,000
)
 
(36,253
)
 
(128,494
)
 
(105,410
)
After-tax operating income available to Arch
 
199,574

 
252,682

 
252,999

 
245,580

 
198,509

 
950,835

 
493,196

Preferred dividends
 
(10,403
)
 
(10,402
)
 
(10,403
)
 
(10,437
)
 
(11,105
)
 
(41,645
)
 
(46,041
)
After-tax operating income available to Arch common shareholders
 
$
189,171

 
$
242,280

 
$
242,596

 
$
235,143

 
$
187,404

 
$
909,190

 
$
447,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
 
16.8
%
 
11.8
%
 
9.8
%
 
9.9
%
 
15.4
%
 
11.9
%
 
17.6
%

(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
 
Years Ended
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
 
2017
Balances in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
(22,031
)
 
$
(209
)
 
$
(318
)
 
$
(560
)
 
$
(23,901
)
 
$
(23,118
)
 
$
(63,394
)
Net investment income
 
41,591

 
29,696

 
27,907

 
26,481

 
25,802

 
125,675

 
88,800

Interest expense
 
(5,386
)
 
(5,064
)
 
(4,286
)
 
(4,729
)
 
(4,836
)
 
(19,465
)
 
(13,839
)
Preferred dividends
 
(4,588
)
 
(4,599
)
 
(4,585
)
 
(4,585
)
 
(4,588
)
 
(18,357
)
 
(18,344
)
Pre-tax operating income (loss) available to common shareholders
 
9,586

 
19,824

 
18,718

 
16,607

 
(7,523
)
 
64,735

 
(6,777
)
Arch ownership
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
Arch share of ‘Other’ segment operating income (loss) (3)
 
$
1,053

 
$
2,187

 
$
2,062

 
$
1,831

 
$
(829
)
 
$
7,133

 
$
(747
)

(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)
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
Debt:
 
 
 
 
 
 
 
 
 
 
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)
 
$
300,000

 
$
300,000

 
$
300,000

 
$
300,000

 
$
300,000

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

 
500,000

 
500,000

 
500,000

 
500,000

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

 
500,000

 
500,000

 
500,000

 
500,000

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

 
450,000

 
450,000

 
450,000

 
450,000

Deferred debt costs on senior notes
 
(16,472
)
 
(16,636
)
 
(16,789
)
 
(16,957
)
 
(17,116
)
Revolving credit agreement borrowings, due October 26, 2021 (variable)
 
—

 
125,000

 
125,000

 
375,000

 
375,000

Total debt
 
$
1,733,528

 
$
1,858,364

 
$
1,858,211

 
$
2,108,043

 
$
2,107,884

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

 
$
—

 
$
—

 
$
—

 
$
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

 
330,000

Common shareholders’ equity (a)
 
8,659,827

 
8,575,148

 
8,383,755

 
8,370,372

 
8,324,047

Total shareholders’ equity available to Arch
 
$
9,439,827

 
$
9,355,148

 
$
9,163,755

 
$
9,150,372

 
$
9,196,602

 
 
 
 
 
 
 
 
 
 
 
Total capital available to Arch
 
$
11,173,355

 
$
11,213,512

 
$
11,021,966

 
$
11,258,415

 
$
11,304,486

 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, net of treasury shares (b)
 
402,454,834

 
405,524,360

 
405,436,637

 
410,047,266

 
409,956,417

 
 
 
 
 
 
 
 
 
 
 
Book value per common share (4) (a)/(b)
 
$
21.52

 
$
21.15

 
$
20.68

 
$
20.41

 
$
20.30

 
 
 
 
 
 
 
 
 
 
 
Leverage ratios:
 
 
 
 
 
 
 
 
 
 
Senior notes/total capital available to Arch
 
15.5
%
 
15.5
%
 
15.7
%
 
15.4
%
 
15.3
%
Revolving credit agreement borrowings/total capital available to Arch
 
—
%
 
1.1
%
 
1.1
%
 
3.3
%
 
3.3
%
Debt/total capital available to Arch
 
15.5
%
 
16.6
%
 
16.9
%
 
18.7
%
 
18.6
%
Preferred/total capital available to Arch
 
7.0
%
 
7.0
%
 
7.1
%
 
6.9
%
 
7.7
%
Debt and preferred/total capital available to Arch
 
22.5
%
 
23.5
%
 
23.9
%
 
25.7
%
 
26.4
%

(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
 
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
December 31,
 
 
2018
 
2018
 
2018
 
2018
 
2017
 
2018
Effect of share repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate cost of shares repurchased
 
$
98,233

 
$
10,954

 
$
170,276

 
$
3,299

 
$
—

 
$
3,965,423

Shares repurchased
 
3,623,534

 
413,671

 
6,404,430

 
118,215

 
—

 
386,231,382

Average price per share repurchased
 
$
27.11

 
$
26.48

 
$
26.59

 
$
27.91

 
$
—

 
$
10.27

 
 
 
 
 
 
 
 
 
 
 
 
 
Remaining share repurchase authorization (1)
 
 
 
 
 
 
 
 
 
 
 
$
163,739

 
(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