ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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Page No.
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March 31, 2018 (unaudited) and December 31, 2017
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For the three month periods ended March 31, 2018 and 2017 (unaudited)
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For the three month periods ended March 31, 2018 and 2017 (unaudited)
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For the three month periods ended March 31, 2018 and 2017 (unaudited)
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For the three month periods ended March 31, 2018 and 2017 (unaudited)
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Notes to Consolidated Financial Statements (unaudited)
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ARCH CAPITAL
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4
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2018 FIRST QUARTER FORM 10-Q
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Arch Capital Group Ltd.:
Results of Review of Financial Statements
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries as of
March 31, 2018
, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended
March 31, 2018
and
March 31,
2017
including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31,
2017
, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31,
2017
, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
New York, NY
May 9, 2018
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ARCH CAPITAL
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5
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2018 FIRST QUARTER FORM 10-Q
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
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(Unaudited)
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March 31,
2018
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December 31,
2017
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Assets
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Investments:
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Fixed maturities available for sale, at fair value (amortized cost: $14,469,013 and $13,869,460)
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$
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14,348,941
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$
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13,876,003
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Short-term investments available for sale, at fair value (amortized cost: $966,722 and $1,468,955)
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967,389
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1,469,042
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Collateral received under securities lending, at fair value (amortized cost: $367,034 and $476,605)
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367,043
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476,615
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Equity securities, at fair value
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543,650
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495,804
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Other investments available for sale, at fair value (cost: $0 and $198,163)
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—
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264,989
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Investments accounted for using the fair value option
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4,119,139
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4,216,237
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Investments accounted for using the equity method
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1,394,548
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1,041,322
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Total investments
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21,740,710
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21,840,012
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Cash
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680,891
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606,199
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Accrued investment income
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106,114
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113,133
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Securities pledged under securities lending, at fair value (amortized cost: $356,518 and $463,181)
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358,152
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464,917
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Premiums receivable
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1,375,080
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1,135,249
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Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
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2,510,119
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2,540,143
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Contractholder receivables
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2,002,469
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1,978,414
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Ceded unearned premiums
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996,772
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926,611
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Deferred acquisition costs
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596,264
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535,824
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Receivable for securities sold
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217,224
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205,536
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Goodwill and intangible assets
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626,004
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652,611
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Other assets
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922,156
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1,053,009
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Total assets
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$
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32,131,955
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$
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32,051,658
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Liabilities
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Reserve for losses and loss adjustment expenses
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$
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11,496,205
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$
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11,383,792
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Unearned premiums
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3,885,297
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3,622,314
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Reinsurance balances payable
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379,728
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323,496
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Contractholder payables
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2,002,469
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1,978,414
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Collateral held for insured obligations
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253,709
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240,183
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Senior notes
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1,733,043
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1,732,884
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Revolving credit agreement borrowings
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755,294
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816,132
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Securities lending payable
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367,034
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476,605
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Payable for securities purchased
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282,731
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449,186
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Other liabilities
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765,948
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782,717
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Total liabilities
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21,921,458
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21,805,723
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Commitments and Contingencies
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Redeemable noncontrolling interests
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206,013
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205,922
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Shareholders' Equity
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Non-cumulative preferred shares
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780,000
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872,555
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Convertible non-voting common equivalent preferred shares
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—
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489,627
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Common shares ($0.0033 par, shares issued: 189,070,234 and 183,290,742)
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630
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611
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Additional paid-in capital
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1,737,978
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1,230,617
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Retained earnings
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8,849,959
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8,562,889
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Accumulated other comprehensive income (loss), net of deferred income tax
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(134,009
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118,044
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Common shares held in treasury, at cost (shares: 52,387,812 and 52,312,803)
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(2,084,186
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(2,077,741
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Total shareholders' equity available to Arch
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9,150,372
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9,196,602
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Non-redeemable noncontrolling interests
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854,112
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843,411
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Total shareholders' equity
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10,004,484
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10,040,013
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Total liabilities, noncontrolling interests and shareholders' equity
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$
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32,131,955
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$
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32,051,658
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See Notes to Consolidated Financial Statements
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ARCH CAPITAL
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6
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2018 FIRST QUARTER FORM 10-Q
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
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(Unaudited)
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Three Months Ended
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March 31,
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2018
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2017
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Revenues
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Net premiums written
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$
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1,412,544
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$
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1,276,260
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Change in unearned premiums
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(177,645
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)
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(159,243
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)
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Net premiums earned
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1,234,899
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1,117,017
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Net investment income
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126,724
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117,874
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Net realized gains (losses)
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(110,998
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)
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34,153
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Other-than-temporary impairment losses
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(162
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)
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(1,807
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)
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Less investment impairments recognized in other comprehensive income, before taxes
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—
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—
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Net impairment losses recognized in earnings
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(162
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(1,807
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)
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Other underwriting income
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5,349
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4,633
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Equity in net income (loss) of investment funds accounted for using the equity method
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28,069
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48,088
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Other income (loss)
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74
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(782
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)
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Total revenues
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1,283,955
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1,319,176
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Expenses
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Losses and loss adjustment expenses
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636,860
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552,570
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Acquisition expenses
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191,376
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182,289
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Other operating expenses
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175,015
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174,719
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Corporate expenses
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15,312
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27,792
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Amortization of intangible assets
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26,736
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31,294
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Interest expense
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30,636
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28,676
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Net foreign exchange losses (gains)
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19,721
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19,404
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Total expenses
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1,095,656
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1,016,744
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Income before income taxes
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188,299
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302,432
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Income tax expense
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(21,915
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)
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(28,397
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)
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Net income
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$
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166,384
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$
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274,035
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Net (income) loss attributable to noncontrolling interests
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(15,961
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)
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(20,908
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)
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Net income available to Arch
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150,423
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253,127
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Preferred dividends
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(10,437
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)
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(11,218
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)
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Loss on redemption of preferred shares
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(2,710
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)
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—
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Net income available to Arch common shareholders
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$
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137,276
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$
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241,909
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Net income per common share and common share equivalent
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Basic
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$
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1.01
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$
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1.80
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Diluted
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$
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0.99
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$
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1.74
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Weighted average common shares and common share equivalents outstanding
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Basic
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135,846,576
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134,034,927
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Diluted
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139,297,934
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139,047,672
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See Notes to Consolidated Financial Statements
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ARCH CAPITAL
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7
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2018 FIRST QUARTER FORM 10-Q
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
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(Unaudited)
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Three Months Ended
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March 31,
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2018
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2017
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Comprehensive Income
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Net income
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$
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166,384
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$
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274,035
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Other comprehensive income (loss), net of deferred income tax
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Unrealized appreciation (decline) in value of available-for-sale investments:
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Unrealized holding gains (losses) arising during period
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(166,677
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)
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100,792
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Reclassification of net realized (gains) losses, net of income taxes, included in net income
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62,461
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(5,044
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)
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Foreign currency translation adjustments
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1,282
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3,124
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Comprehensive income
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63,450
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372,907
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Net (income) loss attributable to noncontrolling interests
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(15,961
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)
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(20,908
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)
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Foreign currency translation adjustments attributable to noncontrolling interests
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673
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(8
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)
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Comprehensive income available to Arch
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$
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48,162
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$
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351,991
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See Notes to Consolidated Financial Statements
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ARCH CAPITAL
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8
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2018 FIRST QUARTER FORM 10-Q
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
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(Unaudited)
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Three Months Ended
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March 31,
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2018
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2017
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Non-cumulative preferred shares
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Balance at beginning of year
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$
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872,555
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$
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772,555
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Preferred shares redeemed
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(92,555
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)
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—
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Balance at end of period
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780,000
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|
772,555
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Convertible non-voting common equivalent preferred shares
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Balance at beginning of year
|
489,627
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|
1,101,304
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Preferred shares converted to common shares
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(489,627
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)
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—
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Balance at end of period
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—
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1,101,304
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Common shares
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Balance at beginning of year
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611
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|
582
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Common shares issued, net
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19
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1
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Balance at end of period
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630
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|
583
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Additional paid-in capital
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Balance at beginning of year
|
1,230,617
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|
531,687
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|
Preferred shares converted to common shares
|
489,608
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|
|
—
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Reversal of issue costs on preferred shares redeemed
|
2,710
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|
|
—
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All other
|
15,043
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|
|
16,366
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|
Balance at end of period
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1,737,978
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|
548,053
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|
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Retained earnings
|
|
|
|
|
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Balance at beginning of year
|
8,562,889
|
|
|
7,996,701
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Cumulative effect of an accounting change (see Note 2)
|
149,794
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|
|
(314
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)
|
Balance at beginning of year, as adjusted
|
8,712,683
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|
|
7,996,387
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|
Net income
|
166,384
|
|
|
274,035
|
|
Net (income) loss attributable to noncontrolling interests
|
(15,961
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)
|
|
(20,908
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)
|
Preferred share dividends
|
(10,437
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)
|
|
(11,218
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)
|
Loss on redemption of preferred shares
|
(2,710
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)
|
|
—
|
|
Balance at end of period
|
8,849,959
|
|
|
8,238,296
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of deferred income tax
|
|
|
|
Balance at beginning of year
|
118,044
|
|
|
(114,541
|
)
|
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
|
|
|
|
Balance at beginning of year
|
157,400
|
|
|
(27,641
|
)
|
Cumulative effect of an accounting change (see Note 2)
|
(149,794
|
)
|
|
—
|
|
Balance at beginning of year, as adjusted
|
7,606
|
|
|
(27,641
|
)
|
Unrealized holding gains (losses) arising during period, net of reclassification adjustment
|
(104,216
|
)
|
|
95,748
|
|
Unrealized holding gains (losses) arising during period attributable to noncontrolling interests
|
372
|
|
|
—
|
|
Balance at end of period
|
(96,238
|
)
|
|
68,107
|
|
Foreign currency translation adjustments, net of deferred income tax:
|
|
|
|
Balance at beginning of year
|
(39,356
|
)
|
|
(86,900
|
)
|
Foreign currency translation adjustments
|
1,282
|
|
|
3,124
|
|
Foreign currency translation adjustments attributable to noncontrolling interests
|
303
|
|
|
(8
|
)
|
Balance at end of period
|
(37,771
|
)
|
|
(83,784
|
)
|
Balance at end of period
|
(134,009
|
)
|
|
(15,677
|
)
|
|
|
|
|
Common shares held in treasury, at cost
|
|
|
|
Balance at beginning of year
|
(2,077,741
|
)
|
|
(2,034,570
|
)
|
Shares repurchased for treasury
|
(6,445
|
)
|
|
(4,700
|
)
|
Balance at end of period
|
(2,084,186
|
)
|
|
(2,039,270
|
)
|
|
|
|
|
Total shareholders’ equity available to Arch
|
9,150,372
|
|
|
8,605,844
|
|
Non-redeemable noncontrolling interests
|
854,112
|
|
|
868,186
|
|
Total shareholders’ equity
|
$
|
10,004,484
|
|
|
$
|
9,474,030
|
|
See Notes to Consolidated Financial Statements
|
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ARCH CAPITAL
|
9
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Three Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Operating Activities
|
|
|
|
|
|
Net income
|
$
|
166,384
|
|
|
$
|
274,035
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Net realized (gains) losses
|
101,995
|
|
|
(40,855
|
)
|
Net impairment losses recognized in earnings
|
162
|
|
|
1,807
|
|
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
|
(19,383
|
)
|
|
(36,141
|
)
|
Amortization of intangible assets
|
26,736
|
|
|
31,294
|
|
Share-based compensation
|
14,664
|
|
|
15,657
|
|
Changes in:
|
|
|
|
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable
|
86,319
|
|
|
53,027
|
|
Unearned premiums, net of ceded unearned premiums
|
177,645
|
|
|
159,243
|
|
Premiums receivable
|
(233,772
|
)
|
|
(176,350
|
)
|
Deferred acquisition costs
|
(30,347
|
)
|
|
(41,728
|
)
|
Reinsurance balances payable
|
53,634
|
|
|
20,114
|
|
Other items, net
|
56,143
|
|
|
(76,445
|
)
|
Net cash provided by operating activities
|
400,180
|
|
|
183,658
|
|
Investing Activities
|
|
|
|
|
|
Purchases of fixed maturity investments
|
(9,681,267
|
)
|
|
(10,476,918
|
)
|
Purchases of equity securities
|
(377,000
|
)
|
|
(143,833
|
)
|
Purchases of other investments
|
(522,454
|
)
|
|
(427,039
|
)
|
Proceeds from sales of fixed maturity investments
|
8,679,147
|
|
|
10,386,746
|
|
Proceeds from sales of equity securities
|
291,311
|
|
|
253,347
|
|
Proceeds from sales, redemptions and maturities of other investments
|
436,566
|
|
|
317,518
|
|
Proceeds from redemptions and maturities of fixed maturity investments
|
287,031
|
|
|
174,718
|
|
Net settlements of derivative instruments
|
36,070
|
|
|
(3,921
|
)
|
Net (purchases) sales of short-term investments
|
595,318
|
|
|
(397,851
|
)
|
Change in cash collateral related to securities lending
|
161,567
|
|
|
180,946
|
|
Purchases of fixed assets
|
(4,240
|
)
|
|
(5,194
|
)
|
Other
|
40,037
|
|
|
23,068
|
|
Net cash provided by (used for) investing activities
|
(57,914
|
)
|
|
(118,413
|
)
|
Financing Activities
|
|
|
|
|
|
Redemption of preferred shares
|
(92,555
|
)
|
|
—
|
|
Purchases of common shares under share repurchase program
|
(3,299
|
)
|
|
—
|
|
Proceeds from common shares issued, net
|
(2,779
|
)
|
|
(3,990
|
)
|
Proceeds from borrowings
|
39,585
|
|
|
—
|
|
Repayments of borrowings
|
(101,000
|
)
|
|
(22,000
|
)
|
Change in cash collateral related to securities lending
|
(161,567
|
)
|
|
(180,946
|
)
|
Dividends paid to redeemable noncontrolling interests
|
(4,497
|
)
|
|
(4,497
|
)
|
Other
|
(2,356
|
)
|
|
(5,018
|
)
|
Preferred dividends paid
|
(10,437
|
)
|
|
(11,218
|
)
|
Net cash provided by (used for) financing activities
|
(338,905
|
)
|
|
(227,669
|
)
|
|
|
|
|
Effects of exchange rate changes on foreign currency cash and restricted cash
|
1,611
|
|
|
2,618
|
|
|
|
|
|
Increase (decrease) in cash and restricted cash
|
4,972
|
|
|
(159,806
|
)
|
Cash and restricted cash, beginning of year
|
727,284
|
|
|
969,569
|
|
Cash and restricted cash, end of period
|
$
|
732,256
|
|
|
$
|
809,763
|
|
|
|
|
|
Reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
|
March 31,
2018
|
|
December 31,
2017
|
Cash
|
$
|
680,891
|
|
|
$
|
606,199
|
|
Restricted cash (included in ‘other assets’)
|
$
|
51,365
|
|
|
$
|
121,085
|
|
Cash and restricted cash
|
$
|
732,256
|
|
|
$
|
727,284
|
|
See Notes to Consolidated Financial Statements
|
|
|
|
ARCH CAPITAL
|
10
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1
. General
Arch Capital Group Ltd. (“Arch Capital”) is a Bermuda public limited liability company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries. See Note
3
.
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31,
2017
(“2017 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2
. Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities,” which enhances the
reporting model for financial instruments and provides improved financial information to readers of the financial statements. Among other provisions focused on improving the recognition and measurement of financial instruments, the ASU significantly changes the income statement impact of equity instruments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with any changes in fair value recognized in net income rather than other comprehensive income. Upon adoption of this ASU, the Company recorded a cumulative effect adjustment of
$149.8 million
in retained earnings and an offsetting decrease in accumulated other comprehensive income. The adoption of this ASU did not have a material impact on the Company's financial position, cash flows, or total comprehensive income, but may increase volatility in the Company's results of operations in future periods.
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which creates a new comprehensive revenue recognition standard that serves as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts or financial instruments. The ASU also requires enhanced disclosures about revenue. The Company adopted the ASU using the modified retrospective method, whereby the cumulative effect of adoption was recognized as an adjustment to retained earnings at the date of initial application. The impact of the adoption of this ASU was not material, mostly because the accounting for insurance contracts is outside of the scope of ASU 2014-09.
The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” which
requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. As a result, transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. The revised presentation required in this ASU is reflected in the Company’s consolidated statements of cash flows for both periods presented. The adoption of this ASU did not have any effect on the Company’s results of operations, financial position or comprehensive income.
Recently Issued Accounting Standards Not Yet Adopted
For
information regarding accounting standards that the Company has not yet adopted, see note 3(q), “Significant
|
|
|
|
ARCH CAPITAL
|
11
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2017 Form 10-K.
|
|
3
.
|
Variable Interest Entities and Noncontrolling Interests
|
A variable interest entity (“VIE”) refers to an entity that has characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have characteristics of a controlling financial interest. The primary beneficiary of a VIE is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. If a company is determined to be the primary beneficiary, it is required to consolidate the VIE in its financial statements.
Watford Holdings Ltd.
In March 2014, the Company invested
$100.0 million
and acquired approximately
11%
of Watford Holdings Ltd.’s common equity and a warrant to purchase additional common equity. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford Re”). Watford Re is considered a VIE and the Company concluded that it is the primary beneficiary of Watford Re. As such, the results of Watford Re are included in the Company’s consolidated financial statements.
The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.
The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford Re are reported:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Assets
|
|
|
|
Investments accounted for using the fair value option
|
$
|
2,331,393
|
|
|
$
|
2,426,066
|
|
Fixed maturities available for sale, at fair value
|
203,176
|
|
|
—
|
|
Cash
|
54,053
|
|
|
54,503
|
|
Accrued investment income
|
16,831
|
|
|
18,261
|
|
Premiums receivable
|
242,116
|
|
|
177,492
|
|
Reinsurance recoverable on unpaid and paid losses and LAE
|
47,289
|
|
|
42,777
|
|
Ceded unearned premiums
|
45,111
|
|
|
24,762
|
|
Deferred acquisition costs
|
92,699
|
|
|
85,961
|
|
Receivable for securities sold
|
47,568
|
|
|
36,374
|
|
Goodwill and intangible assets
|
7,650
|
|
|
7,650
|
|
Other assets
|
63,143
|
|
|
140,808
|
|
Total assets of consolidated VIE
|
$
|
3,151,029
|
|
|
$
|
3,014,654
|
|
|
|
|
|
Liabilities
|
|
|
|
Reserves for losses and loss adjustment expenses
|
$
|
852,828
|
|
|
$
|
798,262
|
|
Unearned premiums
|
395,605
|
|
|
330,644
|
|
Reinsurance balances payable
|
26,340
|
|
|
18,424
|
|
Revolving credit agreement borrowings
|
380,294
|
|
|
441,132
|
|
Payable for securities purchased
|
79,786
|
|
|
42,501
|
|
Other liabilities
|
235,554
|
|
|
215,186
|
|
Total liabilities of consolidated VIE
|
$
|
1,970,407
|
|
|
$
|
1,846,149
|
|
|
|
|
|
Redeemable noncontrolling interests
|
$
|
220,713
|
|
|
$
|
220,622
|
|
For the
three months ended March 31, 2018
, Watford Re generated
$30.2 million
of cash
provided by
operating activities,
$35.4 million
of cash
used for
investing activities and
$66.2 million
of cash
used for
financing activities, compared to
$62.2 million
of cash
provided by
operating activities,
$58.8 million
of cash
used for
investing activities and
$29.0 million
of cash
used for
financing activities for the
three months ended March 31, 2017
.
Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford Re’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford Re’s common shares was approximately
89%
at
March 31, 2018
. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
|
|
|
|
ARCH CAPITAL
|
12
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table sets forth activity in the non-redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Balance, beginning of period
|
$
|
843,411
|
|
|
$
|
851,854
|
|
Amounts attributable to noncontrolling interests
|
11,376
|
|
|
16,324
|
|
Foreign currency translation adjustments
|
(675
|
)
|
|
8
|
|
Balance, end of period
|
$
|
854,112
|
|
|
$
|
868,186
|
|
Redeemable noncontrolling interests
The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests relate to the
9,065,200
cumulative redeemable preference shares (“Watford Preference Shares”) issued in March 2014 with a par value of
$0.01
per share and a liquidation preference of
$25.00
per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
The following table sets forth activity in the redeemable non-controlling interests:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Balance, beginning of period
|
$
|
205,922
|
|
|
$
|
205,553
|
|
Accretion of preference share issuance costs
|
91
|
|
|
91
|
|
Balance, end of period
|
$
|
206,013
|
|
|
$
|
205,644
|
|
The portion of Watford Re’s income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Amounts attributable to non-redeemable noncontrolling interests
|
$
|
(11,376
|
)
|
|
$
|
(16,324
|
)
|
Dividends attributable to redeemable noncontrolling interests
|
(4,585
|
)
|
|
(4,584
|
)
|
Net (income) loss attributable to noncontrolling interests
|
$
|
(15,961
|
)
|
|
$
|
(20,908
|
)
|
Bellemeade Re
The Company has entered into various aggregate excess of loss reinsurance agreements with Bellemeade Re I Ltd. (July 2015), with Bellemeade Re II Ltd. (May 2016) and with Bellemeade 2017-1 Ltd. (October 2017) (the “Bellemeade Agreements”),
special purpose reinsurance companies domiciled in Bermuda. At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that Bellemeade Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd. are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to the economic performance of Bellemeade Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd., the Company does not consolidate such companies in its consolidated financial statements.
The following table presents total assets of Bellemeade Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd., as well as the Company’s maximum exposure to loss associated with these VIEs as of
March 31, 2018
and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Exposure to Loss
|
|
Total VIE Assets
|
|
On-Balance Sheet
|
|
Off-Balance Sheet
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
Bellemeade Re I Ltd.
|
$
|
79,372
|
|
|
$
|
360
|
|
|
$
|
610
|
|
|
$
|
970
|
|
Bellemeade Re II Ltd.
|
100,871
|
|
|
72
|
|
|
278
|
|
|
350
|
|
Bellemeade 2017-1 Ltd.
|
336,343
|
|
|
519
|
|
|
1,979
|
|
|
2,498
|
|
Total
|
$
|
516,586
|
|
|
$
|
951
|
|
|
$
|
2,867
|
|
|
$
|
3,818
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Bellemeade Re I Ltd.
|
$
|
92,390
|
|
|
$
|
471
|
|
|
$
|
832
|
|
|
$
|
1,303
|
|
Bellemeade Re II Ltd.
|
135,201
|
|
|
20
|
|
|
527
|
|
|
547
|
|
Bellemeade 2017-1 Ltd.
|
347,139
|
|
|
391
|
|
|
1,867
|
|
|
2,258
|
|
Total
|
$
|
574,730
|
|
|
$
|
882
|
|
|
$
|
3,226
|
|
|
$
|
4,108
|
|
See note
16
, “Subsequent Events.”
|
|
|
|
ARCH CAPITAL
|
13
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4
. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income
|
$
|
166,384
|
|
|
$
|
274,035
|
|
Amounts attributable to noncontrolling interests
|
(15,961
|
)
|
|
(20,908
|
)
|
Net income available to Arch
|
150,423
|
|
|
253,127
|
|
Preferred dividends
|
(10,437
|
)
|
|
(11,218
|
)
|
Loss on redemption of preferred shares
|
(2,710
|
)
|
|
—
|
|
Net income available to Arch common shareholders
|
$
|
137,276
|
|
|
$
|
241,909
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted average common shares outstanding
|
131,370,263
|
|
|
121,272,107
|
|
Series D preferred shares (1)
|
4,476,313
|
|
|
12,762,820
|
|
Weighted average common shares and common share equivalents outstanding — basic
|
135,846,576
|
|
|
134,034,927
|
|
Effect of dilutive common share equivalents:
|
|
|
|
Nonvested restricted shares
|
719,859
|
|
|
1,646,555
|
|
Stock options (2)
|
2,731,499
|
|
|
3,366,190
|
|
Weighted average common shares and common share equivalents outstanding — diluted
|
139,297,934
|
|
|
139,047,672
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
Basic
|
$
|
1.01
|
|
|
$
|
1.80
|
|
Diluted
|
$
|
0.99
|
|
|
$
|
1.74
|
|
|
|
(1)
|
Such shares are convertible non-voting common equivalent preferred shares issued in connection with the UGC acquisition. See Note
11
.
|
|
|
(2)
|
Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the
2018 first quarter
and
2017 first quarter
, the number of stock options excluded were
1,056,262
and
263,475
, respectively.
|
|
|
|
|
ARCH CAPITAL
|
14
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5
. Segment Information
The Company classifies its businesses into
three
underwriting segments — insurance, reinsurance and mortgage — and
two
other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the 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 underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the 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 Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, UGC transaction costs and other, 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.
The ‘other’ segment includes the results of Watford Re (see Note
3
). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.
|
|
|
|
ARCH CAPITAL
|
15
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
Insurance
|
|
Reinsurance
|
|
Mortgage
|
|
Sub-Total
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
$
|
823,378
|
|
|
$
|
577,483
|
|
|
$
|
321,178
|
|
|
$
|
1,721,605
|
|
|
$
|
213,870
|
|
|
$
|
1,838,214
|
|
Premiums ceded
|
(247,180
|
)
|
|
(195,730
|
)
|
|
(46,137
|
)
|
|
(488,613
|
)
|
|
(34,318
|
)
|
|
(425,670
|
)
|
Net premiums written
|
576,198
|
|
|
381,753
|
|
|
275,041
|
|
|
1,232,992
|
|
|
179,552
|
|
|
1,412,544
|
|
Change in unearned premiums
|
(37,461
|
)
|
|
(102,581
|
)
|
|
5,201
|
|
|
(134,841
|
)
|
|
(42,804
|
)
|
|
(177,645
|
)
|
Net premiums earned
|
538,737
|
|
|
279,172
|
|
|
280,242
|
|
|
1,098,151
|
|
|
136,748
|
|
|
1,234,899
|
|
Other underwriting income (loss)
|
—
|
|
|
1,232
|
|
|
3,416
|
|
|
4,648
|
|
|
701
|
|
|
5,349
|
|
Losses and loss adjustment expenses
|
(353,730
|
)
|
|
(141,675
|
)
|
|
(43,466
|
)
|
|
(538,871
|
)
|
|
(97,989
|
)
|
|
(636,860
|
)
|
Acquisition expenses
|
(85,169
|
)
|
|
(48,319
|
)
|
|
(26,567
|
)
|
|
(160,055
|
)
|
|
(31,321
|
)
|
|
(191,376
|
)
|
Other operating expenses
|
(91,974
|
)
|
|
(35,571
|
)
|
|
(38,771
|
)
|
|
(166,316
|
)
|
|
(8,699
|
)
|
|
(175,015
|
)
|
Underwriting income (loss)
|
$
|
7,864
|
|
|
$
|
54,839
|
|
|
$
|
174,854
|
|
|
237,557
|
|
|
(560
|
)
|
|
236,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
100,243
|
|
|
26,481
|
|
|
126,724
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
(111,859
|
)
|
|
861
|
|
|
(110,998
|
)
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
|
(162
|
)
|
|
—
|
|
|
(162
|
)
|
Equity in net income (loss) of investment funds accounted for using the equity method
|
|
|
|
|
|
|
28,069
|
|
|
—
|
|
|
28,069
|
|
Other income (loss)
|
|
|
|
|
|
|
74
|
|
|
—
|
|
|
74
|
|
Corporate expenses (2)
|
|
|
|
|
|
|
(14,482
|
)
|
|
—
|
|
|
(14,482
|
)
|
UGC transaction costs and other (2)
|
|
|
|
|
|
|
(830
|
)
|
|
—
|
|
|
(830
|
)
|
Amortization of intangible assets
|
|
|
|
|
|
|
(26,736
|
)
|
|
—
|
|
|
(26,736
|
)
|
Interest expense
|
|
|
|
|
|
|
(25,907
|
)
|
|
(4,729
|
)
|
|
(30,636
|
)
|
Net foreign exchange gains (losses)
|
|
|
|
|
|
|
(15,039
|
)
|
|
(4,682
|
)
|
|
(19,721
|
)
|
Income before income taxes
|
|
|
|
|
|
|
170,928
|
|
|
17,371
|
|
|
188,299
|
|
Income tax expense
|
|
|
|
|
|
|
(21,912
|
)
|
|
(3
|
)
|
|
(21,915
|
)
|
Net income
|
|
|
|
|
|
|
149,016
|
|
|
17,368
|
|
|
166,384
|
|
Dividends attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
—
|
|
|
(4,585
|
)
|
|
(4,585
|
)
|
Amounts attributable to nonredeemable noncontrolling interests
|
|
|
|
|
|
|
—
|
|
|
(11,376
|
)
|
|
(11,376
|
)
|
Net income available to Arch
|
|
|
|
|
|
|
149,016
|
|
|
1,407
|
|
|
150,423
|
|
Preferred dividends
|
|
|
|
|
|
|
(10,437
|
)
|
|
—
|
|
|
(10,437
|
)
|
Loss on redemption of preferred shares
|
|
|
|
|
|
|
(2,710
|
)
|
|
—
|
|
|
(2,710
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
|
|
$
|
135,869
|
|
|
$
|
1,407
|
|
|
$
|
137,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
65.7
|
%
|
|
50.7
|
%
|
|
15.5
|
%
|
|
49.1
|
%
|
|
71.7
|
%
|
|
51.6
|
%
|
Acquisition expense ratio
|
15.8
|
%
|
|
17.3
|
%
|
|
9.5
|
%
|
|
14.6
|
%
|
|
22.9
|
%
|
|
15.5
|
%
|
Other operating expense ratio
|
17.1
|
%
|
|
12.7
|
%
|
|
13.8
|
%
|
|
15.1
|
%
|
|
6.4
|
%
|
|
14.2
|
%
|
Combined ratio
|
98.6
|
%
|
|
80.7
|
%
|
|
38.8
|
%
|
|
78.8
|
%
|
|
101.0
|
%
|
|
81.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
$
|
21,664
|
|
|
$
|
—
|
|
|
$
|
596,690
|
|
|
$
|
618,354
|
|
|
$
|
7,650
|
|
|
$
|
626,004
|
|
|
|
(1)
|
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
|
|
|
(2)
|
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of the presentation of such items.
|
|
|
|
|
ARCH CAPITAL
|
16
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
Insurance
|
|
Reinsurance
|
|
Mortgage
|
|
Sub-Total
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
$
|
782,281
|
|
|
$
|
475,782
|
|
|
$
|
348,623
|
|
|
$
|
1,606,686
|
|
|
$
|
154,120
|
|
|
$
|
1,657,990
|
|
Premiums ceded
|
(234,095
|
)
|
|
(166,092
|
)
|
|
(73,925
|
)
|
|
(474,112
|
)
|
|
(10,434
|
)
|
|
(381,730
|
)
|
Net premiums written
|
548,186
|
|
|
309,690
|
|
|
274,698
|
|
|
1,132,574
|
|
|
143,686
|
|
|
1,276,260
|
|
Change in unearned premiums
|
(42,540
|
)
|
|
(64,839
|
)
|
|
(30,175
|
)
|
|
(137,554
|
)
|
|
(21,689
|
)
|
|
(159,243
|
)
|
Net premiums earned
|
505,646
|
|
|
244,851
|
|
|
244,523
|
|
|
995,020
|
|
|
121,997
|
|
|
1,117,017
|
|
Other underwriting income (loss)
|
—
|
|
|
(306
|
)
|
|
4,123
|
|
|
3,817
|
|
|
816
|
|
|
4,633
|
|
Losses and loss adjustment expenses
|
(332,641
|
)
|
|
(105,454
|
)
|
|
(29,065
|
)
|
|
(467,160
|
)
|
|
(85,410
|
)
|
|
(552,570
|
)
|
Acquisition expenses
|
(74,868
|
)
|
|
(46,147
|
)
|
|
(28,766
|
)
|
|
(149,781
|
)
|
|
(32,508
|
)
|
|
(182,289
|
)
|
Other operating expenses
|
(88,126
|
)
|
|
(37,533
|
)
|
|
(41,870
|
)
|
|
(167,529
|
)
|
|
(7,190
|
)
|
|
(174,719
|
)
|
Underwriting income (loss)
|
$
|
10,011
|
|
|
$
|
55,411
|
|
|
$
|
148,945
|
|
|
214,367
|
|
|
(2,295
|
)
|
|
212,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
95,812
|
|
|
22,062
|
|
|
117,874
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
28,512
|
|
|
5,641
|
|
|
34,153
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
|
(1,807
|
)
|
|
—
|
|
|
(1,807
|
)
|
Equity in net income (loss) of investment funds accounted for using the equity method
|
|
|
|
|
|
|
48,088
|
|
|
—
|
|
|
48,088
|
|
Other income (loss)
|
|
|
|
|
|
|
(782
|
)
|
|
—
|
|
|
(782
|
)
|
Corporate expenses (2)
|
|
|
|
|
|
|
(12,208
|
)
|
|
—
|
|
|
(12,208
|
)
|
UGC transaction costs and other (2)
|
|
|
|
|
|
|
(15,584
|
)
|
|
—
|
|
|
(15,584
|
)
|
Amortization of intangible assets
|
|
|
|
|
|
|
(31,294
|
)
|
|
—
|
|
|
(31,294
|
)
|
Interest expense
|
|
|
|
|
|
|
(25,756
|
)
|
|
(2,920
|
)
|
|
(28,676
|
)
|
Net foreign exchange gains (losses)
|
|
|
|
|
|
|
(19,845
|
)
|
|
441
|
|
|
(19,404
|
)
|
Income before income taxes
|
|
|
|
|
|
|
279,503
|
|
|
22,929
|
|
|
302,432
|
|
Income tax (expense) benefit
|
|
|
|
|
|
|
(28,397
|
)
|
|
—
|
|
|
(28,397
|
)
|
Net income
|
|
|
|
|
|
|
251,106
|
|
|
22,929
|
|
|
274,035
|
|
Dividends attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
—
|
|
|
(4,584
|
)
|
|
(4,584
|
)
|
Amounts attributable to nonredeemable noncontrolling interests
|
|
|
|
|
|
|
—
|
|
|
(16,324
|
)
|
|
(16,324
|
)
|
Net income available to Arch
|
|
|
|
|
|
|
251,106
|
|
|
2,021
|
|
|
253,127
|
|
Preferred dividends
|
|
|
|
|
|
|
(11,218
|
)
|
|
—
|
|
|
(11,218
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
|
|
$
|
239,888
|
|
|
$
|
2,021
|
|
|
$
|
241,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
65.8
|
%
|
|
43.1
|
%
|
|
11.9
|
%
|
|
46.9
|
%
|
|
70.0
|
%
|
|
49.5
|
%
|
Acquisition expense ratio
|
14.8
|
%
|
|
18.8
|
%
|
|
11.8
|
%
|
|
15.1
|
%
|
|
26.6
|
%
|
|
16.3
|
%
|
Other operating expense ratio
|
17.4
|
%
|
|
15.3
|
%
|
|
17.1
|
%
|
|
16.8
|
%
|
|
5.9
|
%
|
|
15.6
|
%
|
Combined ratio
|
98.0
|
%
|
|
77.2
|
%
|
|
40.8
|
%
|
|
78.8
|
%
|
|
102.5
|
%
|
|
81.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
$
|
24,371
|
|
|
$
|
773
|
|
|
$
|
717,521
|
|
|
$
|
742,665
|
|
|
$
|
7,650
|
|
|
$
|
750,315
|
|
|
|
(1)
|
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
|
|
|
(2)
|
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of the presentation of such items.
|
|
|
|
|
ARCH CAPITAL
|
17
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6
. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Reserve for losses and loss adjustment expenses at beginning of year
|
$
|
11,383,792
|
|
|
$
|
10,200,960
|
|
Unpaid losses and loss adjustment expenses recoverable
|
2,464,910
|
|
|
2,083,575
|
|
Net reserve for losses and loss adjustment expenses at beginning of year
|
8,918,882
|
|
|
8,117,385
|
|
|
|
|
|
Net incurred losses and loss adjustment expenses relating to losses occurring in:
|
|
|
|
Current year
|
687,885
|
|
|
635,776
|
|
Prior years
|
(51,025
|
)
|
|
(83,206
|
)
|
Total net incurred losses and loss adjustment expenses
|
636,860
|
|
|
552,570
|
|
|
|
|
|
Net foreign exchange losses
|
44,014
|
|
|
31,279
|
|
|
|
|
|
Net paid losses and loss adjustment expenses relating to losses occurring in:
|
|
|
|
Current year
|
(36,000
|
)
|
|
(35,003
|
)
|
Prior years
|
(514,541
|
)
|
|
(464,540
|
)
|
Total net paid losses and loss adjustment expenses
|
(550,541
|
)
|
|
(499,543
|
)
|
|
|
|
|
Net reserve for losses and loss adjustment expenses at end of period
|
9,049,215
|
|
|
8,201,691
|
|
Unpaid losses and loss adjustment expenses recoverable
|
2,446,990
|
|
|
2,095,130
|
|
Reserve for losses and loss adjustment expenses at end of period
|
$
|
11,496,205
|
|
|
$
|
10,296,821
|
|
Development on Prior Year Loss Reserves
2018 First Quarter
During the
2018 first quarter
, the Company recorded net favorable development on prior year loss reserves of
$51.0 million
, which consisted of
$36.5 million
from the reinsurance segment,
$2.1 million
from the insurance segment,
$13.0 million
from the mortgage segment and adverse development of
$0.6 million
from the ‘other’ segment.
The reinsurance segment’s net favorable development of
$36.5 million
, or
13.1
points, for the
2018 first quarter
consisted of
$28.9 million
from short-tailed lines and
$7.6 million
from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included
$21.1 million
from property catastrophe and property other than property catastrophe reserves, across most underwriting years (
i.e.
, all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed and medium-tailed lines reflected reductions in marine reserves of
$6.2 million
, primarily from the 2011 accident year, and in casualty reserves of
$1.1 million
based on varying levels of reported and paid claims activity, primarily from the 2002 to 2009 underwriting years.
The insurance segment’s net favorable development of
$2.1 million
, or
0.4
points, for the
2018 first quarter
consisted of
$8.7 million
of net favorable development in short-tailed lines and
$3.0 million
of net favorable development in long-tailed lines, partially offset by
$9.6 million
of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2017 accident year (
i.e.
, the year in which a loss occurred) while net favorable development in long-tailed lines primarily resulted from reductions in casualty reserves of
$3.9 million
, primarily from the 2012 to 2014 accident years. Net adverse development in medium-tailed lines reflected
$10.2 million
of adverse development in program business, primarily driven by a few inactive programs that were non-renewed in 2015 and early in 2016.
The mortgage segment’s net favorable development was
$13.0 million
, or
4.6
points, for the
2018 first quarter
. The
2018 first quarter
development was primarily driven by continued lower than expected claim rates on first lien business and subrogation recoveries on second lien business.
|
|
|
|
ARCH CAPITAL
|
18
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2017 First Quarter
During the
2017 first quarter
, the Company recorded net favorable development on prior year loss reserves of
$83.2 million
, which consisted of
$57.2 million
from the reinsurance segment,
$2.1 million
from the insurance segment,
$23.6 million
from the mortgage segment and
$0.3 million
from the ‘other’ segment.
The reinsurance segment’s net favorable development of
$57.2 million
, or
23.4
points, for the
2017 first quarter
consisted of
$40.8 million
from short-tailed lines and
$16.4 million
from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included
$34.0 million
from property catastrophe and property other than property catastrophe reserves, across most underwriting years, reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed and medium-tailed lines reflected reductions in casualty reserves of
$5.5 million
based on varying levels of reported and paid claims activity, primarily from the 2003 to 2013 underwriting years, and favorable development in marine reserves of
$9.9 million
across most underwriting years.
The insurance segment’s net favorable development of
$2.1 million
, or
0.4
points, for the
2017 first quarter
consisted of
$7.0 million
of net favorable development in long-tailed lines and
$1.9 million
of net favorable development in short-tailed lines, partially offset by
$6.8 million
of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2014 accident years. Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2011 to 2016 accident years. Net adverse development in medium-tailed lines primarily resulted from an increase in programs, partially offset by favorable development of
$7.5 million
in other medium-tailed lines, primarily in professional liability and surety.
The mortgage segment’s net favorable development was
$23.6 million
, or
9.6
points, for the
2017 first quarter
. The
2017 first quarter
development was primarily driven by lower than expected claim rates on first lien business and subrogation recoveries on second lien business.
|
|
|
|
ARCH CAPITAL
|
19
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7
. Investment Information
At
March 31, 2018
, total investable assets of
$22.28 billion
included
$19.79 billion
held by the Company and
$2.49 billion
attributable to Watford Re.
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Cost or
Amortized
Cost
|
|
OTTI
Unrealized
Losses (2)
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Fixed maturities (1):
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
5,405,695
|
|
|
$
|
12,379
|
|
|
$
|
(95,220
|
)
|
|
$
|
5,488,536
|
|
|
$
|
(73
|
)
|
Mortgage backed securities
|
339,662
|
|
|
1,751
|
|
|
(5,054
|
)
|
|
342,965
|
|
|
(15
|
)
|
Municipal bonds
|
1,553,616
|
|
|
7,906
|
|
|
(24,106
|
)
|
|
1,569,816
|
|
|
—
|
|
Commercial mortgage backed securities
|
561,543
|
|
|
1,106
|
|
|
(11,078
|
)
|
|
571,515
|
|
|
—
|
|
U.S. government and government agencies
|
3,060,805
|
|
|
5,622
|
|
|
(20,734
|
)
|
|
3,075,917
|
|
|
—
|
|
Non-U.S. government securities
|
1,656,859
|
|
|
44,821
|
|
|
(21,910
|
)
|
|
1,633,948
|
|
|
—
|
|
Asset backed securities
|
2,121,126
|
|
|
3,891
|
|
|
(17,812
|
)
|
|
2,135,047
|
|
|
—
|
|
Total
|
14,699,306
|
|
|
77,476
|
|
|
(195,914
|
)
|
|
14,817,744
|
|
|
(88
|
)
|
Equity securities (3)
|
|
|
|
|
|
|
|
|
|
Other investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
967,389
|
|
|
1,851
|
|
|
(1,184
|
)
|
|
966,722
|
|
|
—
|
|
Total
|
$
|
15,666,695
|
|
|
$
|
79,327
|
|
|
$
|
(197,098
|
)
|
|
$
|
15,784,466
|
|
|
$
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Fixed maturities (1):
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
4,434,439
|
|
|
$
|
30,943
|
|
|
$
|
(32,340
|
)
|
|
$
|
4,435,836
|
|
|
$
|
(73
|
)
|
Mortgage backed securities
|
316,141
|
|
|
1,640
|
|
|
(2,561
|
)
|
|
317,062
|
|
|
(15
|
)
|
Municipal bonds
|
2,158,840
|
|
|
20,285
|
|
|
(12,308
|
)
|
|
2,150,863
|
|
|
—
|
|
Commercial mortgage backed securities
|
545,817
|
|
|
2,131
|
|
|
(4,268
|
)
|
|
547,954
|
|
|
—
|
|
U.S. government and government agencies
|
3,484,257
|
|
|
2,188
|
|
|
(28,769
|
)
|
|
3,510,838
|
|
|
—
|
|
Non-U.S. government securities
|
1,612,754
|
|
|
48,764
|
|
|
(17,321
|
)
|
|
1,581,311
|
|
|
—
|
|
Asset backed securities
|
1,780,143
|
|
|
5,147
|
|
|
(8,614
|
)
|
|
1,783,610
|
|
|
—
|
|
Total
|
14,332,391
|
|
|
111,098
|
|
|
(106,181
|
)
|
|
14,327,474
|
|
|
(88
|
)
|
Equity securities
|
504,333
|
|
|
88,739
|
|
|
(5,583
|
)
|
|
421,177
|
|
|
—
|
|
Other investments
|
264,989
|
|
|
66,946
|
|
|
(120
|
)
|
|
198,163
|
|
|
—
|
|
Short-term investments
|
1,469,042
|
|
|
650
|
|
|
(563
|
)
|
|
1,468,955
|
|
|
—
|
|
Total
|
$
|
16,570,755
|
|
|
$
|
267,433
|
|
|
$
|
(112,447
|
)
|
|
$
|
16,415,769
|
|
|
$
|
(88
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
|
|
|
(2)
|
Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At
March 31, 2018
, the net unrealized
gain
related to securities for which a non-credit OTTI was recognized in AOCI was
$0.3 million
, compared to a net unrealized
gain
of
$0.3 million
at
December 31, 2017
.
|
|
|
(3)
|
Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments (see Note
2
). As a result, equity securities are no longer accounted for as available for sale and are excluded from this table.
|
|
|
|
|
ARCH CAPITAL
|
20
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities (1):
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
4,504,553
|
|
|
$
|
(85,531
|
)
|
|
$
|
262,846
|
|
|
$
|
(9,689
|
)
|
|
$
|
4,767,399
|
|
|
$
|
(95,220
|
)
|
Mortgage backed securities
|
233,380
|
|
|
(5,025
|
)
|
|
722
|
|
|
(29
|
)
|
|
234,102
|
|
|
(5,054
|
)
|
Municipal bonds
|
952,179
|
|
|
(18,804
|
)
|
|
116,001
|
|
|
(5,302
|
)
|
|
1,068,180
|
|
|
(24,106
|
)
|
Commercial mortgage backed securities
|
375,841
|
|
|
(7,416
|
)
|
|
57,015
|
|
|
(3,662
|
)
|
|
432,856
|
|
|
(11,078
|
)
|
U.S. government and government agencies
|
2,110,130
|
|
|
(19,330
|
)
|
|
59,567
|
|
|
(1,404
|
)
|
|
2,169,697
|
|
|
(20,734
|
)
|
Non-U.S. government securities
|
1,351,254
|
|
|
(20,544
|
)
|
|
87,172
|
|
|
(1,366
|
)
|
|
1,438,426
|
|
|
(21,910
|
)
|
Asset backed securities
|
1,457,917
|
|
|
(14,124
|
)
|
|
165,038
|
|
|
(3,688
|
)
|
|
1,622,955
|
|
|
(17,812
|
)
|
Total
|
10,985,254
|
|
|
(170,774
|
)
|
|
748,361
|
|
|
(25,140
|
)
|
|
11,733,615
|
|
|
(195,914
|
)
|
Equity securities (2)
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
218,597
|
|
|
(1,184
|
)
|
|
—
|
|
|
—
|
|
|
218,597
|
|
|
(1,184
|
)
|
Total
|
$
|
11,203,851
|
|
|
$
|
(171,958
|
)
|
|
$
|
748,361
|
|
|
$
|
(25,140
|
)
|
|
$
|
11,952,212
|
|
|
$
|
(197,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities (1):
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,320,716
|
|
|
$
|
(25,411
|
)
|
|
$
|
279,082
|
|
|
$
|
(6,929
|
)
|
|
$
|
2,599,798
|
|
|
$
|
(32,340
|
)
|
Mortgage backed securities
|
221,113
|
|
|
(1,715
|
)
|
|
28,380
|
|
|
(846
|
)
|
|
249,493
|
|
|
(2,561
|
)
|
Municipal bonds
|
1,030,389
|
|
|
(8,438
|
)
|
|
132,469
|
|
|
(3,870
|
)
|
|
1,162,858
|
|
|
(12,308
|
)
|
Commercial mortgage backed securities
|
225,164
|
|
|
(1,899
|
)
|
|
57,291
|
|
|
(2,369
|
)
|
|
282,455
|
|
|
(4,268
|
)
|
U.S. government and government agencies
|
2,646,415
|
|
|
(26,501
|
)
|
|
111,879
|
|
|
(2,268
|
)
|
|
2,758,294
|
|
|
(28,769
|
)
|
Non-U.S. government securities
|
1,218,514
|
|
|
(15,546
|
)
|
|
93,530
|
|
|
(1,775
|
)
|
|
1,312,044
|
|
|
(17,321
|
)
|
Asset backed securities
|
1,111,246
|
|
|
(5,915
|
)
|
|
209,207
|
|
|
(2,699
|
)
|
|
1,320,453
|
|
|
(8,614
|
)
|
Total
|
8,773,557
|
|
|
(85,425
|
)
|
|
911,838
|
|
|
(20,756
|
)
|
|
9,685,395
|
|
|
(106,181
|
)
|
Equity securities
|
166,562
|
|
|
(5,583
|
)
|
|
—
|
|
|
—
|
|
|
166,562
|
|
|
(5,583
|
)
|
Other investments
|
15,025
|
|
|
(120
|
)
|
|
—
|
|
|
—
|
|
|
15,025
|
|
|
(120
|
)
|
Short-term investments
|
109,528
|
|
|
(563
|
)
|
|
—
|
|
|
—
|
|
|
109,528
|
|
|
(563
|
)
|
Total
|
$
|
9,064,672
|
|
|
$
|
(91,691
|
)
|
|
$
|
911,838
|
|
|
$
|
(20,756
|
)
|
|
$
|
9,976,510
|
|
|
$
|
(112,447
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
|
|
|
(2)
|
Effective January 1, 2018, the Company adopted new accounting guidance for financial instruments (see Note
2
). As a result, equity securities are no longer accounted for as available for sale and are excluded from this table.
|
At
March 31, 2018
, on a lot level basis, approximately
5,450
security lots out of a total of approximately
7,500
security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was
$1.1 million
. At
December 31, 2017
, on a lot level basis, approximately
3,830
security lots out of a total of approximately
7,450
security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was
$1.3 million
.
|
|
|
|
ARCH CAPITAL
|
21
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Maturity
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
Due in one year or less
|
|
$
|
569,345
|
|
|
$
|
567,333
|
|
|
$
|
550,711
|
|
|
$
|
548,771
|
|
Due after one year through five years
|
|
8,016,509
|
|
|
8,063,846
|
|
|
7,436,153
|
|
|
7,434,801
|
|
Due after five years through 10 years
|
|
2,817,417
|
|
|
2,865,124
|
|
|
3,369,635
|
|
|
3,369,750
|
|
Due after 10 years
|
|
273,704
|
|
|
271,914
|
|
|
333,791
|
|
|
325,526
|
|
|
|
11,676,975
|
|
|
11,768,217
|
|
|
11,690,290
|
|
|
11,678,848
|
|
Mortgage backed securities
|
|
339,662
|
|
|
342,965
|
|
|
316,141
|
|
|
317,062
|
|
Commercial mortgage backed securities
|
|
561,543
|
|
|
571,515
|
|
|
545,817
|
|
|
547,954
|
|
Asset backed securities
|
|
2,121,126
|
|
|
2,135,047
|
|
|
1,780,143
|
|
|
1,783,610
|
|
Total (1)
|
|
$
|
14,699,306
|
|
|
$
|
14,817,744
|
|
|
$
|
14,332,391
|
|
|
$
|
14,327,474
|
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
|
Securities Lending Agreements
The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan from the Company.
The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short term investments. At
March 31, 2018
, the fair value of the cash collateral received on securities lending was
$38.3 million
and the fair value of security collateral received was
$328.7 million
. At
December 31, 2017
, the fair value of the cash collateral received on securities lending was
$199.9 million
, and the fair value of security collateral received was
$276.7 million
.
The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
Overnight and Continuous
|
|
Less than 30 Days
|
|
30-90 Days
|
|
90 Days or More
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
213,300
|
|
|
$
|
2,710
|
|
|
$
|
105,349
|
|
|
$
|
—
|
|
|
$
|
321,359
|
|
Corporate bonds
|
|
37,828
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,828
|
|
Equity securities
|
|
7,847
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,847
|
|
Total
|
|
$
|
258,975
|
|
|
$
|
2,710
|
|
|
$
|
105,349
|
|
|
$
|
—
|
|
|
$
|
367,034
|
|
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9
|
|
$
|
—
|
|
Amounts related to securities lending not included in offsetting disclosure in Note 9
|
|
$
|
367,034
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
343,425
|
|
|
$
|
20,309
|
|
|
$
|
76,086
|
|
|
$
|
—
|
|
|
$
|
439,820
|
|
Corporate bonds
|
|
28,003
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,003
|
|
Equity securities
|
|
8,782
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,782
|
|
Total
|
|
$
|
380,210
|
|
|
$
|
20,309
|
|
|
$
|
76,086
|
|
|
$
|
—
|
|
|
$
|
476,605
|
|
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9
|
|
$
|
—
|
|
Amounts related to securities lending not included in offsetting disclosure in Note 9
|
|
$
|
476,605
|
|
|
|
|
|
ARCH CAPITAL
|
22
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Investments
The following table summarizes the Company’s other investments, including available for sale and fair value option components:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Available for sale securities:
|
|
|
|
Asian and emerging markets
|
$
|
—
|
|
|
$
|
135,140
|
|
Investment grade fixed income
|
—
|
|
|
53,878
|
|
Credit related funds
|
—
|
|
|
18,365
|
|
Other
|
—
|
|
|
57,606
|
|
Total available for sale (1)
|
—
|
|
|
264,989
|
|
Fair value option:
|
|
|
|
Term loan investments (par value: $1,178,470 and $1,223,453)
|
$
|
1,160,675
|
|
|
$
|
1,200,882
|
|
Mezzanine debt funds
|
234,078
|
|
|
252,160
|
|
Credit related funds
|
205,303
|
|
|
175,422
|
|
Investment grade fixed income
|
106,744
|
|
|
102,347
|
|
Asian and emerging markets
|
340,507
|
|
|
258,541
|
|
Other (2)
|
132,402
|
|
|
147,029
|
|
Total fair value option
|
2,179,709
|
|
|
2,136,381
|
|
Total
|
$
|
2,179,709
|
|
|
$
|
2,401,370
|
|
|
|
(1)
|
The Company reviewed the accounting treatment for three limited partnership investments which were accounted for as available for sale at December 31, 2017 and determined, based on reconsideration during the period of the Company’s percentage ownership, that the equity method of accounting was appropriate for such investments at March 31, 2018.
|
|
|
(2)
|
Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure assets and other.
|
Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Fair Value Option
The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Fixed maturities
|
$
|
1,553,870
|
|
|
$
|
1,642,855
|
|
Other investments
|
2,179,709
|
|
|
2,136,381
|
|
Short-term investments
|
207,095
|
|
|
297,426
|
|
Equity securities
|
178,465
|
|
|
139,575
|
|
Investments accounted for using the fair value option
|
$
|
4,119,139
|
|
|
$
|
4,216,237
|
|
Limited Partnership Interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The
Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded
commitment.
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Investments accounted for using the equity method (1)
|
$
|
1,210,325
|
|
|
$
|
1,041,321
|
|
Investments accounted for using the fair value option (2)
|
157,556
|
|
|
130,471
|
|
Total
|
$
|
1,367,881
|
|
|
$
|
1,171,792
|
|
|
|
(1)
|
Aggregate unfunded commitments were
$957.8 million
at
March 31, 2018
, compared to
$1.02 billion
at
December 31, 2017
.
|
|
|
(2)
|
Aggregate unfunded commitments were
$107.2 million
at
March 31, 2018
, compared to
$100.4 million
at
December 31, 2017
.
|
|
|
|
|
ARCH CAPITAL
|
23
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Investment Income
The components of net investment income were derived from the following sources:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Fixed maturities
|
$
|
107,887
|
|
|
$
|
94,393
|
|
Equity securities
|
2,568
|
|
|
2,643
|
|
Short-term investments
|
4,860
|
|
|
1,759
|
|
Other (1)
|
37,374
|
|
|
39,580
|
|
Gross investment income
|
152,689
|
|
|
138,375
|
|
Investment expenses
|
(25,965
|
)
|
|
(20,501
|
)
|
Net investment income
|
$
|
126,724
|
|
|
$
|
117,874
|
|
|
|
(1)
|
Includes income distributions from investment funds, term loan investments and other items.
|
Net Realized Gains (Losses)
Net realized gains (losses) were as follows, excluding other than-temporary impairment provision.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
Gross gains on investment sales
|
$
|
14,965
|
|
|
$
|
69,175
|
|
Gross losses on investment sales
|
(82,551
|
)
|
|
(61,362
|
)
|
Change in fair value of assets and liabilities accounted for using the fair value option:
|
|
|
|
Fixed maturities
|
(17,551
|
)
|
|
20,541
|
|
Other investments
|
(6,374
|
)
|
|
17,248
|
|
Equity securities
|
6,668
|
|
|
3,545
|
|
Short-term investments
|
(151
|
)
|
|
4
|
|
Equity securities (1)
|
(12,951
|
)
|
|
—
|
|
Derivative instruments (2)
|
(3,963
|
)
|
|
(9,181
|
)
|
Other (3)
|
(9,090
|
)
|
|
(5,817
|
)
|
Net realized gains (losses)
|
$
|
(110,998
|
)
|
|
$
|
34,153
|
|
|
|
(1)
|
Pursuant to new accounting guidance (see Note 2), changes in fair value on equity securities are recorded through net income effective for the
2018 first quarter
. Such amount included
$7.6 million
of net unrealized
losses
on equity instruments still held as of
March 31, 2018
.
|
|
|
(2)
|
See Note
9
for information on the Company’s derivative instruments.
|
|
|
(3)
|
Includes the re-measurement of contingent consideration liability amounts.
|
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
The Company recorded
$28.1 million
of equity in net income related to investment funds accounted for using the equity method in the
2018 first quarter
, compared to
$48.1 million
for the
2017 first quarter
. In applying the equity method, 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 market value of the underlying securities in the funds). Such investments are generally recorded on a
one
to
three
month lag based on the availability of reports from the investment funds.
Other-Than-Temporary Impairments
The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance.
The following table details the net impairment losses recognized in earnings by asset class:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
Mortgage backed securities
|
$
|
(42
|
)
|
|
$
|
(1,319
|
)
|
Corporate bonds
|
(120
|
)
|
|
(1
|
)
|
Non-U.S. government securities
|
—
|
|
|
(198
|
)
|
Total
|
(162
|
)
|
|
(1,518
|
)
|
Equity securities
|
—
|
|
|
(186
|
)
|
Other investments
|
—
|
|
|
(103
|
)
|
Net impairment losses recognized in earnings
|
$
|
(162
|
)
|
|
$
|
(1,807
|
)
|
Net impairment losses recognized in earnings in the
2018 first quarter
were primarily related to foreign currency fluctuations on one corporate bond.
The Company believes that the
$0.1 million
of OTTI included in accumulated other comprehensive income at
March 31, 2018
on the securities which were considered by the Company to be impaired was due to market and sector-related factors (
i.e.
, not credit losses). At
March 31, 2018
, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.
The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2018
|
|
2017
|
Three Months Ended
|
|
|
|
Balance at start of period
|
$
|
767
|
|
|
$
|
13,138
|
|
Credit loss impairments recognized on securities not previously impaired
|
—
|
|
|
—
|
|
Credit loss impairments recognized on securities previously impaired
|
—
|
|
|
23
|
|
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
|
—
|
|
|
—
|
|
Reductions for securities sold during the period
|
—
|
|
|
(624
|
)
|
Balance at end of period
|
$
|
767
|
|
|
$
|
12,537
|
|
|
|
|
|
ARCH CAPITAL
|
24
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See note 16, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2017 Form 10-K.
The following table details the value of the Company’s restricted assets:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Assets used for collateral or guarantees:
|
|
|
|
|
|
Affiliated transactions
|
$
|
4,717,146
|
|
|
$
|
4,323,726
|
|
Third party agreements
|
1,517,580
|
|
|
1,674,304
|
|
Deposits with U.S. regulatory authorities
|
706,316
|
|
|
616,987
|
|
Deposits with non-U.S. regulatory authorities
|
56,171
|
|
|
55,895
|
|
Total restricted assets
|
$
|
6,997,213
|
|
|
$
|
6,670,912
|
|
8
. Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
|
|
Level 1:
|
Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for
identical
assets or liabilities in
active markets
|
|
|
Level 2:
|
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for
|
the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
|
|
Level 3:
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement
|
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used
(i.e.
, a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at
March 31, 2018
.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the
$20.50 billion
of financial assets and
|
|
|
|
ARCH CAPITAL
|
25
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
liabilities measured at fair value at
March 31, 2018
, approximately
$207.9 million
, or
1.0%
, were priced using non-binding broker-dealer quotes. Of the
$20.92 billion
of financial assets and liabilities measured at fair value at
December 31, 2017
, approximately
$181.5 million
, or
0.9%
, were priced using non-binding broker-dealer quotes.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
•
U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
•
Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•
Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing
vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•
Municipal bonds — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
•
Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•
Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
•
Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option
|
|
|
|
ARCH CAPITAL
|
26
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy.
Other investments
The Company determined that exchange-traded investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.
Contingent consideration liabilities
Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to the acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies and other acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.
|
|
|
|
ARCH CAPITAL
|
27
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements Using:
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets measured at fair value (1):
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
5,405,695
|
|
|
$
|
—
|
|
|
$
|
5,396,543
|
|
|
$
|
9,152
|
|
Mortgage backed securities
|
339,662
|
|
|
—
|
|
|
339,294
|
|
|
368
|
|
Municipal bonds
|
1,553,616
|
|
|
—
|
|
|
1,553,616
|
|
|
—
|
|
Commercial mortgage backed securities
|
561,543
|
|
|
—
|
|
|
561,498
|
|
|
45
|
|
U.S. government and government agencies
|
3,060,805
|
|
|
2,999,218
|
|
|
61,587
|
|
|
—
|
|
Non-U.S. government securities
|
1,656,859
|
|
|
—
|
|
|
1,656,859
|
|
|
—
|
|
Asset backed securities
|
2,121,126
|
|
|
—
|
|
|
2,116,126
|
|
|
5,000
|
|
Total
|
14,699,306
|
|
|
2,999,218
|
|
|
11,685,523
|
|
|
14,565
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
967,389
|
|
|
866,985
|
|
|
100,404
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value
|
551,437
|
|
|
548,279
|
|
|
3,158
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Derivative instruments (4)
|
14,649
|
|
|
—
|
|
|
14,649
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fair value option:
|
|
|
|
|
|
|
|
Corporate bonds
|
1,058,042
|
|
|
—
|
|
|
1,046,170
|
|
|
11,872
|
|
Non-U.S. government bonds
|
174,954
|
|
|
—
|
|
|
174,954
|
|
|
—
|
|
Mortgage backed securities
|
18,373
|
|
|
—
|
|
|
18,373
|
|
|
—
|
|
Municipal bonds
|
13,355
|
|
|
—
|
|
|
13,355
|
|
|
—
|
|
Commercial mortgage backed securities
|
1,435
|
|
|
—
|
|
|
1,435
|
|
|
—
|
|
Asset backed securities
|
152,905
|
|
|
—
|
|
|
152,905
|
|
|
—
|
|
U.S. government and government agencies
|
134,806
|
|
|
134,536
|
|
|
270
|
|
|
—
|
|
Short-term investments
|
207,095
|
|
|
17,742
|
|
|
189,353
|
|
|
—
|
|
Equity securities
|
178,465
|
|
|
81,706
|
|
|
96,759
|
|
|
—
|
|
Other investments
|
1,158,368
|
|
|
65,857
|
|
|
1,034,059
|
|
|
58,452
|
|
Other investments measured at net asset value (2)
|
1,021,341
|
|
|
|
|
|
|
|
Total
|
4,119,139
|
|
|
299,841
|
|
|
2,727,633
|
|
|
70,324
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
20,351,920
|
|
|
$
|
4,714,323
|
|
|
$
|
14,531,367
|
|
|
$
|
84,889
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
|
$
|
(62,449
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(62,449
|
)
|
Securities sold but not yet purchased (3)
|
(63,110
|
)
|
|
—
|
|
|
(63,110
|
)
|
|
—
|
|
Derivative instruments (4)
|
(26,726
|
)
|
|
—
|
|
|
(26,726
|
)
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
(152,285
|
)
|
|
$
|
—
|
|
|
$
|
(89,836
|
)
|
|
$
|
(62,449
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note
7
, “Investment Information—Securities Lending Agreements.”
|
|
|
(2)
|
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
|
|
|
(3)
|
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
|
|
|
(4)
|
See Note
9
, “Derivative Instruments.”
|
|
|
|
|
ARCH CAPITAL
|
28
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements Using:
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets measured at fair value (1):
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
4,434,439
|
|
|
$
|
—
|
|
|
$
|
4,424,979
|
|
|
$
|
9,460
|
|
Mortgage backed securities
|
316,141
|
|
|
—
|
|
|
315,754
|
|
|
387
|
|
Municipal bonds
|
2,158,840
|
|
|
—
|
|
|
2,158,840
|
|
|
—
|
|
Commercial mortgage backed securities
|
545,817
|
|
|
—
|
|
|
545,277
|
|
|
540
|
|
U.S. government and government agencies
|
3,484,257
|
|
|
3,408,902
|
|
|
75,355
|
|
|
—
|
|
Non-U.S. government securities
|
1,612,754
|
|
|
—
|
|
|
1,612,754
|
|
|
—
|
|
Asset backed securities
|
1,780,143
|
|
|
—
|
|
|
1,775,143
|
|
|
5,000
|
|
Total
|
14,332,391
|
|
|
3,408,902
|
|
|
10,908,102
|
|
|
15,387
|
|
|
|
|
|
|
|
|
|
Equity securities
|
504,333
|
|
|
498,182
|
|
|
6,151
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
1,469,042
|
|
|
1,420,732
|
|
|
48,310
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other investments
|
76,427
|
|
|
74,611
|
|
|
1,816
|
|
|
—
|
|
Other investments measured at net asset value (2)
|
188,562
|
|
|
|
|
|
|
|
Total other investments
|
264,989
|
|
|
74,611
|
|
|
1,816
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Derivative instruments (4)
|
15,747
|
|
|
—
|
|
|
15,747
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fair value option:
|
|
|
|
|
|
|
|
Corporate bonds
|
1,068,725
|
|
|
—
|
|
|
1,056,508
|
|
|
12,217
|
|
Non-U.S. government bonds
|
195,788
|
|
|
—
|
|
|
195,788
|
|
|
—
|
|
Mortgage backed securities
|
20,491
|
|
|
—
|
|
|
20,491
|
|
|
—
|
|
Municipal bonds
|
15,210
|
|
|
—
|
|
|
15,210
|
|
|
—
|
|
Commercial mortgage backed securities
|
11,997
|
|
|
—
|
|
|
11,997
|
|
|
—
|
|
Asset backed securities
|
99,354
|
|
|
—
|
|
|
99,354
|
|
|
—
|
|
U.S. government and government agencies
|
231,290
|
|
|
231,019
|
|
|
271
|
|
|
—
|
|
Short-term investments
|
297,426
|
|
|
40,166
|
|
|
257,260
|
|
|
—
|
|
Equity securities
|
139,575
|
|
|
67,440
|
|
|
72,135
|
|
|
—
|
|
Other investments
|
1,128,094
|
|
|
82,291
|
|
|
986,636
|
|
|
59,167
|
|
Other investments measured at net asset value (2)
|
1,008,287
|
|
|
|
|
|
|
|
Total
|
4,216,237
|
|
|
420,916
|
|
|
2,715,650
|
|
|
71,384
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
20,802,739
|
|
|
$
|
5,823,343
|
|
|
$
|
13,695,776
|
|
|
$
|
86,771
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
|
$
|
(60,996
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(60,996
|
)
|
Securities sold but not yet purchased (3)
|
(34,375
|
)
|
|
—
|
|
|
(34,375
|
)
|
|
—
|
|
Derivative instruments (4)
|
(20,464
|
)
|
|
—
|
|
|
(20,464
|
)
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
(115,835
|
)
|
|
$
|
—
|
|
|
$
|
(54,839
|
)
|
|
$
|
(60,996
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note
7
, “Investment Information—Securities Lending Agreements.”
|
|
|
(2)
|
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
|
|
|
(3)
|
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
|
|
|
(4)
|
See Note
9
, “Derivative Instruments.”
|
|
|
|
|
ARCH CAPITAL
|
29
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
s
|
Available For Sale
|
|
Fair Value Option
|
|
|
|
|
|
Structured Securities (1)
|
|
Corporate
Bonds
|
|
Corporate
Bonds
|
|
Other
Investments
|
|
Total
|
|
Contingent Consideration Liabilities
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
5,927
|
|
|
$
|
9,460
|
|
|
$
|
12,217
|
|
|
$
|
59,167
|
|
|
$
|
86,771
|
|
|
$
|
(60,996
|
)
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (2)
|
1
|
|
|
—
|
|
|
12
|
|
|
17
|
|
|
30
|
|
|
(1,453
|
)
|
Included in other comprehensive income
|
(4
|
)
|
|
148
|
|
|
(87
|
)
|
|
(732
|
)
|
|
(675
|
)
|
|
—
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
(511
|
)
|
|
(456
|
)
|
|
(270
|
)
|
|
—
|
|
|
(1,237
|
)
|
|
—
|
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
5,413
|
|
|
$
|
9,152
|
|
|
$
|
11,872
|
|
|
$
|
58,452
|
|
|
$
|
84,889
|
|
|
$
|
(62,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
11,289
|
|
|
$
|
18,344
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
54,633
|
|
|
$
|
(122,350
|
)
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (2)
|
707
|
|
|
257
|
|
|
—
|
|
|
—
|
|
|
964
|
|
|
(3,646
|
)
|
Included in other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
(1,359
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,359
|
)
|
|
452
|
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
10,637
|
|
|
$
|
18,601
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
54,238
|
|
|
$
|
(125,544
|
)
|
|
|
(1)
|
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
|
|
|
(2)
|
Gains or losses were included in net realized gains (losses).
|
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at
March 31, 2018
, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At
March 31, 2018
, the Company’s senior notes were carried at their cost, net of debt issuance costs, of
$1.73 billion
and had a fair value of
$1.96 billion
. At
December 31, 2017
, Company’s senior notes were carried at their cost, net of debt issuance costs, of
$1.73 billion
and had a fair value of
$2.04 billion
. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.
9
. Derivative Instruments
The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.
In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between
|
|
|
|
ARCH CAPITAL
|
30
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Notional
Value (1)
|
March 31, 2018
|
|
|
|
|
|
Futures contracts (2)
|
$
|
1,929
|
|
|
$
|
(6,291
|
)
|
|
$
|
1,209,668
|
|
Foreign currency forward contracts (2)
|
4,598
|
|
|
(11,383
|
)
|
|
1,489,627
|
|
Other (2)
|
8,122
|
|
|
(9,052
|
)
|
|
1,934,144
|
|
Total
|
$
|
14,649
|
|
|
$
|
(26,726
|
)
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
Futures contracts (2)
|
$
|
3,371
|
|
|
$
|
(1,542
|
)
|
|
$
|
1,452,497
|
|
Foreign currency forward contracts (2)
|
4,478
|
|
|
(4,381
|
)
|
|
686,941
|
|
TBAs (3)
|
27,184
|
|
|
—
|
|
|
27,066
|
|
Other (2)
|
7,898
|
|
|
(14,541
|
)
|
|
1,457,345
|
|
Total
|
$
|
42,931
|
|
|
$
|
(20,464
|
)
|
|
|
|
|
(1)
|
Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
|
|
|
(2)
|
The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
|
|
|
(3)
|
The fair value of TBAs are included in ‘fixed maturities available for sale, at fair value.’
|
The Company did not hold any derivatives which were designated as hedging instruments at
March 31, 2018
or
December 31, 2017
.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure. The remaining derivatives included in the table above were not subject to a master netting agreement.
At
March 31, 2018
, asset derivatives and liability derivatives of
$12.1 million
and
$25.8 million
, respectively, were subject
to a master netting agreement, compared to
$40.6 million
and
$19.6 million
, respectively, at
December 31, 2017
. The remaining derivatives included in the preceding table were not subject to a master netting agreement.
Realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
|
|
March 31,
|
hedging instruments:
|
|
2018
|
|
2017
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Net realized gains (losses):
|
|
|
|
|
Futures contracts
|
|
$
|
5,030
|
|
|
$
|
7,720
|
|
Foreign currency forward contracts
|
|
(5,924
|
)
|
|
(11,766
|
)
|
TBAs
|
|
(97
|
)
|
|
(65
|
)
|
Other
|
|
(2,972
|
)
|
|
(5,070
|
)
|
Total
|
|
$
|
(3,963
|
)
|
|
$
|
(9,181
|
)
|
10
. Commitments and Contingencies
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately
$1.63 billion
at
March 31, 2018
, compared to
$1.70 billion
at
December 31, 2017
.
Interest Paid
Interest paid on the Company’s senior notes and other borrowings were
$7.9 million
for the
three months ended March 31, 2018
, compared to
$5.8 million
for the
2017
period.
11
. Share Transactions
Share Repurchases
The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased approximately
125.3 million
common shares for an aggregate purchase price of
$3.69 billion
. For the
three months ended March 31, 2018
, Arch Capital repurchased
39,405
shares under the share repurchase program with an aggregate purchase price of
$3.3 million
. Arch Capital did not repurchase any shares under the share repurchase program during the
three months ended March 31, 2017
. At
March 31, 2018
,
$443.2 million
of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. The timing and amount of the
|
|
|
|
ARCH CAPITAL
|
31
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. See note
16
, “Subsequent Events.”
Conversion of Convertible Non-Voting Common Equivalent Preferred Shares
In March 2018, Arch Capital completed an underwritten public secondary offering of
5,674,200
common shares by AIG following transfer of
567,420
Series D convertible non-voting common equivalent preferred shares (“Series D Preferred Shares”). Proceeds from the sale of common shares pursuant to the public offering were received by AIG. At
March 31, 2018
, no Series D Preferred Shares were outstanding.
Series C Preferred Shares
On January 2, 2018, Arch Capital redeemed all outstanding
6.75%
Series C non-cumulative preferred shares. The preferred shares were redeemed at a redemption price equal to
$25
per share, plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.
12
. Other Comprehensive Income (Loss)
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from AOCI
|
|
|
Consolidated Statement of Income
|
|
Three Months Ended
|
Details About
|
|
Line Item That Includes
|
|
March 31,
|
AOCI Components
|
|
Reclassification
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Unrealized appreciation on available-for-sale investments
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
(67,586
|
)
|
|
$
|
7,813
|
|
|
|
Other-than-temporary impairment losses
|
|
(162
|
)
|
|
(1,807
|
)
|
|
|
Total before tax
|
|
(67,748
|
)
|
|
6,006
|
|
|
|
Income tax (expense) benefit
|
|
5,287
|
|
|
(962
|
)
|
|
|
Net of tax
|
|
$
|
(62,461
|
)
|
|
$
|
5,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net of Tax Amount
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
Unrealized appreciation (decline) in value of investments:
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
$
|
(189,943
|
)
|
|
$
|
(23,266
|
)
|
|
$
|
(166,677
|
)
|
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Less reclassification of net realized gains (losses) included in net income
|
(67,748
|
)
|
|
(5,287
|
)
|
|
(62,461
|
)
|
Foreign currency translation adjustments
|
1,432
|
|
|
150
|
|
|
1,282
|
|
Other comprehensive income (loss)
|
$
|
(120,763
|
)
|
|
$
|
(17,829
|
)
|
|
$
|
(102,934
|
)
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
Unrealized appreciation (decline) in value of investments:
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
$
|
111,472
|
|
|
$
|
10,680
|
|
|
$
|
100,792
|
|
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Less reclassification of net realized gains (losses) included in net income
|
6,006
|
|
|
962
|
|
|
5,044
|
|
Foreign currency translation adjustments
|
3,165
|
|
|
41
|
|
|
3,124
|
|
Other comprehensive income (loss)
|
$
|
108,631
|
|
|
$
|
9,759
|
|
|
$
|
98,872
|
|
|
|
|
|
ARCH CAPITAL
|
32
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13
. Guarantor Financial Information
The following tables present condensed financial information for Arch Capital, Arch-U.S., a
100%
owned subsidiary of Arch Capital, and Arch Capital’s other subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
Condensed Consolidating Balance Sheet
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
3,694
|
|
|
$
|
71,440
|
|
|
$
|
21,680,276
|
|
|
$
|
(14,700
|
)
|
|
$
|
21,740,710
|
|
Cash
|
7,109
|
|
|
79,577
|
|
|
594,205
|
|
|
—
|
|
|
680,891
|
|
Investments in subsidiaries
|
9,439,099
|
|
|
4,093,247
|
|
|
—
|
|
|
(13,532,346
|
)
|
|
—
|
|
Due from subsidiaries and affiliates
|
1,275
|
|
|
1,274
|
|
|
1,869,654
|
|
|
(1,872,203
|
)
|
|
—
|
|
Premiums receivable
|
—
|
|
|
—
|
|
|
1,933,663
|
|
|
(558,583
|
)
|
|
1,375,080
|
|
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
8,471,116
|
|
|
(5,960,997
|
)
|
|
2,510,119
|
|
Contractholder receivables
|
—
|
|
|
—
|
|
|
2,002,469
|
|
|
—
|
|
|
2,002,469
|
|
Ceded unearned premiums
|
—
|
|
|
—
|
|
|
1,826,395
|
|
|
(829,623
|
)
|
|
996,772
|
|
Deferred acquisition costs
|
—
|
|
|
—
|
|
|
669,631
|
|
|
(73,367
|
)
|
|
596,264
|
|
Goodwill and intangible assets
|
—
|
|
|
—
|
|
|
626,004
|
|
|
—
|
|
|
626,004
|
|
Other assets
|
13,262
|
|
|
37,825
|
|
|
5,867,259
|
|
|
(4,314,700
|
)
|
|
1,603,646
|
|
|
Total assets
|
$
|
9,464,439
|
|
|
$
|
4,283,363
|
|
|
$
|
45,540,672
|
|
|
$
|
(27,156,519
|
)
|
|
$
|
32,131,955
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,193,367
|
|
|
$
|
(5,697,162
|
)
|
|
$
|
11,496,205
|
|
Unearned premiums
|
—
|
|
|
—
|
|
|
4,714,920
|
|
|
(829,623
|
)
|
|
3,885,297
|
|
Reinsurance balances payable
|
—
|
|
|
—
|
|
|
938,310
|
|
|
(558,582
|
)
|
|
379,728
|
|
Contractholder payables
|
—
|
|
|
—
|
|
|
2,002,469
|
|
|
—
|
|
|
2,002,469
|
|
Collateral held for insured obligations
|
—
|
|
|
—
|
|
|
253,709
|
|
|
|
|
253,709
|
|
Senior notes
|
297,076
|
|
|
494,646
|
|
|
941,321
|
|
|
—
|
|
|
1,733,043
|
|
Revolving credit agreement borrowings
|
—
|
|
|
—
|
|
|
755,294
|
|
|
—
|
|
|
755,294
|
|
Due to subsidiaries and affiliates
|
1,344
|
|
|
542,045
|
|
|
1,328,814
|
|
|
(1,872,203
|
)
|
|
—
|
|
Other liabilities
|
15,647
|
|
|
72,052
|
|
|
5,979,919
|
|
|
(4,651,905
|
)
|
|
1,415,713
|
|
|
Total liabilities
|
314,067
|
|
|
1,108,743
|
|
|
34,108,123
|
|
|
(13,609,475
|
)
|
|
21,921,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
220,713
|
|
|
(14,700
|
)
|
|
206,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
9,150,372
|
|
|
3,174,620
|
|
|
10,357,724
|
|
|
(13,532,344
|
)
|
|
9,150,372
|
|
Non-redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
854,112
|
|
|
—
|
|
|
854,112
|
|
|
Total shareholders’ equity
|
9,150,372
|
|
|
3,174,620
|
|
|
11,211,836
|
|
|
(13,532,344
|
)
|
|
10,004,484
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and shareholders’ equity
|
$
|
9,464,439
|
|
|
$
|
4,283,363
|
|
|
$
|
45,540,672
|
|
|
$
|
(27,156,519
|
)
|
|
$
|
32,131,955
|
|
|
|
|
|
ARCH CAPITAL
|
33
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Condensed Consolidating Balance Sheet
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
96,540
|
|
|
$
|
46,281
|
|
|
$
|
21,711,891
|
|
|
$
|
(14,700
|
)
|
|
$
|
21,840,012
|
|
Cash
|
9,997
|
|
|
30,380
|
|
|
565,822
|
|
|
—
|
|
|
606,199
|
|
Investments in subsidiaries
|
9,396,621
|
|
|
4,097,765
|
|
|
—
|
|
|
(13,494,386
|
)
|
|
—
|
|
Due from subsidiaries and affiliates
|
394
|
|
|
—
|
|
|
1,828,864
|
|
|
(1,829,258
|
)
|
|
—
|
|
Premiums receivable
|
—
|
|
|
—
|
|
|
2,967,701
|
|
|
(1,832,452
|
)
|
|
1,135,249
|
|
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
8,442,192
|
|
|
(5,902,049
|
)
|
|
2,540,143
|
|
Contractholder receivables
|
—
|
|
|
—
|
|
|
1,978,414
|
|
|
—
|
|
|
1,978,414
|
|
Ceded unearned premiums
|
—
|
|
|
—
|
|
|
2,165,789
|
|
|
(1,239,178
|
)
|
|
926,611
|
|
Deferred acquisition costs
|
—
|
|
|
—
|
|
|
693,053
|
|
|
(157,229
|
)
|
|
535,824
|
|
Goodwill and intangible assets
|
—
|
|
|
—
|
|
|
652,611
|
|
|
—
|
|
|
652,611
|
|
Other assets
|
13,176
|
|
|
49,585
|
|
|
1,860,505
|
|
|
(86,671
|
)
|
|
1,836,595
|
|
|
Total assets
|
$
|
9,516,728
|
|
|
$
|
4,224,011
|
|
|
$
|
42,866,842
|
|
|
$
|
(24,555,923
|
)
|
|
$
|
32,051,658
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,236,401
|
|
|
$
|
(5,852,609
|
)
|
|
$
|
11,383,792
|
|
Unearned premiums
|
—
|
|
|
—
|
|
|
4,861,491
|
|
|
(1,239,177
|
)
|
|
3,622,314
|
|
Reinsurance balances payable
|
—
|
|
|
—
|
|
|
2,155,947
|
|
|
(1,832,451
|
)
|
|
323,496
|
|
Contractholder payables
|
—
|
|
|
—
|
|
|
1,978,414
|
|
|
—
|
|
|
1,978,414
|
|
Collateral held for insured obligations
|
—
|
|
|
—
|
|
|
240,183
|
|
|
—
|
|
|
240,183
|
|
Senior notes
|
297,053
|
|
|
494,621
|
|
|
941,210
|
|
|
—
|
|
|
1,732,884
|
|
Revolving credit agreement borrowings
|
—
|
|
|
—
|
|
|
816,132
|
|
|
—
|
|
|
816,132
|
|
Due to subsidiaries and affiliates
|
235
|
|
|
536,919
|
|
|
1,292,104
|
|
|
(1,829,258
|
)
|
|
—
|
|
Other liabilities
|
22,838
|
|
|
29,317
|
|
|
1,949,696
|
|
|
(293,343
|
)
|
|
1,708,508
|
|
|
Total liabilities
|
320,126
|
|
|
1,060,857
|
|
|
31,471,578
|
|
|
(11,046,838
|
)
|
|
21,805,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
220,622
|
|
|
(14,700
|
)
|
|
205,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
9,196,602
|
|
|
3,163,154
|
|
|
10,331,231
|
|
|
(13,494,385
|
)
|
|
9,196,602
|
|
Non-redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
843,411
|
|
|
—
|
|
|
843,411
|
|
|
Total shareholders’ equity
|
9,196,602
|
|
|
3,163,154
|
|
|
11,174,642
|
|
|
(13,494,385
|
)
|
|
10,040,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and shareholders’ equity
|
$
|
9,516,728
|
|
|
$
|
4,224,011
|
|
|
$
|
42,866,842
|
|
|
$
|
(24,555,923
|
)
|
|
$
|
32,051,658
|
|
|
|
|
|
ARCH CAPITAL
|
34
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,234,899
|
|
|
$
|
—
|
|
|
$
|
1,234,899
|
|
Net investment income
|
20
|
|
|
258
|
|
|
148,767
|
|
|
(22,321
|
)
|
|
126,724
|
|
Net realized gains (losses)
|
29
|
|
|
(7
|
)
|
|
(111,020
|
)
|
|
—
|
|
|
(110,998
|
)
|
Net impairment losses recognized in earnings
|
—
|
|
|
—
|
|
|
(162
|
)
|
|
—
|
|
|
(162
|
)
|
Other underwriting income
|
—
|
|
|
—
|
|
|
5,349
|
|
|
—
|
|
|
5,349
|
|
Equity in net income (loss) of investment funds accounted for using the equity method
|
—
|
|
|
—
|
|
|
28,069
|
|
|
—
|
|
|
28,069
|
|
Other income (loss)
|
(78
|
)
|
|
—
|
|
|
152
|
|
|
—
|
|
|
74
|
|
|
Total revenues
|
(29
|
)
|
|
251
|
|
|
1,306,054
|
|
|
(22,321
|
)
|
|
1,283,955
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
636,860
|
|
|
—
|
|
|
636,860
|
|
Acquisition expenses
|
—
|
|
|
—
|
|
|
191,376
|
|
|
—
|
|
|
191,376
|
|
Other operating expenses
|
—
|
|
|
—
|
|
|
175,015
|
|
|
—
|
|
|
175,015
|
|
Corporate expenses
|
16,169
|
|
|
289
|
|
|
(1,146
|
)
|
|
—
|
|
|
15,312
|
|
Amortization of intangible assets
|
—
|
|
|
—
|
|
|
26,736
|
|
|
—
|
|
|
26,736
|
|
Interest expense
|
5,536
|
|
|
11,926
|
|
|
35,172
|
|
|
(21,998
|
)
|
|
30,636
|
|
Net foreign exchange (gains) losses
|
29
|
|
|
—
|
|
|
16,436
|
|
|
3,256
|
|
|
19,721
|
|
|
Total expenses
|
21,734
|
|
|
12,215
|
|
|
1,080,449
|
|
|
(18,742
|
)
|
|
1,095,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
(21,763
|
)
|
|
(11,964
|
)
|
|
225,605
|
|
|
(3,579
|
)
|
|
188,299
|
|
Income tax (expense) benefit
|
—
|
|
|
2,951
|
|
|
(24,866
|
)
|
|
—
|
|
|
(21,915
|
)
|
Income (loss) before equity in net income of subsidiaries
|
(21,763
|
)
|
|
(9,013
|
)
|
|
200,739
|
|
|
(3,579
|
)
|
|
166,384
|
|
Equity in net income of subsidiaries
|
172,186
|
|
|
86,420
|
|
|
—
|
|
|
(258,606
|
)
|
|
—
|
|
Net income
|
150,423
|
|
|
77,407
|
|
|
200,739
|
|
|
(262,185
|
)
|
|
166,384
|
|
Net (income) loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(16,284
|
)
|
|
323
|
|
|
(15,961
|
)
|
Net income available to Arch
|
150,423
|
|
|
77,407
|
|
|
184,455
|
|
|
(261,862
|
)
|
|
150,423
|
|
Preferred dividends
|
(10,437
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,437
|
)
|
Loss on redemption of preferred shares
|
(2,710
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,710
|
)
|
Net income available to Arch common shareholders
|
$
|
137,276
|
|
|
$
|
77,407
|
|
|
$
|
184,455
|
|
|
$
|
(261,862
|
)
|
|
$
|
137,276
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income available to Arch
|
$
|
48,162
|
|
|
$
|
6,537
|
|
|
$
|
79,081
|
|
|
$
|
(85,618
|
)
|
|
$
|
48,162
|
|
|
|
|
|
ARCH CAPITAL
|
35
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,117,017
|
|
|
$
|
—
|
|
|
$
|
1,117,017
|
|
Net investment income
|
5
|
|
|
816
|
|
|
137,981
|
|
|
(20,928
|
)
|
|
117,874
|
|
Net realized gains (losses)
|
—
|
|
|
—
|
|
|
34,153
|
|
|
—
|
|
|
34,153
|
|
Net impairment losses recognized in earnings
|
—
|
|
|
—
|
|
|
(1,807
|
)
|
|
—
|
|
|
(1,807
|
)
|
Other underwriting income
|
—
|
|
|
—
|
|
|
4,633
|
|
|
—
|
|
|
4,633
|
|
Equity in net income (loss) of investment funds accounted for using the equity method
|
—
|
|
|
—
|
|
|
48,088
|
|
|
—
|
|
|
48,088
|
|
Other income (loss)
|
171
|
|
|
—
|
|
|
(953
|
)
|
|
—
|
|
|
(782
|
)
|
|
Total revenues
|
176
|
|
|
816
|
|
|
1,339,112
|
|
|
(20,928
|
)
|
|
1,319,176
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
552,570
|
|
|
—
|
|
|
552,570
|
|
Acquisition expenses
|
—
|
|
|
—
|
|
|
182,289
|
|
|
—
|
|
|
182,289
|
|
Other operating expenses
|
—
|
|
|
—
|
|
|
174,719
|
|
|
—
|
|
|
174,719
|
|
Corporate expenses
|
17,247
|
|
|
2,008
|
|
|
8,537
|
|
|
—
|
|
|
27,792
|
|
Amortization of intangible assets
|
—
|
|
|
—
|
|
|
31,294
|
|
|
—
|
|
|
31,294
|
|
Interest expense
|
6,015
|
|
|
11,930
|
|
|
31,336
|
|
|
(20,605
|
)
|
|
28,676
|
|
Net foreign exchange (gains) losses
|
—
|
|
|
—
|
|
|
15,348
|
|
|
4,056
|
|
|
19,404
|
|
|
Total expenses
|
23,262
|
|
|
13,938
|
|
|
996,093
|
|
|
(16,549
|
)
|
|
1,016,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
(23,086
|
)
|
|
(13,122
|
)
|
|
343,019
|
|
|
(4,379
|
)
|
|
302,432
|
|
Income tax (expense) benefit
|
—
|
|
|
4,873
|
|
|
(33,270
|
)
|
|
—
|
|
|
(28,397
|
)
|
Income (loss) before equity in net income of subsidiaries
|
(23,086
|
)
|
|
(8,249
|
)
|
|
309,749
|
|
|
(4,379
|
)
|
|
274,035
|
|
Equity in net income of subsidiaries
|
276,213
|
|
|
77,373
|
|
|
—
|
|
|
(353,586
|
)
|
|
—
|
|
Net income
|
253,127
|
|
|
69,124
|
|
|
309,749
|
|
|
(357,965
|
)
|
|
274,035
|
|
Net (income) loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(21,231
|
)
|
|
323
|
|
|
(20,908
|
)
|
Net income available to Arch
|
253,127
|
|
|
69,124
|
|
|
288,518
|
|
|
(357,642
|
)
|
|
253,127
|
|
Preferred dividends
|
(11,218
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,218
|
)
|
Net income available to Arch common shareholders
|
$
|
241,909
|
|
|
$
|
69,124
|
|
|
$
|
288,518
|
|
|
$
|
(357,642
|
)
|
|
$
|
241,909
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income available to Arch
|
$
|
351,991
|
|
|
$
|
87,781
|
|
|
$
|
224,173
|
|
|
$
|
(311,954
|
)
|
|
$
|
351,991
|
|
|
|
|
|
ARCH CAPITAL
|
36
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
Condensed Consolidating Statement
of Cash Flows
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used For) Operating Activities
|
$
|
13,315
|
|
|
$
|
74,248
|
|
|
$
|
419,956
|
|
|
$
|
(107,339
|
)
|
|
$
|
400,180
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity investments
|
—
|
|
|
(26,501
|
)
|
|
(10,050,206
|
)
|
|
395,440
|
|
|
(9,681,267
|
)
|
Purchases of equity securities
|
—
|
|
|
—
|
|
|
(377,000
|
)
|
|
—
|
|
|
(377,000
|
)
|
Purchases of other investments
|
—
|
|
|
—
|
|
|
(522,454
|
)
|
|
—
|
|
|
(522,454
|
)
|
Proceeds from the sales of fixed maturity investments
|
—
|
|
|
16,997
|
|
|
9,057,590
|
|
|
(395,440
|
)
|
|
8,679,147
|
|
Proceeds from the sales of equity securities
|
—
|
|
|
—
|
|
|
291,311
|
|
|
—
|
|
|
291,311
|
|
Proceeds from the sales, redemptions and maturities of other investments
|
—
|
|
|
—
|
|
|
436,566
|
|
|
—
|
|
|
436,566
|
|
Proceeds from redemptions and maturities of fixed maturity investments
|
—
|
|
|
—
|
|
|
287,031
|
|
|
—
|
|
|
287,031
|
|
Net settlements of derivative instruments
|
—
|
|
|
—
|
|
|
36,070
|
|
|
—
|
|
|
36,070
|
|
Net (purchases) sales of short-term investments
|
92,885
|
|
|
(15,547
|
)
|
|
517,980
|
|
|
—
|
|
|
595,318
|
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
161,567
|
|
|
—
|
|
|
161,567
|
|
Contributions to subsidiaries
|
—
|
|
|
—
|
|
|
(2,970
|
)
|
|
2,970
|
|
|
—
|
|
Purchases of fixed assets
|
(13
|
)
|
|
—
|
|
|
(4,227
|
)
|
|
—
|
|
|
(4,240
|
)
|
Other
|
—
|
|
|
—
|
|
|
40,037
|
|
|
—
|
|
|
40,037
|
|
|
Net Cash Provided By (Used For) Investing Activities
|
92,872
|
|
|
(25,051
|
)
|
|
(128,705
|
)
|
|
2,970
|
|
|
(57,914
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Redemption of preferred shares
|
(92,555
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(92,555
|
)
|
Purchases of common shares under share repurchase program
|
(3,299
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,299
|
)
|
Proceeds from common shares issued, net
|
(2,779
|
)
|
|
—
|
|
|
2,970
|
|
|
(2,970
|
)
|
|
(2,779
|
)
|
Proceeds from borrowings
|
—
|
|
|
—
|
|
|
39,585
|
|
|
—
|
|
|
39,585
|
|
Repayments of borrowings
|
—
|
|
|
—
|
|
|
(101,000
|
)
|
|
—
|
|
|
(101,000
|
)
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
(161,567
|
)
|
|
—
|
|
|
(161,567
|
)
|
Dividends paid to redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
(4,816
|
)
|
|
319
|
|
|
(4,497
|
)
|
Dividends paid to parent (1)
|
—
|
|
|
—
|
|
|
(107,020
|
)
|
|
107,020
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(2,356
|
)
|
|
—
|
|
|
(2,356
|
)
|
Preferred dividends paid
|
(10,437
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,437
|
)
|
|
Net Cash Provided By (Used For) Financing Activities
|
(109,070
|
)
|
|
—
|
|
|
(334,204
|
)
|
|
104,369
|
|
|
(338,905
|
)
|
Effects of exchange rates changes on foreign currency cash and restricted cash
|
(4
|
)
|
|
—
|
|
|
1,615
|
|
|
—
|
|
|
1,611
|
|
Increase (decrease) in cash and restricted cash
|
(2,887
|
)
|
|
49,197
|
|
|
(41,338
|
)
|
|
—
|
|
|
4,972
|
|
Cash and restricted cash, beginning of year
|
10,052
|
|
|
30,380
|
|
|
686,852
|
|
|
—
|
|
|
727,284
|
|
Cash and restricted cash, end of period
|
$
|
7,165
|
|
|
$
|
79,577
|
|
|
$
|
645,514
|
|
|
$
|
—
|
|
|
$
|
732,256
|
|
(1) Dividends received by parent are included in net cash provided by (used for) operating activities.
|
|
|
|
ARCH CAPITAL
|
37
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
Condensed Consolidating Statement
of Cash Flows
|
Arch Capital (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other Arch Capital Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
Arch Capital Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used For) Operating Activities
|
$
|
701
|
|
|
$
|
(3,257
|
)
|
|
$
|
239,628
|
|
|
$
|
(53,414
|
)
|
|
$
|
183,658
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity investments
|
—
|
|
|
—
|
|
|
(10,476,918
|
)
|
|
—
|
|
|
(10,476,918
|
)
|
Purchases of equity securities
|
—
|
|
|
—
|
|
|
(143,833
|
)
|
|
—
|
|
|
(143,833
|
)
|
Purchases of other investments
|
—
|
|
|
—
|
|
|
(427,039
|
)
|
|
—
|
|
|
(427,039
|
)
|
Proceeds from the sales of fixed maturity investments
|
—
|
|
|
—
|
|
|
10,386,746
|
|
|
—
|
|
|
10,386,746
|
|
Proceeds from the sales of equity securities
|
—
|
|
|
—
|
|
|
253,347
|
|
|
—
|
|
|
253,347
|
|
Proceeds from the sales, redemptions and maturities of other investments
|
—
|
|
|
—
|
|
|
317,518
|
|
|
—
|
|
|
317,518
|
|
Proceeds from redemptions and maturities of fixed maturity investments
|
—
|
|
|
—
|
|
|
174,718
|
|
|
—
|
|
|
174,718
|
|
Net settlements of derivative instruments
|
—
|
|
|
—
|
|
|
(3,921
|
)
|
|
—
|
|
|
(3,921
|
)
|
Net (purchases) sales of short-term investments
|
2,356
|
|
|
(43
|
)
|
|
(400,164
|
)
|
|
—
|
|
|
(397,851
|
)
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
180,946
|
|
|
—
|
|
|
180,946
|
|
Contributions to subsidiaries
|
—
|
|
|
(25,900
|
)
|
|
(60,050
|
)
|
|
85,950
|
|
|
—
|
|
Purchases of fixed assets
|
—
|
|
|
(10
|
)
|
|
(5,184
|
)
|
|
—
|
|
|
(5,194
|
)
|
Other
|
20,641
|
|
|
—
|
|
|
23,068
|
|
|
(20,641
|
)
|
|
23,068
|
|
|
Net Cash Provided By (Used For) Investing Activities
|
22,997
|
|
|
(25,953
|
)
|
|
(180,766
|
)
|
|
65,309
|
|
|
(118,413
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from common shares issued, net
|
(3,990
|
)
|
|
—
|
|
|
85,950
|
|
|
(85,950
|
)
|
|
(3,990
|
)
|
Repayments of borrowings
|
—
|
|
|
—
|
|
|
(22,000
|
)
|
|
—
|
|
|
(22,000
|
)
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
(180,946
|
)
|
|
—
|
|
|
(180,946
|
)
|
Dividends paid to redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
(4,816
|
)
|
|
319
|
|
|
(4,497
|
)
|
Dividends paid to parent (1)
|
—
|
|
|
—
|
|
|
(53,095
|
)
|
|
53,095
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(25,659
|
)
|
|
20,641
|
|
|
(5,018
|
)
|
Preferred dividends paid
|
(11,218
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,218
|
)
|
|
Net Cash Provided By (Used For) Financing Activities
|
(15,208
|
)
|
|
—
|
|
|
(200,566
|
)
|
|
(11,895
|
)
|
|
(227,669
|
)
|
Effects of exchange rates changes on foreign currency cash and restricted cash
|
—
|
|
|
—
|
|
|
2,618
|
|
|
—
|
|
|
2,618
|
|
Increase (decrease) in cash and restricted cash
|
8,490
|
|
|
(29,210
|
)
|
|
(139,086
|
)
|
|
—
|
|
|
(159,806
|
)
|
Cash and restricted cash, beginning of year
|
1,738
|
|
|
71,955
|
|
|
895,876
|
|
|
—
|
|
|
969,569
|
|
Cash and restricted cash, end of period
|
$
|
10,228
|
|
|
$
|
42,745
|
|
|
$
|
756,790
|
|
|
$
|
—
|
|
|
$
|
809,763
|
|
(1) Dividends received by parent are included in net cash provided by (used for) operating activities.
|
|
|
|
ARCH CAPITAL
|
38
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14
. Income Taxes
The Company’s income tax provision on income before income taxes resulted in
an expense
of
11.6%
for the
three months ended March 31, 2018
, compared to
an expense
of
9.4%
for the
2017
period. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. For interim reporting purposes, the Company has calculated its effective tax rate for the full year of 2018 by treating any excess tax benefits that arise from the accounting for stock based compensation as a discrete item. As such, this amount is not included when projecting the Company’s full year effective tax rate but rather is accounted for at the U.S. Federal statutory rate of
21%
after applying the projected full year effective tax rate to actual three-month results before the discrete item. The impact of the discrete item resulted in a benefit of
0.7%
for the
three months ended March 31, 2018
.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Cuts Act”). Pursuant to the guidance within SAB 118, the Company’s remeasurement of its deferred taxes at December 31, 2017 included certain provisional effects associated with enactment of the Tax Cuts Act for which measurement could be reasonably estimated. Provisional amounts may be adjusted in 2018 during the measurement period in accordance with SAB 118 when additional information is obtained. Additional information that may affect the provisional amounts would include, completion of the Company’s U.S. subsidiaries’ 2017 tax return filings, and potential future guidance from the IRS with respect to the transitional adjustment pertaining to loss reserve discounting as well as the utilization of alternative minimum tax credits. The Company’s income tax provision for the three months ended March 31, 2018 does not include any adjustments to the provisional effects recorded at December 31, 2017.
The Company had a net deferred tax asset of
$28.1 million
at
March 31, 2018
, compared to
$39.6 million
at
December 31, 2017
. In addition, the Company
recovered
$49.9 million
and
paid
$0.7 million
of income taxes for the
three months ended March 31, 2018
and
2017
, respectively.
15
. Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of
March 31, 2018
, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
16
. Subsequent Events
Bellemeade 2018-1
In April 2018, the Company’s first-lien U.S. mortgage insurance subsidiaries entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re 2018-1 Ltd. (“Bellemeade 2018-1”), a special purpose reinsurance company domiciled in Bermuda. The Bellemeade 2018-1 agreement provides for up to
$374.5 million
of aggregate excess of loss reinsurance coverage at inception in excess of
$168.5 million
of aggregate losses for new delinquencies on a portfolio of in-force policies primarily issued from July through December of 2017. The coverage amount decreases over a ten-year period as the underlying covered mortgages amortize.
Bellemeade 2018-1 financed the coverage through the issuance of mortgage insurance-linked notes in an aggregate amount of approximately
$374.5 million
to unrelated investors (the “Notes”). The maturity date of the Notes is April 25, 2028. The Notes will be redeemed prior to maturity upon the occurrence of a mandatory termination event or if the ceding insurers trigger a termination of the reinsurance agreement following the occurrence of an optional termination event. All of the proceeds paid to Bellemeade 2018-1 from the sale of the Notes were deposited into a reinsurance trust as security for Bellemeade 2018-1’s obligations. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds.
Three-For-One Common Share Split
On February 28, 2018, the board of directors of Arch Capital approved a
three
-for-one split on Arch Capital’s common shares. The share split was subject to the approval by shareholders of a proposal to amend the memorandum of association by sub-dividing the authorized common shares of Arch Capital to effect a three-for-one split of Arch Capital’s common shares. At the 2018 Annual Meeting of Shareholders, shareholders approved the proposed amendment. Such amendment will become effective on June 18, 2018, which will become the record date for the determination of the owners of common shares entitled to additional common shares and the distribution date for such additional common shares will be on or about June 20, 2018. At that time, each record date
|
|
|
|
ARCH CAPITAL
|
39
|
2018 FIRST QUARTER FORM 10-Q
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
shareholder will become the record owner of, and entitled to receive two additional common shares for each common share then owned of record by such shareholder. Shareholders will receive information about the additional common shares to which they are entitled on or around the distribution date.
The share split will change the Company’s authorized common shares from the current
600 million
common shares, U.S.
$.0033
par value, to
1.8 billion
common shares, U.S.
$.0011
par value. Information pertaining to the composition of the Company’s shareholders’ equity accounts, shares and earnings per share has not been restated in the accompanying financial statements and notes to the consolidated financial statements to reflect the share split.
Information presented on an unaudited pro forma basis, reflecting the impact of the share split for the 2018 first quarter and 2017 first quarter, is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Net income available to Arch common shareholders
|
$
|
137,276
|
|
|
$
|
241,909
|
|
|
|
|
|
Net income per common share and common share equivalent data:
|
|
|
|
As reported:
|
|
|
|
Basic
|
$
|
1.01
|
|
|
$
|
1.80
|
|
Diluted
|
$
|
0.99
|
|
|
$
|
1.74
|
|
|
|
|
|
Pro forma:
|
|
|
|
Basic
|
$
|
0.34
|
|
|
$
|
0.60
|
|
Diluted
|
$
|
0.33
|
|
|
$
|
0.58
|
|
|
|
|
|
Weighted average common shares and common share equivalents outstanding
|
|
|
|
|
As reported:
|
|
|
|
Basic
|
135,846,576
|
|
|
134,034,927
|
|
Diluted
|
139,297,934
|
|
|
139,047,672
|
|
|
|
|
|
Pro forma:
|
|
|
|
Basic
|
407,539,728
|
|
|
402,104,781
|
|
Diluted
|
417,893,802
|
|
|
417,143,016
|
|
Share Repurchases
From April 1, 2018 to May 9, 2018, Arch Capital repurchased
1,379,080
shares under the share repurchase program with an aggregate purchase price of
$110.5 million
. At May 9, 2018, approximately
$332.7 million
of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2019.
|
|
|
|
ARCH CAPITAL
|
40
|
2018 FIRST QUARTER FORM 10-Q
|