ACGL 10Q 3.31.15
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the period ended March 31, 2015
 
Or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number:  001-26456

 
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
 
Bermuda
(State or other jurisdiction of incorporation or organization)
 
Not Applicable
(I.R.S. Employer Identification No.)
 
Waterloo House, Ground Floor
100 Pitts Bay Road, Pembroke HM 08
(Address of principal executive offices)
 
(441) 278-9250
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
 
As of May 5, 2015, there were 124,030,813 common shares, $0.0033 par value per share, of the registrant outstanding.

Table of Contents

ARCH CAPITAL GROUP LTD.
 
INDEX
 
 
 
Page No.
PART I. Financial Information
 
 
 
 
 
Item 1 — Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015 (unaudited) and December 31, 2014
 
 
 
 
 
 
For the three month periods ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
Table of Contents

Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of
Arch Capital Group Ltd.:
 
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2015, and the related consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2015 and March 31, 2014, and the consolidated statements of changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2015 and March 31, 2014. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2014, 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 27, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
/s/ PricewaterhouseCoopers LLP
 
New York, New York
May 8, 2015

2
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
March 31,
2015
 
December 31,
2014
Assets
 

 
 

Investments:
 

 
 

Fixed maturities available for sale, at fair value (amortized cost: $10,343,330 and $10,701,557)
$
10,427,810

 
$
10,750,770

Short-term investments available for sale, at fair value (amortized cost: $859,167 and $801,758)
855,032

 
797,226

Investment of funds received under securities lending, at fair value (amortized cost: $253,159 and $40,473)
257,059

 
44,301

Equity securities available for sale, at fair value (cost: $578,520 and $562,534)
687,713

 
658,182

Other investments available for sale, at fair value (cost: $292,287 and $264,747)
329,677

 
296,224

Investments accounted for using the fair value option
2,441,986

 
2,435,532

Investments accounted for using the equity method
412,367

 
349,014

Total investments
15,411,644

 
15,331,249

 
 
 
 
Cash
471,012

 
485,702

Accrued investment income
73,282

 
74,316

Investment in joint venture (cost: $100,000)
90,724

 
90,426

Fixed maturities and short-term investments pledged under securities lending, at fair value
253,115

 
50,802

Premiums receivable
1,116,389

 
948,695

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
1,788,619

 
1,812,845

Contractholder receivables
1,339,433

 
1,309,192

Prepaid reinsurance premiums
421,908

 
377,078

Deferred acquisition costs, net
442,775

 
414,525

Receivable for securities sold
400,113

 
78,170

Goodwill and intangible assets
106,745

 
109,539

Other assets
933,921

 
927,004

Total assets
$
22,849,680

 
$
22,009,543

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
8,928,950

 
$
9,036,448

Unearned premiums
2,400,834

 
2,231,578

Reinsurance balances payable
200,444

 
219,312

Contractholder payables
1,339,433

 
1,309,192

Deposit accounting liabilities
284,828

 
327,384

Senior notes
800,000

 
800,000

Revolving credit agreement borrowings
100,000

 
100,000

Securities lending payable
263,216

 
50,529

Payable for securities purchased
554,625

 
128,413

Other liabilities
679,450

 
688,041

Total liabilities
15,551,780

 
14,890,897

 
 
 
 
Commitments and Contingencies


 


Redeemable noncontrolling interests
219,604

 
219,512

 
 
 
 
Shareholders' Equity
 
 
 
Non-cumulative preferred shares
325,000

 
325,000

Common shares ($0.0033 par, shares issued: 171,832,868 and 171,672,408)
573

 
572

Additional paid-in capital
399,757

 
383,073

Retained earnings
7,132,423

 
6,854,571

Accumulated other comprehensive income, net of deferred income tax
158,023

 
128,856

Common shares held in treasury, at cost (shares: 47,072,027 and 44,304,474)
(1,727,074
)
 
(1,562,019
)
Total shareholders' equity available to Arch
6,288,702

 
6,130,053

Non-redeemable noncontrolling interests
789,594

 
769,081

Total shareholders' equity
7,078,296

 
6,899,134

Total liabilities, noncontrolling interests and shareholders' equity
$
22,849,680

 
$
22,009,543



See Notes to Consolidated Financial Statements

3
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Revenues
 

 
 

Net premiums written
$
1,066,995

 
$
1,064,990

Change in unearned premiums
(156,731
)
 
(205,210
)
Net premiums earned
910,264

 
859,780

Net investment income
78,994

 
66,994

Net realized gains (losses)
83,348

 
19,697

Other-than-temporary impairment losses
(7,247
)
 
(2,971
)
Less investment impairments recognized in other comprehensive income, before taxes
1,448

 
—

Net impairment losses recognized in earnings
(5,799
)
 
(2,971
)
 
 
 
 
Other underwriting income
11,536

 
1,582

Equity in net income of investment funds accounted for using the equity method
5,889

 
3,253

Other income (loss)
(1,888
)
 
(2,104
)
Total revenues
1,082,344

 
946,231

 
 
 
 
Expenses
 
 
 
Losses and loss adjustment expenses
493,716

 
436,240

Acquisition expenses
163,076

 
160,342

Other operating expenses
157,882

 
145,799

Interest expense
12,736

 
14,404

Net foreign exchange (gains) losses
(66,501
)
 
6,563

Total expenses
760,909

 
763,348

 
 
 
 
Income before income taxes
321,435

 
182,883

Income tax expense
(12,678
)
 
(3,738
)
Net income
$
308,757

 
$
179,145

Amounts attributable to noncontrolling interests
(25,421
)
 
3,355

Net income available to Arch
283,336

 
182,500

Preferred dividends
(5,484
)
 
(5,484
)
Net income available to Arch common shareholders
$
277,852

 
$
177,016

 
 
 
 
Net income per common share
 

 
 

Basic
$
2.24

 
$
1.34

Diluted
$
2.16

 
$
1.30

 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
Basic
124,209,276

 
131,857,910

Diluted
128,451,054

 
136,562,717





See Notes to Consolidated Financial Statements

4
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Comprehensive Income
 
 
 
Net income
$
308,757

 
$
179,145

Other comprehensive income (loss), net of deferred income tax
 
 
 
Unrealized appreciation (decline) in value of available-for-sale investments:
 
 
 
Unrealized holding gains (losses) arising during period
84,304

 
71,353

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
(1,448
)
 
—

Reclassification of net realized (gains) losses, net of income taxes, included in net income
(30,932
)
 
(21,249
)
Foreign currency translation adjustments
(22,757
)
 
(1,349
)
Comprehensive income
337,924

 
227,900

Amounts attributable to noncontrolling interests
(25,421
)
 
3,355

Comprehensive income available to Arch
$
312,503

 
$
231,255





See Notes to Consolidated Financial Statements

5
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Non-cumulative preferred shares
 

 
 

Balance at beginning and end of period
$
325,000

 
$
325,000

 
 
 
 
Common shares
 
 
 
Balance at beginning of year
572

 
565

Common shares issued, net
1

 
2

Balance at end of period
573

 
567

 
 
 
 
Additional paid-in capital
 

 
 

Balance at beginning of year
383,073

 
299,517

Common shares issued, net
—

 
—

Exercise of stock options
3,368

 
8,054

Amortization of share-based compensation
13,238

 
14,175

Other
78

 
(1,243
)
Balance at end of period
399,757

 
320,503

 
 
 
 
Retained earnings
 

 
 

Balance at beginning of year
6,854,571

 
6,042,154

Net income
308,757

 
179,145

Amounts attributable to noncontrolling interests
(25,421
)
 
3,355

Preferred share dividends
(5,484
)
 
(5,484
)
Balance at end of period
7,132,423

 
6,219,170

 
 
 
 
Accumulated other comprehensive income
 
 
 
Balance at beginning of year
128,856

 
74,964

Unrealized appreciation in value of available-for-sale investments, net of deferred income tax:
 
 
 
Balance at beginning of year
161,598

 
80,692

Unrealized holding gains (losses) arising during period, net of reclassification adjustment
53,372

 
50,104

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
(1,448
)
 
—

Balance at end of period
213,522

 
130,796

Foreign currency translation adjustments:
 
 
 
Balance at beginning of year
(32,742
)
 
(5,728
)
Foreign currency translation adjustments
(22,757
)
 
(1,349
)
Balance at end of period
(55,499
)
 
(7,077
)
Balance at end of period
158,023

 
123,719

 
 
 
 
Common shares held in treasury, at cost
 
 
 
Balance at beginning of year
(1,562,019
)
 
(1,094,704
)
Shares repurchased for treasury
(165,055
)
 
(2,122
)
Balance at end of period
(1,727,074
)
 
(1,096,826
)
 
 
 
 
Total shareholders’ equity available to Arch
6,288,702

 
5,892,133

Non-redeemable noncontrolling interests
789,594

 
793,496

Total shareholders’ equity
$
7,078,296

 
$
6,685,629




 

See Notes to Consolidated Financial Statements

6
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Operating Activities
 

 
 

Net income
$
308,757

 
$
179,145

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized gains
(87,907
)
 
(22,367
)
Net impairment losses recognized in earnings
5,799

 
2,971

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
(1,970
)
 
9,559

Share-based compensation
13,238

 
14,175

Changes in:
 
 
 
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable
54,327

 
10,326

Unearned premiums, net of prepaid reinsurance premiums
156,731

 
205,210

Premiums receivable
(192,247
)
 
(242,616
)
Deferred acquisition costs, net
(36,304
)
 
(41,988
)
Reinsurance balances payable
(16,022
)
 
5,428

Other liabilities
(48,856
)
 
59,285

Other items
(70,085
)
 
19,041

Net Cash Provided By Operating Activities
85,461

 
198,169

 
 
 
 
Investing Activities
 

 
 

Purchases of fixed maturity investments
(7,030,731
)
 
(7,131,071
)
Purchases of equity securities
(125,863
)
 
(89,227
)
Purchases of other investments
(685,497
)
 
(304,454
)
Proceeds from sales of fixed maturity investments
6,857,459

 
7,014,281

Proceeds from sales of equity securities
125,906

 
49,614

Proceeds from sales, redemptions and maturities of other investments
605,263

 
331,176

Proceeds from redemptions and maturities of fixed maturity investments
272,657

 
168,484

Net sales (purchases) of short-term investments
66,283

 
156,262

Change in cash collateral related to securities lending
(5,529
)
 
4,669

Purchase of business, net of cash acquired
(2,432
)
 
(235,578
)
Purchases of furniture, equipment and other assets
(32,897
)
 
(5,382
)
Net Cash Provided By (Used For) Investing Activities
44,619

 
(41,226
)
 
 
 
 
Financing Activities
 

 
 

Purchases of common shares under share repurchase program
(162,898
)
 
—

Proceeds from common shares issued, net
(412
)
 
3,021

Change in cash collateral related to securities lending
5,529

 
(4,669
)
Third party investment in non-redeemable noncontrolling interests
—

 
796,903

Third party investment in redeemable noncontrolling interests
—

 
186,893

Dividends paid to redeemable noncontrolling interests
(4,816
)
 
—

Other
29,779

 
1,700

Preferred dividends paid
(5,484
)
 
(5,484
)
Net Cash Provided By (Used For) Financing Activities
(138,302
)
 
978,364

 
 
 
 
Effects of exchange rate changes on foreign currency cash
(6,468
)
 
241

 
 
 
 
Increase (decrease) in cash
(14,690
)
 
1,135,548

Cash beginning of year
485,702

 
434,057

Cash end of period
$
471,012

 
$
1,569,605

 
 
 
 
Income taxes paid
$
3,569

 
$
1,600

Interest paid
$
511

 
$
404



See Notes to Consolidated Financial Statements

7
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.    General

Arch Capital Group Ltd. (“ACGL”) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its subsidiaries (together with ACGL, the “Company”). The Company’s consolidated financial statements include the results of Watford Holdings Ltd., the parent of Watford Re Ltd. (see Note 3).

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 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

A new accounting standard issued in the 2014 second quarter will change the manner in which most companies recognize revenue. The standard requires that revenue reflect the transfer of goods or services to customers based on the consideration or payment the company expects to be entitled to in exchange for those goods or services; however, the standard does not change the accounting for insurance contracts or financial instruments. The new standard also requires enhanced disclosures about revenue. This accounting guidance is effective in the 2017 first quarter and may be applied on a full retrospective or modified retrospective approach. However, there is currently a proposal to defer the effective date by one year. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.

A new accounting standard was issued in the 2015 first quarter providing targeted improvements to consolidation guidance for limited partnerships and other similarly structured entities. The new standard addresses instances where a reporting entity consolidates another entity when the reporting entity is simply acting on the behalf of others, amongst other related issues. While the standard is targeted, the application is relevant for all companies that are required to assess whether or not to consolidate certain entities. The standard is effective in the 2016 first quarter and early adoption is permitted. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.

In April 2015, new accounting guidance was issued relating to the presentation of debt issuance costs in the balance sheet. The new guidance requires that those costs be presented in the balance sheet as a deduction to the carrying amount of the related debt rather than as a separate asset. The new guidance is effective in the 2016 first quarter and early adoption is permitted. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.


8
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.     Variable Interest Entity and Noncontrolling Interests

Variable interest entity

On March 20, 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 variable interest entity (“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 concluded that Watford Re represents a separate operating segment and provides the income statement and total investable assets, total assets and total liabilities of Watford Re within Note 5. At March 31, 2015, Watford Re’s liabilities included unearned premiums of $233.0 million and reserves for losses and loss adjustment expenses of $109.4 million, some of which is related to transactions with the Company. During the 2015 first quarter, Watford Re generated $69.9 million of cash provided by operating activities and $22.9 million of cash provided by financing activities, partially offset by $35.3 million of cash used for investing activities.

Because Watford Re is an independent company, the assets of Watford Re can be used only to settle obligations of Watford Re and Watford Re is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions.

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, 2015. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘amounts attributable to noncontrolling interests.’ The following table sets forth activity in the non-redeemable noncontrolling interests:
 
Three Months Ended
 
March 31,
 
2015
 
2014
Balance, beginning of period
$
769,081

 
$
—

Sale of shares to noncontrolling interests
—

 
796,903

Amounts attributable to noncontrolling interests
20,513

 
(3,407
)
Balance, end of period
$
789,594

 
$
793,496


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 represent the 9,065,200 cumulative redeemable preference shares (“Watford Preference Shares”) issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per share. Third party investors own 100% of the Watford Preference Shares at March 31, 2015. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘amounts attributable to noncontrolling interests’ in the Company’s consolidated statements of income.

The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘amounts attributable to noncontrolling interests.’ During the 2015 first quarter, amounts attributable to noncontrolling interests of $25.4 million reflected the net impact of amounts attributable to non-redeemable noncontrolling interests of $20.5 million and amounts attributable to redeemable noncontrolling interests of $4.9 million, as described above.


9
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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,
 
2015
 
2014
 
 
 
 
Numerator:
 

 
 

Net income
$
308,757

 
$
179,145

Amounts attributable to noncontrolling interests
(25,421
)
 
3,355

Net income available to Arch
283,336

 
182,500

Preferred dividends
(5,484
)
 
(5,484
)
Net income available to Arch common shareholders
$
277,852

 
$
177,016

 
 
 
 
Denominator:
 

 
 

Weighted average common shares outstanding — basic
124,209,276

 
131,857,910

Effect of dilutive common share equivalents:
 
 
 
Nonvested restricted shares
1,416,801

 
1,346,401

Stock options (1)
2,824,977

 
3,358,406

Weighted average common shares and common share equivalents outstanding — diluted
128,451,054

 
136,562,717

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
2.24

 
$
1.34

Diluted
$
2.16

 
$
1.30

_________________________________________________
(1)
Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2015 first quarter and 2014 first quarter, the number of stock options excluded were 703,853 and 759,172, respectively.


10
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.    Segment Information
 
The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the Chairman, President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.

The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).

The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).

The mortgage segment consists of the Company’s mortgage insurance and reinsurance business and includes the results of Arch Mortgage Insurance Company (“Arch MI U.S.”). Arch MI U.S. is approved as an eligible mortgage insurer by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (each a government sponsored enterprise, or “GSE”) and provides mortgage insurance to banks, credit unions and other lenders nationwide. The mortgage segment also provides reinsurance on a global basis, direct mortgage insurance in Europe and various risk-sharing products to government agencies and mortgage lenders.

The corporate (non-underwriting) segment results include net investment income, other income (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net impairment losses included in earnings, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, income taxes and items related to the Company’s non-cumulative preferred shares. Such amounts exclude the results of the ‘other’ segment.

The ‘other’ segment includes the results of Watford Re (see Note 3). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.


11
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:
 
Three Months Ended
 
March 31, 2015
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
766,153

 
$
485,112

 
$
60,541

 
$
1,311,678

 
$
128,633

 
$
1,342,022

Premiums ceded
(224,150
)
 
(136,569
)
 
(8,670
)
 
(369,261
)
 
(4,055
)
 
(275,027
)
Net premiums written
542,003

 
348,543

 
51,871

 
942,417

 
124,578

 
1,066,995

Change in unearned premiums
(34,089
)
 
(68,826
)
 
(1,504
)
 
(104,419
)
 
(52,312
)
 
(156,731
)
Net premiums earned
507,914

 
279,717

 
50,367

 
837,998

 
72,266

 
910,264

Other underwriting income
427

 
1,429

 
7,718

 
9,574

 
1,962

 
11,536

Losses and loss adjustment expenses
(317,896
)
 
(112,532
)
 
(13,809
)
 
(444,237
)
 
(49,479
)
 
(493,716
)
Acquisition expenses, net
(75,078
)
 
(56,604
)
 
(10,418
)
 
(142,100
)
 
(20,976
)
 
(163,076
)
Other operating expenses
(88,119
)
 
(38,044
)
 
(20,369
)
 
(146,532
)
 
(2,005
)
 
(148,537
)
Underwriting income (loss)
$
27,248

 
$
73,966

 
$
13,489

 
114,703

 
1,768

 
116,471

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
70,288

 
8,706

 
78,994

Net realized gains (losses)
 
 
 
 
 
 
65,509

 
17,839

 
83,348

Net impairment losses recognized in earnings
 
 
 
 
 
 
(5,799
)
 
—

 
(5,799
)
Equity in net income of investment funds accounted for using the equity method
 
 
 
 
 
 
5,889

 
—

 
5,889

Other income (loss)
 
 
 
 
 
 
(1,888
)
 
—

 
(1,888
)
Other expenses
 
 
 
 
 
 
(9,345
)
 
—

 
(9,345
)
Interest expense
 
 
 
 
 
 
(12,736
)
 
—

 
(12,736
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
66,853

 
(352
)
 
66,501

Income before income taxes
 
 
 
 
 
 
293,474

 
27,961

 
321,435

Income tax expense
 
 
 
 
 
 
(12,678
)
 
—

 
(12,678
)
Net income
 
 
 
 
 
 
280,796

 
27,961

 
308,757

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
—

 
(4,908
)
 
(4,908
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 
—

 
(20,513
)
 
(20,513
)
Net income available to Arch
 
 
 
 
 
 
280,796

 
2,540

 
283,336

Preferred dividends
 
 
 
 
 
 
(5,484
)
 
—

 
(5,484
)
Net income available to Arch common shareholders
 
 
 
 
 
 
$
275,312

 
$
2,540

 
$
277,852

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
62.6
%
 
40.2
%
 
27.4
%
 
53.0
%
 
68.5
%
 
54.2
%
Acquisition expense ratio
14.8
%
 
20.2
%
 
20.7
%
 
17.0
%
 
29.0
%
 
17.9
%
Other operating expense ratio
17.3
%
 
13.6
%
 
40.4
%
 
17.5
%
 
2.8
%
 
16.3
%
Combined ratio
94.7
%
 
74.0
%
 
88.5
%
 
87.5
%
 
100.3
%
 
88.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
30,526

 
$
2,687

 
$
73,532

 
$
106,745

 
$
—

 
$
106,745

 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
$
14,456,612

 
$
1,267,588

 
$
15,724,200

Total assets
 
 
 
 
 
 
21,227,143

 
1,622,537

 
22,849,680

Total liabilities
 
 
 
 
 
 
15,036,245

 
515,535

 
15,551,780

_________________________________________________
(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.

 

12
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Three Months Ended
 
March 31, 2014
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
730,646

 
$
517,053

 
$
47,907

 
$
1,295,136

 
$
32,194

 
$
1,295,136

Premiums ceded
(185,044
)
 
(73,127
)
 
(4,639
)
 
(262,340
)
 
—

 
(230,146
)
Net premiums written
545,602

 
443,926

 
43,268

 
1,032,796

 
32,194

 
1,064,990

Change in unearned premiums
(68,101
)
 
(102,578
)
 
(4,503
)
 
(175,182
)
 
(30,028
)
 
(205,210
)
Net premiums earned
477,501

 
341,348

 
38,765

 
857,614

 
2,166

 
859,780

Other underwriting income
500

 
316

 
766

 
1,582

 
—

 
1,582

Losses and loss adjustment expenses
(286,770
)
 
(139,636
)
 
(8,478
)
 
(434,884
)
 
(1,356
)
 
(436,240
)
Acquisition expenses, net
(76,932
)
 
(73,433
)
 
(9,154
)
 
(159,519
)
 
(823
)
 
(160,342
)
Other operating expenses
(81,144
)
 
(36,195
)
 
(13,876
)
 
(131,215
)
 
(1,109
)
 
(132,324
)
Underwriting income
$
33,155

 
$
92,400

 
$
8,023

 
133,578

 
(1,122
)
 
132,456

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
66,993

 
1

 
66,994

Net realized gains
 
 
 
 
 
 
19,697

 
—

 
19,697

Net impairment losses recognized in earnings
 
 
 
 
 
 
(2,971
)
 
—

 
(2,971
)
Equity in net income of investment funds accounted for using the equity method
 
 
 
 
 
 
3,253

 
—

 
3,253

Other income (loss)
 
 
 
 
 
 
(2,104
)
 
—

 
(2,104
)
Other expenses
 
 
 
 
 
 
(10,799
)
 
(2,676
)
 
(13,475
)
Interest expense
 
 
 
 
 
 
(14,404
)
 
—

 
(14,404
)
Net foreign exchange losses
 
 
 
 
 
 
(6,656
)
 
93

 
(6,563
)
Income before income taxes
 
 
 
 
 
 
186,587

 
(3,704
)
 
182,883

Income tax expense
 
 
 
 
 
 
(3,738
)
 
—

 
(3,738
)
Net income
 
 
 
 
 
 
182,849

 
(3,704
)
 
179,145

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
—

 
(52
)
 
(52
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 
—

 
3,407

 
3,407

Net income available to Arch
 
 
 
 
 
 
182,849

 
(349
)
 
182,500

Preferred dividends
 
 
 
 
 
 
(5,484
)
 
—

 
(5,484
)
Net income available to Arch common shareholders
 
 
 
 
 
 
$
177,365

 
$
(349
)
 
$
177,016

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
60.1
%
 
40.9
%
 
21.9
%
 
50.7
%
 
62.6
%
 
50.7
%
Acquisition expense ratio
16.1
%
 
21.5
%
 
23.6
%
 
18.6
%
 
38.0
%
 
18.6
%
Other operating expense ratio
17.0
%
 
10.6
%
 
35.8
%
 
15.3
%
 
51.2
%
 
15.4
%
Combined ratio
93.2
%
 
73.0
%
 
81.3
%
 
84.6
%
 
151.8
%
 
84.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
20,184

 
$
5,803

 
$
94,888

 
$
120,875

 
$
—

 
$
120,875

 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
$
14,261,106

 
$
1,083,280

 
$
15,344,386

Total assets
 
 
 
 
 
 
20,653,897

 
1,146,461

 
21,800,358

Total liabilities
 
 
 
 
 
 
14,860,124

 
35,371

 
14,895,495

_________________________________________________
(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.


13
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.    Investment Information
 
At March 31, 2015, total investable assets of $15.72 billion included $14.46 billion managed by the Company and $1.27 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 investments classified as available for sale:
 
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cost or
Amortized
Cost
 
OTTI
Unrealized
Losses (2)
March 31, 2015
 

 
 

 
 

 
 

 
 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):
 

 
 

 
 

 
 

 
 

Corporate bonds
$
3,119,437

 
$
62,922

 
$
(46,982
)
 
$
3,103,497

 
$
(1,143
)
Mortgage backed securities
821,611

 
20,996

 
(2,065
)
 
802,680

 
(3,557
)
Municipal bonds
1,626,580

 
33,377

 
(2,013
)
 
1,595,216

 
—

Commercial mortgage backed securities
1,106,332

 
23,083

 
(2,497
)
 
1,085,746

 
—

U.S. government and government agencies
1,517,834

 
16,821

 
(776
)
 
1,501,789

 
—

Non-U.S. government securities
831,200

 
23,118

 
(52,685
)
 
860,767

 
—

Asset backed securities
1,657,931

 
14,080

 
(3,563
)
 
1,647,414

 
(22
)
Total
10,680,925

 
194,397

 
(110,581
)
 
10,597,109

 
(4,722
)
Equity securities
687,713

 
121,660

 
(12,467
)
 
578,520

 
—

Other investments
329,677

 
37,964

 
(574
)
 
292,287

 
(165
)
Short-term investments
855,032

 
16

 
(4,151
)
 
859,167

 
—

Total
$
12,553,347

 
$
354,037

 
$
(127,773
)
 
$
12,327,083

 
$
(4,887
)
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):
 

 
 

 
 

 
 

 
 

Corporate bonds
$
3,108,513

 
$
37,928

 
$
(38,974
)
 
$
3,109,559

 
$
(317
)
Mortgage backed securities
943,343

 
18,843

 
(3,842
)
 
928,342

 
(3,307
)
Municipal bonds
1,494,122

 
31,227

 
(1,044
)
 
1,463,939

 
—

Commercial mortgage backed securities
1,114,528

 
14,594

 
(3,822
)
 
1,103,756

 
—

U.S. government and government agencies
1,447,972

 
8,345

 
(1,760
)
 
1,441,387

 
—

Non-U.S. government securities
1,015,153

 
21,311

 
(37,203
)
 
1,031,045

 
—

Asset backed securities
1,677,941

 
8,425

 
(6,089
)
 
1,675,605

 
(22
)
Total
10,801,572

 
140,673

 
(92,734
)
 
10,753,633

 
(3,646
)
Equity securities
658,182

 
109,012

 
(13,364
)
 
562,534

 
—

Other investments
296,224

 
31,839

 
(362
)
 
264,747

 
—

Short-term investments
797,226

 
738

 
(5,270
)
 
801,758

 
—

Total
$
12,553,204

 
$
282,262

 
$
(111,730
)
 
$
12,382,672

 
$
(3,646
)
_________________________________________________
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. 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, 2015, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $0.3 million, compared to a net unrealized gain of $0.9 million at December 31, 2014.


14
Table of Contents
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, 2015
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):
 

 
 

 
 

 
 

 
 

 
 

Corporate bonds
$
810,064

 
$
(40,337
)
 
$
60,249

 
$
(6,645
)
 
$
870,313

 
$
(46,982
)
Mortgage backed securities
142,833

 
(1,333
)
 
29,939

 
(732
)
 
172,772

 
(2,065
)
Municipal bonds
241,211

 
(1,494
)
 
13,573

 
(519
)
 
254,784

 
(2,013
)
Commercial mortgage backed securities
194,085

 
(2,375
)
 
30,774

 
(122
)
 
224,859

 
(2,497
)
U.S. government and government agencies
148,004

 
(776
)
 
—

 
—

 
148,004

 
(776
)
Non-U.S. government securities
376,737

 
(43,321
)
 
38,091

 
(9,364
)
 
414,828

 
(52,685
)
Asset backed securities
331,543

 
(2,072
)
 
157,748

 
(1,491
)
 
489,291

 
(3,563
)
Total
2,244,477

 
(91,708
)
 
330,374

 
(18,873
)
 
2,574,851

 
(110,581
)
Equity securities
226,711

 
(12,467
)
 
—

 
—

 
226,711

 
(12,467
)
Other investments
128,867

 
(574
)
 
—

 
—

 
128,867

 
(574
)
Short-term investments
55,615

 
(4,151
)
 
—

 
—

 
55,615

 
(4,151
)
Total
$
2,655,670

 
$
(108,900
)
 
$
330,374

 
$
(18,873
)
 
$
2,986,044

 
$
(127,773
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):
 

 
 

 
 

 
 

 
 

 
 

Corporate bonds
$
1,309,637

 
$
(32,903
)
 
$
148,963

 
$
(6,071
)
 
$
1,458,600

 
$
(38,974
)
Mortgage backed securities
293,624

 
(1,476
)
 
59,107

 
(2,366
)
 
352,731

 
(3,842
)
Municipal bonds
210,614

 
(588
)
 
13,643

 
(456
)
 
224,257

 
(1,044
)
Commercial mortgage backed securities
232,147

 
(770
)
 
125,894

 
(3,052
)
 
358,041

 
(3,822
)
U.S. government and government agencies
618,381

 
(1,626
)
 
3,438

 
(134
)
 
621,819

 
(1,760
)
Non-U.S. government securities
510,766

 
(31,172
)
 
46,910

 
(6,031
)
 
557,676

 
(37,203
)
Asset backed securities
612,950

 
(2,486
)
 
243,452

 
(3,603
)
 
856,402

 
(6,089
)
Total
3,788,119

 
(71,021
)
 
641,407

 
(21,713
)
 
4,429,526

 
(92,734
)
Equity securities
181,002

 
(13,364
)
 
—

 
—

 
181,002

 
(13,364
)
Other investments
59,638

 
(362
)
 
—

 
—

 
59,638

 
(362
)
Short-term investments
79,271

 
(5,270
)
 
—

 
—

 
79,271

 
(5,270
)
Total
$
4,108,030

 
$
(90,017
)
 
$
641,407

 
$
(21,713
)
 
$
4,749,437

 
$
(111,730
)
_________________________________________________
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

At March 31, 2015, on a lot level basis, approximately 1,360 security lots out of a total of approximately 5,130 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 $3.3 million. At December 31, 2014, on a lot level basis, approximately 1,900 security lots out of a total of approximately 4,790 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 $2.9 million.
 

15
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements 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, 2015
 
December 31, 2014
Maturity
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
Due in one year or less
 
$
267,975

 
$
268,219

 
$
235,930

 
$
233,794

Due after one year through five years
 
3,824,832

 
3,819,036

 
4,074,562

 
4,077,408

Due after five years through 10 years
 
2,651,327

 
2,630,130

 
2,475,726

 
2,461,356

Due after 10 years
 
350,917

 
343,884

 
279,542

 
273,372

 
 
7,095,051

 
7,061,269

 
7,065,760

 
7,045,930

Mortgage backed securities
 
821,611

 
802,680

 
943,343

 
928,342

Commercial mortgage backed securities
 
1,106,332

 
1,085,746

 
1,114,528

 
1,103,756

Asset backed securities
 
1,657,931

 
1,647,414

 
1,677,941

 
1,675,605

Total
 
$
10,680,925

 
$
10,597,109

 
$
10,801,572

 
$
10,753,633

 
Securities Lending Agreements
 
The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $253.1 million and $253.8 million, respectively, at March 31, 2015, compared to $50.8 million and $52.1 million, respectively, at December 31, 2014. At March 31, 2015, the fair value of the cash collateral received on securities lending was $49.9 million and the fair value of non-cash collateral received was $207.2 million. At December 31, 2014, the fair value of the cash collateral received on securities lending was $44.3 million and the fair value of non-cash collateral received was nil. Such amounts included approximately $5.7 million of sub-prime securities at March 31, 2015, compared to $5.8 million at December 31, 2014. 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 to the Company. 

Other Investments

The following table summarizes the Company’s other investments, including available for sale and fair value option components:
 
March 31,
2015
 
December 31,
2014
Available for sale:
 
 
 
Asian and emerging markets
$
270,087

 
$
236,586

Investment grade fixed income
59,590

 
59,638

Total available for sale
329,677

 
296,224

Fair value option:
 
 
 
Term loan investments (par value: $1,055,264 and $1,094,337)
1,044,762

 
1,073,649

Mezzanine debt funds
121,570

 
121,341

Credit related funds
138,576

 
114,436

Investment grade fixed income
63,162

 
69,108

Asian and emerging markets
26,846

 
25,800

Other (1)
162,908

 
147,573

Total fair value option
1,557,824

 
1,551,907

Total
$
1,887,501

 
$
1,848,131

_________________________________________________
(1)
Includes fund investments with strategies in mortgage servicing rights, transportation and 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

16
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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,
2015
 
December 31,
2014
Fixed maturities
$
757,467

 
$
632,024

Other investments
1,557,824

 
1,551,907

Short-term investments
125,788

 
251,601

Equity securities
907

 
—

Investments accounted for using the fair value option
$
2,441,986

 
$
2,435,532


Net Investment Income
 
The components of net investment income were derived from the following sources:
 
Three Months Ended
 
March 31,
 
2015
 
2014
Fixed maturities
$
68,596

 
$
62,449

Term loan investments
14,744

 
5,669

Equity securities (dividends)
2,679

 
2,921

Short-term investments
196

 
405

Other (1)
12,747

 
4,719

Gross investment income
98,962

 
76,163

Investment expenses
(19,968
)
 
(9,169
)
Net investment income
$
78,994