Edgar Filing: ARCH CAPITAL GROUP LTD.

Document

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 quarterly period ended June 30, 2017

Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-16209

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)



Bermuda	Not applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Waterloo House, Ground Floor
100 Pitts Bay Road, Pembroke HM 08, Bermuda	(441) 278-9250
(Address of principal executive offices)	(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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting

company o Emerging growth company o

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 August 1, 2017, there were 130,740,860 common shares, $0.0033 par value per share, of the registrant outstanding.

Table of Contents

ARCH CAPITAL GROUP LTD.

INDEX TO FORM 10-Q



		Page No.
	PART I
	Financial Information	2
Item 1.	Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	72

	PART II
	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 5.	Other Information	74
Item 6.	Exhibits	74
	Signatures	75



	ACGL 2017 SECOND QUARTER FORM 10-Q	1

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PART I. FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.

Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:


•	our ability to successfully implement our business strategy during “soft” as well as “hard” markets;


•	acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;


•	the integration of United Guaranty and any other businesses we have acquired or may acquire into our existing operations;


•	our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;


•	general economic and market conditions (including inflation, interest rates, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate;


•	competition, including increased competition, on the basis of pricing, capacity (including alternative forms of capital), coverage terms or other factors;


•	developments in the world’s financial and capital markets and our access to such markets;


•	our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;


•	the loss of key personnel;

•

accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through June 30, 2017;


•	greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries;


•	severity and/or frequency of losses;


•	claims for natural or man-made catastrophic events in our insurance or reinsurance business could cause large losses and substantial volatility in our results of operations;


•	acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;


•	availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;


•	the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;


•	the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;


•	our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;



	ACGL 2017 SECOND QUARTER FORM 10-Q	2

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•	changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations;


•	the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies;


•	losses relating to aviation business and business produced by a certain managing underwriting agency for which we may be liable to the purchaser of our prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in our periodic reports filed with the SEC;


•	changes in accounting principles or policies or in our application of such accounting principles or policies;


•	changes in the political environment of certain countries in which we operate or underwrite business;


•	statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers; and

•

the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



	ACGL 2017 SECOND QUARTER FORM 10-Q	3

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



		Page No.

Report of Independent Registered Public Accounting Firm		5

Consolidated Balance Sheets
June 30, 2017 (unaudited) and December 31, 2016		6

Consolidated Statements of Income
For the three and six month periods ended June 30, 2017 and 2016 (unaudited)		7

Consolidated Statements of Comprehensive Income
For the three and six month periods ended June 30, 2017 and 2016 (unaudited)		8

Consolidated Statements of Changes in Shareholders’ Equity
For the six month periods ended June 30, 2017 and 2016 (unaudited)		9

Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2017 and 2016 (unaudited)		10

Notes to Consolidated Financial Statements (unaudited)
Note 1 - General		11
Note 2 - Recent Accounting Pronouncements		11
Note 3 - Variable Interest Entities and Noncontrolling Interests		12
Note 4 - Earnings Per Common Share		15
Note 5 - Segment Information		16
Note 6 - Reserves for Losses and Loss Adjustment Expenses		21
Note 7 - Investment Information		24
Note 8 - Fair Value		30
Note 9 - Derivative Instruments		36
Note 10 - Commitments and Contingencies		37
Note 11 - Share Transactions		37
Note 12 - Other Comprehensive Income (Loss)		38
Note 13 - Guarantor Financial Information		39
Note 14 - Income Taxes		47
Note 15 - Legal Proceedings		47
Note 16 - Transactions With Related Parties		47
Note 17 - Subsequent Event		47



	ACGL 2017 SECOND QUARTER FORM 10-Q	4

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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 June 30, 2017, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2017 and June 30, 2016, and the consolidated statements of changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2017 and June 30, 2016. 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, 2016, 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 March 1, 2017, 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, 2016, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

August 4, 2017



	ACGL 2017 SECOND QUARTER FORM 10-Q	5

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data)

	(Unaudited)
	June 30, 2017			December 31, 2016
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $13,626,639 and $13,522,671)	$	13,671,011		$	13,426,577
Short-term investments available for sale, at fair value (amortized cost: $914,032 and $611,878)	914,356			612,005
Collateral received under securities lending, at fair value (amortized cost: $627,852 and $762,554)	627,843			762,565
Equity securities available for sale, at fair value (cost: $389,745 and $475,085)	461,017			518,041
Other investments available for sale, at fair value (cost: $208,941 and $149,077)	248,661			167,970
Investments accounted for using the fair value option	3,827,408			3,421,220
Investments accounted for using the equity method	948,856			811,273
Total investments	20,699,152			19,719,651

Cash	740,320			842,942
Accrued investment income	108,562			124,483
Securities pledged under securities lending, at fair value (amortized cost: $610,355 and $746,409)	610,121			744,980
Premiums receivable	1,314,564			1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	2,155,107			2,114,138
Contractholder receivables	1,826,966			1,717,436
Ceded unearned premiums	961,330			859,567
Deferred acquisition costs	506,748			447,560
Receivable for securities sold	212,512			58,284
Goodwill and intangible assets	712,975			781,553
Other assets	1,014,282			889,080
Total assets	$	30,862,639		$	29,372,109

Liabilities
Reserve for losses and loss adjustment expenses	$	10,520,511		$	10,200,960
Unearned premiums	3,679,651			3,406,870
Reinsurance balances payable	361,000			300,407
Contractholder payables	1,826,966			1,717,436
Collateral held for insured obligations	338,737			301,406
Senior notes	1,732,570			1,732,258
Revolving credit agreement borrowings	686,452			756,650
Securities lending payable	627,852			762,554
Payable for securities purchased	458,722			76,183
Other liabilities	648,099			806,260
Total liabilities	20,880,560			20,060,984

Commitments and Contingencies
Redeemable noncontrolling interests	205,736			205,553

Shareholders' Equity
Non-cumulative preferred shares	772,555			772,555
Convertible non-voting common equivalent preferred shares	489,627			1,101,304
Common shares ($0.0033 par, shares issued: 182,714,362 and 174,644,101)	609			582
Additional paid-in capital	1,196,884			531,687
Retained earnings	8,412,114			7,996,701
Accumulated other comprehensive income (loss), net of deferred income tax	78,441			(114,541		)
Common shares held in treasury, at cost (shares: 52,034,403 and 51,856,584)	(2,051,343		)	(2,034,570		)
Total shareholders' equity available to Arch	8,898,887			8,253,718
Non-redeemable noncontrolling interests	877,456			851,854
Total shareholders' equity	9,776,343			9,105,572
Total liabilities, noncontrolling interests and shareholders' equity	$	30,862,639		$	29,372,109

See Notes to Consolidated Financial Statements



	ACGL 2017 SECOND QUARTER FORM 10-Q	6

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data)

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenues
Net premiums written	$	1,248,695		$	1,023,563		$	2,524,955		$	2,144,798
Change in unearned premiums	(7,821		)	(17,578		)	(167,064		)	(187,234		)
Net premiums earned	1,240,874			1,005,985			2,357,891			1,957,564
Net investment income	111,124			88,338			228,998			182,073
Net realized gains (losses)	21,735			68,218			55,888			105,542

Other-than-temporary impairment losses	(1,730		)	(5,395		)	(3,537		)	(13,132		)
Less investment impairments recognized in other comprehensive income, before taxes	—			52			—			150
Net impairment losses recognized in earnings	(1,730		)	(5,343		)	(3,537		)	(12,982		)

Other underwriting income	4,822			25,224			9,455			30,271
Equity in net income (loss) of investment funds accounted for using the equity method	32,706			8,737			80,794			15,392
Other income (loss)	(1,994		)	(7		)	(2,776		)	(32		)
Total revenues	1,407,537			1,191,152			2,726,713			2,277,828

Expenses
Losses and loss adjustment expenses	689,860			584,592			1,242,430			1,107,541
Acquisition expenses	190,436			172,677			372,725			340,515
Other operating expenses	169,981			157,314			344,700			307,462
Corporate expenses	24,876			17,200			52,668			26,583
Amortization of intangible assets	30,824			4,880			62,118			9,628
Interest expense	28,749			15,663			57,425			31,770
Net foreign exchange losses (gains)	39,543			(24,662		)	58,947			(1,096		)
Total expenses	1,174,269			927,664			2,191,013			1,822,403

Income before income taxes	233,268			263,488			535,700			455,425
Income tax expense	(34,169		)	(14,131		)	(62,566		)	(30,441		)
Net income	$	199,099		$	249,357		$	473,134		$	424,984
Net (income) loss attributable to noncontrolling interests	(13,932		)	(38,302		)	(34,840		)	(59,131		)
Net income available to Arch	185,167			211,055			438,294			365,853
Preferred dividends	(11,349		)	(5,485		)	(22,567		)	(10,969		)
Net income available to Arch common shareholders	$	173,818		$	205,570		$	415,727		$	354,884

Net income per common share and common share equivalent
Basic	$	1.29		$	1.70		$	3.10		$	2.94
Diluted	$	1.25		$	1.65		$	2.99		$	2.85

Weighted average common shares and common share equivalents outstanding
Basic	134,486,664			120,599,060			134,262,043			120,513,620
Diluted	139,244,646			124,365,596			139,140,632			124,425,126

See Notes to Consolidated Financial Statements



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands)

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Comprehensive Income
Net income	$	199,099		$	249,357		$	473,134		$	424,984
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	92,969			102,460			193,761			235,441
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—			(52		)	—			(150		)
Reclassification of net realized (gains) losses, net of income taxes, included in net income	(17,224		)	(22,094		)	(22,268		)	(54,317		)
Foreign currency translation adjustments	18,297			(18,151		)	21,421			(838		)
Comprehensive income	293,141			311,520			666,048			605,120
Net (income) loss attributable to noncontrolling interests	(13,932		)	(38,302		)	(34,840		)	(59,131		)
Foreign currency translation adjustments attributable to noncontrolling interests	76			42			68			200
Comprehensive income available to Arch	$	279,285		$	273,260		$	631,276		$	546,189

See Notes to Consolidated Financial Statements



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2017			2016
Non-cumulative preferred shares
Balance at beginning and end of period	$	772,555		$	325,000

Convertible non-voting common equivalent preferred shares
Balance at beginning of year	1,101,304			—
Series D preferred shares issued	—			—
Series D preferred shares converted to common shares	(611,677		)	—
Balance at end of period	489,627			—

Common shares
Balance at beginning of year	582			577
Common shares issued, net	27			4
Balance at end of period	609			581

Additional paid-in capital
Balance at beginning of year	531,687			467,339
Common shares issued, net	9,027			8,265
Series D preferred shares converted to common shares	611,653			—
Exercise of stock options	2,125			5,143
Amortization of share-based compensation	42,739			35,769
Other	(347		)	1,426
Balance at end of period	1,196,884			517,942

Retained earnings
Balance at beginning of year	7,996,701			7,332,032
Cumulative effect of an accounting change	(314		)	—
Balance at beginning of year, as adjusted	7,996,387			7,332,032
Net income	473,134			424,984
Net (income) loss attributable to noncontrolling interests	(34,840		)	(59,131		)
Preferred share dividends	(22,567		)	(10,969		)
Balance at end of period	8,412,114			7,686,916

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of year	(114,541		)	(16,502		)
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of year	(27,641		)	50,085
Unrealized holding gains (losses) arising during period, net of reclassification adjustment	171,493			181,124
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—			(150		)
Balance at end of period	143,852			231,059
Foreign currency translation adjustments:
Balance at beginning of year	(86,900		)	(66,587		)
Foreign currency translation adjustments	21,421			(838		)
Foreign currency translation adjustments attributable to noncontrolling interests	68			200
Balance at end of period	(65,411		)	(67,225		)
Balance at end of period	78,441			163,834

Common shares held in treasury, at cost
Balance at beginning of year	(2,034,570		)	(1,941,904		)
Shares repurchased for treasury	(16,773		)	(86,786		)
Balance at end of period	(2,051,343		)	(2,028,690		)

Total shareholders’ equity available to Arch	8,898,887			6,665,583
Non-redeemable noncontrolling interests	877,456			788,589
Total shareholders’ equity	$	9,776,343		$	7,454,172

See Notes to Consolidated Financial Statements



	ACGL 2017 SECOND QUARTER FORM 10-Q	9

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2017			2016
Operating Activities
Net income	$	473,134		$	424,984
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(74,985		)	(126,337		)
Net impairment losses recognized in earnings	3,537			12,982
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	(47,529		)	11,161
Amortization of intangible assets	62,118			9,628
Share-based compensation	42,739			35,769
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	180,342			186,199
Unearned premiums, net of ceded unearned premiums	167,064			187,234
Premiums receivable	(222,498		)	(278,814		)
Deferred acquisition costs	(53,553		)	(33,450		)
Reinsurance balances payable	50,112			73,712
Other items, net	(26,414		)	38,156
Net Cash Provided By Operating Activities	554,067			541,224
Investing Activities
Purchases of fixed maturity investments	(19,899,326		)	(17,541,731		)
Purchases of equity securities	(400,155		)	(212,678		)
Purchases of other investments	(883,704		)	(650,613		)
Proceeds from sales of fixed maturity investments	19,611,680			16,978,549
Proceeds from sales of equity securities	473,064			337,619
Proceeds from sales, redemptions and maturities of other investments	614,494			636,535
Proceeds from redemptions and maturities of fixed maturity investments	447,941			370,980
Net settlements of derivative instruments	(5,984		)	45,174
Net (purchases) sales of short-term investments	(445,203		)	(304,460		)
Change in cash collateral related to securities lending	175,693			(18,715		)
Acquisitions, net of cash	—			(1,460		)
Purchases of fixed assets	(11,103		)	(8,284		)
Other	(13,792		)	13,416
Net Cash Provided By (Used For) Investing Activities	(336,395		)	(355,668		)
Financing Activities
Purchases of common shares under share repurchase program	—			(75,256		)
Proceeds from common shares issued, net	(6,838		)	(1,487		)
Proceeds from borrowings	—			46,000
Repayments of borrowings	(72,000		)	(179,171		)
Change in cash collateral related to securities lending	(175,693		)	18,715
Dividends paid to redeemable noncontrolling interests	(8,994		)	(8,994		)
Other	(41,698		)	(2,223		)
Preferred dividends paid	(22,567		)	(10,969		)
Net Cash Provided By (Used For) Financing Activities	(327,790		)	(213,385		)

Effects of exchange rate changes on foreign currency cash	7,496			(8,906		)

Increase (decrease) in cash	(102,622		)	(36,735		)
Cash beginning of year	842,942			553,326
Cash end of period	$	740,320		$	516,591

Income taxes paid	$	3,935		$	26,619
Interest paid	$	58,035		$	31,524

See Notes to Consolidated Financial Statements



	ACGL 2017 SECOND QUARTER FORM 10-Q	10

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. General

Arch Capital Group Ltd. (“ACGL”) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means ACGL and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries. See Note 3.

On December 31, 2016, the Company completed the acquisition of United Guaranty Corporation, a North Carolina corporation (“UGC”) pursuant to a stock purchase agreement with American International Group, Inc. (“AIG”). The acquisition of UGC (“UGC acquisition”) expanded the scale of Arch’s existing mortgage insurance businesses by combining UGC’s position as the market leader in the U.S. private mortgage insurance industry with Arch’s financial strength and history of innovation, further diversifying the Company’s business profile and customer base.

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, 2016 (“2016 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, including the presentation of ‘amortization of intangible assets’ on its consolidated statements of income to split out such item

(previously reflected in acquisition expenses and/or other operating expenses). 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 Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017. This ASU was issued in the 2016 first quarter to improve and simplify the accounting for employee share-based payment transactions. This ASU provides simplifications with respect to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows for these types of transactions. With respect to the forfeiture accounting policy election, the Company has elected to account for forfeitures as they occur, which did not result in a material cumulative effect adjustment. With respect to the change in presentation in the statement of cash flows related to excess tax benefits, the Company has applied the guidance prospectively and prior periods have not been adjusted.

Recently Issued Accounting Standards Not Yet Adopted

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” was issued in the 2014 second quarter and updated through various ASUs in 2016. This ASU (and as updated in 2016) creates a new comprehensive revenue recognition standard that will serve as a single source of revenue 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 core principle of this ASU is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU also requires enhanced disclosures about revenue. The ASU is effective in the 2018 first quarter and may be applied on a full retrospective or modified retrospective approach. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated



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financial statements. The adoption of this ASU will not impact the Company's insurance premium revenues or revenues from its investment portfolio, which represent a substantial portion of consolidated revenues, but may have an impact on the Company's other revenues.

ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities,” was issued in the 2016 first quarter to enhance the reporting model for financial instruments and to provide improved financial information to readers of the financial statements. Among other provisions focused on improving the recognition and measurement of financial instruments, the ASU requires that equity investments be measured at fair value on the balance sheet with changes in fair value reported in the income statement and that an exit price notion be used when measuring the fair value of financial instruments for disclosure purposes. The ASU is effective in the 2018 first quarter and, aside from limited situations, cannot be early adopted. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but will have a material impact on the Company's results of operations as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income.

ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash " was issued in the 2016 fourth quarter. The ASU 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 ASU is effective, with retrospective adoption, for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The adoption of this ASU is not expected to have a material effect on the Company’s results of operations, financial position, comprehensive income or net cash provided from operating activities.

ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” was issued in the 2017 first quarter. The ASU amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. The ASU will be effective for the Company on January 1, 2019 and is required to be applied using a modified retrospective approach through a cumulative-effect adjustment to retained

earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The adoption of this ASU is not expected to have a material effect on the Company’s results of operations, financial position or cash flows.

ASU 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting” was issued in the 2017 second quarter. The ASU provides updated guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective prospectively for all companies for annual periods beginning on or after December 15, 2017, with early adoption permitted. The adoption of this ASU is not expected to have a material effect on the Company’s results of operations, financial position or cash flows.


3.	Variable Interest Entities and Noncontrolling Interests

A variable interest entity (“VIE”) refers to an entity that has characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have characteristics of a controlling financial interest. The primary beneficiary of a VIE is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. If a company is determined to be the primary beneficiary, it is required to consolidate the VIE in its financial statements.

Watford Holdings Ltd.

In March 2014, the Company invested $100.0 million and acquired approximately 11% of Watford Holdings Ltd.’s common equity and a warrant to purchase additional common equity. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford Re”). Watford Re is considered a VIE and the Company concluded that it is the primary beneficiary of Watford Re. As such, the results of Watford Re are included in the Company’s consolidated financial statements.

The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford



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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:



	June 30,		December 31,
	2017		2016
Assets
Investments accounted for using the fair value option	$	2,129,436	$	1,857,623
Cash	63,929		74,893
Accrued investment income	13,229		17,017
Premiums receivable	193,769		189,911
Reinsurance recoverable on unpaid and paid losses and LAE	28,267		24,420
Ceded unearned premiums	20,455		12,145
Deferred acquisition costs	91,183		86,379
Receivable for securities sold	32,618		1,326
Goodwill and intangible assets	7,650		7,650
Other assets	132,068		111,386
Total assets of consolidated VIE	$	2,712,604	$	2,382,750

Liabilities
Reserves for losses and loss adjustment expenses	$	643,424	$	510,809
Unearned premiums	314,446		293,480
Reinsurance balances payable	17,623		12,289
Revolving credit agreement borrowings	186,452		256,650
Payable for securities purchased	224,152		42,922
Other liabilities	119,928		88,976
Total liabilities of consolidated VIE	$	1,506,025	$	1,205,126

Redeemable noncontrolling interests	$	220,436	$	220,253

For the six months ended June 30, 2017, Watford Re generated $134.4 million of cash provided by operating activities, $70.1 million of cash used for investing activities and $76.4 million of cash used for financing activities, compared to $131.6 million of cash provided by operating activities, $13.8 million of cash used for investing activities and $148.2 million of cash used for financing activities for the six months ended June 30, 2016.

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 June 30, 2017. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’

The following table sets forth activity in the non-redeemable noncontrolling interests:



	June 30,
	2017			2016
Three Months Ended
Balance, beginning of period	$	868,186		$	754,915
Amounts attributable to noncontrolling interests	9,346			33,716
Foreign currency translation adjustments attributable to noncontrolling interests	(76		)	(42		)
Balance, end of period	$	877,456		$	788,589

Six Months Ended
Balance, beginning of year	$	851,854		$	738,831
Amounts attributable to noncontrolling interests	25,670			49,958
Foreign currency translation adjustments attributable to noncontrolling interests	(68		)	(200		)
Balance, end of period	$	877,456		$	788,589

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:



	June 30,
	2017		2016
Three Months Ended
Balance, beginning of period	$	205,644	$	205,274
Accretion of preference share issuance costs	92		92
Balance, end of period	$	205,736	$	205,366

Six Months Ended
Balance, beginning of year	$	205,553	$	205,182
Accretion of preference share issuance costs	183		184
Balance, end of period	$	205,736	$	205,366



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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:



	June 30,
	2017			2016
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	(9,346	)	$	(33,716	)
Dividends attributable to redeemable noncontrolling interests	(4,586		)	(4,586		)
Net (income) loss attributable to noncontrolling interests	$	(13,932	)	$	(38,302	)

Six Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	(25,670	)	$	(49,958	)
Dividends attributable to redeemable noncontrolling interests	(9,170		)	(9,173		)
Net (income) loss attributable to noncontrolling interests	$	(34,840	)	$	(59,131	)

Bellemeade Re I and II

Upon closing of the UGC acquisition, the Company acquired the rights and obligations related to aggregate excess of loss reinsurance agreements with Bellemeade Re I Ltd. (“Bellemeade I”), entered into in July 2015, and with Bellemeade Re II Ltd. (“Bellemeade II”), entered into in May 2016 (the “Bellemeade Agreements”). Bellemeade I and Bellemeade II are special purpose reinsurance companies domiciled in Bermuda, each of which provided for up to approximately $300 million of aggregate excess of loss reinsurance coverage at inception for new delinquencies on portfolios of in-force policies issued.

As a result of the evaluation of the Bellemeade Agreements, the Company concluded that both Bellemeade I and Bellemeade II 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 I and Bellemeade II, the Company does not consolidate Bellemeade I and Bellemeade II in its consolidated financial statements.

The following table presents total assets of Bellemeade I and Bellemeade II as well as the Company’s maximum exposure to loss associated with these VIEs:



			Maximum Exposure to Loss
	Total VIE Assets		On-Balance Sheet		Off-Balance Sheet		Total
Bellemeade I	$	129,475	$	489	$	1,165	$	1,654
Bellemeade II	238,310		58		929		987
Total	$	367,785	$	547	$	2,094	$	2,641

Irving Partners Limited Partnership

Upon closing of the UGC acquisition, the Company acquired a limited partnership interest in Irving Partners Limited Partnership (“Irving Partners”), which owns and operates an office building in Greensboro, North Carolina in which the Company is the main tenant. The Company concluded that Irving Partners is a VIE but that it is not the primary beneficiary. The Company’s maximum exposure to loss is approximately $13.9 million at June 30, 2017.



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4. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Numerator:
Net income	$	199,099		$	249,357		$	473,134		$	424,984
Amounts attributable to noncontrolling interests	(13,932		)	(38,302		)	(34,840		)	(59,131		)
Net income available to Arch	185,167			211,055			438,294			365,853
Preferred dividends	(11,349		)	(5,485		)	(22,567		)	(10,969		)
Net income available to Arch common shareholders	$	173,818		$	205,570		$	415,727		$	354,884

Denominator:
Weighted average common shares outstanding	123,009,234			120,599,060			122,145,469			120,513,620
Series D preferred shares (1)	11,477,430			—			12,116,574			—
Weighted average common shares and common share equivalents outstanding — basic	134,486,664			120,599,060			134,262,043			120,513,620
Effect of dilutive common share equivalents:
Nonvested restricted shares	1,482,963			1,295,342			1,556,963			1,374,272
Stock options (2)	3,275,019			2,471,194			3,321,626			2,537,234
Weighted average common shares and common share equivalents outstanding — diluted	139,244,646			124,365,596			139,140,632			124,425,126

Earnings per common share:
Basic	$	1.29		$	1.70		$	3.10		$	2.94
Diluted	$	1.25		$	1.65		$	2.99		$	2.85


(1)	Such shares are convertible non-voting common equivalent preferred shares issued in connection with the UGC acquisition.

(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 2017 second quarter and 2016 second quarter, the number of stock options excluded were 499,999 and 575,931, respectively. For the six months ended June 30, 2017 and 2016, the number of stock options excluded were 764,076 and 1,027,784, respectively.



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5. Segment Information

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

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

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

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

The mortgage segment includes the 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, United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity 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, dividends 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.



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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
	June 30, 2017
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	743,902		$	453,186		$	336,226		$	1,533,142		$	152,813		$	1,609,659
Premiums ceded	(247,446		)	(115,262		)	(62,314		)	(424,850		)	(12,410		)	(360,964		)
Net premiums written	496,456			337,924			273,912			1,108,292			140,403			1,248,695
Change in unearned premiums	21,118			(23,222		)	(16,068		)	(18,172		)	10,351			(7,821		)
Net premiums earned	517,574			314,702			257,844			1,090,120			150,754			1,240,874
Other underwriting income (loss)	—			(279		)	4,277			3,998			824			4,822
Losses and loss adjustment expenses	(350,939		)	(207,606		)	(20,694		)	(579,239		)	(110,621		)	(689,860		)
Acquisition expenses	(78,872		)	(51,151		)	(25,666		)	(155,689		)	(34,747		)	(190,436		)
Other operating expenses	(92,267		)	(36,711		)	(32,150		)	(161,128		)	(8,853		)	(169,981		)
Underwriting income (loss)	$	(4,504	)	$	18,955		$	183,611		198,062			(2,643		)	195,419

Net investment income										92,520			18,604			111,124
Net realized gains (losses)										18,046			3,689			21,735
Net impairment losses recognized in earnings										(1,730		)	—			(1,730		)
Equity in net income (loss) of investment funds accounted for using the equity method										32,706			—			32,706
Other income (loss)										(1,994		)	—			(1,994		)
Corporate expenses (2)										(22,201		)	—			(22,201		)
UGC transaction costs and other (2)										(2,675		)	—			(2,675		)
Amortization of intangible assets										(30,824		)	—			(30,824		)
Interest expense										(25,912		)	(2,837		)	(28,749		)
Net foreign exchange gains (losses)										(37,821		)	(1,722		)	(39,543		)
Income (loss) before income taxes										218,177			15,091			233,268
Income tax expense										(34,169		)	—			(34,169		)
Net income (loss)										184,008			15,091			199,099
Dividends attributable to redeemable noncontrolling interests										—			(4,586		)	(4,586		)
Amounts attributable to nonredeemable noncontrolling interests										—			(9,346		)	(9,346		)
Net income (loss) available to Arch										184,008			1,159			185,167
Preferred dividends										(11,349		)	—			(11,349		)
Net income (loss) available to Arch common shareholders										$	172,659		$	1,159		$	173,818

Underwriting Ratios
Loss ratio	67.8		%	66.0		%	8.0		%	53.1		%	73.4		%	55.6		%
Acquisition expense ratio	15.2		%	16.3		%	10.0		%	14.3		%	23.0		%	15.3		%
Other operating expense ratio	17.8		%	11.7		%	12.5		%	14.8		%	5.9		%	13.7		%
Combined ratio	100.8		%	94.0		%	30.5		%	82.2		%	102.3		%	84.6		%

Goodwill and intangible assets	$	24,480		$	609		$	680,236		$	705,325		$	7,650		$	712,975


(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.’



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Three Months Ended
	June 30, 2016
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	762,043		$	412,053		$	118,434		$	1,292,199		$	109,285		$	1,329,936
Premiums ceded	(246,875		)	(119,951		)	(6,969		)	(373,464		)	(4,457		)	(306,373		)
Net premiums written	515,168			292,102			111,465			918,735			104,828			1,023,563
Change in unearned premiums	12,482			(846		)	(44,953		)	(33,317		)	15,739			(17,578		)
Net premiums earned	527,650			291,256			66,512			885,418			120,567			1,005,985
Other underwriting income (loss)	—			20,118			4,137			24,255			969			25,224
Losses and loss adjustment expenses	(354,633		)	(146,091		)	(366		)	(501,090		)	(83,502		)	(584,592		)
Acquisition expenses	(77,312		)	(55,756		)	(5,964		)	(139,032		)	(33,645		)	(172,677		)
Other operating expenses	(91,440		)	(36,914		)	(22,847		)	(151,201		)	(6,113		)	(157,314		)
Underwriting income (loss)	$	4,265		$	72,613		$	41,472		118,350			(1,724		)	116,626

Net investment income										70,397			17,941			88,338
Net realized gains (losses)										40,927			27,291			68,218
Net impairment losses recognized in earnings										(5,343		)	—			(5,343		)
Equity in net income (loss) of investment funds accounted for using the equity method										8,737			—			8,737
Other income (loss)										(7		)	—			(7		)
Corporate expenses										(17,200		)	—			(17,200		)
Amortization of intangible assets										(4,880		)	—			(4,880		)
Interest expense										(12,432		)	(3,231		)	(15,663		)
Net foreign exchange gains (losses)										22,461			2,201			24,662
Income (loss) before income taxes										221,010			42,478			263,488
Income tax expense										(14,131		)	—			(14,131		)
Net income (loss)										206,879			42,478			249,357
Dividends attributable to redeemable noncontrolling interests										—			(4,586		)	(4,586		)
Amounts attributable to nonredeemable noncontrolling interests										—			(33,716		)	(33,716		)
Net income (loss) available to Arch										206,879			4,176			211,055
Preferred dividends										(5,485		)	—			(5,485		)
Net income (loss) available to Arch common shareholders										$	201,394		$	4,176		$	205,570

Underwriting Ratios
Loss ratio	67.2		%	50.2		%	0.6		%	56.6		%	69.3		%	58.1		%
Acquisition expense ratio	14.7		%	19.1		%	9.0		%	15.7		%	27.9		%	17.2		%
Other operating expense ratio	17.3		%	12.7		%	34.4		%	17.1		%	5.1		%	15.6		%
Combined ratio	99.2		%	82.0		%	44.0		%	89.4		%	102.3		%	90.9		%

Goodwill and intangible assets	$	27,457		$	1,440		$	59,430		$	88,327		$	—		$	88,327


(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.



	ACGL 2017 SECOND QUARTER FORM 10-Q	18

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Six Months Ended
	June 30, 2017
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	1,526,183		$	928,968		$	684,849		$	3,139,828		$	306,933		$	3,267,649
Premiums ceded	(481,541		)	(281,354		)	(136,239		)	(898,962		)	(22,844		)	(742,694		)
Net premiums written	1,044,642			647,614			548,610			2,240,866			284,089			2,524,955
Change in unearned premiums	(21,422		)	(88,061		)	(46,243		)	(155,726		)	(11,338		)	(167,064		)
Net premiums earned	1,023,220			559,553			502,367			2,085,140			272,751			2,357,891
Other underwriting income (loss)	—			(585		)	8,400			7,815			1,640			9,455
Losses and loss adjustment expenses	(683,580		)	(313,060		)	(49,759		)	(1,046,399		)	(196,031		)	(1,242,430		)
Acquisition expenses	(153,740		)	(97,298		)	(54,432		)	(305,470		)	(67,255		)	(372,725		)
Other operating expenses	(180,393		)	(74,244		)	(74,020		)	(328,657		)	(16,043		)	(344,700		)
Underwriting income (loss)	$	5,507		$	74,366		$	332,556		412,429			(4,938		)	407,491

Net investment income										188,332			40,666			228,998
Net realized gains (losses)