10-Q 1 acgl10q33116.htm 10-Q 3.31.16 10-Q


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
 
 
March 31, 2016
 
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 2, 2016, there were 122,095,142 common shares, $0.0033 par value per share, of the registrant outstanding.




ARCH CAPITAL GROUP LTD.
 
INDEX TO FORM 10-Q
 

 
 
1


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;
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;
the integration of businesses we have acquired or may acquire into our existing operations;
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 March 31, 2016;
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;

 
 
2


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, 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. 


 
 
3



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
March 31, 2016 (unaudited) and December 31, 2015
 
 
 
 
 
 
For the three month periods ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
 
 
For the three month periods ended March 31, 2016 and 2015 (unaudited)
 
 
 
 
 
 
11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
4


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, 2016, and the related consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2016 and March 31, 2015, and the consolidated statements of changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2016 and March 31, 2015. 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, 2015, 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 26, 2016, 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, 2015, 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 6, 2016

 
 
5


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
March 31,
2016
 
December 31,
2015
Assets
 

 
 

Investments:
 

 
 

Fixed maturities available for sale, at fair value (amortized cost: $10,551,434 and $10,515,440)
$
10,645,257

 
$
10,459,353

Short-term investments available for sale, at fair value (amortized cost: $625,532 and $591,141)
623,844

 
587,904

Collateral received under securities lending, at fair value (amortized cost: $594,922 and $385,984)
594,929

 
389,336

Equity securities available for sale, at fair value (cost: $451,117 and $543,767)
506,915

 
618,405

Other investments available for sale, at fair value (cost: $178,808 and $261,343)
195,079

 
300,476

Investments accounted for using the fair value option
3,139,332

 
2,894,494

Investments accounted for using the equity method
628,832

 
592,973

Total investments
16,334,188

 
15,842,941

 
 
 
 
Cash
557,961

 
553,326

Accrued investment income
81,628

 
87,206

Securities pledged under securities lending, at fair value (amortized cost: $574,577 and $386,411)
580,766

 
384,081

Premiums receivable
1,209,548

 
983,443

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
1,962,863

 
1,867,373

Contractholder receivables
1,529,105

 
1,486,296

Prepaid reinsurance premiums
500,412

 
427,609

Deferred acquisition costs, net
464,288

 
433,477

Receivable for securities sold
329,262

 
45,505

Goodwill and intangible assets
92,670

 
97,531

Other assets
898,678

 
968,482

Total assets
$
24,541,369

 
$
23,177,270

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
9,378,987

 
$
9,125,250

Unearned premiums
2,579,148

 
2,333,932

Reinsurance balances payable
276,426

 
224,120

Contractholder payables
1,529,105

 
1,486,296

Collateral held for insured obligations
249,440

 
248,982

Deposit accounting liabilities
266,140

 
260,364

Senior notes
791,349

 
791,306

Revolving credit agreement borrowings
457,431

 
530,434

Securities lending payable
594,922

 
393,844

Payable for securities purchased
494,813

 
64,996

Other liabilities
549,832

 
568,852

Total liabilities
17,167,593

 
16,028,376

 
 
 
 
Commitments and Contingencies


 


Redeemable noncontrolling interests
205,274

 
205,182

 
 
 
 
Shareholders' Equity
 
 
 
Non-cumulative preferred shares
325,000

 
325,000

Common shares ($0.0033 par, shares issued: 173,744,473 and 173,107,849)
579

 
577

Additional paid-in capital
485,943

 
467,339

Retained earnings
7,519,685

 
7,370,371

Accumulated other comprehensive income (loss), net of deferred income tax
101,629

 
(16,502
)
Common shares held in treasury, at cost (shares: 51,650,877 and 50,480,066)
(2,019,249
)
 
(1,941,904
)
Total shareholders' equity available to Arch
6,413,587

 
6,204,881

Non-redeemable noncontrolling interests
754,915

 
738,831

Total shareholders' equity
7,168,502

 
6,943,712

Total liabilities, noncontrolling interests and shareholders' equity
$
24,541,369

 
$
23,177,270




See Notes to Consolidated Financial Statements
6


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Revenues
 

 
 

Net premiums written
$
1,121,235

 
$
1,066,995

Change in unearned premiums
(169,656
)
 
(156,731
)
Net premiums earned
951,579

 
910,264

Net investment income
93,735

 
78,994

Net realized gains (losses)
37,324

 
83,348

 
 
 
 
Other-than-temporary impairment losses
(7,737
)
 
(7,247
)
Less investment impairments recognized in other comprehensive income, before taxes
98

 
1,448

Net impairment losses recognized in earnings
(7,639
)
 
(5,799
)
 
 
 
 
Other underwriting income
5,047

 
11,536

Equity in net income (loss) of investment funds accounted for using the equity method
6,655

 
5,889

Other income (loss)
(25
)
 
(1,888
)
Total revenues
1,086,676

 
1,082,344

 
 
 
 
Expenses
 
 
 
Losses and loss adjustment expenses
522,949

 
493,716

Acquisition expenses
170,465

 
163,076

Other operating expenses
161,652

 
157,882

Interest expense
16,107

 
12,736

Net foreign exchange losses (gains)
23,566

 
(66,501
)
Total expenses
894,739

 
760,909

 
 
 
 
Income before income taxes
191,937

 
321,435

Income tax expense
(16,310
)
 
(12,678
)
Net income
$
175,627

 
$
308,757

Net (income) loss attributable to noncontrolling interests
(20,829
)
 
(25,421
)
Net income available to Arch
154,798

 
283,336

Preferred dividends
(5,484
)
 
(5,484
)
Net income available to Arch common shareholders
$
149,314

 
$
277,852

 
 
 
 
Net income per common share
 

 
 

Basic
$
1.24

 
$
2.24

Diluted
$
1.20

 
$
2.16

 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
Basic
120,428,179

 
124,209,276

Diluted
124,496,496

 
128,451,054





See Notes to Consolidated Financial Statements
7


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Comprehensive Income
 
 
 
Net income
$
175,627

 
$
308,757

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
132,981

 
84,304

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
(98
)
 
(1,448
)
Reclassification of net realized (gains) losses, net of income taxes, included in net income
(32,223
)
 
(30,932
)
Foreign currency translation adjustments
17,313

 
(22,757
)
Comprehensive income
293,600

 
337,924

Net (income) loss attributable to noncontrolling interests
(20,829
)
 
(25,421
)
Other comprehensive (income) loss attributable to noncontrolling interests
158

 

Comprehensive income available to Arch
$
272,929

 
$
312,503





See Notes to Consolidated Financial Statements
8


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Non-cumulative preferred shares
 

 
 

Balance at beginning and end of period
$
325,000

 
$
325,000

 
 
 
 
Common shares
 
 
 
Balance at beginning of year
577

 
572

Common shares issued, net
2

 
1

Balance at end of period
579

 
573

 
 
 
 
Additional paid-in capital
 

 
 

Balance at beginning of year
467,339

 
383,073

Common shares issued, net

 

Exercise of stock options
4,222

 
3,368

Amortization of share-based compensation
14,265

 
13,238

Other
117

 
78

Balance at end of period
485,943

 
399,757

 
 
 
 
Retained earnings
 

 
 

Balance at beginning of year
7,370,371

 
6,854,571

Net income
175,627

 
308,757

Net (income) loss attributable to noncontrolling interests
(20,829
)
 
(25,421
)
Preferred share dividends
(5,484
)
 
(5,484
)
Balance at end of period
7,519,685

 
7,132,423

 
 
 
 
Accumulated other comprehensive income
 
 
 
Balance at beginning of year
(16,502
)
 
128,856

Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
 
 
 
Balance at beginning of year
50,085

 
161,598

Unrealized holding (losses) gains arising during period, net of reclassification adjustment
100,758

 
53,372

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
(98
)
 
(1,448
)
Balance at end of period
150,745

 
213,522

Foreign currency translation adjustments:
 
 
 
Balance at beginning of year
(66,587
)
 
(32,742
)
Foreign currency translation adjustments
17,313

 
(22,757
)
Foreign currency translation adjustments attributable to noncontrolling interests
158

 

Balance at end of period
(49,116
)
 
(55,499
)
Balance at end of period
101,629

 
158,023

 
 
 
 
Common shares held in treasury, at cost
 
 
 
Balance at beginning of year
(1,941,904
)
 
(1,562,019
)
Shares repurchased for treasury
(77,345
)
 
(165,055
)
Balance at end of period
(2,019,249
)
 
(1,727,074
)
 
 
 
 
Total shareholders’ equity available to Arch
6,413,587

 
6,288,702

Non-redeemable noncontrolling interests
754,915

 
789,594

Total shareholders’ equity
$
7,168,502

 
$
7,078,296




 

See Notes to Consolidated Financial Statements
9


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Operating Activities
 

 
 

Net income
$
175,627

 
$
308,757

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized (gains) losses
(43,034
)
 
(87,907
)
Net impairment losses recognized in earnings
7,639

 
5,799

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
3,243

 
(1,970
)
Share-based compensation
14,265

 
13,238

Changes in:
 
 
 
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable
111,255

 
54,327

Unearned premiums, net of prepaid reinsurance premiums
169,656

 
156,731

Premiums receivable
(217,348
)
 
(192,247
)
Deferred acquisition costs, net
(30,050
)
 
(36,304
)
Reinsurance balances payable
51,929

 
(16,022
)
Other liabilities
32,697

 
(48,856
)
Other items
46,664

 
(70,085
)
Net Cash Provided By Operating Activities
322,543

 
85,461

Investing Activities
 

 
 

Purchases of fixed maturity investments
(8,133,537
)
 
(7,030,731
)
Purchases of equity securities
(128,263
)
 
(125,863
)
Purchases of other investments
(305,198
)
 
(375,402
)
Proceeds from sales of fixed maturity investments
7,827,536

 
6,857,115

Proceeds from sales of equity securities
216,012

 
125,906

Proceeds from sales, redemptions and maturities of other investments
211,125

 
269,449

Proceeds from redemptions and maturities of fixed maturity investments
163,894

 
272,657

Net settlements of derivative instruments
21,091

 
26,063

Net (purchases) sales of short-term investments
(65,594
)
 
66,283

Change in cash collateral related to securities lending
(43,118
)
 
(5,529
)
Purchase of business, net of cash acquired

 
(2,432
)
Purchases of fixed assets
(3,952
)
 
(3,272
)
Change in other assets
6,737

 
(29,625
)
Net Cash Provided By (Used For) Investing Activities
(233,267
)
 
44,619

Financing Activities
 

 
 

Purchases of common shares under share repurchase program
(75,256
)
 
(162,898
)
Proceeds from common shares issued, net
202

 
(412
)
Repayments of borrowings
(74,171
)
 

Change in cash collateral related to securities lending
43,118

 
5,529

Dividends paid to redeemable noncontrolling interests
(4,497
)
 
(4,816
)
Other
29,115

 
29,779

Preferred dividends paid
(5,484
)
 
(5,484
)
Net Cash Provided By (Used For) Financing Activities
(86,973
)
 
(138,302
)
 
 
 
 
Effects of exchange rate changes on foreign currency cash
2,332

 
(6,468
)
 
 
 
 
Increase (decrease) in cash
4,635

 
(14,690
)
Cash beginning of year
553,326

 
485,702

Cash end of period
$
557,961

 
$
471,012

 
 
 
 
Income taxes paid
$
2,504

 
$
3,569

Interest paid
$
3,813

 
$
511


See Notes to Consolidated Financial Statements
10

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 (“Watford Re”). 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, 2015 (“2015 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2.    Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted
The Company adopted a new accounting standard in the quarter that provided targeted improvements to consolidation guidance for limited partnerships and other similarly structured entities. The adoption of this standard resulted in the Company concluding that it no longer had a variable
 
interest in Alternative Re Ltd. and, as a result, no longer is required to consolidate Alternative Re Ltd. in its financial statements. Alternative Re Ltd. is a Bermuda-domiciled company that provides collateralized segregated accounts to its clients. The Company applied this new standard on a modified retrospective basis as of January 1, 2016. Such adoption did not impact the Company’s shareholders’ equity or net income.
The adoption of the new standard also resulted in a review of certain funds within the Company’s investment portfolio where the Company has a limited partnership interest. See Note 6 for disclosures on limited partnership interests.
The Company also adopted new accounting guidance pertaining to hybrid instruments. The new guidance clarified the evaluation of whether the nature of a host contract within a hybrid instrument issued in the form of a share is more akin to debt or equity. The Company has adopted this new guidance on a modified retrospective basis as of January 1, 2016. Based on a review of hybrid instruments issued in the form of a share (both held in its investment portfolio and issued as part of capital raising), the Company determined the new accounting guidance had no impact on the classification or accounting for its existing hybrid instruments.
Recently Issued Accounting Standards Not Yet Adopted
An accounting standard was issued in the 2015 second quarter requiring new disclosures about the reserve for losses and loss adjustment expenses for short-duration insurance contracts. These disclosures will provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. This accounting guidance is effective for the 2016 annual reporting period and interim periods thereafter and should be applied retrospectively. The Company is assessing the impact the implementation of this standard will have on the disclosures included in its consolidated financial statements.
A new accounting standard was issued in the 2016 first quarter to improve and simplify the accounting for employee share-based payment transactions. The new standard 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. The standard is effective in the 2017 first quarter and early adoption is permitted. The application of the new standard is dependent on the specific area that is amended. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.
In the 2016 first quarter, new accounting guidance was issued pertaining to the accounting for leases by a lessee. The new accounting guidance requires that the lessee recognize an


 
 
11

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

asset and a liability for leases with a lease term greater than 12 months regardless of whether the lease is classified as operating or financing. Under current accounting, operating leases are not reflected in the balance sheet. This accounting guidance is effective for the 2019 first quarter, though early application is permitted, and should be applied on a modified retrospective basis. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.
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.
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 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, 2016, Watford Re’s liabilities included unearned premiums of $278.0 million and reserves for losses and loss adjustment expenses of $351.7 million, some of which is related to transactions with the Company, along with $357.4 million of revolving credit agreement borrowings (see Note 9). For the 2016 first quarter, Watford Re generated $65.3 million of cash provided by operating activities, $43.7 million of cash used for financing activities and $51.3 million of cash used for investing activities.
The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to
 
Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from 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, 2016. 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,
 
2016
 
2015
Balance, beginning of period
$
738,831

 
$
769,081

Amounts attributable to noncontrolling interests
16,242

 
20,513

Foreign currency translation adjustments
(158
)
 

Balance, end of period
$
754,915

 
$
789,594

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 late 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 ‘amounts attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
The following table sets forth activity in the redeemable non-controlling interests:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Balance, beginning of period
$
205,182

 
$
219,512

Accretion of preference share issuance costs
92

 
92

Balance, end of period
$
205,274

 
$
219,604



12

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

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’ as summarized in the table below:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Amounts attributable to non-redeemable noncontrolling interests
$
(16,242
)
 
$
(20,513
)
Dividends attributable to redeemable noncontrolling interests
(4,587
)
 
(4,908
)
Net (income) loss attributable to noncontrolling interests
$
(20,829
)
 
$
(25,421
)
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,
 
2016
 
2015
Numerator:
 

 
 

Net income
$
175,627

 
$
308,757

Net (income) loss attributable to noncontrolling interests
(20,829
)
 
(25,421
)
Net income available to Arch
154,798

 
283,336

Preferred dividends
(5,484
)
 
(5,484
)
Net income available to Arch common shareholders
$
149,314

 
$
277,852

 
 
 
 
Denominator:
 

 
 

Weighted average common shares outstanding — basic
120,428,179

 
124,209,276

Effect of dilutive common share equivalents:
 
 
 
Nonvested restricted shares
1,460,654

 
1,416,801

Stock options (1)
2,607,663

 
2,824,977

Weighted average common shares and common share equivalents outstanding — diluted
124,496,496

 
128,451,054

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
1.24

 
$
2.24

Diluted
$
1.20

 
$
2.16

(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 2016 first quarter and 2015 first quarter, the number of stock options excluded were 607,208 and 703,853, respectively.

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 results of Arch Mortgage Insurance Company (“Arch MI U.S.”) and Arch Mortgage Insurance Designated Activity Company, leading providers of mortgage insurance products and services to the U.S. and European markets, respectively. Arch MI U.S. is approved as an eligible mortgage insurer by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a government sponsored enterprise, or “GSE.” The mortgage segment also includes GSE credit risk-sharing transactions and mortgage reinsurance for the U.S. and Australian markets.
The corporate (non-underwriting) segment results include net investment income, other income (loss), other expenses incurred by the Company, interest expense, net realized gains


 
 
13

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

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, 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.

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, 2016
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
798,553

 
$
481,390

 
$
111,280

 
$
1,391,061

 
$
148,606

 
$
1,437,966

Premiums ceded
(248,789
)
 
(160,566
)
 
(4,767
)
 
(413,960
)
 
(4,472
)
 
(316,731
)
Net premiums written
549,764

 
320,824

 
106,513

 
977,101

 
144,134

 
1,121,235

Change in unearned premiums
(36,675
)
 
(59,616
)
 
(44,748
)
 
(141,039
)
 
(28,617
)
 
(169,656
)
Net premiums earned
513,089

 
261,208

 
61,765

 
836,062

 
115,517

 
951,579

Other underwriting income

 
325

 
3,793

 
4,118

 
929

 
5,047

Losses and loss adjustment expenses
(323,609
)
 
(111,598
)
 
(8,629
)
 
(443,836
)
 
(79,113
)
 
(522,949
)
Acquisition expenses, net
(74,354
)
 
(54,787
)
 
(8,385
)
 
(137,526
)
 
(32,939
)
 
(170,465
)
Other operating expenses
(85,861
)
 
(36,455
)
 
(24,615
)
 
(146,931
)
 
(5,338
)
 
(152,269
)
Underwriting income (loss)
$
29,265

 
$
58,693

 
$
23,929

 
111,887

 
(944
)
 
110,943

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
70,409

 
23,326

 
93,735

Net realized gains (losses)
 
 
 
 
 
 
31,862

 
5,462

 
37,324

Net impairment losses recognized in earnings
 
 
 
 
 
 
(7,639
)
 

 
(7,639
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
6,655

 

 
6,655

Other income (loss)
 
 
 
 
 
 
(25
)
 

 
(25
)
Other expenses
 
 
 
 
 
 
(9,383
)
 

 
(9,383
)
Interest expense
 
 
 
 
 
 
(12,627
)
 
(3,480
)
 
(16,107
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
(22,041
)
 
(1,525
)
 
(23,566
)
Income (loss) before income taxes
 
 
 
 
 
 
169,098

 
22,839

 
191,937

Income tax expense
 
 
 
 
 
 
(16,310
)
 

 
(16,310
)
Net income (loss)
 
 
 
 
 
 
152,788

 
22,839

 
175,627

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(4,587
)
 
(4,587
)
Amounts attributable to noncontrolling interests
 
 
 
 
 
 

 
(16,242
)
 
(16,242
)
Net income (loss) available to Arch
 
 
 
 
 
 
152,788

 
2,010

 
154,798

Preferred dividends
 
 
 
 
 
 
(5,484
)
 

 
(5,484
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
$
147,304

 
$
2,010

 
$
149,314

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
63.1
%
 
42.7
%
 
14.0
%
 
53.1
%
 
68.5
%
 
55.0
%
Acquisition expense ratio
14.5
%
 
21.0
%
 
13.6
%
 
16.4
%
 
28.5
%
 
17.9
%
Other operating expense ratio
16.7
%
 
14.0
%
 
39.9
%
 
17.6
%
 
4.6
%
 
16.0
%
Combined ratio
94.3
%
 
77.7
%
 
67.5
%
 
87.1
%
 
101.6
%
 
88.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
27,825

 
$
1,713

 
$
63,132

 
$
92,670

 
$

 
$
92,670

 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
$
14,954,294

 
$
1,709,862

 
$
16,664,156

Total assets
 
 
 
 
 
 
22,217,987

 
2,323,382

 
24,541,369

Total liabilities
 
 
 
 
 
 
15,912,609

 
1,254,984

 
17,167,593


(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.

 
 
14

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

 
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 (loss) 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 (loss) before income taxes
 
 
 
 
 
 
293,474

 
27,961

 
321,435

Income tax expense
 
 
 
 
 
 
(12,678
)
 

 
(12,678
)
Net income (loss)
 
 
 
 
 
 
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 (loss) available to Arch
 
 
 
 
 
 
280,796

 
2,540

 
283,336

Preferred dividends
 
 
 
 
 
 
(5,484
)
 

 
(5,484
)
Net income (loss) 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
 
 
 
 
 
 
$
14,436,148

 
$
1,267,588

 
$
15,703,736

Total assets
 
 
 
 
 
 
21,232,554

 
1,622,537

 
22,855,091

Total liabilities
 
 
 
 
 
 
15,041,656

 
515,535

 
15,557,191


(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.



 
 
15

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

6.    Investment Information


At March 31, 2016, total investable assets of $16.66 billion included $14.95 billion managed by the Company and $1.71 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, 2016
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
2,869,676

 
$
49,618

 
$
(26,280
)
 
$
2,846,338

 
$
(3,106
)
Mortgage backed securities
697,009

 
10,615

 
(2,121
)
 
688,515

 
(3,393
)
Municipal bonds
1,605,234

 
33,497

 
(1,116
)
 
1,572,853

 

Commercial mortgage backed securities
577,853

 
8,158

 
(2,605
)
 
572,300

 

U.S. government and government agencies
2,975,376

 
27,583

 
(3,865
)
 
2,951,658

 

Non-U.S. government securities
1,086,128

 
34,833

 
(25,743
)
 
1,077,038

 

Asset backed securities
1,392,584

 
7,051

 
(12,298
)
 
1,397,831

 
(69
)
Total
11,203,860

 
171,355

 
(74,028
)
 
11,106,533

 
(6,568
)
Equity securities
523,078

 
72,407

 
(13,925
)
 
464,596

 

Other investments
195,079

 
22,181

 
(5,910
)
 
178,808

 

Short-term investments
629,844

 
479

 
(2,166
)
 
631,531

 

Total
$
12,551,861

 
$
266,422

 
$
(96,029
)
 
$
12,381,468

 
$
(6,568
)
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
Corporate bonds
$
2,725,729

 
$
15,978

 
$
(60,508
)
 
$
2,770,259

 
$
(3,553
)
Mortgage backed securities
754,870

 
9,872

 
(5,334
)
 
750,332

 
(3,350
)
Municipal bonds
1,626,281

 
27,014

 
(1,534
)
 
1,600,801

 

Commercial mortgage backed securities
764,152

 
3,269

 
(6,978
)
 
767,861

 

U.S. government and government agencies
2,423,455

 
6,228

 
(9,978
)
 
2,427,205

 

Non-U.S. government securities
917,664

 
10,414

 
(39,122
)
 
946,372

 

Asset backed securities
1,620,506

 
3,307

 
(12,951
)
 
1,630,150

 
(22
)
Total
10,832,657

 
76,082

 
(136,405
)
 
10,892,980

 
(6,925
)
Equity securities
629,182

 
94,341

 
(17,796
)
 
552,637

 

Other investments
300,476

 
43,798

 
(4,665
)
 
261,343

 

Short-term investments
587,904

 
187

 
(3,425
)
 
591,142

 

Total
$
12,350,219

 
$
214,408

 
$
(162,291
)
 
$
12,298,102

 
$
(6,925
)
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
(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, 2016, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $0.6 million, compared to a net unrealized loss of $1.4 million at December 31, 2015.


 
 
16

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, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
410,065

 
$
(10,070
)
 
$
140,629

 
$
(16,210
)
 
$
550,694

 
$
(26,280
)
Mortgage backed securities
87,587

 
(915
)
 
52,249

 
(1,206
)
 
139,836

 
(2,121
)
Municipal bonds
171,960

 
(881
)
 
26,269

 
(235
)
 
198,229

 
(1,116
)
Commercial mortgage backed securities
123,862

 
(2,140
)
 
20,306

 
(465
)
 
144,168

 
(2,605
)
U.S. government and government agencies
268,422

 
(3,865
)
 

 

 
268,422

 
(3,865
)
Non-U.S. government securities
258,144

 
(7,095
)
 
131,460

 
(18,648
)
 
389,604

 
(25,743
)
Asset backed securities
567,758

 
(9,603
)
 
169,161

 
(2,695
)
 
736,919

 
(12,298
)
Total
1,887,798

 
(34,569
)
 
540,074

 
(39,459
)
 
2,427,872

 
(74,028
)
Equity securities
192,866

 
(13,925
)
 

 

 
192,866

 
(13,925
)
Other investments
39,127

 
(5,910
)
 

 

 
39,127

 
(5,910
)
Short-term investments
10,208

 
(2,166
)
 

 

 
10,208

 
(2,166
)
Total
$
2,129,999

 
$
(56,570
)
 
$
540,074

 
$
(39,459
)
 
$
2,670,073

 
$
(96,029
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities (1):
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
1,810,988

 
$
(37,445
)
 
$
129,896

 
$
(23,063
)
 
$
1,940,884

 
$
(60,508
)
Mortgage backed securities
487,018

 
(4,508
)
 
48,991

 
(826
)
 
536,009

 
(5,334
)
Municipal bonds
269,015

 
(1,303
)
 
9,692

 
(231
)
 
278,707

 
(1,534
)
Commercial mortgage backed securities
511,261

 
(6,639
)
 
20,596

 
(339
)
 
531,857

 
(6,978
)
U.S. government and government agencies
1,991,163

 
(9,978
)
 

 

 
1,991,163

 
(9,978
)
Non-U.S. government securities
458,414

 
(13,494
)
 
138,792

 
(25,628
)
 
597,206

 
(39,122
)
Asset backed securities
1,217,163

 
(9,328
)
 
134,841

 
(3,623
)
 
1,352,004

 
(12,951
)
Total
6,745,022

 
(82,695
)
 
482,808

 
(53,710
)
 
7,227,830

 
(136,405
)
Equity securities
232,275

 
(17,796
)
 

 

 
232,275

 
(17,796
)
Other investments
93,614

 
(4,665
)
 

 

 
93,614

 
(4,665
)
Short-term investments
30,625

 
(3,425
)
 

 

 
30,625

 
(3,425
)
Total
$
7,101,536

 
$
(108,581
)
 
$
482,808

 
$
(53,710
)
 
$
7,584,344

 
$
(162,291
)
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”

At March 31, 2016, on a lot level basis, approximately 1,770 security lots out of a total of approximately 5,700 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 $2.5 million. At December 31, 2015, on a lot level basis, approximately 3,560 security lots out of a total of approximately 5,550 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 $3.1 million.

 
 
17

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

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
March 31, 2016
 
December 31, 2015
Maturity
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
Due in one year or less
 
$
282,800

 
$
283,961

 
$
337,898

 
$
341,595

Due after one year through five years
 
5,233,801

 
5,199,753

 
4,644,516

 
4,677,230

Due after five years through 10 years
 
2,443,031

 
2,400,852

 
2,214,413

 
2,228,638

Due after 10 years
 
576,782

 
563,321

 
496,302

 
497,174

 
 
8,536,414

 
8,447,887

 
7,693,129

 
7,744,637