10-Q 1 acgl10q93018.htm 10-Q 9.30.18 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 September 30, 2018
 
Or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-16209

 archlogorgbsolida32.jpg
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth 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 November 7, 2018, there were 404,724,220 common shares, $0.0011 par value per share, of the registrant outstanding.




ARCH CAPITAL GROUP LTD.
 
INDEX TO FORM 10-Q
 

ARCH CAPITAL
 1
2018 THIRD QUARTER FORM 10-Q


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 report 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 report 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 report 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 any 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, unemployment, housing prices, 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 sources 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 September 30, 2018;
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 or severe economic events in our insurance, reinsurance and mortgage businesses 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;

ARCH CAPITAL
 2
2018 THIRD QUARTER FORM 10-Q


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;
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;
a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service providers, which could negatively impact our business and/or expose us to litigation;
statutory or regulatory developments, including as to tax 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, including the Tax Cuts and Jobs Act of 2017; 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, 2017, 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. 


ARCH CAPITAL
 3
2018 THIRD QUARTER FORM 10-Q



ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
September 30, 2018 (unaudited) and December 31, 2017
 
 
 
 
 
 
For the three and nine month periods ended September 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
For the three and nine month periods ended September 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
For the three and nine month periods ended September 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
For the nine month periods ended September 30, 2018 and 2017 (unaudited)
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ARCH CAPITAL
 4
2018 THIRD QUARTER FORM 10-Q



Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of Arch Capital Group Ltd.:

Results of Review of Financial Statements

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries as of September 30, 2018, the related consolidated statements of income, comprehensive income and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2018 and September 30, 2017, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2018 and September 30, 2017, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, NY
November 9, 2018

ARCH CAPITAL
 5
2018 THIRD QUARTER FORM 10-Q


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
 
 
September 30,
2018
 
December 31,
2017
Assets
 

 
 

Investments:
 

 
 

Fixed maturities available for sale, at fair value (amortized cost: $14,510,474 and $13,869,460)
$
14,331,641

 
$
13,876,003

Short-term investments available for sale, at fair value (amortized cost: $961,993 and $1,468,955)
961,799

 
1,469,042

Collateral received under securities lending, at fair value (amortized cost: $306,886 and $476,605)
306,893

 
476,615

Equity securities, at fair value
444,118

 
495,804

Other investments available for sale, at fair value (cost: $0 and $198,163)

 
264,989

Investments accounted for using the fair value option
4,097,735

 
4,216,237

Investments accounted for using the equity method
1,524,242

 
1,041,322

Total investments
21,666,428

 
21,840,012

 
 
 
 
Cash
651,037

 
606,199

Accrued investment income
106,543

 
113,133

Securities pledged under securities lending, at fair value (amortized cost: $316,147 and $463,181)
299,409

 
464,917

Premiums receivable
1,307,466

 
1,135,249

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
2,749,785

 
2,540,143

Contractholder receivables
2,067,268

 
1,978,414

Ceded unearned premiums
1,011,850

 
926,611

Deferred acquisition costs
572,987

 
535,824

Receivable for securities sold
278,753

 
205,536

Goodwill and intangible assets
566,662

 
652,611

Other assets
974,346

 
1,053,009

Total assets
$
32,252,534

 
$
32,051,658

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss adjustment expenses
$
11,554,321

 
$
11,383,792

Unearned premiums
3,868,379

 
3,622,314

Reinsurance balances payable
404,936

 
323,496

Contractholder payables
2,067,268

 
1,978,414

Collateral held for insured obligations
249,723

 
240,183

Senior notes
1,733,364

 
1,732,884

Revolving credit agreement borrowings
554,756

 
816,132

Securities lending payable
306,886

 
476,605

Payable for securities purchased
255,427

 
449,186

Other liabilities
819,373

 
782,717

Total liabilities
21,814,433

 
21,805,723

 
 
 
 
Commitments and Contingencies


 


Redeemable noncontrolling interests
206,199

 
205,922

 
 
 
 
Shareholders' Equity
 
 
 
Non-cumulative preferred shares
780,000

 
872,555

Convertible non-voting common equivalent preferred shares

 
489,627

Common shares ($0.0011 par, shares issued: 570,048,156 and 549,872,226)
633

 
611

Additional paid-in capital
1,775,499

 
1,230,617

Retained earnings
9,300,208

 
8,562,889

Accumulated other comprehensive income (loss), net of deferred income tax
(221,041
)
 
118,044

Common shares held in treasury, at cost (shares: 164,523,796 and 156,938,409)
(2,280,151
)
 
(2,077,741
)
Total shareholders' equity available to Arch
9,355,148

 
9,196,602

Non-redeemable noncontrolling interests
876,754

 
843,411

Total shareholders' equity
10,231,902

 
10,040,013

Total liabilities, noncontrolling interests and shareholders' equity
$
32,252,534

 
$
32,051,658


See Notes to Consolidated Financial Statements

ARCH CAPITAL
6
2018 THIRD QUARTER FORM 10-Q


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 

 
 

Net premiums written
$
1,333,553

 
$
1,325,403

 
$
4,044,993

 
$
3,850,358

Change in unearned premiums
(42,675
)
 
(63,517
)
 
(182,453
)
 
(230,581
)
Net premiums earned
1,290,878

 
1,261,886

 
3,862,540

 
3,619,777

Net investment income
144,024

 
116,459

 
406,416

 
345,457

Net realized gains (losses)
(51,705
)
 
66,275

 
(239,314
)
 
122,163

 
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(492
)
 
(1,878
)
 
(1,124
)
 
(5,415
)
Less investment impairments recognized in other comprehensive income, before taxes

 

 

 

Net impairment losses recognized in earnings
(492
)
 
(1,878
)
 
(1,124
)
 
(5,415
)
 
 
 
 
 
 
 
 
Other underwriting income
5,823

 
6,064

 
15,046

 
15,519

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

 
31,090

 
52,523

 
111,884

Other income (loss)
(726
)
 
(342
)
 
2,461

 
(3,118
)
Total revenues
1,403,784

 
1,479,554

 
4,098,548

 
4,206,267

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses
699,420

 
1,046,141

 
2,062,433

 
2,288,571

Acquisition expenses
201,602

 
193,854

 
595,816

 
566,579

Other operating expenses
161,098

 
170,127

 
512,294

 
514,827

Corporate expenses
14,335

 
17,098

 
52,159

 
69,766

Amortization of intangible assets
26,315

 
31,824

 
79,523

 
93,942

Interest expense
29,730

 
29,510

 
90,710

 
86,935

Net foreign exchange (gains) losses
(10,838
)
 
28,028

 
(44,823
)
 
86,975

Total expenses
1,121,662

 
1,516,582

 
3,348,112

 
3,707,595

 
 
 
 
 
 
 
 
Income (loss) before income taxes
282,122

 
(37,028
)
 
750,436

 
498,672

Income tax expense
(33,356
)
 
(8,189
)
 
(78,939
)
 
(70,755
)
Net income (loss)
$
248,766

 
$
(45,217
)
 
$
671,497

 
$
427,917

Net (income) loss attributable to noncontrolling interests
(21,358
)
 
11,561

 
(50,020
)
 
(23,279
)
Net income (loss) available to Arch
227,408

 
(33,656
)
 
621,477

 
404,638

Preferred dividends
(10,402
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Loss on redemption of preferred shares

 
(6,735
)
 
(2,710
)
 
(6,735
)
Net income (loss) available to Arch common shareholders
$
217,006

 
$
(52,760
)
 
$
587,525

 
$
362,967

 
 
 
 
 
 
 
 
Net income (loss) per common share and common share equivalent
 

 
 

 
 

 
 

Basic
$
0.54

 
$
(0.13
)
 
$
1.45

 
$
0.90

Diluted
$
0.53

 
$
(0.13
)
 
$
1.42

 
$
0.87

 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 

 
 

Basic
402,939,092

 
404,656,353

 
405,076,228

 
403,416,387

Diluted
411,721,214

 
404,656,353

 
413,993,192

 
417,666,972





See Notes to Consolidated Financial Statements

ARCH CAPITAL
7
2018 THIRD QUARTER FORM 10-Q


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Comprehensive Income
 
 
 
 
 

 
 

Net income (loss)
$
248,766

 
$
(45,217
)
 
$
671,497

 
$
427,917

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
(53,308
)
 
66,462

 
(305,256
)
 
260,223

Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)
23,203

 
(23,912
)
 
122,307

 
(46,180
)
Foreign currency translation adjustments
2,063

 
8,280

 
(9,250
)
 
29,701

Comprehensive income
220,724

 
5,613

 
479,298

 
671,661

Net (income) loss attributable to noncontrolling interests
(21,358
)
 
11,561

 
(50,020
)
 
(23,279
)
Other comprehensive (income) loss attributable to noncontrolling interests
1,158

 
411

 
2,908

 
479

Comprehensive income available to Arch
$
200,524

 
$
17,585

 
$
432,186

 
$
648,861





See Notes to Consolidated Financial Statements

ARCH CAPITAL
8
2018 THIRD QUARTER FORM 10-Q


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Non-cumulative preferred shares
 
 
 
 
 

 
 

Balance at beginning of period
$
780,000

 
$
772,555

 
$
872,555

 
$
772,555

Preferred shares issued

 
230,000

 

 
230,000

Preferred shares redeemed

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

 
772,555

 
780,000

 
772,555

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

 
489,627

 
489,627

 
1,101,304

Preferred shares converted to common shares

 

 
(489,627
)
 
(611,677
)
Balance at end of period

 
489,627

 

 
489,627

 
 
 
 
 
 
 
 
Common shares
 
 
 
 
 
 
 
Balance at beginning of period
633

 
609

 
611

 
582

Common shares issued, net

 
1

 
22

 
28

Balance at end of period
633

 
610

 
633

 
610

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 

 
 

Balance at beginning of period
1,760,606

 
1,196,884

 
1,230,617

 
531,687

Preferred shares converted to common shares

 

 
489,608

 
611,653

Other changes
14,893


16,076


55,274


69,620

Balance at end of period
1,775,499

 
1,212,960

 
1,775,499

 
1,212,960

 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 

 
 

Balance at beginning of period
9,083,202

 
8,412,114

 
8,562,889

 
7,996,701

Cumulative effect of an accounting change (see Note 1)

 

 
149,794

 
(314
)
Balance at beginning of period, as adjusted
9,083,202

 
8,412,114

 
8,712,683

 
7,996,387

Net income
248,766

 
(45,217
)
 
671,497

 
427,917

Net (income) loss attributable to noncontrolling interests
(21,358
)
 
11,561

 
(50,020
)
 
(23,279
)
Preferred share dividends
(10,402
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Loss on redemption of preferred shares

 
(6,735
)
 
(2,710
)
 
(6,735
)
Balance at end of period
9,300,208

 
8,359,354

 
9,300,208

 
8,359,354

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), net of deferred income tax
 
 
 
 
 
 
 
Balance at beginning of period
(194,157
)
 
78,441

 
118,044

 
(114,541
)
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
 
 
 
 
 
 
 
Balance at beginning of period
(143,353
)
 
143,852

 
157,400

 
(27,641
)
Cumulative effect of an accounting change (see Note 1)

 

 
(149,794
)
 

Balance at beginning of period, as adjusted
(143,353
)
 
143,852

 
7,606

 
(27,641
)
Unrealized holding gains (losses) during period, net of reclassification adj.
(30,105
)
 
42,550

 
(182,949
)
 
214,043

Unrealized holding gains (losses) during period attrib. to noncontrolling int.
1,238

 

 
3,123

 

Balance at end of period
(172,220
)
 
186,402

 
(172,220
)
 
186,402

Foreign currency translation adjustments, net of deferred income tax:
 
 
 
 
 
 
 
Balance at beginning of period
(50,804
)
 
(65,411
)
 
(39,356
)
 
(86,900
)
Foreign currency translation adjustments
2,063

 
8,280

 
(9,250
)
 
29,701

Foreign currency translation adjustments attributable to noncontrolling int.
(80
)
 
411

 
(215
)
 
479

Balance at end of period
(48,821
)
 
(56,720
)
 
(48,821
)
 
(56,720
)
Balance at end of period
(221,041
)
 
129,682

 
(221,041
)
 
129,682

 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
Balance at beginning of period
(2,266,529
)
 
(2,051,343
)
 
(2,077,741
)
 
(2,034,570
)
Shares repurchased for treasury
(13,622
)
 
(2,301
)
 
(202,410
)
 
(19,074
)
Balance at end of period
(2,280,151
)
 
(2,053,644
)
 
(2,280,151
)
 
(2,053,644
)
 
 
 
 
 
 
 
 
Total shareholders’ equity available to Arch
9,355,148

 
8,911,144

 
9,355,148

 
8,911,144

Non-redeemable noncontrolling interests
876,754

 
860,898

 
876,754

 
860,898

Total shareholders’ equity
$
10,231,902

 
$
9,772,042

 
$
10,231,902

 
$
9,772,042



See Notes to Consolidated Financial Statements

ARCH CAPITAL
9
2018 THIRD QUARTER FORM 10-Q


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Operating Activities
 

 
 

Net income
$
671,497

 
$
427,917

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized (gains) losses
224,757

 
(141,944
)
Net impairment losses recognized in earnings
1,124

 
5,415

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
6,357

 
(63,784
)
Amortization of intangible assets
79,523

 
93,942

Share-based compensation
45,806

 
58,308

Changes in:
 
 
 
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable
68,245

 
602,652

Unearned premiums, net of ceded unearned premiums
182,453

 
230,581

Premiums receivable
(203,247
)
 
(167,143
)
Deferred acquisition costs
(36,074
)
 
(73,631
)
Reinsurance balances payable
83,696

 
37,528

Other items, net
(3,150
)
 
50,868

Net cash provided by operating activities
1,120,987

 
1,060,709

Investing Activities
 

 
 

Purchases of fixed maturity investments
(24,837,917
)
 
(28,079,129
)
Purchases of equity securities
(819,342
)
 
(667,135
)
Purchases of other investments
(1,543,332
)
 
(1,406,528
)
Proceeds from sales of fixed maturity investments
23,310,203

 
27,629,474

Proceeds from sales of equity securities
866,919

 
751,873

Proceeds from sales, redemptions and maturities of other investments
1,178,035

 
938,581

Proceeds from redemptions and maturities of fixed maturity investments
724,021

 
747,621

Net settlements of derivative instruments
765

 
(20,952
)
Net sales (purchases) of short-term investments
554,315

 
(964,653
)
Change in cash collateral related to securities lending
137,073

 
148,692

Acquisitions, net of cash

 
(27,709
)
Purchases of fixed assets
(19,050
)
 
(16,862
)
Other
58,227

 
94,089

Net cash provided by (used for) investing activities
(390,083
)
 
(872,638
)
Financing Activities
 

 
 

Proceeds from issuance of preferred shares, net

 
222,054

Redemption of preferred shares
(92,555
)
 
(230,000
)
Purchases of common shares under share repurchase program
(184,529
)
 

Proceeds from common shares issued, net
(12,029
)
 
(7,484
)
Proceeds from borrowings
167,259

 
238,915

Repayments of borrowings
(427,000
)
 
(172,000
)
Change in cash collateral related to securities lending
(137,073
)
 
(148,692
)
Dividends paid to redeemable noncontrolling interests
(13,491
)
 
(13,491
)
Other
(6,084
)
 
(49,280
)
Preferred dividends paid
(31,242
)
 
(34,936
)
Net cash provided by (used for) financing activities
(736,744
)
 
(194,914
)
 
 
 
 
Effects of exchange rate changes on foreign currency cash and restricted cash
(11,625
)
 
17,888

 
 
 
 
Increase (decrease) in cash and restricted cash
(17,465
)
 
11,045

Cash and restricted cash, beginning of year
727,284

 
969,569

Cash and restricted cash, end of period
$
709,819

 
$
980,614



See Notes to Consolidated Financial Statements

ARCH CAPITAL
10
2018 THIRD QUARTER FORM 10-Q

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

 
1.    Basis of Presentation and Recent Accounting Pronouncements

Basis of Presentation
Arch Capital Group Ltd. (“Arch Capital”) is a Bermuda public limited liability company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries. See Note 10.
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of
 
Financial Assets and Financial Liabilities,” which enhances the reporting model for financial instruments and provides improved financial information to readers of the financial statements. Among other provisions focused on improving the recognition and measurement of financial instruments, the ASU significantly changes the income statement impact of equity instruments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with any changes in fair value recognized in net income rather than other comprehensive income. Upon adoption of this ASU, the Company recorded a cumulative effect adjustment of $149.8 million in retained earnings and an offsetting decrease in accumulated other comprehensive income. The adoption of this ASU did not have a material impact on the Company's financial position, cash flows, or total comprehensive income, but may increase volatility in the Company's results of operations in future periods.
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which creates a new comprehensive revenue recognition standard that serves as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts or financial instruments. The ASU also requires enhanced disclosures about revenue. The Company adopted the ASU using the modified retrospective method, whereby the cumulative effect of adoption was recognized as an adjustment to retained earnings at the date of initial application. The impact of the adoption of this ASU was not material, mostly because the accounting for insurance contracts is outside of the scope of ASU 2014-09.
The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. As a result, transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. The revised presentation required in this ASU is reflected in the Company’s consolidated statements of cash flows for both periods presented. The adoption of this ASU did not have any effect on the Company’s results of operations, financial position or comprehensive income.

ARCH CAPITAL
 11
2018 THIRD QUARTER FORM 10-Q

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

Recently Issued Accounting Standards Not Yet Adopted
In July 2018, the FASB issued ASU 2018-11, “Leases: Targeted Improvements (Topic 842),” which will ease implementation of the lease standard (ASU 2016-02). The guidance provides an alternative transition method by which leases are recognized at the date of adoption. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company will adopt this alternative transition method when adopting the new lease standard as of January 1, 2019. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40),” to align the requirements for capitalizing certain implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.
For information regarding additional accounting standards that the Company has not yet adopted, see note 3(q), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2017 Form 10-K.
2.    Share Transactions

Three-For-One Common Share Split
In May 2018, shareholders approved a proposal to amend the memorandum of association by sub-dividing the authorized common shares of Arch Capital to effect a three-for-one split of Arch Capital’s common shares. The share split changed the Company’s authorized common shares to 1.8 billion common shares (600 million previously), with a par value of $.0011 per share ($.0033 previously). Information pertaining to the composition of the Company’s shareholders’ equity accounts, shares and earnings per share has been retroactively restated in the accompanying financial statements and notes to the consolidated financial statements to reflect the share split.
 
Share Repurchases 
The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased 382.6 million common shares for an aggregate purchase price of $3.87 billion. For the nine months ended September 30, 2018, Arch Capital repurchased 6.9 million shares under the share repurchase program with an aggregate purchase price of $184.5 million. Arch Capital did not repurchase any shares under the share repurchase program during the nine months ended September 30, 2017. At September 30, 2018, $262.0 million of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
Conversion of Convertible Non-Voting Common Equivalent Preferred Shares  
In March 2018, Arch Capital completed an underwritten public secondary offering of 17.0 million common shares (split adjusted) by American International Group, Inc. (“AIG”) following transfer of 0.6 million Series D convertible non-voting common equivalent preferred shares (“Series D Preferred Shares”). Proceeds from the sale of common shares pursuant to the public offering were received by AIG. At September 30, 2018, no Series D Preferred Shares were outstanding.
Series C Preferred Shares
On January 2, 2018, Arch Capital redeemed all outstanding 6.75% Series C non-cumulative preferred shares. The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.

ARCH CAPITAL
 12
2018 THIRD QUARTER FORM 10-Q

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

3.    Earnings (Loss) Per Common Share

Due to the net loss recorded in the 2017 third quarter, diluted weighted average common shares and common share equivalents outstanding for the 2017 third quarter do not include the effect of 4.7 million otherwise dilutive securities since the inclusion of such securities is anti-dilutive to per share results. Since the Company reported net income for the other periods presented, the computation of diluted average shares outstanding includes dilutive securities for such periods.
The following table sets forth the computation of basic and diluted earnings per common share:
 
Three Months Ended

Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
248,766

 
$
(45,217
)
 
$
671,497

 
$
427,917

Amounts attributable to noncontrolling interests
(21,358
)
 
11,561

 
(50,020
)
 
(23,279
)
Net income (loss) available to Arch
227,408

 
(33,656
)
 
621,477

 
404,638

Preferred dividends
(10,402
)
 
(12,369
)
 
(31,242
)
 
(34,936
)
Loss on redemption of preferred shares

 
(6,735
)
 
(2,710
)
 
(6,735
)
Net income (loss) available to Arch common shareholders
$
217,006

 
$
(52,760
)
 
$
587,525

 
$
362,967

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
402,939,092

 
387,633,753

 
400,649,105

 
373,579,833

Series D preferred shares (1)

 
17,022,600

 
4,427,123

 
29,836,554

Weighted average common shares and common share equivalents outstanding — basic
402,939,092

 
404,656,353

 
405,076,228

 
403,416,387

Effect of dilutive common share equivalents:
 
 
 
 
 
 
 
Nonvested restricted shares
1,619,286

 

 
1,568,044

 
4,379,637

Stock options (2)
7,162,836

 

 
7,348,920

 
9,870,948

Weighted average common shares and common share equivalents outstanding — diluted
411,721,214

 
404,656,353

 
413,993,192

 
417,666,972

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
(0.13
)
 
$
1.45

 
$
0.90

Diluted
$
0.53

 
$
(0.13
)
 
$
1.42

 
$
0.87

(1)
Such shares are convertible non-voting common equivalent preferred shares issued in connection with the UGC acquisition. See Note 2.
(2)
Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2018 third quarter and 2017 third quarter, the number of stock options excluded were 4,396,352 and 0, respectively. For the nine months ended September 30, 2018 and 2017, the number of stock options excluded were 5,481,584 and 2,516,604, respectively.

ARCH CAPITAL
 13
2018 THIRD QUARTER FORM 10-Q

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

4.    Segment Information

The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of Arch Capital, and the Chief Financial Officer of Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.
The ‘other’ segment includes the results of Watford Re (see Note 10). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.

ARCH CAPITAL
 14
2018 THIRD QUARTER FORM 10-Q

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

The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
 
Three Months Ended
 
September 30, 2018
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
836,820

 
$
435,396

 
$
350,559

 
$
1,622,532

 
$
185,033

 
$
1,731,328

Premiums ceded
(259,968
)
 
(123,705
)
 
(57,226
)
 
(440,656
)
 
(33,356
)
 
(397,775
)
Net premiums written
576,852

 
311,691

 
293,333

 
1,181,876

 
151,677

 
1,333,553

Change in unearned premiums
(15,794
)
 
(18,418
)
 
7,591

 
(26,621
)
 
(16,054
)
 
(42,675
)
Net premiums earned
561,058

 
293,273

 
300,924

 
1,155,255

 
135,623

 
1,290,878

Other underwriting income (loss)

 
1,387

 
3,733

 
5,120

 
703

 
5,823

Losses and loss adjustment expenses
(409,435
)
 
(183,413
)
 
(9,615
)
 
(602,463
)
 
(96,957
)
 
(699,420
)
Acquisition expenses
(88,255
)
 
(50,367
)
 
(33,361
)
 
(171,983
)
 
(29,619
)
 
(201,602
)
Other operating expenses
(90,081
)
 
(29,936
)
 
(31,122
)
 
(151,139
)
 
(9,959
)
 
(161,098
)
Underwriting income (loss)
$
(26,713
)
 
$
30,944

 
$
230,559

 
234,790

 
(209
)
 
234,581

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
114,328

 
29,696

 
144,024

Net realized gains (losses)
 
 
 
 
 
 
(47,010
)
 
(4,695
)
 
(51,705
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
(492
)
 

 
(492
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
15,982

 

 
15,982

Other income (loss)
 
 
 
 
 
 
(726
)
 

 
(726
)
Corporate expenses (2)
 
 
 
 
 
 
(13,244
)
 

 
(13,244
)
Transaction costs and other (2)
 
 
 
 
 
 
(1,091
)
 

 
(1,091
)
Amortization of intangible assets
 
 
 
 
 
 
(26,315
)
 

 
(26,315
)
Interest expense
 
 
 
 
 
 
(24,666
)
 
(5,064
)
 
(29,730
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
7,130

 
3,708

 
10,838

Income before income taxes
 
 
 
 
 
 
258,686

 
23,436

 
282,122

Income tax expense
 
 
 
 
 
 
(33,356
)
 

 
(33,356
)
Net income
 
 
 
 
 
 
225,330

 
23,436

 
248,766

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(4,599
)
 
(4,599
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 

 
(16,759
)
 
(16,759
)
Net income available to Arch
 
 
 
 
 
 
225,330

 
2,078

 
227,408

Preferred dividends
 
 
 
 
 
 
(10,402
)
 

 
(10,402
)
Net income available to Arch common shareholders
 
 
 
 
 
 
$
214,928

 
$
2,078

 
$
217,006

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
73.0
%
 
62.5
%
 
3.2
%
 
52.1
%
 
71.5
%
 
54.2
%
Acquisition expense ratio
15.7
%
 
17.2
%
 
11.1
%
 
14.9
%
 
21.8
%
 
15.6
%
Other operating expense ratio
16.1
%
 
10.2
%
 
10.3
%
 
13.1
%
 
7.3
%
 
12.5
%
Combined ratio
104.8
%
 
89.9
%
 
24.6
%
 
80.1
%
 
100.6
%
 
82.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
20,141

 
$

 
$
538,871

 
$
559,012

 
$
7,650

 
$
566,662

(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 ‘transaction costs and other.’


ARCH CAPITAL
 15
2018 THIRD QUARTER FORM 10-Q

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

 
Three Months Ended
 
September 30, 2017
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
787,447

 
$
422,083

 
$
347,951

 
$
1,557,179

 
$
166,198

 
$
1,648,246

Premiums ceded
(222,516
)
 
(105,389
)
 
(57,900
)
 
(385,503
)
 
(12,471
)
 
(322,843
)
Net premiums written
564,931

 
316,694

 
290,051

 
1,171,676

 
153,727

 
1,325,403

Change in unearned premiums
(29,766
)
 
6,879

 
(15,533
)
 
(38,420
)
 
(25,097
)
 
(63,517
)
Net premiums earned
535,165

 
323,573

 
274,518

 
1,133,256

 
128,630

 
1,261,886

Other underwriting income (loss)

 
1,728

 
3,599

 
5,327

 
737

 
6,064

Losses and loss adjustment expenses
(568,795
)
 
(318,609
)
 
(35,156
)
 
(922,560
)
 
(123,581
)
 
(1,046,141
)
Acquisition expenses
(82,638
)
 
(57,340
)
 
(21,803
)
 
(161,781
)
 
(32,073
)
 
(193,854
)
Other operating expenses
(90,875
)
 
(36,214
)
 
(34,770
)
 
(161,859
)
 
(8,268
)
 
(170,127
)
Underwriting income (loss)
$
(207,143
)
 
$
(86,862
)
 
$
186,388

 
(107,617
)
 
(34,555
)
 
(142,172
)
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
94,127

 
22,332

 
116,459

Net realized gains (losses)
 
 
 
 
 
 
64,104

 
2,171

 
66,275

Net impairment losses recognized in earnings
 
 
 
 
 
 
(1,878
)
 

 
(1,878
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
31,090

 

 
31,090

Other income (loss)
 
 
 
 
 
 
(342
)
 

 
(342
)
Corporate expenses (2)
 
 
 
 
 
 
(14,108
)
 

 
(14,108
)
Transaction costs and other (2)
 
 
 
 
 
 
(2,990
)
 

 
(2,990
)
Amortization of intangible assets
 
 
 
 
 
 
(31,824
)
 

 
(31,824
)
Interest expense
 
 
 
 
 
 
(26,264
)
 
(3,246
)
 
(29,510
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
(27,785
)
 
(243
)
 
(28,028
)
Income (loss) before income taxes
 
 
 
 
 
 
(23,487
)
 
(13,541
)
 
(37,028
)
Income tax expense
 
 
 
 
 
 
(8,168
)
 
(21
)
 
(8,189
)
Net income (loss)
 
 
 
 
 
 
(31,655
)
 
(13,562
)
 
(45,217
)
Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 

 
(4,586
)
 
(4,586
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 

 
16,147

 
16,147

Net income (loss) available to Arch
 
 
 
 
 
 
(31,655
)
 
(2,001
)
 
(33,656
)
Preferred dividends
 
 
 
 
 
 
(12,369
)
 

 
(12,369
)
Loss on redemption of preferred shares
 
 
 
 
 
 
(6,735
)
 

 
(6,735
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
$
(50,759
)
 
$
(2,001
)
 
$
(52,760
)
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 

 
 

 
 

 
 
 
 

 
 

Loss ratio
106.3
%
 
98.5
%
 
12.8
%
 
81.4
%
 
96.1
%
 
82.9
%
Acquisition expense ratio
15.4
%
 
17.7
%
 
7.9
%
 
14.3
%
 
24.9
%
 
15.4
%
Other operating expense ratio
17.0
%
 
11.2
%
 
12.7
%
 
14.3
%
 
6.4
%
 
13.5
%
Combined ratio
138.7
%
 
127.4
%
 
33.4
%
 
110.0
%
 
127.4
%
 
111.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
23,445

 
$
417

 
$
652,893

 
$
676,755

 
$
7,650

 
$
684,405


(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 ‘transaction costs and other.’


ARCH CAPITAL
 16
2018 THIRD QUARTER FORM 10-Q

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

 
Nine Months Ended
 
September 30, 2018
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-Total
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written (1)
$
2,429,570

 
$
1,503,206

 
$
1,002,727

 
$
4,935,339

 
$
574,078

 
$
5,266,086

Premiums ceded
(752,413
)
 
(455,682
)
 
(154,230
)
 
(1,362,161
)
 
(102,263
)
 
(1,221,093
)
Net premiums written
1,677,157

 
1,047,524

 
848,497

 
3,573,178

 
471,815

 
4,044,993

Change in unearned premiums
(30,913
)
 
(134,761
)
 
23,147

 
(142,527
)
 
(39,926
)
 
(182,453
)
Net premiums earned
1,646,244

 
912,763

 
871,644

 
3,430,651

 
431,889

 
3,862,540

Other underwriting income (loss)

 
2,490

 
10,464

 
12,954

 
2,092

 
15,046

Losses and loss adjustment expenses
(1,120,630
)
 
(555,044
)
 
(74,672
)
 
(1,750,346
)
 
(312,087
)
 
(2,062,433
)
Acquisition expenses
(264,094
)
 
(148,828
)
 
(87,665
)
 
(500,587
)
 
(95,229
)
 
(595,816
)
Other operating expenses
(274,735
)
 
(101,185
)
 
(108,622
)
 
(484,542
)
 
(27,752
)
 
(512,294
)
Underwriting income (loss)
$
(13,215
)
 
$
110,196

 
$
611,149

 
708,130

 
(1,087
)
 
707,043

 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
322,332

 
84,084

 
406,416

Net realized gains (losses)
 
 
 
 
 
 
(218,414
)
 
(20,900
)
 
(239,314
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
(1,124
)
 

 
(1,124
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
52,523

 

 
52,523

Other income (loss)
 
 
 
 
 
 
2,461

 

 
2,461

Corporate expenses (2)
 
 
 
 
 
 
(43,330
)
 

 
(43,330
)
Transaction costs and other (2)
 
 
 
 
 
 
(8,829
)
 

 
(8,829
)
Amortization of intangible assets
 
 
 
 
 
 
(79,523
)
 

 
(79,523
)
Interest expense
 
 
 
 
 
 
(76,631