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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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
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
|
|
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
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.
|
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.
|
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
.
|
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
.
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
|
|
Mortgage backed securities
|
|
697,009
|
|
|
688,515
|
|
|
754,870
|
|
|
750,332
|
|
Commercial mortgage backed securities
|
|
577,853
|
|
|
572,300
|
|
|
764,152
|
|
|
767,861
|
|
Asset backed securities
|
|
1,392,584
|
|
|
1,397,831
|
|
|
1,620,506
|
|
|
1,630,150
|
|
Total (1)
|
|
$
|
11,203,860
|
|
|
$
|
11,106,533
|
|
|
$
|
10,832,657
|
|
|
$
|
10,892,980
|
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
|
Securities Lending Agreements
The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan to the Company.
The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short-term investments. At
March 31, 2016
, the fair value of the cash collateral received on securities lending was
$100.3 million
and the fair value of security collateral received was
$494.6 million
. At
December 31, 2015
, the fair value of the cash collateral received on securities lending was
$52.7 million
, which included
$3.0 million
that was reinvested in sub-prime mortgage backed securities, and the fair value of security collateral received was
$336.7 million
.
The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
Overnight and Continuous
|
|
Less than 30 Days
|
|
30-90 Days
|
|
90 Days or More
|
|
Total
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
393,463
|
|
|
$
|
—
|
|
|
$
|
148,013
|
|
|
$
|
—
|
|
|
$
|
541,476
|
|
Corporate bonds
|
|
36,885
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,885
|
|
Equity securities
|
|
16,561
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,561
|
|
Total
|
|
$
|
446,909
|
|
|
$
|
—
|
|
|
$
|
148,013
|
|
|
$
|
—
|
|
|
$
|
594,922
|
|
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 8
|
|
$
|
—
|
|
Amounts related to securities lending not included in offsetting disclosure in Note 8
|
|
$
|
594,922
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
235,728
|
|
|
$
|
—
|
|
|
$
|
82,286
|
|
|
$
|
9,598
|
|
|
$
|
327,612
|
|
Corporate bonds
|
|
55,086
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55,086
|
|
Equity securities
|
|
6,722
|
|
|
4,424
|
|
|
—
|
|
|
—
|
|
|
11,146
|
|
Total
|
|
$
|
297,536
|
|
|
$
|
4,424
|
|
|
$
|
82,286
|
|
|
$
|
9,598
|
|
|
$
|
393,844
|
|
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 8
|
|
$
|
—
|
|
Amounts related to securities lending not included in offsetting disclosure in Note 8
|
|
$
|
393,844
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Investments
The following table summarizes the Company’s other investments, including available for sale and fair value option components:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Available for sale:
|
|
|
|
Asian and emerging markets
|
$
|
112,769
|
|
|
$
|
206,861
|
|
Investment grade fixed income
|
32,515
|
|
|
31,370
|
|
Credit related funds
|
13,609
|
|
|
22,512
|
|
Other
|
36,186
|
|
|
39,733
|
|
Total available for sale
|
195,079
|
|
|
300,476
|
|
Fair value option:
|
|
|
|
Term loan investments (par value: $1,237,615 and $1,197,143)
|
1,149,249
|
|
|
1,108,017
|
|
Mezzanine debt funds
|
123,696
|
|
|
121,589
|
|
Credit related funds
|
217,122
|
|
|
219,049
|
|
Investment grade fixed income
|
66,050
|
|
|
63,053
|
|
Asian and emerging markets
|
121,232
|
|
|
34,761
|
|
Other (1)
|
115,355
|
|
|
124,502
|
|
Total fair value option
|
1,792,704
|
|
|
1,670,971
|
|
Total
|
$
|
1,987,783
|
|
|
$
|
1,971,447
|
|
|
|
(1)
|
Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure and other.
|
Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Fair Value Option
The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Fixed maturities
|
$
|
1,061,398
|
|
|
$
|
936,802
|
|
Other investments
|
1,792,704
|
|
|
1,670,971
|
|
Short-term investments
|
284,793
|
|
|
285,923
|
|
Equity securities
|
437
|
|
|
798
|
|
Investments accounted for using the fair value option
|
$
|
3,139,332
|
|
|
$
|
2,894,494
|
|
Limited partnership interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ Based on the new accounting guidance for consolidation, the Company determined that these
limited partnership interests represented variable interests in the funds because the
general partner did not have a significant interest in the fund. The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The
Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded
commitment.
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Investments accounted for using the equity method (1)
|
$
|
619,964
|
|
|
$
|
584,158
|
|
Investments accounted for using the fair value option (2)
|
84,394
|
|
|
90,969
|
|
Total
|
$
|
704,358
|
|
|
$
|
675,127
|
|
|
|
(1)
|
Aggregate unfunded commitments were
$668.4 million
at
March 31, 2016
, compared to
$535.4 million
at
December 31, 2015
.
|
|
|
(2)
|
Aggregate unfunded commitments were
$28.1 million
at
March 31, 2016
, compared to
$22.7 million
at
December 31, 2015
.
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Investment Income
The components of net investment income were derived from the following sources:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Fixed maturities
|
$
|
73,673
|
|
|
$
|
68,596
|
|
Term loan investments
|
20,012
|
|
|
14,744
|
|
Equity securities (dividends)
|
3,435
|
|
|
2,679
|
|
Short-term investments
|
496
|
|
|
196
|
|
Other (1)
|
13,743
|
|
|
12,747
|
|
Gross investment income
|
111,359
|
|
|
98,962
|
|
Investment expenses
|
(17,624
|
)
|
|
(19,968
|
)
|
Net investment income
|
$
|
93,735
|
|
|
$
|
78,994
|
|
|
|
(1)
|
Includes income distributions from investment funds and other items.
|
Net Realized Gains (Losses)
Net realized gains (losses) were as follows, excluding other-than-temporary impairment provisions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Available for sale securities:
|
|
|
|
|
|
Gross gains on investment sales
|
$
|
107,819
|
|
|
$
|
97,591
|
|
Gross losses on investment sales
|
(63,131
|
)
|
|
(55,160
|
)
|
Change in fair value of assets and liabilities accounted for using the fair value option:
|
|
|
|
Fixed maturities
|
(333
|
)
|
|
(3,302
|
)
|
Other investments
|
(21,548
|
)
|
|
6,287
|
|
Equity securities
|
36
|
|
|
(2
|
)
|
Short-term investments
|
(422
|
)
|
|
5,846
|
|
Derivative instruments (1)
|
20,732
|
|
|
36,676
|
|
Other (2)
|
(5,829
|
)
|
|
(4,588
|
)
|
Net realized gains (losses)
|
$
|
37,324
|
|
|
$
|
83,348
|
|
|
|
(1)
|
See Note
8
for information on the Company’s derivative instruments.
|
|
|
(2)
|
Includes the re-measurement of contingent consideration liability amounts.
|
Other-Than-Temporary Impairments
The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance.
The following table details the net impairment losses recognized in earnings by asset class:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Fixed maturities:
|
|
|
|
|
|
Mortgage backed securities
|
$
|
(473
|
)
|
|
$
|
(1,072
|
)
|
Corporate bonds
|
(4,880
|
)
|
|
(1,976
|
)
|
Non-U.S. government securities
|
(181
|
)
|
|
—
|
|
Asset backed securities
|
(6
|
)
|
|
—
|
|
Total
|
(5,540
|
)
|
|
(3,048
|
)
|
Short-term investments
|
—
|
|
|
(2,341
|
)
|
Equity securities
|
(1,102
|
)
|
|
(129
|
)
|
Other investments
|
(997
|
)
|
|
(281
|
)
|
Net impairment losses recognized in earnings
|
$
|
(7,639
|
)
|
|
$
|
(5,799
|
)
|
A description of the methodology and significant inputs used to measure the amount of net impairment losses recognized in earnings in the
2016 first quarter
is as follows:
|
|
•
|
Corporate bonds — the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain corporate bonds. Impairment losses for the
2016 first quarter
primarily resulted from non-investment grade corporate bonds in the energy sector, reflecting current market conditions;
|
|
|
•
|
Equity securities — the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. Impairment losses for the
2016 first quarter
resulted on certain equities which were in an unrealized loss position for a significant length of time;
|
|
|
•
|
Other investments — the Company utilized information received from asset managers on investment funds, including the business prospects, recent events, industry and market data and other factors. Impairment losses for the
2016 first quarter
were on one fund which was in an unrealized loss position for a significant length of time;
|
|
|
•
|
Mortgage backed securities — the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis includes expected cash flow projections under base case and stress case scenarios which modify the expected default expectations and loss severities and slow down prepayment assumptions. The significant inputs in the models include the expected default rates,
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
delinquency rates and foreclosure costs. Impairment losses for the
2016 first quarter
resulted from relatively small adjustments on a number of mortgage backed securities.
The Company believes that the
$6.6 million
of OTTI included in accumulated other comprehensive income at
March 31, 2016
on the securities which were considered by the Company to be impaired was due to market and sector-related factors (
i.e.
, not credit losses). At
March 31, 2016
, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.
The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Balance at start of period
|
$
|
26,875
|
|
|
$
|
20,196
|
|
Credit loss impairments recognized on securities not previously impaired
|
1,063
|
|
|
4,489
|
|
Credit loss impairments recognized on securities previously impaired
|
522
|
|
|
79
|
|
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security
|
—
|
|
|
—
|
|
Reductions for securities sold during the period
|
(10,169
|
)
|
|
(420
|
)
|
Balance at end of period
|
$
|
18,291
|
|
|
$
|
24,344
|
|
Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note
9
for further details.
The following table details the value of the Company’s restricted assets:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Assets used for collateral or guarantees:
|
|
|
|
|
|
Affiliated transactions
|
$
|
3,773,948
|
|
|
$
|
3,810,104
|
|
Third party agreements
|
1,493,873
|
|
|
1,286,257
|
|
Deposits with U.S. regulatory authorities
|
401,964
|
|
|
391,458
|
|
Deposits with non-U.S. regulatory authorities
|
42,374
|
|
|
38,230
|
|
Total restricted assets
|
$
|
5,712,159
|
|
|
$
|
5,526,049
|
|
7
. Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
|
|
Level 1:
|
Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for
identical
assets or liabilities in
active markets
|
|
|
Level 2:
|
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
|
|
|
Level 3:
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement
|
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at
March 31, 2016
.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the
$15.90 billion
of financial assets and liabilities measured at fair value at
March 31, 2016
, approximately
$295.1 million
, or
1.9%
, were priced using non-binding broker-dealer quotes. Of the
$15.40 billion
of financial assets and liabilities measured at fair value at
December 31, 2015
, approximately
$317.8 million
, or
2.1%
, were priced using non-binding broker-dealer quotes.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain
market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
|
|
•
|
U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
|
|
|
•
|
Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2.
|
|
|
•
|
Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
market inputs, the fair value of these securities are classified within Level 2.
|
|
•
|
Municipal bonds — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
|
|
|
•
|
Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
|
|
|
•
|
Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
|
|
|
•
|
Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
|
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy.
Other investments
The Company determined that exchange-traded investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.
Contingent consideration liabilities
Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to the acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies and other acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs
which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.
The following table presents the Company’s financial assets and liabilities measured at fair value by level at
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements Using:
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets measured at fair value (1):
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,869,676
|
|
|
$
|
—
|
|
|
$
|
2,854,510
|
|
|
$
|
15,166
|
|
Mortgage backed securities
|
697,009
|
|
|
—
|
|
|
697,009
|
|
|
—
|
|
Municipal bonds
|
1,605,234
|
|
|
—
|
|
|
1,605,234
|
|
|
—
|
|
Commercial mortgage backed securities
|
577,853
|
|
|
—
|
|
|
577,853
|
|
|
—
|
|
U.S. government and government agencies
|
2,975,376
|
|
|
2,873,646
|
|
|
101,730
|
|
|
—
|
|
Non-U.S. government securities
|
1,086,128
|
|
|
—
|
|
|
1,086,128
|
|
|
—
|
|
Asset backed securities
|
1,392,584
|
|
|
—
|
|
|
1,335,084
|
|
|
57,500
|
|
Total
|
11,203,860
|
|
|
2,873,646
|
|
|
8,257,548
|
|
|
72,666
|
|
|
|
|
|
|
|
|
|
Equity securities
|
523,078
|
|
|
521,381
|
|
|
1,697
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
629,844
|
|
|
601,966
|
|
|
27,878
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other investments
|
86,564
|
|
|
86,564
|
|
|
—
|
|
|
—
|
|
Other investments measured at net asset value (2)
|
108,515
|
|
|
|
|
|
|
|
Total other investments
|
195,079
|
|
|
86,564
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Derivative instruments (4)
|
33,027
|
|
|
—
|
|
|
33,027
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fair value option:
|
|
|
|
|
|
|
|
Corporate bonds
|
813,488
|
|
|
—
|
|
|
813,488
|
|
|
—
|
|
Non-U.S. government bonds
|
105,813
|
|
|
—
|
|
|
105,813
|
|
|
—
|
|
Mortgage backed securities
|
16,992
|
|
|
—
|
|
|
16,992
|
|
|
—
|
|
Asset backed securities
|
21,725
|
|
|
—
|
|
|
21,725
|
|
|
—
|
|
U.S. government and government agencies
|
103,380
|
|
|
103,380
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
284,793
|
|
|
284,793
|
|
|
—
|
|
|
—
|
|
Equity securities
|
437
|
|
|
437
|
|
|
—
|
|
|
—
|
|
Other investments
|
1,209,626
|
|
|
60,377
|
|
|
1,149,249
|
|
|
—
|
|
Other investments measured at net asset value (2)
|
583,078
|
|
|
|
|
|
|
|
Total
|
3,139,332
|
|
|
448,987
|
|
|
2,107,267
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
15,724,220
|
|
|
$
|
4,532,544
|
|
|
$
|
10,427,417
|
|
|
$
|
72,666
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
|
$
|
(100,710
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(100,710
|
)
|
Securities sold but not yet purchased (3)
|
(48,279
|
)
|
|
—
|
|
|
(48,279
|
)
|
|
—
|
|
Derivative instruments (4)
|
(25,520
|
)
|
|
—
|
|
|
(25,520
|
)
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
(174,509
|
)
|
|
$
|
—
|
|
|
$
|
(73,799
|
)
|
|
$
|
(100,710
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note
6
, “Investment Information—Securities Lending Agreements.”
|
|
|
(2)
|
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
|
|
|
(3)
|
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
|
|
|
(4)
|
See Note
8
, “Derivative Instruments.”
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements Using:
|
|
Estimated
Fair
Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets measured at fair value (1):
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,725,729
|
|
|
$
|
—
|
|
|
$
|
2,709,361
|
|
|
$
|
16,368
|
|
Mortgage backed securities
|
754,870
|
|
|
—
|
|
|
754,870
|
|
|
—
|
|
Municipal bonds
|
1,626,281
|
|
|
—
|
|
|
1,626,281
|
|
|
—
|
|
Commercial mortgage backed securities
|
764,152
|
|
|
—
|
|
|
764,152
|
|
|
—
|
|
U.S. government and government agencies
|
2,423,455
|
|
|
2,378,662
|
|
|
44,793
|
|
|
—
|
|
Non-U.S. government securities
|
917,664
|
|
|
—
|
|
|
917,664
|
|
|
—
|
|
Asset backed securities
|
1,620,506
|
|
|
—
|
|
|
1,563,006
|
|
|
57,500
|
|
Total
|
10,832,657
|
|
|
2,378,662
|
|
|
8,380,127
|
|
|
73,868
|
|
|
|
|
|
|
|
|
|
Equity securities
|
629,182
|
|
|
627,441
|
|
|
1,741
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
587,904
|
|
|
572,604
|
|
|
15,300
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other investments
|
99,159
|
|
|
99,159
|
|
|
—
|
|
|
—
|
|
Other investments measured at net asset value (2)
|
201,317
|
|
|
|
|
|
|
|
Total other investments
|
300,476
|
|
|
99,159
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Derivative instruments (4)
|
20,022
|
|
|
—
|
|
|
20,022
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fair value option:
|
|
|
|
|
|
|
|
Corporate bonds
|
771,733
|
|
|
—
|
|
|
771,733
|
|
|
—
|
|
Non-U.S. government bonds
|
81,824
|
|
|
—
|
|
|
81,824
|
|
|
—
|
|
Mortgage backed securities
|
57,687
|
|
|
—
|
|
|
57,687
|
|
|
—
|
|
Asset backed securities
|
25,444
|
|
|
—
|
|
|
25,444
|
|
|
—
|
|
U.S. government and government agencies
|
114
|
|
|
114
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
285,923
|
|
|
285,923
|
|
|
—
|
|
|
—
|
|
Equity securities
|
798
|
|
|
798
|
|
|
—
|
|
|
—
|
|
Other investments
|
1,176,312
|
|
|
68,295
|
|
|
1,108,017
|
|
|
—
|
|
Other investments measured at net asset value (2)
|
494,659
|
|
|
|
|
|
|
|
Total
|
2,894,494
|
|
|
355,130
|
|
|
2,044,705
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
15,264,735
|
|
|
$
|
4,032,996
|
|
|
$
|
10,461,895
|
|
|
$
|
73,868
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
|
$
|
(96,048
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(96,048
|
)
|
Securities sold but not yet purchased (3)
|
(30,583
|
)
|
|
—
|
|
|
(30,583
|
)
|
|
—
|
|
Derivative instruments (4)
|
(11,863
|
)
|
|
—
|
|
|
(11,863
|
)
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
(138,494
|
)
|
|
$
|
—
|
|
|
$
|
(42,446
|
)
|
|
$
|
(96,048
|
)
|
|
|
(1)
|
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note
6
, “Investment Information—Securities Lending Agreements.”
|
|
|
(2)
|
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
|
|
|
(3)
|
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
|
|
|
(4)
|
See Note
8
, “Derivative Instruments.”
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
s
|
Available For Sale
|
|
Fair Value Option
|
|
|
|
|
|
Asset Backed Securities
|
|
Corporate
Bonds
|
|
Total
|
|
Contingent Consideration Liabilities
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
57,500
|
|
|
$
|
16,368
|
|
|
$
|
73,868
|
|
|
$
|
(96,048
|
)
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
—
|
|
|
(1,202
|
)
|
|
(1,202
|
)
|
|
(5,198
|
)
|
Included in other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
536
|
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
57,500
|
|
|
$
|
15,166
|
|
|
$
|
72,666
|
|
|
$
|
(100,710
|
)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
57,500
|
|
|
$
|
—
|
|
|
$
|
57,500
|
|
|
$
|
(61,845
|
)
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,548
|
)
|
Included in other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
Purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,068
|
)
|
Sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers in and/or out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
57,500
|
|
|
$
|
—
|
|
|
$
|
57,500
|
|
|
$
|
(66,461
|
)
|
|
|
(1)
|
Gains or losses in the table above were included in net realized gains (losses).
|
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at
March 31, 2016
, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At
March 31, 2016
, the senior notes of ACGL were carried at their cost, net of debt issuance costs, of
$296.9 million
and had a fair value of
$401.6 million
while the senior notes of Arch-U.S. were carried at their cost, net of debt issuance costs, of
$494.5 million
and had a fair value of
$538.8 million
. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair value of the senior notes is classified within Level 2.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8
. Derivative Instruments
The Company’s investment strategy allows for the use of derivative securities. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.
In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
|
Asset
Derivatives
|
|
Liability Derivatives
|
|
Notional
Value (1)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Futures contracts (2)
|
$
|
4,071
|
|
|
$
|
(491
|
)
|
|
$
|
2,048,907
|
|
Foreign currency forward contracts (2)
|
23,299
|
|
|
(22,031
|
)
|
|
1,190,540
|
|
TBAs (3)
|
126,962
|
|
|
(115,820
|
)
|
|
231,996
|
|
Other (2)
|
5,657
|
|
|
(3,481
|
)
|
|
2,210,777
|
|
Total
|
$
|
159,989
|
|
|
$
|
(141,823
|
)
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Futures contracts (2)
|
$
|
2,816
|
|
|
$
|
(1,202
|
)
|
|
$
|
1,797,115
|
|
Foreign currency forward contracts (2)
|
9,336
|
|
|
(6,344
|
)
|
|
773,619
|
|
TBAs (3)
|
6,525
|
|
|
—
|
|
|
6,316
|
|
Other (2)
|
7,870
|
|
|
(4,317
|
)
|
|
1,694,935
|
|
Total
|
$
|
26,547
|
|
|
$
|
(11,863
|
)
|
|
|
|
|
(1)
|
Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
|
|
|
(2)
|
The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
|
|
|
(3)
|
The fair value of TBAs are included in ‘fixed maturities available for sale, at fair value.’
|
The Company did not hold any derivatives which were designated as hedging instruments at
March 31, 2016
or
December 31, 2015
.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure.
At
March 31, 2016
, asset derivatives and liability derivatives of
$146.3 million
and
$131.7 million
, respectively, were subject to a master netting agreement, compared to
$26.5 million
and
$11.9 million
, respectively, at
December 31, 2015
. The remaining derivatives included in the preceding table were not subject to a master netting agreement.
All realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in net realized gains (losses) in the consolidated statements of income, as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Derivatives not designated as
|
|
March 31,
|
hedging instruments:
|
|
2016
|
|
2015
|
Net realized gains (losses):
|
|
|
|
|
Futures contracts
|
|
$
|
26,451
|
|
|
$
|
19,326
|
|
Foreign currency forward contracts
|
|
(4,752
|
)
|
|
16,819
|
|
TBAs
|
|
297
|
|
|
486
|
|
Other
|
|
(1,264
|
)
|
|
45
|
|
Total
|
|
$
|
20,732
|
|
|
$
|
36,676
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9
. Commitments and Contingencies
Letter of Credit and Revolving Credit Facilities
As of
March 31, 2016
, ACGL and its wholly-owned subsidiaries had a
$300.0 million
unsecured revolving loan and letter of credit facility and a
$500.0 million
secured letter of credit facility (the “Credit Agreement”). Under the terms of the Credit Agreement, Arch Reinsurance Company and Arch Reinsurance Ltd. are limited to issuing an aggregate of
$100.0 million
of unsecured letters of credit as part of the unsecured revolving loan. The Credit Agreement expires on
June 30, 2019
. In addition, certain of ACGL’s subsidiaries had outstanding letters of credit of
$242.4 million
as of
March 31, 2016
, which were issued on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). ACGL and its’ subsidiaries which are party to the LOC Facilities were in compliance with all covenants contained in the LOC Facilities at
March 31, 2016
. At such date,
$437.9 million
in letters of credit under the LOC Facilities were outstanding, which were secured by investments with a fair value of
$499.7 million
, and had
$100.0 million
of borrowings were outstanding under the Credit Agreement. Under the
$500.0 million
secured letter of credit facility, ACGL’s subsidiaries had remaining capacity of
$304.5 million
.
As of
March 31, 2016
, Watford Re had a
$100.0 million
letter of credit facility expiring on
May 19, 2016
and an
$800.0 million
secured credit facility expiring on
June 4, 2018
, that provides for borrowings and the issuance of letters of credit not to exceed
$400.0 million
. Borrowings of revolving loans may be made by Watford Re at a variable rate based on LIBOR or an alternative base rate at the option of Watford Re. At
March 31, 2016
, Watford Re had
$167.1 million
in outstanding letters of credit under the two facilities and
$357.4 million
of borrowings outstanding under the secured credit facility, backed by Watford Re’s investment portfolio. Watford Re was in compliance with all covenants contained in both of its credit facilities at
March 31, 2016
. 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.
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately
$1.19 billion
at
March 31, 2016
, compared to
$1.11 billion
at
December 31, 2015
.
10
. Share Transactions
Share Repurchases
The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Since the inception of the share repurchase program, ACGL has repurchased approximately
125.2 million
common shares for an aggregate purchase price of
$3.68 billion
. During the
2016 first quarter
, ACGL repurchased
1.1 million
common shares for an aggregate purchase price of
$75.3 million
, compared to
2.7 million
common shares repurchased for an aggregate purchase price of
$162.9 million
during the
2015
period. At
March 31, 2016
,
$446.5 million
of share repurchases were available under the program. 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.
11
. Income Taxes
The Company’s income tax provision on income before income taxes resulted in
an expense
of
8.5%
for the
2016 first quarter
, compared to
an expense
of
3.9%
for the
2015
period. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.
The Company had a net deferred tax asset of
$123.7 million
at
March 31, 2016
, compared to
$135.7 million
at
December 31, 2015
. In addition, the Company
paid
$2.5 million
in income taxes for the
2016 first quarter
, while the Company
paid
$3.6 million
for the
2015
period.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12
. Other Comprehensive Income (Loss)
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from AOCI
|
|
|
Consolidated Statement of Income
|
|
Three Months Ended
|
Details About
|
|
Line Item That Includes
|
|
March 31,
|
AOCI Components
|
|
Reclassification
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Unrealized appreciation on available-for-sale investments
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
44,687
|
|
|
$
|
42,431
|
|
|
|
Other-than-temporary impairment losses
|
|
(7,737
|
)
|
|
(7,247
|
)
|
|
|
Total before tax
|
|
36,950
|
|
|
35,184
|
|
|
|
Income tax (expense) benefit
|
|
(4,727
|
)
|
|
(4,252
|
)
|
|
|
Net of tax
|
|
$
|
32,223
|
|
|
$
|
30,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net of Tax Amount
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
Unrealized appreciation (decline) in value of investments:
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
$
|
152,174
|
|
|
$
|
19,193
|
|
|
$
|
132,981
|
|
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)
|
(98
|
)
|
|
—
|
|
|
(98
|
)
|
Less reclassification of net realized gains (losses) included in net income
|
36,950
|
|
|
4,727
|
|
|
32,223
|
|
Foreign currency translation adjustments
|
17,860
|
|
|
547
|
|
|
17,313
|
|
Other comprehensive income (loss)
|
$
|
132,986
|
|
|
$
|
15,013
|
|
|
$
|
117,973
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
Unrealized appreciation (decline) in value of investments:
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
$
|
94,387
|
|
|
$
|
10,083
|
|
|
$
|
84,304
|
|
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)
|
(1,448
|
)
|
|
—
|
|
|
(1,448
|
)
|
Less reclassification of net realized gains (losses) included in net income
|
35,184
|
|
|
4,252
|
|
|
30,932
|
|
Foreign currency translation adjustments
|
(23,626
|
)
|
|
(869
|
)
|
|
(22,757
|
)
|
Other comprehensive income (loss)
|
$
|
34,129
|
|
|
$
|
4,962
|
|
|
$
|
29,167
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13
. Guarantor Financial Information
The following tables present condensed financial information for ACGL, Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a
100%
owned subsidiary of ACGL, and ACGL’s other subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
Condensed Consolidating Balance Sheet
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
110
|
|
|
$
|
42,235
|
|
|
$
|
16,306,543
|
|
|
$
|
(14,700
|
)
|
|
$
|
16,334,188
|
|
Cash
|
6,795
|
|
|
12,437
|
|
|
538,729
|
|
|
—
|
|
|
557,961
|
|
Investments in subsidiaries
|
6,803,490
|
|
|
1,782,957
|
|
|
—
|
|
|
(8,586,447
|
)
|
|
—
|
|
Due from subsidiaries and affiliates
|
5
|
|
|
49,544
|
|
|
388,529
|
|
|
(438,078
|
)
|
|
—
|
|
Premiums receivable
|
—
|
|
|
—
|
|
|
1,749,790
|
|
|
(540,242
|
)
|
|
1,209,548
|
|
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
5,909,286
|
|
|
(3,946,423
|
)
|
|
1,962,863
|
|
Contractholder receivables
|
—
|
|
|
—
|
|
|
1,529,105
|
|
|
—
|
|
|
1,529,105
|
|
Prepaid reinsurance premiums
|
—
|
|
|
—
|
|
|
1,679,707
|
|
|
(1,179,295
|
)
|
|
500,412
|
|
Deferred acquisition costs, net
|
—
|
|
|
—
|
|
|
464,288
|
|
|
—
|
|
|
464,288
|
|
Other assets
|
14,942
|
|
|
46,465
|
|
|
2,523,073
|
|
|
(601,476
|
)
|
|
1,983,004
|
|
|
Total assets
|
$
|
6,825,342
|
|
|
$
|
1,933,638
|
|
|
$
|
31,089,050
|
|
|
$
|
(15,306,661
|
)
|
|
$
|
24,541,369
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,294,397
|
|
|
$
|
(3,915,410
|
)
|
|
$
|
9,378,987
|
|
Unearned premiums
|
—
|
|
|
—
|
|
|
3,758,443
|
|
|
(1,179,295
|
)
|
|
2,579,148
|
|
Reinsurance balances payable
|
—
|
|
|
—
|
|
|
817,562
|
|
|
(541,136
|
)
|
|
276,426
|
|
Contractholder payables
|
—
|
|
|
—
|
|
|
1,529,105
|
|
|
—
|
|
|
1,529,105
|
|
Collateral held for insured obligations
|
—
|
|
|
—
|
|
|
249,440
|
|
|
|
|
249,440
|
|
Deposit accounting liabilities
|
—
|
|
|
—
|
|
|
473,140
|
|
|
(207,000
|
)
|
|
266,140
|
|
Senior notes
|
296,894
|
|
|
494,455
|
|
|
—
|
|
|
—
|
|
|
791,349
|
|
Revolving credit agreement borrowings
|
100,000
|
|
|
—
|
|
|
357,431
|
|
|
—
|
|
|
457,431
|
|
Due to subsidiaries and affiliates
|
323
|
|
|
35,000
|
|
|
402,755
|
|
|
(438,078
|
)
|
|
—
|
|
Other liabilities
|
14,538
|
|
|
51,956
|
|
|
1,997,667
|
|
|
(424,594
|
)
|
|
1,639,567
|
|
|
Total liabilities
|
411,755
|
|
|
581,411
|
|
|
22,879,940
|
|
|
(6,705,513
|
)
|
|
17,167,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
219,974
|
|
|
(14,700
|
)
|
|
205,274
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
6,413,587
|
|
|
1,352,227
|
|
|
7,234,221
|
|
|
(8,586,448
|
)
|
|
6,413,587
|
|
Non-redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
754,915
|
|
|
—
|
|
|
754,915
|
|
|
Total shareholders’ equity
|
6,413,587
|
|
|
1,352,227
|
|
|
7,989,136
|
|
|
(8,586,448
|
)
|
|
7,168,502
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and shareholders’ equity
|
$
|
6,825,342
|
|
|
$
|
1,933,638
|
|
|
$
|
31,089,050
|
|
|
$
|
(15,306,661
|
)
|
|
$
|
24,541,369
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Condensed Consolidating Balance Sheet
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
Total investments
|
$
|
50
|
|
|
$
|
42,210
|
|
|
$
|
15,815,381
|
|
|
$
|
(14,700
|
)
|
|
$
|
15,842,941
|
|
Cash
|
6,809
|
|
|
17,023
|
|
|
529,494
|
|
|
—
|
|
|
553,326
|
|
Investments in subsidiaries
|
6,609,174
|
|
|
1,712,757
|
|
|
—
|
|
|
(8,321,931
|
)
|
|
—
|
|
Due from subsidiaries and affiliates
|
23
|
|
|
48,811
|
|
|
384,469
|
|
|
(433,303
|
)
|
|
—
|
|
Premiums receivable
|
—
|
|
|
—
|
|
|
1,376,310
|
|
|
(392,867
|
)
|
|
983,443
|
|
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
5,783,452
|
|
|
(3,916,079
|
)
|
|
1,867,373
|
|
Contractholder receivables
|
—
|
|
|
—
|
|
|
1,486,296
|
|
|
—
|
|
|
1,486,296
|
|
Prepaid reinsurance premiums
|
—
|
|
|
—
|
|
|
1,511,795
|
|
|
(1,084,186
|
)
|
|
427,609
|
|
Deferred acquisition costs, net
|
—
|
|
|
—
|
|
|
433,477
|
|
|
—
|
|
|
433,477
|
|
Other assets
|
4,138
|
|
|
45,522
|
|
|
2,119,279
|
|
|
(586,134
|
)
|
|
1,582,805
|
|
|
Total assets
|
$
|
6,620,194
|
|
|
$
|
1,866,323
|
|
|
$
|
29,439,953
|
|
|
$
|
(14,749,200
|
)
|
|
$
|
23,177,270
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,010,608
|
|
|
$
|
(3,885,358
|
)
|
|
$
|
9,125,250
|
|
Unearned premiums
|
—
|
|
|
—
|
|
|
3,418,118
|
|
|
(1,084,186
|
)
|
|
2,333,932
|
|
Reinsurance balances payable
|
—
|
|
|
—
|
|
|
603,586
|
|
|
(379,466
|
)
|
|
224,120
|
|
Contractholder payables
|
—
|
|
|
—
|
|
|
1,486,296
|
|
|
—
|
|
|
1,486,296
|
|
Collateral held for insured obligations
|
—
|
|
|
—
|
|
|
248,982
|
|
|
—
|
|
|
248,982
|
|
Deposit accounting liabilities
|
—
|
|
|
—
|
|
|
463,507
|
|
|
(203,143
|
)
|
|
260,364
|
|
Senior notes
|
296,874
|
|
|
494,432
|
|
|
—
|
|
|
—
|
|
|
791,306
|
|
Revolving credit agreement borrowings
|
100,000
|
|
|
—
|
|
|
430,434
|
|
|
—
|
|
|
530,434
|
|
Due to subsidiaries and affiliates
|
26
|
|
|
35,000
|
|
|
398,277
|
|
|
(433,303
|
)
|
|
—
|
|
Other liabilities
|
18,413
|
|
|
50,890
|
|
|
1,385,500
|
|
|
(427,111
|
)
|
|
1,027,692
|
|
|
Total liabilities
|
415,313
|
|
|
580,322
|
|
|
21,445,308
|
|
|
(6,412,567
|
)
|
|
16,028,376
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
219,882
|
|
|
(14,700
|
)
|
|
205,182
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
6,204,881
|
|
|
1,286,001
|
|
|
7,035,932
|
|
|
(8,321,933
|
)
|
|
6,204,881
|
|
Non-redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
738,831
|
|
|
—
|
|
|
738,831
|
|
|
Total shareholders’ equity
|
6,204,881
|
|
|
1,286,001
|
|
|
7,774,763
|
|
|
(8,321,933
|
)
|
|
6,943,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and shareholders’ equity
|
$
|
6,620,194
|
|
|
$
|
1,866,323
|
|
|
$
|
29,439,953
|
|
|
$
|
(14,749,200
|
)
|
|
$
|
23,177,270
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
951,579
|
|
|
$
|
—
|
|
|
$
|
951,579
|
|
Net investment income
|
1
|
|
|
773
|
|
|
100,261
|
|
|
(7,300
|
)
|
|
93,735
|
|
Net realized gains (losses)
|
—
|
|
|
—
|
|
|
37,324
|
|
|
—
|
|
|
37,324
|
|
Net impairment losses recognized in earnings
|
—
|
|
|
—
|
|
|
(7,639
|
)
|
|
—
|
|
|
(7,639
|
)
|
Other underwriting income
|
—
|
|
|
—
|
|
|
5,319
|
|
|
(272
|
)
|
|
5,047
|
|
Equity in net income (loss) of investment funds accounted for using the equity method
|
—
|
|
|
—
|
|
|
6,655
|
|
|
—
|
|
|
6,655
|
|
Other income (loss)
|
206
|
|
|
—
|
|
|
(231
|
)
|
|
—
|
|
|
(25
|
)
|
|
Total revenues
|
207
|
|
|
773
|
|
|
1,093,268
|
|
|
(7,572
|
)
|
|
1,086,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
522,949
|
|
|
—
|
|
|
522,949
|
|
Acquisition expenses
|
—
|
|
|
—
|
|
|
170,465
|
|
|
—
|
|
|
170,465
|
|
Other operating expenses
|
9,355
|
|
|
582
|
|
|
151,715
|
|
|
—
|
|
|
161,652
|
|
Interest expense
|
5,934
|
|
|
6,672
|
|
|
10,752
|
|
|
(7,251
|
)
|
|
16,107
|
|
Net foreign exchange (gains) losses
|
—
|
|
|
—
|
|
|
16,495
|
|
|
7,071
|
|
|
23,566
|
|
|
Total expenses
|
15,289
|
|
|
7,254
|
|
|
872,376
|
|
|
(180
|
)
|
|
894,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
(15,082
|
)
|
|
(6,481
|
)
|
|
220,892
|
|
|
(7,392
|
)
|
|
191,937
|
|
Income tax (expense) benefit
|
—
|
|
|
2,244
|
|
|
(18,554
|
)
|
|
—
|
|
|
(16,310
|
)
|
Income (loss) before equity in net income of subsidiaries
|
(15,082
|
)
|
|
(4,237
|
)
|
|
202,338
|
|
|
(7,392
|
)
|
|
175,627
|
|
Equity in net income of subsidiaries
|
169,880
|
|
|
22,866
|
|
|
—
|
|
|
(192,746
|
)
|
|
—
|
|
Net income
|
154,798
|
|
|
18,629
|
|
|
202,338
|
|
|
(200,138
|
)
|
|
175,627
|
|
Net (income) loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(21,150
|
)
|
|
321
|
|
|
(20,829
|
)
|
Net income available to Arch
|
154,798
|
|
|
18,629
|
|
|
181,188
|
|
|
(199,817
|
)
|
|
154,798
|
|
Preferred dividends
|
(5,484
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,484
|
)
|
Net income available to Arch common shareholders
|
$
|
149,314
|
|
|
$
|
18,629
|
|
|
$
|
181,188
|
|
|
$
|
(199,817
|
)
|
|
$
|
149,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) available to Arch
|
$
|
272,929
|
|
|
$
|
58,649
|
|
|
$
|
292,251
|
|
|
$
|
(350,900
|
)
|
|
$
|
272,929
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Revenues
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
910,264
|
|
|
$
|
—
|
|
|
$
|
910,264
|
|
Net investment income
|
—
|
|
|
5
|
|
|
86,010
|
|
|
(7,021
|
)
|
|
78,994
|
|
Net realized gains (losses)
|
—
|
|
|
—
|
|
|
83,348
|
|
|
—
|
|
|
83,348
|
|
Net impairment losses recognized in earnings
|
—
|
|
|
—
|
|
|
(5,799
|
)
|
|
—
|
|
|
(5,799
|
)
|
Other underwriting income
|
—
|
|
|
—
|
|
|
11,536
|
|
|
—
|
|
|
11,536
|
|
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
|
)
|
|
Total revenues
|
—
|
|
|
5
|
|
|
1,089,360
|
|
|
(7,021
|
)
|
|
1,082,344
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
—
|
|
|
—
|
|
|
493,716
|
|
|
—
|
|
|
493,716
|
|
Acquisition expenses
|
—
|
|
|
—
|
|
|
163,076
|
|
|
—
|
|
|
163,076
|
|
Other operating expenses
|
8,632
|
|
|
1,259
|
|
|
147,991
|
|
|
—
|
|
|
157,882
|
|
Interest expense
|
5,856
|
|
|
6,366
|
|
|
7,535
|
|
|
(7,021
|
)
|
|
12,736
|
|
Net foreign exchange (gains) losses
|
—
|
|
|
—
|
|
|
(39,630
|
)
|
|
(26,871
|
)
|
|
(66,501
|
)
|
|
Total expenses
|
14,488
|
|
|
7,625
|
|
|
772,688
|
|
|
(33,892
|
)
|
|
760,909
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
(14,488
|
)
|
|
(7,620
|
)
|
|
316,672
|
|
|
26,871
|
|
|
321,435
|
|
Income tax (expense) benefit
|
—
|
|
|
1,413
|
|
|
(14,091
|
)
|
|
—
|
|
|
(12,678
|
)
|
Income (loss) before equity in net income of subsidiaries
|
(14,488
|
)
|
|
(6,207
|
)
|
|
302,581
|
|
|
26,871
|
|
|
308,757
|
|
Equity in net income of subsidiaries
|
297,824
|
|
|
14,495
|
|
|
—
|
|
|
(312,319
|
)
|
|
—
|
|
Net income
|
283,336
|
|
|
8,288
|
|
|
302,581
|
|
|
(285,448
|
)
|
|
308,757
|
|
Net (income) loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(25,421
|
)
|
|
—
|
|
|
(25,421
|
)
|
Net income available to Arch
|
283,336
|
|
|
8,288
|
|
|
277,160
|
|
|
(285,448
|
)
|
|
283,336
|
|
Preferred dividends
|
(5,484
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,484
|
)
|
Net income available to Arch common shareholders
|
$
|
277,852
|
|
|
$
|
8,288
|
|
|
$
|
277,160
|
|
|
$
|
(285,448
|
)
|
|
$
|
277,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) available to Arch
|
$
|
312,503
|
|
|
$
|
11,750
|
|
|
$
|
333,193
|
|
|
$
|
(344,943
|
)
|
|
$
|
312,503
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Condensed Consolidating Statement
of Cash Flows
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used For) Operating Activities
|
$
|
83,892
|
|
|
$
|
(4,740
|
)
|
|
$
|
340,558
|
|
|
$
|
(97,167
|
)
|
|
$
|
322,543
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity investments
|
—
|
|
|
—
|
|
|
(8,133,537
|
)
|
|
—
|
|
|
(8,133,537
|
)
|
Purchases of equity securities
|
—
|
|
|
—
|
|
|
(128,263
|
)
|
|
—
|
|
|
(128,263
|
)
|
Purchases of other investments
|
—
|
|
|
—
|
|
|
(305,198
|
)
|
|
—
|
|
|
(305,198
|
)
|
Proceeds from the sales of fixed maturity investments
|
—
|
|
|
—
|
|
|
7,827,536
|
|
|
—
|
|
|
7,827,536
|
|
Proceeds from the sales of equity securities
|
—
|
|
|
—
|
|
|
216,012
|
|
|
—
|
|
|
216,012
|
|
Proceeds from the sales, redemptions and maturities of other investments
|
—
|
|
|
—
|
|
|
211,125
|
|
|
—
|
|
|
211,125
|
|
Proceeds from redemptions and maturities of fixed maturity investments
|
—
|
|
|
—
|
|
|
163,894
|
|
|
—
|
|
|
163,894
|
|
Net settlements of derivative instruments
|
—
|
|
|
—
|
|
|
21,091
|
|
|
—
|
|
|
21,091
|
|
Net (purchases) sales of short-term investments
|
(60
|
)
|
|
(30
|
)
|
|
(65,504
|
)
|
|
—
|
|
|
(65,594
|
)
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
(43,118
|
)
|
|
—
|
|
|
(43,118
|
)
|
Contributions to subsidiaries
|
(3,300
|
)
|
|
—
|
|
|
(2,779
|
)
|
|
6,079
|
|
|
—
|
|
Purchases of fixed assets
|
(8
|
)
|
|
—
|
|
|
(3,944
|
)
|
|
—
|
|
|
(3,952
|
)
|
Change in other assets
|
—
|
|
|
—
|
|
|
6,737
|
|
|
—
|
|
|
6,737
|
|
|
Net Cash Provided By (Used For) Investing Activities
|
(3,368
|
)
|
|
(30
|
)
|
|
(235,948
|
)
|
|
6,079
|
|
|
(233,267
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of common shares under share repurchase program
|
(75,256
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(75,256
|
)
|
Proceeds from common shares issued, net
|
202
|
|
|
—
|
|
|
6,079
|
|
|
(6,079
|
)
|
|
202
|
|
Repayments of borrowings
|
—
|
|
|
—
|
|
|
(74,171
|
)
|
|
—
|
|
|
(74,171
|
)
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
43,118
|
|
|
—
|
|
|
43,118
|
|
Dividends paid to redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
(4,816
|
)
|
|
319
|
|
|
(4,497
|
)
|
Dividends paid to parent (1)
|
—
|
|
|
—
|
|
|
(96,848
|
)
|
|
96,848
|
|
|
—
|
|
Other
|
—
|
|
|
184
|
|
|
28,931
|
|
|
—
|
|
|
29,115
|
|
Preferred dividends paid
|
(5,484
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,484
|
)
|
|
Net Cash Provided By (Used For) Financing Activities
|
(80,538
|
)
|
|
184
|
|
|
(97,707
|
)
|
|
91,088
|
|
|
(86,973
|
)
|
Effects of exchange rates changes on foreign currency cash
|
—
|
|
|
—
|
|
|
2,332
|
|
|
—
|
|
|
2,332
|
|
Increase (decrease) in cash
|
(14
|
)
|
|
(4,586
|
)
|
|
9,235
|
|
|
—
|
|
|
4,635
|
|
Cash beginning of year
|
6,809
|
|
|
17,023
|
|
|
529,494
|
|
|
—
|
|
|
553,326
|
|
Cash end of period
|
$
|
6,795
|
|
|
$
|
12,437
|
|
|
$
|
538,729
|
|
|
$
|
—
|
|
|
$
|
557,961
|
|
(1) Included in net cash provided by (used for) operating activities in the ACGL (Parent Guarantor) column.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Condensed Consolidating Statement
of Cash Flows
|
ACGL (Parent Guarantor)
|
|
Arch-U.S. (Subsidiary Issuer)
|
|
Other ACGL Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
ACGL Consolidated
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By (Used For) Operating Activities
|
$
|
173,508
|
|
|
$
|
(8,950
|
)
|
|
$
|
106,903
|
|
|
$
|
(186,000
|
)
|
|
$
|
85,461
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity investments
|
—
|
|
|
—
|
|
|
(7,030,731
|
)
|
|
—
|
|
|
(7,030,731
|
)
|
Purchases of equity securities
|
—
|
|
|
—
|
|
|
(125,863
|
)
|
|
—
|
|
|
(125,863
|
)
|
Purchases of other investments
|
—
|
|
|
—
|
|
|
(375,402
|
)
|
|
—
|
|
|
(375,402
|
)
|
Proceeds from the sales of fixed maturity investments
|
—
|
|
|
9,001
|
|
|
6,848,114
|
|
|
—
|
|
|
6,857,115
|
|
Proceeds from the sales of equity securities
|
—
|
|
|
—
|
|
|
125,906
|
|
|
—
|
|
|
125,906
|
|
Proceeds from the sales, redemptions and maturities of other investments
|
—
|
|
|
—
|
|
|
269,449
|
|
|
—
|
|
|
269,449
|
|
Proceeds from redemptions and maturities of fixed maturity investments
|
—
|
|
|
—
|
|
|
272,657
|
|
|
—
|
|
|
272,657
|
|
Net settlements of derivative instruments
|
—
|
|
|
—
|
|
|
26,063
|
|
|
—
|
|
|
26,063
|
|
Net (purchases) sales of short-term investments
|
83
|
|
|
(16
|
)
|
|
66,216
|
|
|
—
|
|
|
66,283
|
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
(5,529
|
)
|
|
—
|
|
|
(5,529
|
)
|
Contributions to subsidiaries
|
—
|
|
|
—
|
|
|
(5,500
|
)
|
|
5,500
|
|
|
—
|
|
Intercompany loans issued
|
—
|
|
|
(7,500
|
)
|
|
(7,500
|
)
|
|
15,000
|
|
|
—
|
|
Purchase of business, net of cash acquired
|
—
|
|
|
—
|
|
|
(2,432
|
)
|
|
—
|
|
|
(2,432
|
)
|
Purchases of fixed assets
|
(23
|
)
|
|
—
|
|
|
(3,249
|
)
|
|
—
|
|
|
(3,272
|
)
|
Change in other assets
|
—
|
|
|
—
|
|
|
(29,625
|
)
|
|
—
|
|
|
(29,625
|
)
|
|
Net Cash Provided By (Used For) Investing Activities
|
60
|
|
|
1,485
|
|
|
22,574
|
|
|
20,500
|
|
|
44,619
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of common shares under share repurchase program
|
(162,898
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(162,898
|
)
|
Proceeds from common shares issued, net
|
(412
|
)
|
|
—
|
|
|
5,500
|
|
|
(5,500
|
)
|
|
(412
|
)
|
Proceeds from intercompany borrowings
|
—
|
|
|
7,500
|
|
|
7,500
|
|
|
(15,000
|
)
|
|
—
|
|
Change in cash collateral related to securities lending
|
—
|
|
|
—
|
|
|
5,529
|
|
|
—
|
|
|
5,529
|
|
Dividends paid to redeemable noncontrolling interests
|
—
|
|
|
—
|
|
|
(4,816
|
)
|
|
—
|
|
|
(4,816
|
)
|
Dividends paid to parent (1)
|
—
|
|
|
—
|
|
|
(186,000
|
)
|
|
186,000
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
29,779
|
|
|
—
|
|
|
29,779
|
|
Preferred dividends paid
|
(5,484
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,484
|
)
|
|
Net Cash Provided By (Used For) Financing Activities
|
(168,794
|
)
|
|
7,500
|
|
|
(142,508
|
)
|
|
165,500
|
|
|
(138,302
|
)
|
Effects of exchange rates changes on foreign currency cash
|
—
|
|
|
—
|
|
|
(6,468
|
)
|
|
—
|
|
|
(6,468
|
)
|
Increase (decrease) in cash
|
4,774
|
|
|
35
|
|
|
(19,499
|
)
|
|
—
|
|
|
(14,690
|
)
|
Cash beginning of year
|
3,218
|
|
|
2,787
|
|
|
479,697
|
|
|
—
|
|
|
485,702
|
|
Cash end of period
|
$
|
7,992
|
|
|
$
|
2,822
|
|
|
$
|
460,198
|
|
|
$
|
—
|
|
|
$
|
471,012
|
|
(1) Included in net cash provided by (used for) operating activities in the ACGL (Parent Guarantor) column.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14
. Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of
March 31, 2016
, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
15
. Transactions with Related Parties
Kewsong Lee, a director of ACGL, is a Managing Director and Deputy Chief Investment Officer for Corporate Private Equity of The Carlyle Group (“Carlyle”). As part of its investment philosophy, the Company invests a portion of its investment portfolio in alternative investment funds. As of
March 31, 2016
, the Company had aggregate commitments of
$770.9 million
to funds managed by Carlyle, of which
$523.4 million
was unfunded. The Company may make additional commitments to funds managed by Carlyle from time to time. The Company made aggregate capital contributions to funds managed by Carlyle of
$40.1 million
in the
2016 first quarter
, compared to
$23.4 million
in the
2015 first quarter
.