UNITED STATES | ||
SECURITIES AND EXCHANGE COMMISSION | ||
Washington, D.C. 20549 | ||
FORM 10-K | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended December 31, | Commission File No. 0-26456 |
Bermuda | Not applicable |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Waterloo House, Ground Floor | |
100 Pitts Bay Road, Pembroke HM 08, Bermuda | (441) 278-9250 |
(Address of principal executive offices) | (Registrant’s telephone number, including area code) |
Title of each class | Name of each exchange on which registered |
Common Shares, $0.0033 par value per share | NASDAQ Stock Market (Common Shares) |
6.75% Non-Cumulative Preferred Shares, Series C, $0.01 par value per share | New York Stock Exchange |
5.25% Non-Cumulative Preferred Shares, Series E, $0.01 par value per share | NASDAQ Stock Market |
DOCUMENTS INCORPORATED BY REFERENCE | |
Portions of Part III and Part IV incorporate by reference our definitive proxy statement for the | |
ARCH CAPITAL GROUP LTD. | ||
TABLE OF CONTENTS | ||
Item | Page | |
PART I | ||
PART II | ||
PART III | ||
PART IV | ||
ACGL 2016 FORM 10-K | 1 |
ACGL 2016 FORM 10-K | 2 |
ACGL 2016 FORM 10-K | 3 |
ACGL 2016 FORM 10-K | 4 |
ACGL 2016 FORM 10-K | 5 |
ACGL 2016 FORM 10-K | 6 |
ACGL 2016 FORM 10-K | 7 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||
INSURANCE SEGMENT | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||
Net premiums written | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||
Professional lines | $ | 434,024 | 21 | $ | 476,604 | 22 | $ | 476,193 | 24 | $ | 440,149 | 21 | $ | 434,024 | 21 | $ | 476,604 | 22 | ||||||||||||||||
Programs | 423,157 | 21 | 480,580 | 22 | 419,673 | 22 | 330,322 | 16 | 423,157 | 21 | 480,580 | 22 | ||||||||||||||||||||||
Construction and national accounts | 299,463 | 15 | 286,994 | 13 | 271,110 | 14 | 328,997 | 16 | 299,463 | 15 | 286,994 | 13 | ||||||||||||||||||||||
Travel, accident and health | 224,380 | 11 | 160,132 | 8 | 145,732 | 7 | ||||||||||||||||||||||||||||
Excess and surplus casualty | 204,856 | 10 | 212,519 | 10 | 149,286 | 8 | 214,863 | 10 | 204,856 | 10 | 212,519 | 10 | ||||||||||||||||||||||
Property, energy, marine and aviation | 203,186 | 10 | 244,640 | 11 | 280,551 | 14 | 175,376 | 9 | 203,186 | 10 | 244,640 | 11 | ||||||||||||||||||||||
Travel, accident and health | 160,132 | 8 | 145,732 | 7 | 104,903 | 5 | ||||||||||||||||||||||||||||
Lenders products | 106,916 | 5 | 100,407 | 5 | 101,576 | 5 | 105,650 | 5 | 106,916 | 5 | 100,407 | 5 | ||||||||||||||||||||||
Other | 213,937 | 11 | 199,178 | 9 | 145,504 | 8 | 252,544 | 12 | 213,937 | 11 | 199,178 | 9 | ||||||||||||||||||||||
Total | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | $ | 1,948,796 | 100 | $ | 2,072,281 | 100 | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | ||||||||||||||||
Net premiums written by client location | ||||||||||||||||||||||||||||||||||
By client location | ||||||||||||||||||||||||||||||||||
United States | $ | 1,710,918 | 84 | $ | 1,726,181 | 80 | $ | 1,526,156 | 78 | $ | 1,718,415 | 83 | $ | 1,710,918 | 84 | $ | 1,726,181 | 80 | ||||||||||||||||
Europe | 187,020 | 9 | 240,136 | 11 | 226,254 | 12 | 173,423 | 8 | 187,020 | 9 | 240,136 | 11 | ||||||||||||||||||||||
Asia and Pacific | 64,638 | 3 | 79,564 | 4 | 95,970 | 5 | 93,752 | 5 | 64,638 | 3 | 79,564 | 4 | ||||||||||||||||||||||
Other | 83,095 | 4 | 100,773 | 5 | 100,416 | 5 | 86,691 | 4 | 83,095 | 4 | 100,773 | 5 | ||||||||||||||||||||||
Total | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | $ | 1,948,796 | 100 | $ | 2,072,281 | 100 | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | ||||||||||||||||
Net premiums written by underwriting location | ||||||||||||||||||||||||||||||||||
By underwriting location | ||||||||||||||||||||||||||||||||||
United States | $ | 1,673,867 | 82 | $ | 1,688,887 | 79 | $ | 1,478,930 | 76 | $ | 1,690,208 | 82 | $ | 1,673,867 | 82 | $ | 1,688,887 | 79 | ||||||||||||||||
Europe | 317,998 | 16 | 394,430 | 18 | 389,763 | 20 | 327,034 | 16 | 317,998 | 16 | 394,430 | 18 | ||||||||||||||||||||||
Other | 53,806 | 3 | 63,337 | 3 | 80,103 | 4 | 55,039 | 3 | 53,806 | 3 | 63,337 | 3 | ||||||||||||||||||||||
Total | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | $ | 1,948,796 | 100 | $ | 2,072,281 | 100 | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 |
ACGL 2016 FORM 10-K | 8 |
ACGL 2016 FORM 10-K | 9 |
ACGL 2016 FORM 10-K | 10 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||
REINSURANCE SEGMENT | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||
Net premiums written | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||
Other specialty | $ | 348,852 | 33 | $ | 298,794 | 29 | $ | 405,126 | 32 | |||||||||||||||||||||||||
Casualty | $ | 303,093 | 29 | $ | 317,996 | 25 | $ | 306,304 | 23 | 305,252 | 29 | 303,093 | 29 | 317,996 | 25 | |||||||||||||||||||
Other specialty | 298,794 | 29 | 405,126 | 32 | 417,865 | 32 | ||||||||||||||||||||||||||||
Property excluding property catastrophe | 280,511 | 27 | 343,043 | 27 | 292,536 | 22 | 267,548 | 25 | 280,511 | 27 | 343,043 | 27 | ||||||||||||||||||||||
Property catastrophe | 91,620 | 9 | 137,471 | 11 | 220,749 | 17 | 75,789 | 7 | 91,620 | 9 | 137,471 | 11 | ||||||||||||||||||||||
Marine and aviation | 50,834 | 5 | 50,444 | 4 | 64,380 | 5 | 37,790 | 4 | 50,834 | 5 | 50,444 | 4 | ||||||||||||||||||||||
Other | 13,556 | 1 | 11,911 | 1 | 11,167 | 1 | 18,625 | 2 | 13,556 | 1 | 11,911 | 1 | ||||||||||||||||||||||
Total | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | $ | 1,313,001 | 100 | $ | 1,053,856 | 100 | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | ||||||||||||||||
Net premiums written by client location | ||||||||||||||||||||||||||||||||||
By client location | ||||||||||||||||||||||||||||||||||
United States | $ | 470,484 | 45 | $ | 589,255 | 47 | $ | 706,388 | 54 | $ | 448,763 | 43 | $ | 470,484 | 45 | $ | 589,255 | 47 | ||||||||||||||||
Europe | 307,165 | 30 | 355,735 | 28 | 327,059 | 25 | 337,168 | 32 | 307,165 | 30 | 355,735 | 28 | ||||||||||||||||||||||
Asia and Pacific | 94,609 | 9 | 142,626 | 11 | 94,252 | 7 | 111,821 | 11 | 94,609 | 9 | 142,626 | 11 | ||||||||||||||||||||||
Bermuda | 80,888 | 8 | 77,620 | 6 | 87,047 | 7 | 74,347 | 7 | 80,888 | 8 | 77,620 | 6 | ||||||||||||||||||||||
Other | 85,262 | 8 | 100,755 | 8 | 98,255 | 7 | 81,757 | 8 | 85,262 | 8 | 100,755 | 8 | ||||||||||||||||||||||
Total | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | $ | 1,313,001 | 100 | $ | 1,053,856 | 100 | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | ||||||||||||||||
Net premiums written by underwriting location | ||||||||||||||||||||||||||||||||||
By underwriting location | ||||||||||||||||||||||||||||||||||
Bermuda | $ | 281,985 | 27 | $ | 394,351 | 31 | $ | 459,467 | 35 | $ | 277,625 | 26 | $ | 281,985 | 27 | $ | 394,351 | 31 | ||||||||||||||||
United States | 439,190 | 42 | 492,891 | 39 | 507,183 | 39 | 432,683 | 41 | 439,190 | 42 | 492,891 | 39 | ||||||||||||||||||||||
Europe | 298,790 | 29 | 343,823 | 27 | 309,129 | 24 | 308,415 | 29 | 298,790 | 29 | 343,823 | 27 | ||||||||||||||||||||||
Other | 18,443 | 2 | 34,926 | 3 | 37,222 | 3 | 35,133 | 3 | 18,443 | 2 | 34,926 | 3 | ||||||||||||||||||||||
Total | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | $ | 1,313,001 | 100 | $ | 1,053,856 | 100 | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 |
ACGL 2016 FORM 10-K | 11 |
ACGL 2016 FORM 10-K | 12 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||
MORTGAGE SEGMENT | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||
Net premiums written by client location | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||
By client location | ||||||||||||||||||||||||||||||||||
United States | $ | 193,617 | 72 | $ | 184,333 | 90 | $ | 63,692 | 71 | $ | 280,509 | 72 | $ | 193,617 | 72 | $ | 184,333 | 90 | ||||||||||||||||
Other | 73,876 | 28 | 20,504 | 10 | 25,878 | 29 | 110,957 | 28 | 73,876 | 28 | 20,504 | 10 | ||||||||||||||||||||||
Total | $ | 267,493 | 100 | $ | 204,837 | 100 | $ | 89,570 | 100 | $ | 391,466 | 100 | $ | 267,493 | 100 | $ | 204,837 | 100 | ||||||||||||||||
Net premiums written by underwriting location | ||||||||||||||||||||||||||||||||||
By underwriting location | ||||||||||||||||||||||||||||||||||
United States | $ | 125,317 | 47 | $ | 98,809 | 48 | $ | — | — | $ | 186,826 | 48 | $ | 125,317 | 47 | $ | 98,809 | 48 | ||||||||||||||||
Other | 142,176 | 53 | 106,028 | 52 | 89,570 | 100 | 204,640 | 52 | 142,176 | 53 | 106,028 | 52 | ||||||||||||||||||||||
Total | $ | 267,493 | 100 | $ | 204,837 | 100 | $ | 89,570 | 100 | $ | 391,466 | 100 | $ | 267,493 | 100 | $ | 204,837 | 100 |
ACGL 2016 FORM 10-K | 13 |
ACGL 2016 FORM 10-K | 14 |
Development of GAAP Reserves | |||||||||||||||||||||||||||||||||
Cumulative Redundancy (Deficiency) | |||||||||||||||||||||||||||||||||
(U.S. dollars in millions) | Year Ended December 31, | ||||||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||
Reserve for losses and loss adjustment expenses, net of reinsurance recoverables | $ | 4,063 | $ | 4,911 | $ | 5,483 | $ | 5,938 | $ | 6,214 | $ | 6,395 | $ | 6,638 | $ | 7,104 | $ | 7,076 | $ | 7,258 | $ | 7,296 | |||||||||||
Cumulative net paid losses as of: | |||||||||||||||||||||||||||||||||
One year later | 745 | 843 | 954 | 1,167 | 1,106 | 1,127 | 1,169 | 1,351 | 1,300 | 1,454 | |||||||||||||||||||||||
Two years later | 1,332 | 1,486 | 1,817 | 2,114 | 1,943 | 1,938 | 2,096 | 2,353 | 2,313 | ||||||||||||||||||||||||
Three years later | 1,688 | 2,040 | 2,308 | 2,768 | 2,561 | 2,613 | 2,845 | 3,118 | |||||||||||||||||||||||||
Four years later | 1,993 | 2,375 | 2,755 | 3,222 | 3,070 | 3,128 | 3,363 | ||||||||||||||||||||||||||
Five years later | 2,249 | 2,680 | 3,023 | 3,596 | 3,469 | 3,491 | |||||||||||||||||||||||||||
Six years later | 2,447 | 2,867 | 3,254 | 3,871 | 3,761 | ||||||||||||||||||||||||||||
Seven years later | 2,603 | 3,005 | 3,429 | 4,083 | |||||||||||||||||||||||||||||
Eight years later | 2,684 | 3,123 | 3,577 | ||||||||||||||||||||||||||||||
Nine years later | 2,767 | 3,250 | |||||||||||||||||||||||||||||||
Ten years later | 2,842 | ||||||||||||||||||||||||||||||||
Net re-estimated reserve as of: | |||||||||||||||||||||||||||||||||
One year later | 3,986 | 4,726 | 5,173 | 5,749 | 6,067 | 6,110 | 6,416 | 6,840 | 6,749 | 6,973 | |||||||||||||||||||||||
Two years later | 3,809 | 4,387 | 4,959 | 5,620 | 5,826 | 5,927 | 6,160 | 6,540 | 6,479 | ||||||||||||||||||||||||
Three years later | 3,541 | 4,164 | 4,849 | 5,466 | 5,711 | 5,748 | 5,930 | 6,303 | |||||||||||||||||||||||||
Four years later | 3,381 | 4,107 | 4,740 | 5,403 | 5,570 | 5,567 | 5,739 | ||||||||||||||||||||||||||
Five years later | 3,359 | 4,026 | 4,680 | 5,308 | 5,439 | 5,406 | |||||||||||||||||||||||||||
Six years later | 3,301 | 3,989 | 4,604 | 5,200 | 5,313 | ||||||||||||||||||||||||||||
Seven years later | 3,327 | 3,944 | 4,508 | 5,112 | |||||||||||||||||||||||||||||
Eight years later | 3,280 | 3,860 | 4,452 | ||||||||||||||||||||||||||||||
Nine years later | 3,237 | 3,816 | |||||||||||||||||||||||||||||||
Ten years later | 3,200 | ||||||||||||||||||||||||||||||||
Cumulative net redundancy | $ | 863 | $ | 1,095 | $ | 1,031 | $ | 826 | $ | 901 | $ | 989 | $ | 899 | $ | 801 | $ | 597 | $ | 285 | |||||||||||||
Cumulative net redundancy as a percentage of net reserves | 21.2 | % | 22.3 | % | 18.8 | % | 13.9 | % | 14.5 | % | 15.5 | % | 13.5 | % | 11.3 | % | 8.4 | % | 3.9 | % | |||||||||||||
Gross reserve for losses and loss adjustment expenses | $ | 5,453 | $ | 6,463 | $ | 7,092 | $ | 7,667 | $ | 7,873 | $ | 8,098 | $ | 8,456 | $ | 8,933 | $ | 8,824 | $ | 9,036 | $ | 9,125 | |||||||||||
Reinsurance recoverable | (1,390 | ) | (1,552 | ) | (1,609 | ) | (1,729 | ) | (1,659 | ) | (1,703 | ) | (1,818 | ) | (1,829 | ) | (1,748 | ) | (1,778 | ) | (1,829 | ) | |||||||||||
Net reserve for losses and loss adjustment expenses | $ | 4,063 | $ | 4,911 | $ | 5,483 | $ | 5,938 | $ | 6,214 | $ | 6,395 | $ | 6,638 | $ | 7,104 | $ | 7,076 | $ | 7,258 | $ | 7,296 | |||||||||||
Gross re-estimated reserve | $ | 4,482 | $ | 5,119 | $ | 5,839 | $ | 6,554 | $ | 6,719 | $ | 6,794 | $ | 7,250 | $ | 8,037 | $ | 8,200 | $ | 8,786 | |||||||||||||
Re-estimated reinsurance recoverable | (1,282 | ) | (1,303 | ) | (1,387 | ) | (1,442 | ) | (1,406 | ) | (1,388 | ) | (1,511 | ) | (1,734 | ) | (1,721 | ) | (1,813 | ) | |||||||||||||
Net re-estimated reserve | 3,200 | 3,816 | 4,452 | 5,112 | 5,313 | 5,406 | 5,739 | 6,303 | 6,479 | 6,973 | |||||||||||||||||||||||
Gross re-estimated redundancy | $ | 971 | $ | 1,344 | $ | 1,253 | $ | 1,113 | $ | 1,154 | $ | 1,304 | $ | 1,206 | $ | 896 | $ | 624 | $ | 250 |
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Reserve for losses and loss adjustment expenses at beginning of year | $ | 9,036,448 | $ | 8,824,696 | $ | 8,933,292 | |||||
Unpaid losses and loss adjustment expenses recoverable | 1,778,303 | 1,748,250 | 1,829,070 | ||||||||
Net reserve for losses and loss adjustment expenses at beginning of year | 7,258,145 | 7,076,446 | 7,104,222 | ||||||||
Net incurred losses and loss adjustment expenses relating to losses occurring in: | |||||||||||
Current year | 2,336,026 | 2,246,152 | 1,943,466 | ||||||||
Prior years | (285,123 | ) | (326,902 | ) | (264,042 | ) | |||||
Total net incurred losses and loss adjustment expenses | 2,050,903 | 1,919,250 | 1,679,424 | ||||||||
Net losses and loss adjustment expense reserves of acquired business (1) | 262 | 120,671 | — | ||||||||
Foreign exchange (gains) losses | (143,653 | ) | (160,486 | ) | 1,617 | ||||||
Net paid losses and loss adjustment expenses relating to losses occurring in: | |||||||||||
Current year | (454,179 | ) | (347,270 | ) | (288,114 | ) | |||||
Prior years | (1,415,065 | ) | (1,350,466 | ) | (1,420,703 | ) | |||||
Total net paid losses and loss adjustment expenses | (1,869,244 | ) | (1,697,736 | ) | (1,708,817 | ) | |||||
Net reserve for losses and loss adjustment expenses at end of year | 7,296,413 | 7,258,145 | 7,076,446 | ||||||||
Unpaid losses and loss adjustment expenses recoverable | 1,828,837 | 1,778,303 | 1,748,250 | ||||||||
Reserve for losses and loss adjustment expenses at end of year | $ | 9,125,250 | $ | 9,036,448 | $ | 8,824,696 |
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Reserve for losses and loss adjustment expenses at beginning of year | $ | 9,125,250 | $ | 9,036,448 | $ | 8,824,696 | |||||
Unpaid losses and loss adjustment expenses recoverable | 1,828,837 | 1,778,303 | 1,748,250 | ||||||||
Net reserve for losses and loss adjustment expenses at beginning of year | 7,296,413 | 7,258,145 | 7,076,446 | ||||||||
Net incurred losses and loss adjustment expenses relating to losses occurring in: | |||||||||||
Current year | 2,455,563 | 2,336,026 | 2,246,152 | ||||||||
Prior years | (269,964 | ) | (285,123 | ) | (326,902 | ) | |||||
Total net incurred losses and loss adjustment expenses | 2,185,599 | 2,050,903 | 1,919,250 | ||||||||
Net losses and loss adjustment expense reserves of acquired business (1) | 551,096 | 262 | 120,671 | ||||||||
Foreign exchange (gains) losses | (102,367 | ) | (143,653 | ) | (160,486 | ) | |||||
Net paid losses and loss adjustment expenses relating to losses occurring in: | |||||||||||
Current year | (445,700 | ) | (454,179 | ) | (347,270 | ) | |||||
Prior years | (1,367,656 | ) | (1,415,065 | ) | (1,350,466 | ) | |||||
Total net paid losses and loss adjustment expenses | (1,813,356 | ) | (1,869,244 | ) | (1,697,736 | ) | |||||
Net reserve for losses and loss adjustment expenses at end of year | 8,117,385 | 7,296,413 | 7,258,145 | ||||||||
Unpaid losses and loss adjustment expenses recoverable | 2,083,575 | 1,828,837 | 1,778,303 | ||||||||
Reserve for losses and loss adjustment expenses at end of year | $ | 10,200,960 | $ | 9,125,250 | $ | 9,036,448 |
(1) | 2016 amount relates to our acquisition of UGC while the 2014 amount relates to our acquisition of AMIC. |
ACGL 2016 FORM 10-K | 15 |
December 31, 2016 | December 31, 2015 | ||||||||||||
Amount | % | Amount | % | ||||||||||
Investable assets (1) (2): | |||||||||||||
Fixed maturities available for sale, at fair value | $ | 13,426,577 | 72.0 | $ | 10,459,353 | 71.4 | |||||||
Fixed maturities, at fair value (3) | 364,856 | 2.0 | 367,780 | 2.5 | |||||||||
Fixed maturities pledged under securities lending agreements, at fair value | 730,341 | 3.9 | 373,304 | 2.5 | |||||||||
Total fixed maturities | 14,521,774 | 77.9 | 11,200,437 | 76.5 | |||||||||
Short-term investments available for sale, at fair value | 612,005 | 3.3 | 587,904 | 4.0 | |||||||||
Short-term investments, at fair value (3) | 64,542 | 0.3 | — | — | |||||||||
Cash | 768,049 | 4.1 | 444,776 | 3.0 | |||||||||
Equity securities available for sale, at fair value | 518,041 | 2.8 | 618,405 | 4.2 | |||||||||
Equity securities, at fair value (3) | 25,328 | 0.1 | 798 | — | |||||||||
Equity securities pledged under securities lending agreements, at fair value | 14,639 | 0.1 | 10,777 | 0.1 | |||||||||
Other investments available for sale, at fair value | 167,970 | 0.9 | 300,476 | 2.1 | |||||||||
Other investments, at fair value (3) | 1,108,871 | 6.0 | 908,809 | 6.2 | |||||||||
Investments accounted for using the equity method (4) | 811,273 | 4.4 | 592,973 | 4.0 | |||||||||
Securities transactions entered into but not settled at the balance sheet date | 23,697 | 0.1 | (20,524 | ) | (0.1 | ) | |||||||
Total investable assets held by Arch | $ | 18,636,189 | 100.0 | $ | 14,644,831 | 100.0 |
December 31, 2015 | December 31, 2014 | ||||||||||||
Amount | % of Total | Amount | % of Total | ||||||||||
Investable assets (1) (2): | |||||||||||||
Fixed maturities available for sale, at fair value | $ | 10,459,353 | 71.4 | $ | 10,750,770 | 73.6 | |||||||
Fixed maturities, at fair value (3) | 367,780 | 2.5 | 377,053 | 2.6 | |||||||||
Fixed maturities pledged under securities lending agreements, at fair value | 373,304 | 2.5 | 50,802 | 0.3 | |||||||||
Total fixed maturities | 11,200,437 | 76.5 | 11,178,625 | 76.6 | |||||||||
Short-term investments available for sale, at fair value | 587,904 | 4.0 | 797,226 | 5.5 | |||||||||
Cash | 444,776 | 3.0 | 474,247 | 3.2 | |||||||||
Equity securities available for sale, at fair value | 618,405 | 4.2 | 658,182 | 4.5 | |||||||||
Equity securities, at fair value (3) | 798 | — | — | — | |||||||||
Equity securities pledged under securities lending agreements, at fair value | 10,777 | 0.1 | — | — | |||||||||
Other investments available for sale, at fair value | 300,476 | 2.1 | 296,224 | 2.0 | |||||||||
Other investments, at fair value (3) | 908,809 | 6.2 | 878,774 | 6.0 | |||||||||
Investments accounted for using the equity method (4) | 592,973 | 4.0 | 349,014 | 2.4 | |||||||||
Securities transactions entered into but not settled at the balance sheet date | (20,524 | ) | (0.1 | ) | (32,802 | ) | (0.2 | ) | |||||
Total investable assets managed by Arch | $ | 14,644,831 | 100.0 | $ | 14,599,490 | 100.0 |
(1) | The table above excludes investable assets attributable to the ‘other’ segment. Such amounts are summarized as follows: |
(U.S. dollars in thousands) | December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | ||||||||||
Investable assets in ‘other’ segment: | ||||||||||||||
Cash | $ | 108,550 | $ | 11,455 | $ | 74,893 | $ | 108,550 | ||||||
Investments accounted for using the fair value option | 1,617,107 | 1,169,226 | 1,857,623 | 1,617,107 | ||||||||||
Securities sold but not yet purchased | (30,583 | ) | — | (33,157 | ) | (30,583 | ) | |||||||
Securities transactions entered into but not settled at the balance sheet date | 1,033 | (17,441 | ) | (41,596 | ) | 1,033 | ||||||||
Total investable assets included in ‘other’ segment | $ | 1,696,107 | $ | 1,163,240 | $ | 1,857,763 | $ | 1,696,107 |
(2) | This table excludes the collateral received and reinvested and includes the fixed maturities |
(3) | Represents investments which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on our balance sheet. Changes in the carrying value of such investments are recorded in net realized gains or losses. |
(4) | Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income. |
ACGL 2016 FORM 10-K | 16 |
December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||
Rating (1) | Fair Value | % of Total | Fair Value | % of Total | Fair Value | % | Fair Value | % | ||||||||||||||||||||
U.S. government and government agencies (2) | $ | 3,060,869 | 27.3 | $ | 2,245,489 | 20.1 | $ | 3,210,899 | 22.1 | $ | 3,060,869 | 27.3 | ||||||||||||||||
AAA | 4,000,750 | 35.7 | 4,299,060 | 38.5 | 3,918,739 | 27.0 | 4,000,750 | 35.7 | ||||||||||||||||||||
AA | 1,651,760 | 14.7 | 1,917,392 | 17.2 | 3,148,226 | 21.7 | 1,651,760 | 14.7 | ||||||||||||||||||||
A | 1,431,138 | 12.8 | 1,739,922 | 15.6 | 2,338,834 | 16.1 | 1,431,138 | 12.8 | ||||||||||||||||||||
BBB | 457,251 | 4.1 | 339,395 | 3.0 | 1,203,942 | 8.3 | 457,251 | 4.1 | ||||||||||||||||||||
BB | 203,426 | 1.8 | 157,232 | 1.4 | 226,321 | 1.6 | 203,426 | 1.8 | ||||||||||||||||||||
B | 138,770 | 1.2 | 184,869 | 1.7 | 156,405 | 1.1 | 138,770 | 1.2 | ||||||||||||||||||||
Lower than B | 130,545 | 1.2 | 154,823 | 1.4 | 90,833 | 0.6 | 130,545 | 1.2 | ||||||||||||||||||||
Not rated | 125,928 | 1.1 | 140,443 | 1.3 | 227,574 | 1.6 | 125,928 | 1.1 | ||||||||||||||||||||
Total | $ | 11,200,437 | 100.0 | $ | 11,178,625 | 100.0 | $ | 14,521,774 | 100.0 | $ | 11,200,437 | 100.0 |
(1) | For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings. |
(2) | Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities. |
Arch | Benchmark | Arch | Benchmark | |||||||
Portfolio (1) | Return | Portfolio (1) | Return | |||||||
Pre-tax total return (before investment expenses): | ||||||||||
Year Ended December 31, 2016 | 2.07 | % | 2.13 | % | ||||||
Year Ended December 31, 2015 | 0.41 | % | (0.38 | )% | 0.41 | % | (0.38 | )% | ||
Year Ended December 31, 2014 | 3.21 | % | 2.58 | % | 3.21 | % | 2.58 | % | ||
Year Ended December 31, 2013 | 1.28 | % | 0.85 | % |
(1) | Our investment expenses were approximately |
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ITEM 2. | PROPERTIES |
ITEM 3. | LEGAL PROCEEDINGS |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||
1st Quarter | $63.01 | $57.67 | $59.55 | $52.23 | $71.67 | $59.83 | $63.01 | $57.67 | ||||||||||||||||||||||
2nd Quarter | $68.01 | $59.78 | $58.52 | $55.61 | $73.12 | $67.50 | $68.01 | $59.78 | ||||||||||||||||||||||
3rd Quarter | $74.98 | $64.28 | $58.24 | $52.98 | $85.16 | $68.85 | $74.98 | $64.28 | ||||||||||||||||||||||
4th Quarter | $78.81 | $67.98 | $60.10 | $52.51 | $88.41 | $76.47 | $78.81 | $67.98 |
ACGL 2016 FORM 10-K | 69 |
Issuer Purchases of Equity Securities | |||||||||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs (2) | |||||||||
10/1/2015-10/31/2015 | 1,948 | $ | 75.89 | — | $ | 521,757 | |||||||
11/1/2015-11/30/2015 | 10,198 | $ | 73.95 | — | $ | 521,757 | |||||||
12/1/2015-12/31/2015 | 2,956 | $ | 70.10 | — | $ | 521,757 | |||||||
Total | 15,102 | $ | 73.45 | — | $ | 521,757 |
Issuer Purchases of Common Shares | |||||||||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs (2) | |||||||||
10/1/2016-10/31/2016 | 8,263 | $ | 77.59 | — | $ | 446,501 | |||||||
11/1/2016-11/30/2016 | 5,364 | $ | 79.33 | — | $ | 446,501 | |||||||
12/1/2016-12/31/2016 | 19,131 | $ | 85.93 | — | $ | 446,501 | |||||||
Total | 32,758 | $ | 82.74 | — | $ | 446,501 |
(1) | Includes repurchases by ACGL of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights were exercised. |
(2) | Remaining amount available at December 31, |
Issuer Purchases of Preferred Shares | ||||||||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs | ||||||||
12/1/2016-12/31/2016 | 97,807 | $ | 25.48 | — | — | |||||||
Total | 97,807 | $ | 25.48 | — | — |
ACGL 2016 FORM 10-K | 70 |
Base Period | Base Period | |||||||||||||||||||||||||||||||||||||
Company Name/Index | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | Company Name/Index | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | |||||||||||||||||||||||||
l | Arch Capital Group Ltd. | $100.00 | $126.85 | $149.98 | $203.37 | $201.36 | $237.65 | Arch Capital Group Ltd. | $100.00 | $118.24 | $160.33 | $158.74 | $187.35 | $231.78 | ||||||||||||||||||||||||
n | S&P 500 Index | $100.00 | $102.11 | $118.45 | $156.82 | $178.28 | $180.75 | S&P 500 Index | $100.00 | $116.00 | $153.57 | $174.60 | $177.01 | $198.18 | ||||||||||||||||||||||||
p | S&P 500 Property & Casualty Insurance Index | $100.00 | $99.75 | $119.81 | $165.69 | $191.78 | $210.05 | S&P 500 Property & Casualty Insurance Index | $100.00 | $120.11 | $166.10 | $192.25 | $210.57 | $243.65 |
(1) | Stock price appreciation plus dividends. |
(2) | The above graph assumes that the value of the investment was $100 on December 31, |
(3) | This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933 or the Securities and Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. |
ACGL 2016 FORM 10-K | 71 |
ITEM 6. | SELECTED FINANCIAL DATA |
(U.S. dollars in thousands except share data) | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||||||||||||||||||||
Net premiums written | $ | 3,817,531 | $ | 3,891,938 | $ | 3,351,367 | $ | 3,052,235 | $ | 2,673,326 | $ | 4,031,391 | $ | 3,817,531 | $ | 3,891,938 | $ | 3,351,367 | $ | 3,052,235 | ||||||||||||||||||
Net premiums earned | 3,733,905 | 3,593,748 | 3,145,952 | 2,935,140 | 2,631,815 | 3,884,822 | 3,733,905 | 3,593,748 | 3,145,952 | 2,935,140 | ||||||||||||||||||||||||||||
Net investment income | 348,090 | 302,585 | 267,219 | 294,895 | 338,198 | 366,742 | 348,090 | 302,585 | 267,219 | 294,895 | ||||||||||||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 25,455 | 19,883 | 35,701 | 73,510 | (9,605 | ) | 48,475 | 25,455 | 19,883 | 35,701 | 73,510 | |||||||||||||||||||||||||||
Net realized gains | (185,842 | ) | 102,917 | 74,018 | 194,228 | 110,646 | ||||||||||||||||||||||||||||||||
Net realized gains (losses) | 137,586 | (185,842 | ) | 102,917 | 74,018 | 194,228 | ||||||||||||||||||||||||||||||||
Total revenues | 3,936,590 | 3,988,873 | 3,526,157 | 3,482,381 | 3,063,307 | 4,463,556 | 3,936,590 | 3,988,873 | 3,526,157 | 3,482,381 | ||||||||||||||||||||||||||||
Income before income taxes | 567,194 | 844,247 | 742,505 | 589,387 | 426,370 | 855,552 | 567,194 | 844,247 | 734,770 | 586,368 | ||||||||||||||||||||||||||||
Net income | $ | 526,582 | $ | 821,260 | $ | 709,731 | $ | 593,397 | $ | 436,163 | $ | 824,178 | $ | 526,582 | $ | 821,260 | $ | 703,119 | $ | 590,815 | ||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | 11,156 | 13,095 | — | — | — | (131,440 | ) | 11,156 | 13,095 | — | — | |||||||||||||||||||||||||||
Net income available to Arch | 537,738 | 834,355 | 709,731 | 593,397 | 436,163 | 692,738 | 537,738 | 834,355 | 703,119 | 590,815 | ||||||||||||||||||||||||||||
Preferred dividends | (21,938 | ) | (21,938 | ) | (21,938 | ) | (25,079 | ) | (25,844 | ) | (28,070 | ) | (21,938 | ) | (21,938 | ) | (21,938 | ) | (25,079 | ) | ||||||||||||||||||
Loss on repurchase of preferred shares | — | — | — | (10,612 | ) | — | — | — | — | — | (10,612 | ) | ||||||||||||||||||||||||||
Net income available to Arch common shareholders | $ | 515,800 | $ | 812,417 | $ | 687,793 | $ | 557,706 | $ | 410,319 | $ | 664,668 | $ | 515,800 | $ | 812,417 | $ | 681,181 | $ | 555,124 | ||||||||||||||||||
Diluted net income per share | $ | 4.09 | $ | 6.02 | $ | 5.07 | $ | 4.03 | $ | 2.97 | $ | 5.33 | $ | 4.09 | $ | 6.02 | $ | 5.02 | $ | 4.02 | ||||||||||||||||||
Cash dividends per share | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
After-tax operating income available to Arch common shareholders | $ | 565,199 | $ | 617,312 | $ | 595,715 | $ | 350,640 | $ | 303,382 | $ | 577,444 | $ | 565,199 | $ | 617,312 | $ | 589,103 | $ | 348,058 | ||||||||||||||||||
After-tax operating income available to Arch common shareholders per share — diluted | $ | 4.48 | $ | 4.58 | $ | 4.39 | $ | 2.54 | $ | 2.19 | $ | 4.63 | $ | 4.48 | $ | 4.58 | $ | 4.34 | $ | 2.52 | ||||||||||||||||||
After-tax operating return on average common equity (2) | 9.7 | % | 11.1 | % | 11.7 | % | 7.7 | % | 7.2 | % | ||||||||||||||||||||||||||||
Weighted average common shares and common share equivalents outstanding — diluted | 126,038,743 | 134,922,322 | 135,777,183 | 138,258,847 | 138,289,702 | |||||||||||||||||||||||||||||||||
After-tax return on average common equity (3) | 10.9 | % | 8.9 | % | 14.7 | % | 13.5 | % | 12.3 | % | ||||||||||||||||||||||||||||
After-tax operating return on average common equity (3) | 9.4 | % | 9.7 | % | 11.2 | % | 11.7 | % | 7.7 | % | ||||||||||||||||||||||||||||
Weighted average common shares and common share equivalents outstanding — diluted (3) | 124,717,493 | 126,038,743 | 134,922,322 | 135,777,183 | 138,258,847 |
(1) | Amounts reflect a cumulative effect of an accounting change. See note 1, “General,” of the notes accompanying our consolidated financial statements for additional information. |
(2) | After-tax operating income available to Arch common shareholders is defined as net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other and loss on repurchase of preferred shares, net of income taxes. The presentation of after-tax operating income available to Arch common shareholders is a “non-GAAP financial measure” as defined in Regulation G. See “Management’s Discussion and |
Equals after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity for each period presented. For the 2016 period, the return on average common shareholders’ equity reflects the weighted impact of the $1.10 billion of convertible non-voting common equivalent preferred shares, which were issued on December 31, 2016 as part of the UGC acquisition. For the 2015 and prior periods, the average common shareholders’ equity balances in each period reflect a cumulative effect of an accounting change. See note 1, “General,” of the notes accompanying our consolidated financial statements for additional information. |
ACGL 2016 FORM 10-K | 72 |
(U.S. dollars in thousands except share data) | December 31, | December 31, | ||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||
Total investable assets (1) | $ | 16,340,938 | $ | 15,762,730 | $ | 14,049,525 | $ | 13,045,134 | $ | 12,316,205 | $ | 20,493,952 | $ | 16,340,938 | $ | 15,762,730 | $ | 14,049,525 | $ | 13,045,134 | ||||||||||||||||||
Premiums receivable | 983,443 | 948,695 | 753,924 | 688,873 | 501,563 | 1,072,435 | 983,443 | 948,695 | 753,924 | 688,873 | ||||||||||||||||||||||||||||
Reinsurance recoverables on unpaid and paid losses and loss adjustment expenses | 1,867,373 | 1,812,845 | 1,804,330 | 1,870,037 | 1,851,584 | 2,114,138 | 1,867,373 | 1,812,845 | 1,804,330 | 1,870,037 | ||||||||||||||||||||||||||||
Total assets | 23,177,270 | 22,006,081 | 19,557,054 | 17,813,419 | 17,101,951 | 29,372,109 | 23,138,931 | 21,967,742 | 19,518,715 | 17,778,189 | ||||||||||||||||||||||||||||
Reserves for losses and loss adjustment expenses: | ||||||||||||||||||||||||||||||||||||||
Before unpaid losses and loss adjustment expenses recoverable | 9,125,250 | 9,036,448 | 8,824,696 | 8,933,292 | 8,456,210 | 10,200,960 | 9,125,250 | 9,036,448 | 8,824,696 | 8,933,292 | ||||||||||||||||||||||||||||
Net of unpaid losses and loss adjustment expenses recoverable | 7,296,413 | 7,258,145 | 7,076,446 | 7,104,222 | 6,638,163 | 8,117,385 | 7,296,413 | 7,258,145 | 7,076,446 | 7,104,222 | ||||||||||||||||||||||||||||
Unearned premiums: | ||||||||||||||||||||||||||||||||||||||
Before prepaid reinsurance premiums | 2,333,932 | 2,231,578 | 1,896,365 | 1,647,978 | 1,411,872 | |||||||||||||||||||||||||||||||||
Net of prepaid reinsurance premiums | 1,906,323 | 1,854,500 | 1,568,022 | 1,349,494 | 1,146,176 | |||||||||||||||||||||||||||||||||
Before ceded unearned premiums | 3,406,870 | 2,333,932 | 2,231,578 | 1,896,365 | 1,647,978 | |||||||||||||||||||||||||||||||||
Net of ceded unearned premiums | 2,547,303 | 1,906,323 | 1,854,500 | 1,568,022 | 1,349,494 | |||||||||||||||||||||||||||||||||
Senior notes | 791,306 | 791,141 | 790,960 | 296,657 | 296,594 | 1,732,258 | 791,306 | 791,141 | 790,960 | 296,657 | ||||||||||||||||||||||||||||
Revolving credit agreement borrowings | 530,434 | 100,000 | 100,000 | 100,000 | 100,000 | 756,650 | 530,434 | 100,000 | 100,000 | 100,000 | ||||||||||||||||||||||||||||
Total liabilities | 16,028,376 | 14,887,435 | 13,909,558 | 12,644,541 | 12,509,877 | 20,060,984 | 16,028,376 | 14,887,435 | 13,909,558 | 12,644,541 | ||||||||||||||||||||||||||||
Total shareholders’ equity | 6,943,712 | 6,899,134 | 5,647,496 | 5,168,878 | 4,592,074 | 9,105,572 | 6,905,373 | 6,860,795 | 5,609,157 | 5,133,648 | ||||||||||||||||||||||||||||
Total shareholders' equity available to Arch | 6,204,881 | 6,130,053 | 5,647,496 | 5,168,878 | 4,592,074 | 8,253,718 | 6,166,542 | 6,091,714 | 5,609,157 | 5,133,648 | ||||||||||||||||||||||||||||
Preferred shareholders' equity | 325,000 | 325,000 | 325,000 | 325,000 | 325,000 | 772,555 | 325,000 | 325,000 | 325,000 | 325,000 | ||||||||||||||||||||||||||||
Common shareholders' equity available to Arch | $ | 5,879,881 | $ | 5,805,053 | $ | 5,322,496 | $ | 4,843,878 | $ | 4,267,074 | $ | 7,481,163 | $ | 5,841,542 | $ | 5,766,714 | $ | 5,284,157 | $ | 4,808,648 | ||||||||||||||||||
Common shares outstanding, net of treasury shares (2) | 122,627,783 | 127,367,934 | 133,674,884 | 133,842,613 | 134,358,345 | |||||||||||||||||||||||||||||||||
Book value per common share (3) | $ | 47.95 | $ | 45.58 | $ | 39.82 | $ | 36.19 | $ | 31.76 | ||||||||||||||||||||||||||||
Common shares and common share equivalents outstanding, net of treasury shares (3) | 135,550,337 | 122,627,783 | 127,367,934 | 133,674,884 | 133,842,613 | |||||||||||||||||||||||||||||||||
Book value per share (2) (4) | $ | 55.19 | $ | 47.64 | $ | 45.28 | $ | 39.53 | $ | 35.93 |
(1) | This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value. |
(2) |
(3) | Reflects the impact of the $1.10 billion of convertible non-voting common equivalent preferred shares, which were issued on December 31, 2016 as part of the UGC acquisition. |
(4) | Excludes the effects of stock options and restricted stock units. |
ACGL 2016 FORM 10-K | 73 |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ACGL 2016 FORM 10-K | 74 |
ACGL 2016 FORM 10-K | 75 |
Arch Portfolio (1) | Benchmark Return | Arch Portfolio (1) | Benchmark Return | |||||
Pre-tax total return (before investment expenses): | ||||||||
Year Ended December 31, 2016 | 2.07% | 2.13% | ||||||
Year Ended December 31, 2015 | 0.41 | % | -0.38 | % | 0.41% | -0.38% | ||
Year Ended December 31, 2014 | 3.21 | % | 2.58 | % | 3.21% | 2.58% | ||
Year Ended December 31, 2013 | 1.28 | % | 0.85 | % |
(1) | Our investment expenses were approximately |
ACGL 2016 FORM 10-K | 76 |
% | ||
Barclays | ||
Barclays | ||
MSCI All Country World Gross Total Return Index | ||
Total | % |
ACGL 2016 FORM 10-K | 77 |
ACGL 2016 FORM 10-K | 78 |
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
After-tax operating income available to Arch common shareholders | $ | 565,199 | $ | 617,312 | $ | 595,715 | |||||
Net realized gains (losses), net of tax | (117,607 | ) | 122,863 | 73,844 | |||||||
Net impairment losses recognized in earnings, net of tax | (20,116 | ) | (30,150 | ) | (3,786 | ) | |||||
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax | 24,519 | 19,235 | 35,738 | ||||||||
Net foreign exchange gains (losses), net of tax | 63,805 | 83,157 | (13,718 | ) | |||||||
Net income available to Arch common shareholders | $ | 515,800 | $ | 812,417 | $ | 687,793 |
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net income available to Arch common shareholders | $ | 664,668 | $ | 515,800 | $ | 812,417 | |||||
Net realized (gains) losses | (77,081 | ) | 108,690 | (130,026 | ) | ||||||
Net impairment losses recognized in earnings | 30,442 | 20,116 | 30,150 | ||||||||
Equity in net (income) loss of investment funds accounted for using the equity method | (48,475 | ) | (25,456 | ) | (19,883 | ) | |||||
Net foreign exchange (gains) losses | (31,987 | ) | (63,011 | ) | (82,777 | ) | |||||
UGC transaction costs and other | 41,729 | — | — | ||||||||
Income tax expense (benefit) | (1,852 | ) | 9,060 | 7,431 | |||||||
After-tax operating income available to Arch common shareholders | $ | 577,444 | $ | 565,199 | $ | 617,312 | |||||
Beginning common shareholders’ equity | $ | 5,841,542 | $ | 5,766,714 | $ | 5,284,157 | |||||
Ending common shareholders’ equity | 7,481,163 | 5,841,542 | 5,766,714 | ||||||||
Average common shareholders’ equity (1) | $ | 6,113,718 | $ | 5,804,128 | $ | 5,525,436 | |||||
Annualized return on average common equity % | 10.9 | 8.9 | 14.7 | ||||||||
Annualized operating return on average common equity % | 9.4 | 9.7 | 11.2 |
Year Ended December 31, | ||||||||||
2016 | 2015 | % Change | ||||||||
Gross premiums written | $ | 3,027,049 | $ | 2,944,018 | 2.8 | |||||
Premiums ceded | (954,768 | ) | (898,347 | ) | ||||||
Net premiums written | 2,072,281 | 2,045,671 | 1.3 | |||||||
Change in unearned premiums | 1,623 | (863 | ) | |||||||
Net premiums earned | 2,073,904 | 2,044,808 | 1.4 | |||||||
Other underwriting income | — | 1,993 | ||||||||
Losses and loss adjustment expenses | (1,359,313 | ) | (1,292,647 | ) | ||||||
Acquisition expenses | (304,066 | ) | (299,317 | ) | ||||||
Other operating expenses | (353,782 | ) | (354,416 | ) | ||||||
Underwriting income (loss) | $ | 56,743 | $ | 100,421 | (43.5 | ) | ||||
Underwriting Ratios | % Point Change | |||||||||
Loss ratio | 65.5 | % | 63.2 | % | 2.3 | |||||
Acquisition expense ratio | 14.7 | % | 14.6 | % | 0.1 | |||||
Other operating expense ratio | 17.1 | % | 17.3 | % | (0.2 | ) | ||||
Combined ratio | 97.3 | % | 95.1 | % | 2.2 |
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | % Change | 2014 | 2013 | % Change | ||||||||||||||||
Gross premiums written | $ | 2,944,018 | $ | 3,008,669 | (2.1 | ) | $ | 3,008,669 | $ | 2,712,509 | 10.9 | ||||||||||
Premiums ceded | (898,347 | ) | (862,015 | ) | (862,015 | ) | (763,713 | ) | |||||||||||||
Net premiums written | 2,045,671 | 2,146,654 | (4.7 | ) | 2,146,654 | 1,948,796 | 10.2 | ||||||||||||||
Change in unearned premiums | (863 | ) | (129,284 | ) | (129,284 | ) | (72,782 | ) | |||||||||||||
Net premiums earned | 2,044,808 | 2,017,370 | 1.4 | 2,017,370 | 1,876,014 | 7.5 | |||||||||||||||
Other underwriting income | 1,993 | 2,135 | 2,135 | 2,122 | |||||||||||||||||
Losses and loss adjustment expenses | (1,292,647 | ) | (1,260,953 | ) | (1,260,953 | ) | (1,188,445 | ) | |||||||||||||
Acquisition expenses, net | (299,317 | ) | (316,308 | ) | (316,308 | ) | (311,904 | ) | |||||||||||||
Other operating expenses | (354,416 | ) | (335,157 | ) | (335,157 | ) | (315,387 | ) | |||||||||||||
Underwriting income (loss) | $ | 100,421 | $ | 107,087 | (6.2 | ) | $ | 107,087 | $ | 62,400 | 71.6 | ||||||||||
Underwriting Ratios | % Point Change | % Point Change | |||||||||||||||||||
Loss ratio | 63.2 | % | 62.5 | % | 0.7 | 62.5 | % | 63.3 | % | (0.8 | ) | ||||||||||
Acquisition expense ratio | 14.6 | % | 15.7 | % | (1.1 | ) | 15.7 | % | 16.6 | % | (0.9 | ) | |||||||||
Other operating expense ratio | 17.3 | % | 16.6 | % | 0.7 | 16.6 | % | 16.8 | % | (0.2 | ) | ||||||||||
Combined ratio | 95.1 | % | 94.8 | % | 0.3 | 94.8 | % | 96.7 | % | (1.9 | ) |
ACGL 2016 FORM 10-K | 79 |
Year Ended December 31, | ||||||||||
2015 | 2014 | % Change | ||||||||
Gross premiums written | $ | 2,944,018 | $ | 3,008,669 | (2.1 | ) | ||||
Premiums ceded | (898,347 | ) | (862,015 | ) | ||||||
Net premiums written | 2,045,671 | 2,146,654 | (4.7 | ) | ||||||
Change in unearned premiums | (863 | ) | (129,284 | ) | ||||||
Net premiums earned | 2,044,808 | 2,017,370 | 1.4 | |||||||
Other underwriting income | 1,993 | 2,135 | ||||||||
Losses and loss adjustment expenses | (1,292,647 | ) | (1,260,953 | ) | ||||||
Acquisition expenses | (299,317 | ) | (316,308 | ) | ||||||
Other operating expenses | (354,416 | ) | (335,157 | ) | ||||||
Underwriting income (loss) | $ | 100,421 | $ | 107,087 | (6.2 | ) | ||||
Underwriting Ratios | % Point Change | |||||||||
Loss ratio | 63.2 | % | 62.5 | % | 0.7 | |||||
Acquisition expense ratio | 14.6 | % | 15.7 | % | (1.1 | ) | ||||
Other operating expense ratio | 17.3 | % | 16.6 | % | 0.7 | |||||
Combined ratio | 95.1 | % | 94.8 | % | 0.3 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | ||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Professional lines | $ | 434,024 | 21 | $ | 476,604 | 22 | $ | 476,193 | 24 | $ | 440,149 | 21.2 | $ | 434,024 | 21.2 | |||||||||||||
Construction and national accounts | 328,997 | 15.9 | 299,463 | 14.6 | ||||||||||||||||||||||||
Programs | 423,157 | 21 | 480,580 | 22 | 419,673 | 22 | 330,322 | 15.9 | 423,157 | 20.7 | ||||||||||||||||||
Construction and national accounts | 299,463 | 15 | 286,994 | 13 | 271,110 | 14 | ||||||||||||||||||||||
Travel, accident and health | 224,380 | 10.8 | 160,132 | 7.8 | ||||||||||||||||||||||||
Excess and surplus casualty | 204,856 | 10 | 212,519 | 10 | 149,286 | 8 | 214,863 | 10.4 | 204,856 | 10.0 | ||||||||||||||||||
Property, energy, marine and aviation | 203,186 | 10 | 244,640 | 11 | 280,551 | 14 | 175,376 | 8.5 | 203,186 | 9.9 | ||||||||||||||||||
Travel, accident and health | 160,132 | 8 | 145,732 | 7 | 104,903 | 5 | ||||||||||||||||||||||
Lenders products | 106,916 | 5 | 100,407 | 5 | 101,576 | 5 | 105,650 | 5.1 | 106,916 | 5.2 | ||||||||||||||||||
Other | 213,937 | 11 | 199,178 | 9 | 145,504 | 8 | 252,544 | 12.2 | 213,937 | 10.5 | ||||||||||||||||||
Total | $ | 2,045,671 | 100 | $ | 2,146,654 | 100 | $ | 1,948,796 | 100 | $ | 2,072,281 | 100.0 | $ | 2,045,671 | 100.0 |
ACGL 2016 FORM 10-K | 80 |
Year Ended December 31, | |||||||||||
2015 | 2014 | ||||||||||
Amount | % | Amount | % | ||||||||
Professional lines | $ | 434,024 | 21.2 | $ | 476,604 | 22.2 | |||||
Construction and national accounts | 299,463 | 14.6 | 286,994 | 13.4 | |||||||
Programs | 423,157 | 20.7 | 480,580 | 22.4 | |||||||
Travel, accident and health | 160,132 | 7.8 | 145,732 | 6.8 | |||||||
Excess and surplus casualty | 204,856 | 10.0 | 212,519 | 9.9 | |||||||
Property, energy, marine and aviation | 203,186 | 9.9 | 244,640 | 11.4 | |||||||
Lenders products | 106,916 | 5.2 | 100,407 | 4.7 | |||||||
Other | 213,937 | 10.5 | 199,178 | 9.3 | |||||||
Total | $ | 2,045,671 | 100.0 | $ | 2,146,654 | 100.0 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | ||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Professional lines | $ | 424,968 | 21 | $ | 456,508 | 23 | $ | 491,791 | 26 | $ | 431,391 | 20.8 | $ | 424,968 | 20.8 | |||||||||||||
Construction and national accounts | 322,072 | 15.5 | 296,828 | 14.5 | ||||||||||||||||||||||||
Programs | 446,512 | 22 | 460,392 | 23 | 386,840 | 21 | 357,715 | 17.2 | 446,512 | 21.8 | ||||||||||||||||||
Construction and national accounts | 296,828 | 15 | 277,811 | 14 | 250,729 | 13 | ||||||||||||||||||||||
Travel, accident and health | 219,169 | 10.6 | 153,578 | 7.5 | ||||||||||||||||||||||||
Excess and surplus casualty | 208,091 | 10 | 182,024 | 9 | 118,395 | 6 | 219,046 | 10.6 | 208,091 | 10.2 | ||||||||||||||||||
Property, energy, marine and aviation | 216,127 | 11 | 244,974 | 12 | 304,294 | 16 | 188,938 | 9.1 | 216,127 | 10.6 | ||||||||||||||||||
Travel, accident and health | 153,578 | 8 | 127,691 | 6 | 97,135 | 5 | ||||||||||||||||||||||
Lenders products | 90,906 | 4 | 94,438 | 5 | 99,847 | 5 | 98,517 | 4.8 | 90,906 | 4.4 | ||||||||||||||||||
Other | 207,798 | 10 | 173,532 | 9 | 126,983 | 7 | 237,056 | 11.4 | 207,798 | 10.2 | ||||||||||||||||||
Total | $ | 2,044,808 | 100 | $ | 2,017,370 | 100 | $ | 1,876,014 | 100 | $ | 2,073,904 | 100.0 | $ | 2,044,808 | 100.0 |
Year Ended December 31, | |||||||||||
2015 | 2014 | ||||||||||
Amount | % | Amount | % | ||||||||
Professional lines | $ | 424,968 | 20.8 | $ | 456,508 | 22.6 | |||||
Construction and national accounts | 296,828 | 14.5 | 277,811 | 13.8 | |||||||
Programs | 446,512 | 21.8 | 460,392 | 22.8 | |||||||
Travel, accident and health | 153,578 | 7.5 | 127,691 | 6.3 | |||||||
Excess and surplus casualty | 208,091 | 10.2 | 182,024 | 9.0 | |||||||
Property, energy, marine and aviation | 216,127 | 10.6 | 244,974 | 12.1 | |||||||
Lenders products | 90,906 | 4.4 | 94,438 | 4.7 | |||||||
Other | 207,798 | 10.2 | 173,532 | 8.6 | |||||||
Total | $ | 2,044,808 | 100.0 | $ | 2,017,370 | 100.0 |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Current year | 67.1 | % | 65.5 | % | 65.4 | % | ||
Prior period reserve development | (1.6 | )% | (2.3 | )% | (2.9 | )% | ||
Loss ratio | 65.5 | % | 63.2 | % | 62.5 | % |
Year Ended December 31, | ||||||||
2015 | 2014 | 2013 | ||||||
Current year | 65.5 | % | 65.4 | % | 65.7 | % | ||
Prior period reserve development | (2.3 | )% | (2.9 | )% | (2.4 | )% | ||
Loss ratio | 63.2 | % | 62.5 | % | 63.3 | % |
ACGL 2016 FORM 10-K | 81 |
ACGL 2016 FORM 10-K | 82 |
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
2015 | 2014 | % Change | 2014 | 2013 | % Change | 2016 | 2015 | % Change | |||||||||||||||||||||||
Gross premiums written | $ | 1,419,022 | $ | 1,527,245 | (7.1 | ) | $ | 1,527,245 | $ | 1,399,621 | 9.1 | $ | 1,494,397 | $ | 1,419,022 | 5.3 | |||||||||||||||
Premiums ceded | (380,614 | ) | (261,254 | ) | (261,254 | ) | (86,620 | ) | (440,541 | ) | (380,614 | ) | |||||||||||||||||||
Net premiums written | 1,038,408 | 1,265,991 | (18.0 | ) | 1,265,991 | 1,313,001 | (3.6 | ) | 1,053,856 | 1,038,408 | 1.5 | ||||||||||||||||||||
Change in unearned premiums | 38,727 | 13,337 | 13,337 | (94,329 | ) | 2,376 | 38,727 | ||||||||||||||||||||||||
Net premiums earned | 1,077,135 | 1,279,328 | (15.8 | ) | 1,279,328 | 1,218,672 | 5.0 | 1,056,232 | 1,077,135 | (1.9 | ) | ||||||||||||||||||||
Other underwriting income | 10,606 | 3,167 | 3,167 | 5,258 | 36,403 | 10,606 | |||||||||||||||||||||||||
Losses and loss adjustment expenses | (440,350 | ) | (532,450 | ) | (532,450 | ) | (486,236 | ) | (475,762 | ) | (440,350 | ) | |||||||||||||||||||
Acquisition expenses, net | (223,632 | ) | (261,438 | ) | (261,438 | ) | (234,373 | ) | |||||||||||||||||||||||
Other operating expense | (155,811 | ) | (147,964 | ) | (147,964 | ) | (134,563 | ) | |||||||||||||||||||||||
Acquisition expenses | (212,375 | ) | (223,632 | ) | |||||||||||||||||||||||||||
Other operating expenses | (143,408 | ) | (155,811 | ) | |||||||||||||||||||||||||||
Underwriting income | $ | 267,948 | $ | 340,643 | (21.3 | ) | $ | 340,643 | $ | 368,758 | (7.6 | ) | $ | 261,090 | $ | 267,948 | (2.6 | ) | |||||||||||||
Underwriting Ratios | % Point Change | % Point Change | % Point Change | ||||||||||||||||||||||||||||
Loss ratio | 40.9 | % | 41.6 | % | (0.7 | ) | 41.6 | % | 39.9 | % | 1.7 | 45.0 | % | 40.9 | % | 4.1 | |||||||||||||||
Acquisition expense ratio | 20.8 | % | 20.4 | % | 0.4 | 20.4 | % | 19.2 | % | 1.2 | 20.1 | % | 20.8 | % | (0.7 | ) | |||||||||||||||
Other operating expense ratio | 14.5 | % | 11.6 | % | 2.9 | 11.6 | % | 11.0 | % | 0.6 | 13.6 | % | 14.5 | % | (0.9 | ) | |||||||||||||||
Combined ratio | 76.2 | % | 73.6 | % | 2.6 | 73.6 | % | 70.1 | % | 3.5 | 78.7 | % | 76.2 | % | 2.5 |
Year Ended December 31, | ||||||||||
2015 | 2014 | % Change | ||||||||
Gross premiums written | $ | 1,419,022 | $ | 1,527,245 | (7.1 | ) | ||||
Premiums ceded | (380,614 | ) | (261,254 | ) | ||||||
Net premiums written | 1,038,408 | 1,265,991 | (18.0 | ) | ||||||
Change in unearned premiums | 38,727 | 13,337 | ||||||||
Net premiums earned | 1,077,135 | 1,279,328 | (15.8 | ) | ||||||
Other underwriting income | 10,606 | 3,167 | ||||||||
Losses and loss adjustment expenses | (440,350 | ) | (532,450 | ) | ||||||
Acquisition expenses | (223,632 | ) | (261,438 | ) | ||||||
Other operating expenses | (155,811 | ) | (147,964 | ) | ||||||
Underwriting income | $ | 267,948 | $ | 340,643 | (21.3 | ) | ||||
Underwriting Ratios | % Point Change | |||||||||
Loss ratio | 40.9 | % | 41.6 | % | (0.7 | ) | ||||
Acquisition expense ratio | 20.8 | % | 20.4 | % | 0.4 | |||||
Other operating expense ratio | 14.5 | % | 11.6 | % | 2.9 | |||||
Combined ratio | 76.2 | % | 73.6 | % | 2.6 |
ACGL 2016 FORM 10-K | 83 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | ||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Other specialty | $ | 348,852 | 33.1 | $ | 298,794 | 28.8 | ||||||||||||||||||||||
Casualty | $ | 303,093 | 29 | $ | 317,996 | 25 | $ | 306,304 | 23 | 305,252 | 29.0 | 303,093 | 29.2 | |||||||||||||||
Other specialty | 298,794 | 29 | 405,126 | 32 | 417,865 | 32 | ||||||||||||||||||||||
Property excluding property catastrophe | 280,511 | 27 | 343,043 | 27 | 292,536 | 22 | 267,548 | 25.4 | 280,511 | 27.0 | ||||||||||||||||||
Property catastrophe | 91,620 | 9 | 137,471 | 11 | 220,749 | 17 | 75,789 | 7.2 | 91,620 | 8.8 | ||||||||||||||||||
Marine and aviation | 50,834 | 5 | 50,444 | 4 | 64,380 | 5 | 37,790 | 3.6 | 50,834 | 4.9 | ||||||||||||||||||
Other | 13,556 | 1 | 11,911 | 1 | 11,167 | 1 | 18,625 | 1.8 | 13,556 | 1.3 | ||||||||||||||||||
Total | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | $ | 1,313,001 | 100 | $ | 1,053,856 | 100.0 | $ | 1,038,408 | 100.0 | |||||||||||||
Pro rata | $ | 537,556 | 52 | $ | 663,135 | 52 | $ | 692,024 | 53 | $ | 558,671 | 53.0 | $ | 537,556 | 51.8 | |||||||||||||
Excess of loss | 500,852 | 48 | 602,856 | 48 | 620,977 | 47 | 495,185 | 47.0 | 500,852 | 48.2 | ||||||||||||||||||
Total | $ | 1,038,408 | 100 | $ | 1,265,991 | 100 | $ | 1,313,001 | 100 | $ | 1,053,856 | 100.0 | $ | 1,038,408 | 100.0 |
Year Ended December 31, | |||||||||||
2015 | 2014 | ||||||||||
Amount | % | Amount | % | ||||||||
Other specialty | $ | 298,794 | 28.8 | $ | 405,126 | 32.0 | |||||
Casualty | 303,093 | 29.2 | 317,996 | 25.1 | |||||||
Property excluding property catastrophe | 280,511 | 27.0 | 343,043 | 27.1 | |||||||
Property catastrophe | 91,620 | 8.8 | 137,471 | 10.9 | |||||||
Marine and aviation | 50,834 | 4.9 | 50,444 | 4.0 | |||||||
Other | 13,556 | 1.3 | 11,911 | 0.9 | |||||||
Total | $ | 1,038,408 | 100.0 | $ | 1,265,991 | 100.0 | |||||
Pro rata | $ | 537,556 | 51.8 | $ | 663,135 | 52.4 | |||||
Excess of loss | 500,852 | 48.2 | 602,856 | 47.6 | |||||||
Total | $ | 1,038,408 | 100.0 | $ | 1,265,991 | 100.0 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | ||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Other specialty | $ | 329,994 | 31.2 | $ | 311,307 | 28.9 | ||||||||||||||||||||||
Casualty | $ | 310,249 | 29 | $ | 327,518 | 26 | $ | 241,774 | 20 | 300,160 | 28.4 | 310,249 | 28.8 | |||||||||||||||
Other specialty | 311,307 | 29 | 424,725 | 33 | 387,630 | 32 | ||||||||||||||||||||||
Property excluding property catastrophe | 295,487 | 27 | 303,496 | 24 | 274,719 | 23 | 282,018 | 26.7 | 295,487 | 27.4 | ||||||||||||||||||
Property catastrophe | 96,865 | 9 | 150,761 | 12 | 232,423 | 19 | 73,803 | 7.0 | 96,865 | 9.0 | ||||||||||||||||||
Marine and aviation | 50,808 | 5 | 61,118 | 5 | 70,105 | 6 | 52,579 | 5.0 | 50,808 | 4.7 | ||||||||||||||||||
Other | 12,419 | 1 | 11,710 | 1 | 12,021 | 1 | 17,678 | 1.7 | 12,419 | 1.2 | ||||||||||||||||||
Total | $ | 1,077,135 | 100 | $ | 1,279,328 | 100 | $ | 1,218,672 | 100 | $ | 1,056,232 | 100.0 | $ | 1,077,135 | 100.0 | |||||||||||||
Pro rata | $ | 563,585 | 52 | $ | 686,201 | 54 | $ | 608,586 | 50 | $ | 561,986 | 53.2 | $ | 563,585 | 52.3 | |||||||||||||
Excess of loss | 513,550 | 48 | 593,127 | 46 | 610,086 | 50 | 494,246 | 46.8 | 513,550 | 47.7 | ||||||||||||||||||
Total | $ | 1,077,135 | 100 | $ | 1,279,328 | 100 | $ | 1,218,672 | 100 | $ | 1,056,232 | 100.0 | $ | 1,077,135 | 100.0 |
Year Ended December 31, | |||||||||||
2015 | 2014 | ||||||||||
Amount | % | Amount | % | ||||||||
Other specialty | $ | 311,307 | 28.9 | $ | 424,725 | 33.2 | |||||
Casualty | 310,249 | 28.8 | 327,518 | 25.6 | |||||||
Property excluding property catastrophe | 295,487 | 27.4 | 303,496 | 23.7 | |||||||
Property catastrophe | 96,865 | 9.0 | 150,761 | 11.8 | |||||||
Marine and aviation | 50,808 | 4.7 | 61,118 | 4.8 | |||||||
Other | 12,419 | 1.2 | 11,710 | 0.9 | |||||||
Total | $ | 1,077,135 | 100.0 | $ | 1,279,328 | 100.0 | |||||
Pro rata | $ | 563,585 | 52.3 | $ | 686,201 | 53.6 | |||||
Excess of loss | 513,550 | 47.7 | 593,127 | 46.4 | |||||||
Total | $ | 1,077,135 | 100.0 | $ | 1,279,328 | 100.0 |
ACGL 2016 FORM 10-K | 84 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||
Current year | 61.8 | % | 62.5 | % | 57.8 | % | 65.7 | % | 61.8 | % | 62.5 | % | ||||
Prior period reserve development | (20.9 | )% | (20.9 | )% | (17.9 | )% | (20.7 | )% | (20.9 | )% | (20.9 | )% | ||||
Loss ratio | 40.9 | % | 41.6 | % | 39.9 | % | 45.0 | % | 40.9 | % | 41.6 | % |
ACGL 2016 FORM 10-K | 85 |
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
2015 | 2014 | % Change | 2014 | 2013 | % Change | 2016 | 2015 | % Change | |||||||||||||||||||||||
Gross premiums written | $ | 295,557 | $ | 227,356 | 30.0 | $ | 227,356 | $ | 89,570 | 153.8 | $ | 499,725 | $ | 295,557 | 69.1 | ||||||||||||||||
Premiums ceded | (28,064 | ) | (22,519 | ) | (22,519 | ) | — | (108,259 | ) | (28,064 | ) | ||||||||||||||||||||
Net premiums written | 267,493 | 204,837 | 30.6 | 204,837 | 89,570 | 128.7 | 391,466 | 267,493 | 46.3 | ||||||||||||||||||||||
Change in unearned premiums | (53,383 | ) | (11,264 | ) | (11,264 | ) | (38,304 | ) | (104,750 | ) | (53,383 | ) | |||||||||||||||||||
Net premiums earned | 214,110 | 193,573 | 10.6 | 193,573 | 51,266 | 277.6 | 286,716 | 214,110 | 33.9 | ||||||||||||||||||||||
Other underwriting income | 18,430 | 4,840 | 4,840 | 259 | 17,024 | 18,430 | |||||||||||||||||||||||||
Losses and loss adjustment expenses | (40,247 | ) | (55,674 | ) | (55,674 | ) | (4,743 | ) | (28,943 | ) | (40,247 | ) | |||||||||||||||||||
Acquisition expenses, net | (45,076 | ) | (49,400 | ) | (49,400 | ) | (17,826 | ) | |||||||||||||||||||||||
Other operating expense | (82,370 | ) | (66,891 | ) | (66,891 | ) | (8,377 | ) | |||||||||||||||||||||||
Acquisition expenses | (32,065 | ) | (45,076 | ) | |||||||||||||||||||||||||||
Other operating expenses | (101,293 | ) | (82,370 | ) | |||||||||||||||||||||||||||
Underwriting income | $ | 64,847 | $ | 26,448 | 145.2 | $ | 26,448 | $ | 20,579 | 28.5 | $ | 141,439 | $ | 64,847 | 118.1 | ||||||||||||||||
Underwriting Ratios | % Point Change | % Point Change | % Point Change | ||||||||||||||||||||||||||||
Loss ratio | 18.8 | % | 28.8 | % | (10.0 | ) | 28.8 | % | 9.3 | % | 19.5 | 10.1 | % | 18.8 | % | (8.7 | ) | ||||||||||||||
Acquisition expense ratio | 21.1 | % | 25.5 | % | (4.4 | ) | 25.5 | % | 34.8 | % | (9.3 | ) | 11.2 | % | 21.1 | % | (9.9 | ) | |||||||||||||
Other operating expense ratio | 38.5 | % | 34.6 | % | 3.9 | 34.6 | % | 16.3 | % | 18.3 | 35.3 | % | 38.5 | % | (3.2 | ) | |||||||||||||||
Combined ratio | 78.4 | % | 88.9 | % | (10.5 | ) | 88.9 | % | 60.4 | % | 28.5 | 56.6 | % | 78.4 | % | (21.8 | ) |
Year Ended December 31, | ||||||||||
2015 | 2014 | % Change | ||||||||
Gross premiums written | $ | 295,557 | $ | 227,356 | 30.0 | |||||
Premiums ceded | (28,064 | ) | (22,519 | ) | ||||||
Net premiums written | 267,493 | 204,837 | 30.6 | |||||||
Change in unearned premiums | (53,383 | ) | (11,264 | ) | ||||||
Net premiums earned | 214,110 | 193,573 | 10.6 | |||||||
Other underwriting income | 18,430 | 4,840 | ||||||||
Losses and loss adjustment expenses | (40,247 | ) | (55,674 | ) | ||||||
Acquisition expenses | (45,076 | ) | (49,400 | ) | ||||||
Other operating expenses | (82,370 | ) | (66,891 | ) | ||||||
Underwriting income | $ | 64,847 | $ | 26,448 | 145.2 | |||||
Underwriting Ratios | % Point Change | |||||||||
Loss ratio | 18.8 | % | 28.8 | % | (10.0 | ) | ||||
Acquisition expense ratio | 21.1 | % | 25.5 | % | (4.4 | ) | ||||
Other operating expense ratio | 38.5 | % | 34.6 | % | 3.9 | |||||
Combined ratio | 78.4 | % | 88.9 | % | (10.5 | ) |
ACGL 2016 FORM 10-K | 86 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Net premiums written by client location | ||||||||||||||||||||||
United States | $ | 193,617 | $ | 184,333 | $ | 63,692 | $ | 280,509 | $ | 193,617 | $ | 184,333 | ||||||||||
Other | 73,876 | 20,504 | 25,878 | 110,957 | 73,876 | 20,504 | ||||||||||||||||
Total | $ | 267,493 | $ | 204,837 | $ | 89,570 | $ | 391,466 | $ | 267,493 | $ | 204,837 | ||||||||||
Net premiums written by underwriting location | ||||||||||||||||||||||
United States | $ | 125,317 | $ | 98,809 | $ | — | $ | 186,826 | $ | 125,317 | $ | 98,809 | ||||||||||
Other | 142,176 | 106,028 | 89,570 | 204,640 | 142,176 | 106,028 | ||||||||||||||||
Total | $ | 267,493 | $ | 204,837 | $ | 89,570 | $ | 391,466 | $ | 267,493 | $ | 204,837 |
(U.S. Dollars in millions) | Three Months Ended | Year Ended | ||||||||||||||||||||||||||||||||
December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2015 | ||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Total new insurance written (NIW) | $ | 2,575 | $ | 3,179 | $ | 2,709 | $ | 1,808 | $ | 10,271 | ||||||||||||||||||||||||
Total NIW by credit quality (FICO score): | ||||||||||||||||||||||||||||||||||
>=740 | $ | 1,543 | 60 | $ | 1,973 | 62 | $ | 1,723 | 64 | $ | 1,064 | 59 | $ | 6,303 | 61 | |||||||||||||||||||
680-739 | 842 | 33 | 976 | 31 | 842 | 31 | 602 | 33 | 3,262 | 32 | ||||||||||||||||||||||||
620-679 | 190 | 7 | 230 | 7 | 143 | 5 | 142 | 8 | 705 | 7 | ||||||||||||||||||||||||
<620 | — | — | — | — | 1 | — | — | — | 1 | — | ||||||||||||||||||||||||
Total | $ | 2,575 | 100 | $ | 3,179 | 100 | $ | 2,709 | 100 | $ | 1,808 | 100 | $ | 10,271 | 100 | |||||||||||||||||||
Total NIW by LTV: | ||||||||||||||||||||||||||||||||||
95.01% and above | $ | 164 | 6 | $ | 219 | 7 | $ | 165 | 6 | $ | 86 | 5 | $ | 634 | 6 | |||||||||||||||||||
90.01% to 95.00% | 1,164 | 45 | 1,458 | 46 | 1,227 | 45 | 682 | 38 | 4,531 | 44 | ||||||||||||||||||||||||
85.01% to 90.00% | 856 | 33 | 1,054 | 33 | 908 | 34 | 583 | 32 | 3,401 | 33 | ||||||||||||||||||||||||
85.01% and below | 391 | 15 | 448 | 14 | 409 | 15 | 457 | 25 | 1,705 | 17 | ||||||||||||||||||||||||
Total | $ | 2,575 | 100 | $ | 3,179 | 100 | $ | 2,709 | 100 | $ | 1,808 | 100 | $ | 10,271 | 100 | |||||||||||||||||||
Total NIW purchase vs. refinance: | ||||||||||||||||||||||||||||||||||
Purchase | $ | 1,923 | 75 | $ | 2,483 | 78 | $ | 1,830 | 68 | $ | 918 | 51 | $ | 7,154 | 70 | |||||||||||||||||||
Refinance | 652 | 25 | 696 | 22 | 879 | 32 | 890 | 49 | 3,117 | 30 | ||||||||||||||||||||||||
Total | $ | 2,575 | 100 | $ | 3,179 | 100 | $ | 2,709 | 100 | $ | 1,808 | 100 | $ | 10,271 | 100 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Net premiums earned by client location | ||||||||||||||||||||||
United States | $ | 202,930 | $ | 187,194 | $ | 49,045 | $ | 265,527 | $ | 202,930 | $ | 187,194 | ||||||||||
Other | 11,180 | 6,379 | 2,221 | 21,189 | 11,180 | 6,379 | ||||||||||||||||
Total | $ | 214,110 | $ | 193,573 | $ | 51,266 | $ | 286,716 | $ | 214,110 | $ | 193,573 | ||||||||||
Net premiums earned by underwriting location | ||||||||||||||||||||||
United States | $ | 113,062 | $ | 92,236 | $ | — | $ | 155,929 | $ | 113,062 | $ | 92,236 | ||||||||||
Other | 101,048 | 101,337 | 51,266 | 130,787 | 101,048 | 101,337 | ||||||||||||||||
Total | $ | 214,110 | $ | 193,573 | $ | 51,266 | $ | 286,716 | $ | 214,110 | $ | 193,573 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||
Current year | 24.5 | % | 29.3 | % | 11.2 | % | 17.5 | % | 24.5 | % | 29.3 | % | ||||
Prior period reserve development | (5.7 | )% | (0.5 | )% | (1.9 | )% | (7.4 | )% | (5.7 | )% | (0.5 | )% | ||||
Loss ratio | 18.8 | % | 28.8 | % | 9.3 | % | 10.1 | % | 18.8 | % | 28.8 | % |
ACGL 2016 FORM 10-K | 87 |
Year Ended December 31, | |||||||
2015 | 2014 | ||||||
Gross premiums written | $ | 488,899 | $ | 288,627 | |||
Premiums ceded | (22,940 | ) | (14,171 | ) | |||
Net premiums written | 465,959 | 274,456 | |||||
Change in unearned premiums | (68,107 | ) | (170,979 | ) | |||
Net premiums earned | 397,852 | 103,477 | |||||
Other underwriting income | 4,468 | — | |||||
Losses and loss adjustment expenses | (277,659 | ) | (70,173 | ) | |||
Acquisition expenses, net | (113,451 | ) | (30,116 | ) | |||
Other operating expenses | (14,919 | ) | (6,268 | ) | |||
Underwriting income (loss) | (3,709 | ) | (3,080 | ) | |||
Net investment income | 76,410 | 18,249 | |||||
Other expenses | — | (2,329 | ) | ||||
Net realized gains (losses) | (86,709 | ) | (30,467 | ) | |||
Interest expense | (4,356 | ) | — | ||||
Net foreign exchange gains (losses) | 3,494 | 1,086 | |||||
Net income (loss) | (14,870 | ) | (16,541 | ) | |||
Dividends attributable to redeemable noncontrolling interests (1) | (18,828 | ) | (14,728 | ) | |||
Net income (loss) attributable to common interests | (33,698 | ) | (31,269 | ) | |||
Amounts attributable to nonredeemable noncontrolling interests (1) | 29,984 | 27,823 | |||||
Net income (loss) available to Arch | $ | (3,714 | ) | $ | (3,446 | ) | |
Underwriting Ratios | |||||||
Loss ratio | 69.8 | % | 67.8 | % | |||
Acquisition expense ratio | 28.5 | % | 29.1 | % | |||
Other operating expense ratio | 3.7 | % | 6.1 | % | |||
Combined ratio | 102.0 | % | 103.0 | % | |||
Total investable assets | $ | 1,696,107 | $ | 1,163,240 | |||
Total assets | 2,122,332 | 1,482,516 | |||||
Total liabilities | 1,072,102 | 398,660 |
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Fixed maturities | $ | 241,389 | $ | 257,387 | $ | 249,833 | $ | 242,310 | $ | 241,389 | $ | 257,387 | ||||||||||
Term loan investments | 19,290 | 21,521 | 20,608 | 26,550 | 19,290 | 21,521 | ||||||||||||||||
Equity securities | 14,339 | 13,005 | 8,919 | 13,823 | 14,339 | 13,005 | ||||||||||||||||
Short-term investments | 574 | 904 | 1,259 | 3,619 | 574 | 904 | ||||||||||||||||
Other (1) | 41,721 | 28,803 | 19,710 | 39,750 | 41,721 | 28,803 | ||||||||||||||||
Gross investment income | 317,313 | 321,620 | 300,329 | 326,052 | 317,313 | 321,620 | ||||||||||||||||
Investment expenses (2) | (45,633 | ) | (37,284 | ) | (33,110 | ) | (48,859 | ) | (45,633 | ) | (37,284 | ) | ||||||||||
Net investment income | $ | 271,680 | $ | 284,336 | $ | 267,219 | $ | 277,193 | $ | 271,680 | $ | 284,336 |
(1) | Amounts include dividends and income distributions on investment funds and other items. |
(2) | Investment expenses were approximately |
ACGL 2016 FORM 10-K | 88 |
ACGL 2016 FORM 10-K | 89 |
December 31, | |||||||
2016 | 2015 | ||||||
Insurance: | |||||||
Case reserves | $ | 1,414,603 | $ | 1,434,986 | |||
IBNR reserves | 3,187,451 | 3,080,122 | |||||
Total net reserves | 4,602,054 | 4,515,108 | |||||
Reinsurance: | |||||||
Case reserves | 762,730 | 699,860 | |||||
Additional case reserves | 92,524 | 99,343 | |||||
IBNR reserves | 1,517,983 | 1,593,186 | |||||
Total net reserves | 2,373,237 | 2,392,389 | |||||
Mortgage: | |||||||
Case reserves | 593,222 | 86,278 | |||||
IBNR reserves | 59,791 | 23,211 | |||||
Total net reserves | 653,013 | 109,489 | |||||
Other: | |||||||
Case reserves | 125,703 | 64,875 | |||||
Additional case reserves | 9,513 | 5,199 | |||||
IBNR reserves | 353,865 | 209,353 | |||||
Total net reserves | 489,081 | 279,427 | |||||
Total: | |||||||
Case reserves | 2,896,258 | 2,285,999 | |||||
Additional case reserves | 102,037 | 104,542 | |||||
IBNR reserves | 5,119,090 | 4,905,872 | |||||
Total net reserves | $ | 8,117,385 | $ | 7,296,413 |
December 31, | |||||||
2015 | 2014 | ||||||
Insurance: | |||||||
Case reserves | $ | 1,434,986 | $ | 1,459,040 | |||
IBNR reserves | 3,080,122 | 3,066,962 | |||||
Total net reserves | 4,515,108 | 4,526,002 | |||||
Reinsurance: | |||||||
Case reserves | 699,860 | 794,838 | |||||
Additional case reserves | 99,343 | 97,413 | |||||
IBNR reserves | 1,593,186 | 1,658,468 | |||||
Total net reserves | 2,392,389 | 2,550,719 | |||||
Mortgage: | |||||||
Case reserves | 86,278 | 96,092 | |||||
IBNR reserves | 23,211 | 21,709 | |||||
Total net reserves | 109,489 | 117,801 | |||||
Other: | |||||||
Case reserves | 64,875 | 12,010 | |||||
Additional case reserves | 5,199 | — | |||||
IBNR reserves | 209,353 | 51,613 | |||||
Total net reserves | 279,427 | 63,623 | |||||
Total: | |||||||
Case reserves | 2,285,999 | 2,361,980 | |||||
Additional case reserves | 104,542 | 97,413 | |||||
IBNR reserves | 4,905,872 | 4,798,752 | |||||
Total net reserves | $ | 7,296,413 | $ | 7,258,145 |
December 31, | December 31, | |||||||||||||
2015 | 2014 | 2016 | 2015 | |||||||||||
Professional lines (1) | $ | 1,346,882 | $ | 1,453,770 | $ | 1,293,667 | $ | 1,346,882 | ||||||
Construction and national accounts | 876,278 | 806,007 | 976,109 | 876,278 | ||||||||||
Excess and surplus casualty (2) | 687,305 | 682,286 | ||||||||||||
Programs | 687,405 | 669,601 | 667,677 | 687,405 | ||||||||||
Excess and surplus casualty (2) | 682,286 | 683,305 | ||||||||||||
Property, energy, marine and aviation | 330,104 | 407,730 | 302,057 | 330,104 | ||||||||||
Travel, accident and health | 64,537 | 60,888 | 72,726 | 64,537 | ||||||||||
Lenders products | 44,273 | 40,579 | 42,147 | 44,273 | ||||||||||
Other (3) | 483,343 | 404,122 | 560,366 | 483,343 | ||||||||||
Total net reserves | $ | 4,515,108 | $ | 4,526,002 | $ | 4,602,054 | $ | 4,515,108 |
(1) | Includes professional liability, executive assurance and healthcare business. |
(2) | Includes casualty and contract binding business. |
(3) | Includes alternative markets, excess workers’ compensation and surety business. |
ACGL 2016 FORM 10-K | 90 |
December 31, | |||||||
2016 | 2015 | ||||||
Casualty | $ | 1,355,362 | $ | 1,386,084 | |||
Other specialty | 428,205 | 420,865 | |||||
Property excluding property catastrophe | 297,200 | 301,757 | |||||
Marine and aviation | 147,700 | 137,969 | |||||
Property catastrophe | 86,026 | 94,991 | |||||
Other | 58,744 | 50,723 | |||||
Total net reserves | $ | 2,373,237 | $ | 2,392,389 |
December 31, | |||||||
2015 | 2014 | ||||||
Casualty | $ | 1,386,084 | $ | 1,432,203 | |||
Other specialty | 420,865 | 448,418 | |||||
Property excluding property catastrophe | 301,757 | 346,610 | |||||
Marine and aviation | 137,969 | 139,318 | |||||
Property catastrophe | 94,991 | 128,436 | |||||
Other | 50,723 | 55,734 | |||||
Total net reserves | $ | 2,392,389 | $ | 2,550,719 |
(U.S. Dollars in thousands, except loan count) | Three Months Ended | Year Ended | |||||||||||||||||
December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2015 | |||||||||||||||
Rollforward of insured loans in default: | |||||||||||||||||||
Beginning delinquent number of loans | 2,757 | 2,850 | 3,006 | 3,474 | 3,474 | ||||||||||||||
Plus: new notices | 1,134 | 1,196 | 1,145 | 1,190 | 4,665 | ||||||||||||||
Less: cures | (987 | ) | (1,057 | ) | (1,011 | ) | (1,376 | ) | (4,431 | ) | |||||||||
Less: paid claims | (205 | ) | (233 | ) | (292 | ) | (288 | ) | (1,018 | ) | |||||||||
Less: delinquent rescissions and denials | 3 | 1 | 2 | 6 | 12 | ||||||||||||||
Ending delinquent number of loans | 2,702 | 2,757 | 2,850 | 3,006 | 2,702 | ||||||||||||||
Ending percentage of loans in default | 1.8 | % | 1.9 | % | 2.1 | % | 2.3 | % | |||||||||||
Losses: | |||||||||||||||||||
Number of claims paid | 205 | 233 | 292 | 288 | 1,018 | ||||||||||||||
Total paid claims | $ | 8,093 | $ | 9,036 | $ | 12,672 | $ | 12,180 | $ | 41,981 | |||||||||
Average per claim | $ | 39.5 | $ | 38.8 | $ | 43.4 | $ | 42.3 | $ | 41.2 | |||||||||
Severity (1) | 96.2 | % | 91.7 | % | 97.0 | % | 97.1 | % | 95.8 | % | |||||||||
Average reserve per default | $ | 29.1 | $ | 30.6 | $ | 32.9 | $ | 33.1 |
INSURANCE SEGMENT | Higher Expected Loss Ratios | Slower Loss Development Patterns | |||||
Reserving lines selected assumptions: | |||||||
Property, energy, marine and aviation | 5 points | 3 months | |||||
Third party occurrence business (1) | 10 | 6 | |||||
Third party claims-made business (2) | 10 | 6 | |||||
All other (3) | 10 | 6 | |||||
Increase (decrease) in Loss Reserves: | |||||||
Property, energy, marine and aviation | $ | 15,680 | $ | 21,340 | |||
Third party occurrence business (1) | 108,499 | 93,982 | |||||
Third party claims-made business (2) | 224,098 | 156,134 | |||||
All other (3) | 123,784 | 128,724 |
INSURANCE SEGMENT | Lower Expected Loss Ratios | Faster Loss Development Patterns | |||||
Reserving lines selected assumptions: | |||||||
Property, energy, marine and aviation | (5) points | (3) months | |||||
Third party occurrence business | (10) | (6) | |||||
Third party claims-made business | (10) | (6) | |||||
Multi-line and other specialty | (10) | (6) | |||||
Increase (decrease) in Loss Reserves: | |||||||
Property, energy, marine and aviation | $ | (15,680 | ) | $ | (15,992 | ) | |
Third party occurrence business | (108,499 | ) | (76,809 | ) | |||
Third party claims-made business | (224,098 | ) | (130,545 | ) | |||
Multi-line and other specialty | (123,784 | ) | (102,506 | ) |
INSURANCE SEGMENT | Higher Expected Loss Ratios | Slower Loss Development Patterns | Lower Expected Loss Ratios | Faster Loss Development Patterns | |||||||||||
Reserving lines selected assumptions: | |||||||||||||||
Property, energy, marine and aviation | 5 points | 3 months | (5) points | (3) months | |||||||||||
Third party occurrence business (1) | 10 | 6 | (10) | (6) | |||||||||||
Third party claims-made business (2) | 10 | 6 | (10) | (6) | |||||||||||
All other (3) | 10 | 6 | (10) | (6) | |||||||||||
Increase (decrease) in Loss Reserves, net: | |||||||||||||||
Property, energy, marine and aviation | $ | 17,188 | $ | 28,322 | $ | (17,188 | ) | $ | (15,269 | ) | |||||
Third party occurrence business (1) | 199,716 | 106,696 | (199,716 | ) | (96,972 | ) | |||||||||
Third party claims-made business (2) | 116,278 | 135,998 | (116,278 | ) | (104,569 | ) | |||||||||
All other (3) | 119,266 | 118,536 | (119,266 | ) | (92,447 | ) |
REINSURANCE SEGMENT | Higher Expected Loss Ratios | Slower Loss Development Patterns | |||||
Reserving lines selected assumptions: | |||||||
Casualty | 10 points | 6 months | |||||
Property catastrophe | 5 | 3 | |||||
Property excluding property catastrophe | 5 | 3 | |||||
Marine and aviation | 5 | 3 | |||||
Other specialty | 5 | 3 | |||||
Other | 5 | 3 | |||||
Increase (decrease) in Loss Reserves: | |||||||
Casualty | $ | 113,511 | $ | 132,275 | |||
Property catastrophe | 12,799 | 14,617 | |||||
Property excluding property catastrophe | 17,046 | 37,022 | |||||
Marine and aviation | 7,799 | 12,099 | |||||
Other specialty | 37,572 | 20,113 | |||||
Other | 3,937 | 2,179 |
REINSURANCE SEGMENT | Lower Expected Loss Ratios | Faster Loss Development Patterns | |||||
Reserving lines selected assumptions: | |||||||
Casualty | (10) points | (6) months | |||||
Property catastrophe | (5) | (3) | |||||
Property excluding property catastrophe | (5) | (3) | |||||
Marine and aviation | (5) | (3) | |||||
Other specialty | (5) | (3) | |||||
Other | (5) | (3) | |||||
Increase (decrease) in Loss Reserves: | |||||||
Casualty | $ | (113,511 | ) | $ | (104,681 | ) | |
Property catastrophe | (12,799 | ) | (10,296 | ) | |||
Property excluding property catastrophe | (17,046 | ) | (35,321 | ) | |||
Marine and aviation | (7,799 | ) | (12,251 | ) | |||
Other specialty | (37,572 | ) | (35,161 | ) | |||
Other | (3,937 | ) | (2,031 | ) |
91 |
REINSURANCE SEGMENT | Higher Expected Loss Ratios | Slower Loss Development Patterns | Lower Expected Loss Ratios | Faster Loss Development Patterns | |||||||||||
Reserving lines selected assumptions: | |||||||||||||||
Casualty | 10 points | 6 months | (10) points | (6) months | |||||||||||
Other specialty | 5 | 3 | (5) | (3) | |||||||||||
Property excluding property catastrophe | 5 | 3 | (5) | (3) | |||||||||||
Property catastrophe | 5 | 3 | (5) | (3) | |||||||||||
Marine and aviation | 5 | 3 | (5) | (3) | |||||||||||
Other | 5 | 3 | (5) | (3) | |||||||||||
Increase (decrease) in Loss Reserves, net: | |||||||||||||||
Casualty | $ | 117,665 | $ | 136,212 | $ | (117,665 | ) | $ | (113,554 | ) | |||||
Other specialty | 44,134 | 27,025 | (44,134 | ) | (39,745 | ) | |||||||||
Property excluding property catastrophe | 17,413 | 37,349 | (17,413 | ) | (35,609 | ) | |||||||||
Marine and aviation | 7,931 | 12,090 | (7,931 | ) | (12,040 | ) | |||||||||
Property catastrophe | 8,204 | 13,261 | (8,204 | ) | (8,997 | ) | |||||||||
Other | 3,845 | 2,029 | (3,845 | ) | (1,927 | ) |
December 31, 2015 | Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Total | |||||||||||||||||||||||||||
Total net reserves (1) | $4,515,108 | $2,392,389 | $109,489 | $7,016,986 | ||||||||||||||||||||||||||
Loss Reserves (1) | $4,602,054 | $2,373,237 | $653,013 | $7,628,304 | ||||||||||||||||||||||||||
Simulation results: | ||||||||||||||||||||||||||||||
90th percentile (2) | $5,460,582 | $3,033,490 | $131,036 | $8,303,258 | $5,591,394 | $3,002,464 | $781,521 | $8,955,759 | ||||||||||||||||||||||
10th percentile (3) | $3,653,196 | $1,844,032 | $89,404 | $5,848,271 | $3,702,815 | $1,834,192 | $533,222 | $6,416,379 |
(1) | Net of reinsurance recoverables. Excludes amounts reflected in the ‘other’ segment. |
(2) | Simulation results indicate that a 90% probability exists that the net reserves for losses and loss adjustment expenses will not exceed the indicated amount. |
(3) | Simulation results indicate that a 10% probability exists that the net reserves for losses and loss adjustment expenses will be at or below the indicated amount. |
ACGL 2016 FORM 10-K | 92 |
(U.S. Dollars in millions) | December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(U.S. Dollars in millions, except policy count) | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||||
Insurance In Force (IIF) (1): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. mortgage insurance | $ | 27,101 | 36 | $ | 25,697 | 40 | $ | 24,175 | 42 | $ | 22,984 | 41 | $ | 234,518 | 74 | $ | 40,258 | 35 | $ | 33,367 | 31 | $ | 28,433 | 31 | ||||||||||||||||||||||||||||||
Mortgage reinsurance | 20,876 | 27 | 19,550 | 30 | 19,245 | 33 | 20,262 | 36 | 24,315 | 8 | 22,071 | 19 | 22,242 | 21 | 22,393 | 24 | ||||||||||||||||||||||||||||||||||||||
Other (3) | 28,415 | 37 | 19,357 | 30 | 14,734 | 25 | 12,944 | 23 | 56,776 | 18 | 53,826 | 46 | 52,926 | 49 | 41,172 | 45 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 76,392 | 100 | $ | 64,604 | 100 | $ | 58,154 | 100 | $ | 56,190 | 100 | $ | 315,609 | 100 | $ | 116,155 | 100 | $ | 108,535 | 100 | $ | 91,998 | 100 | ||||||||||||||||||||||||||||||
Risk In Force (RIF) (2): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. mortgage insurance | $ | 6,826 | 59 | $ | 6,467 | 63 | $ | 6,053 | 64 | $ | 5,733 | 62 | $ | 59,712 | 93 | $ | 10,168 | 69 | $ | 8,396 | 65 | $ | 7,165 | 63 | ||||||||||||||||||||||||||||||
Mortgage reinsurance | 3,464 | 30 | 3,008 | 29 | 2,776 | 29 | 2,936 | 32 | 2,489 | 4 | 2,557 | 17 | 2,567 | 20 | 2,661 | 23 | ||||||||||||||||||||||||||||||||||||||
Other (3) | 1,206 | 11 | 796 | 8 | 679 | 7 | 616 | 7 | 2,242 | 4 | 2,104 | 14 | 1,993 | 15 | 1,636 | 14 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 11,496 | 100 | $ | 10,271 | 100 | $ | 9,508 | 100 | $ | 9,285 | 100 | $ | 64,443 | 100 | $ | 14,829 | 100 | $ | 12,956 | 100 | $ | 11,462 | 100 | ||||||||||||||||||||||||||||||
Ending number of policies in force | 148,943 | 143,335 | 137,724 | 133,079 | 1,153,630 | 199,661 | 172,666 | 153,984 |
(1) |
(2) |
(3) | Includes GSE credit risk-sharing |
(U.S. Dollars in thousands, except loan and claim count) | Three Months Ended | Year Ended | |||||||||||||||||
December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | December 31, 2016 | |||||||||||||||
Rollforward of insured loans in default: | |||||||||||||||||||
Beginning delinquent number of loans | 2,423 | 2,245 | 2,325 | 2,702 | 2,702 | ||||||||||||||
Plus: new notices | 1,161 | 1,251 | 1,033 | 1,048 | 4,493 | ||||||||||||||
Less: cures | (1,026 | ) | (925 | ) | (919 | ) | (1,206 | ) | (4,076 | ) | |||||||||
Less: paid claims | (153 | ) | (151 | ) | (193 | ) | (222 | ) | (719 | ) | |||||||||
Less: delinquent rescissions and denials | (2 | ) | 3 | (1 | ) | 3 | 3 | ||||||||||||
Plus: acquired delinquent loans (1) | 27,288 | — | — | — | 27,288 | ||||||||||||||
Ending delinquent number of loans | 29,691 | 2,423 | 2,245 | 2,325 | 29,691 | ||||||||||||||
Ending percentage of loans in default | 2.6 | % | 1.2 | % | 1.3 | % | 1.5 | % | |||||||||||
Losses: | |||||||||||||||||||
Number of claims paid | 153 | 151 | 193 | 222 | 719 | ||||||||||||||
Total paid claims | $ | 6,080 | $ | 5,513 | $ | 7,744 | $ | 9,168 | $ | 28,505 | |||||||||
Average per claim | $ | 39.7 | $ | 36.5 | $ | 40.1 | $ | 41.3 | $ | 39.6 | |||||||||
Severity (2) | 92.3 | % | 90.4 | % | 94.8 | % | 93.9 | % | 93.1 | % | |||||||||
Average reserve per default | $ | 20.5 | $ | 25.2 | $ | 27.8 | $ | 32.1 |
(1) | Includes first lien primary and pool policies. |
(2) | Represents total paid claims divided by RIF of loans for which claims were paid. |
ACGL 2016 FORM 10-K | 93 |
(U.S. Dollars in millions) | December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||||
Total RIF by credit quality (FICO): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
>=740 | $ | 3,763 | 55 | $ | 3,532 | 55 | $ | 3,238 | 54 | $ | 3,009 | 53 | $ | 34,867 | 58 | $ | 5,817 | 57 | $ | 4,766 | 57 | $ | 3,995 | 56 | ||||||||||||||||||||||||||||||
680-739 | 2,237 | 33 | 2,114 | 33 | 1,994 | 33 | 1,895 | 33 | 18,976 | 32 | 3,425 | 34 | 2,779 | 33 | 2,354 | 33 | ||||||||||||||||||||||||||||||||||||||
620-679 | 717 | 11 | 705 | 11 | 696 | 12 | 698 | 12 | 5,050 | 9 | 834 | 8 | 753 | 9 | 712 | 10 | ||||||||||||||||||||||||||||||||||||||
<620 | 109 | 2 | 116 | 2 | 125 | 2 | 131 | 2 | 819 | 1 | 92 | 1 | 98 | 1 | 104 | 2 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 6,826 | 100 | $ | 6,467 | 100 | $ | 6,053 | 100 | $ | 5,733 | 100 | $ | 59,712 | 100 | $ | 10,168 | 100 | $ | 8,396 | 100 | $ | 7,165 | 100 | ||||||||||||||||||||||||||||||
Weighted average FICO score | 738 | 737 | 735 | 734 | 743 | 742 | 741 | 739 | ||||||||||||||||||||||||||||||||||||||||||||||
Total RIF by Loan-to-Value (LTV): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
95.01% and above | $ | 1,050 | 15 | $ | 1,045 | 16 | $ | 1,093 | 18 | $ | 1,102 | 19 | $ | 5,781 | 10 | $ | 1,221 | 12 | $ | 1,135 | 14 | $ | 1,052 | 15 | ||||||||||||||||||||||||||||||
90.01% to 95.00% | 3,472 | 51 | 3,252 | 50 | 2,959 | 49 | 2,742 | 48 | 32,986 | 55 | 5,430 | 53 | 4,379 | 52 | 3,677 | 51 | ||||||||||||||||||||||||||||||||||||||
85.01% to 90.00% | 1,942 | 29 | 1,831 | 28 | 1,685 | 28 | 1,590 | 28 | 18,140 | 30 | 2,982 | 29 | 2,438 | 29 | 2,056 | 29 | ||||||||||||||||||||||||||||||||||||||
85.00% and below | 362 | 5 | 339 | 5 | 316 | 5 | 299 | 5 | 2,805 | 5 | 535 | 5 | 444 | 5 | 380 | 5 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 6,826 | 100 | $ | 6,467 | 100 | $ | 6,053 | 100 | $ | 5,733 | 100 | $ | 59,712 | 100 | $ | 10,168 | 100 | $ | 8,396 | 100 | $ | 7,165 | 100 | ||||||||||||||||||||||||||||||
Weighted average LTV | 93.0 | % | 93.2 | % | 93.2 | % | 93.3 | % | 92.9 | % | 92.9 | % | 92.9 | % | 93.0 | % | ||||||||||||||||||||||||||||||||||||||
Total RIF by State: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Texas | $ | 4,961 | 8 | $ | 583 | 6 | $ | 469 | 6 | $ | 401 | 6 | ||||||||||||||||||||||||||||||||||||||||||
California | $ | 599 | 9 | $ | 570 | 9 | $ | 527 | 9 | $ | 492 | 9 | 3,222 | 5 | 865 | 9 | 727 | 9 | 622 | 9 | ||||||||||||||||||||||||||||||||||
Wisconsin | 581 | 9 | 574 | 9 | 554 | 9 | 536 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||
Texas | 380 | 6 | 355 | 6 | 325 | 5 | 307 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||
Virginia | 2,586 | 4 | 377 | 4 | 300 | 4 | 237 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Florida | 327 | 5 | 310 | 5 | 297 | 5 | 280 | 5 | 2,367 | 4 | 544 | 5 | 422 | 5 | 345 | 5 | ||||||||||||||||||||||||||||||||||||||
Washington | 2,331 | 4 | 302 | 3 | 279 | 3 | 261 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
Georgia | 2,111 | 4 | 301 | 3 | 247 | 3 | 215 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Illinois | 2,090 | 4 | 348 | 3 | 279 | 3 | 218 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Maryland | 2,080 | 4 | 299 | 3 | 241 | 3 | 199 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Minnesota | 315 | 5 | 306 | 5 | 291 | 5 | 278 | 5 | 1,986 | 3 | 388 | 4 | 351 | 4 | 319 | 5 | ||||||||||||||||||||||||||||||||||||||
Washington | 259 | 4 | 247 | 4 | 243 | 4 | 234 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
Massachusetts | 249 | 4 | 235 | 4 | 217 | 4 | 213 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
Michigan | 230 | 3 | 220 | 3 | 200 | 3 | 186 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
New York | 223 | 3 | 212 | 3 | 197 | 3 | 189 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Virginia | 218 | 3 | 213 | 3 | 215 | 4 | 206 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
Ohio | 1,916 | 3 | 312 | 3 | 260 | 3 | 212 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||
Others | 3,445 | 51 | 3,225 | 50 | 2,987 | 49 | 2,812 | 49 | 34,062 | 57 | 5,849 | 58 | 4,821 | 57 | 4,136 | 58 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 6,826 | 100 | $ | 6,467 | 100 | $ | 6,053 | 100 | $ | 5,733 | 100 | $ | 59,712 | 100 | $ | 10,168 | 100 | $ | 8,396 | 100 | $ | 7,165 | 100 | ||||||||||||||||||||||||||||||
Weighted average coverage (1) | 25.2 | % | 25.2 | % | 25.0 | % | 24.9 | % | 25.5 | % | 25.3 | % | 25.2 | % | 25.2 | % | ||||||||||||||||||||||||||||||||||||||
Analysts’ persistency (2) | 75.6 | % | 76.0 | % | 78.3 | % | 79.6 | % | 76.1 | % | 75.4 | % | 75.6 | % | 74.2 | % | ||||||||||||||||||||||||||||||||||||||
Risk-to-capital ratio (3) | 10.5:1 | 10.1:1 | 9.7:1 | 9.3:1 | 12.0:1 | 15.4:1 | 12.4:1 | 11.1:1 | ||||||||||||||||||||||||||||||||||||||||||||||
U.S. mortgage insurance total RIF, net of reinsurance (4) | $ | 42,183 | $ | 8,918 | $ | 7,198 | $ | 6,274 |
(1) | Represents the end of period RIF divided by end of period IIF. |
(2) | Represents the percentage of IIF at the beginning of a 12-month period that remained in force at the end of the period. |
(3) | Represents total current (non-delinquent) RIF, net of reinsurance, divided by total statutory capital. Ratio calculated for |
(4) | Total RIF for the U.S. mortgage insurance operations after external reinsurance. |
ACGL 2016 FORM 10-K | 94 |
ACGL 2016 FORM 10-K | 95 |
December 31, 2015 | December 31, 2014 | December 31, 2016 | ||||||||||||||||||||||||||||||||
Gross Amount | Acquisition Expenses | Net Amount | Gross Amount | Acquisition Expenses | Net Amount | Gross Amount | Acquisition Expenses | Net Amount | ||||||||||||||||||||||||||
Casualty | $ | 185,334 | $ | (57,236 | ) | $ | 128,098 | $ | 142,071 | $ | (45,193 | ) | $ | 96,878 | $ | 205,016 | $ | (64,563 | ) | $ | 140,453 | |||||||||||||
Other specialty | 138,242 | (41,055 | ) | 97,187 | 116,719 | (28,881 | ) | 87,838 | 141,943 | (39,392 | ) | 102,551 | ||||||||||||||||||||||
Property excluding property catastrophe | 62,786 | (19,975 | ) | 42,811 | 39,874 | (10,533 | ) | 29,341 | 64,483 | (21,544 | ) | 42,939 | ||||||||||||||||||||||
Marine and aviation | 41,228 | (12,045 | ) | 29,183 | 36,940 | (9,762 | ) | 27,178 | 30,560 | (8,669 | ) | 21,891 | ||||||||||||||||||||||
Property catastrophe | 1,645 | (94 | ) | 1,551 | 1,257 | (71 | ) | 1,186 | 1,158 | (66 | ) | 1,092 | ||||||||||||||||||||||
Other | 38,703 | (8,787 | ) | 29,916 | 21,425 | (6,346 | ) | 15,079 | 55,569 | (12,657 | ) | 42,912 | ||||||||||||||||||||||
Total | $ | 467,938 | $ | (139,192 | ) | $ | 328,746 | $ | 358,286 | $ | (100,786 | ) | $ | 257,500 | $ | 498,729 | $ | (146,891 | ) | $ | 351,838 |
ACGL 2016 FORM 10-K | 96 |
ACGL 2016 FORM 10-K | 97 |
ACGL 2016 FORM 10-K | 98 |
December 31, 2015 | December 31, 2014 | ||||||||||||
Amount | % of Total | Amount | % of Total | ||||||||||
Investable assets (1) (2): | |||||||||||||
Fixed maturities available for sale, at fair value | $ | 10,459,353 | 71.4 | $ | 10,750,770 | 73.6 | |||||||
Fixed maturities, at fair value (3) | 367,780 | 2.5 | 377,053 | 2.6 | |||||||||
Fixed maturities pledged under securities lending agreements, at fair value | 373,304 | 2.5 | 50,802 | 0.3 | |||||||||
Total fixed maturities | 11,200,437 | 76.5 | 11,178,625 | 76.6 | |||||||||
Short-term investments available for sale, at fair value | 587,904 | 4.0 | 797,226 | 5.5 | |||||||||
Cash | 444,776 | 3.0 | 474,247 | 3.2 | |||||||||
Equity securities available for sale, at fair value | 618,405 | 4.2 | 658,182 | 4.5 | |||||||||
Equity securities, at fair value (3) | 798 | — | — | — | |||||||||
Equity securities pledged under securities lending agreements, at fair value | 10,777 | 0.1 | — | — | |||||||||
Other investments available for sale, at fair value | 300,476 | 2.1 | 296,224 | 2.0 | |||||||||
Other investments, at fair value (3) | 908,809 | 6.2 | 878,774 | 6.0 | |||||||||
Investments accounted for using the equity method (4) | 592,973 | 4.0 | 349,014 | 2.4 | |||||||||
Securities transactions entered into but not settled at the balance sheet date | (20,524 | ) | (0.1 | ) | (32,802 | ) | (0.2 | ) | |||||
Total investable assets managed by Arch | $ | 14,644,831 | 100.0 | $ | 14,599,490 | 100.0 |
Investable assets (1): | Estimated Fair Value | % of Total | ||||
December 31, 2016 | ||||||
Fixed maturities (2) | $ | 14,521,774 | 77.9 | |||
Short-term investments (2) | 676,547 | 3.6 | ||||
Cash | 768,049 | 4.1 | ||||
Equity securities (2) | 558,008 | 3.0 | ||||
Other investments (2) | 1,276,841 | 6.9 | ||||
Investments accounted for using the equity method | 811,273 | 4.4 | ||||
Securities transactions entered into but not settled at the balance sheet date | 23,697 | 0.1 | ||||
Total investable assets held by Arch | $ | 18,636,189 | 100.0 | |||
December 31, 2015 | ||||||
Fixed maturities (2) | $ | 11,200,437 | 76.5 | |||
Short-term investments (2) | 587,904 | 4.0 | ||||
Cash | 444,776 | 3.0 | ||||
Equity securities (2) | 629,980 | 4.3 | ||||
Other investments (2) | 1,209,285 | 8.3 | ||||
Investments accounted for using the equity method | 592,973 | 4.0 | ||||
Securities transactions entered into but not settled at the balance sheet date | (20,524 | ) | (0.1 | ) | ||
Total investable assets held by Arch | $ | 14,644,831 | 100.0 |
(1) |
In securities lending transactions, we receive collateral in excess of the fair value of the securities pledged. For purposes of this table, we have excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. |
Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Cost or Amortized Cost | ||||||||||||
December 31, 2015 | |||||||||||||||
Corporate bonds | $ | 2,960,694 | $ | 15,978 | $ | (60,508 | ) | $ | 3,005,224 | ||||||
Mortgage backed securities | 812,557 | 9,872 | (5,334 | ) | 808,019 | ||||||||||
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 | 992,792 | 10,414 | (39,122 | ) | 1,021,500 | ||||||||||
Asset backed securities | 1,620,506 | 3,307 | (12,951 | ) | 1,630,150 | ||||||||||
Total | $ | 11,200,437 | $ | 76,082 | $ | (136,405 | ) | $ | 11,260,760 | ||||||
December 31, 2014 | |||||||||||||||
Corporate bonds | $ | 3,379,139 | $ | 37,928 | $ | (38,974 | ) | $ | 3,380,185 | ||||||
Mortgage backed securities | 965,533 | 18,843 | (3,842 | ) | 950,532 | ||||||||||
Municipal bonds | 1,494,122 | 31,227 | (1,044 | ) | 1,463,939 | ||||||||||
Commercial mortgage backed securities | 1,114,528 | 14,594 | (3,822 | ) | 1,103,756 | ||||||||||
U.S. government and government agencies | 1,447,972 | 8,345 | (1,760 | ) | 1,441,387 | ||||||||||
Non-U.S. government securities | 1,099,390 | 21,311 | (37,203 | ) | 1,115,282 | ||||||||||
Asset backed securities | 1,677,941 | 8,425 | (6,089 | ) | 1,675,605 | ||||||||||
Total | $ | 11,178,625 | $ | 140,673 | $ | (92,734 | ) | $ | 11,130,686 |
December 31, 2015 | December 31, 2014 | |||||||||||||
Rating (1) | Fair Value | % of Total | Fair Value | % of Total | ||||||||||
U.S. government and government agencies (2) | $ | 3,060,869 | 27.3 | $ | 2,245,489 | 20.1 | ||||||||
AAA | 4,000,750 | 35.7 | 4,299,060 | 38.5 | ||||||||||
AA | 1,651,760 | 14.7 | 1,917,392 | 17.2 | ||||||||||
A | 1,431,138 | 12.8 | 1,739,922 | 15.6 | ||||||||||
BBB | 457,251 | 4.1 | 339,395 | 3.0 | ||||||||||
BB | 203,426 | 1.8 | 157,232 | 1.4 | ||||||||||
B | 138,770 | 1.2 | 184,869 | 1.7 | ||||||||||
Lower than B | 130,545 | 1.2 | 154,823 | 1.4 | ||||||||||
Not rated | 125,928 | 1.1 | 140,443 | 1.3 | ||||||||||
Total | $ | 11,200,437 | 100.0 | $ | 11,178,625 | 100.0 |
Estimated Fair Value | % of Total | |||||
December 31, 2016 | ||||||
Corporate bonds | $ | 4,696,079 | 32.3 | |||
Mortgage backed securities | 504,677 | 3.5 | ||||
Municipal bonds | 3,713,434 | 25.6 | ||||
Commercial mortgage backed securities | 536,051 | 3.7 | ||||
U.S. government and government agencies | 2,804,811 | 19.3 | ||||
Non-U.S. government securities | 1,142,735 | 7.9 | ||||
Asset backed securities | 1,123,987 | 7.7 | ||||
Total | $ | 14,521,774 | 100.0 | |||
December 31, 2015 | ||||||
Corporate bonds | $ | 2,960,694 | 26.4 | |||
Mortgage backed securities | 812,557 | 7.3 | ||||
Municipal bonds | 1,626,281 | 14.5 | ||||
Commercial mortgage backed securities | 764,152 | 6.8 | ||||
U.S. government and government agencies | 2,423,455 | 21.6 | ||||
Non-U.S. government securities | 992,792 | 8.9 | ||||
Asset backed securities | 1,620,506 | 14.5 | ||||
Total | $ | 11,200,437 | 100.0 |
ACGL 2016 FORM 10-K | 99 |
Estimated Fair Value | % of Total | |||||
December 31, 2016 | ||||||
U.S. government and gov’t agencies (1) | $ | 3,210,899 | 22.1 | |||
AAA | 3,918,739 | 27.0 | ||||
AA | 3,148,226 | 21.7 | ||||
A | 2,338,834 | 16.1 | ||||
BBB | 1,203,942 | 8.3 | ||||
BB | 226,321 | 1.6 | ||||
B | 156,405 | 1.1 | ||||
Lower than B | 90,833 | 0.6 | ||||
Not rated | 227,574 | 1.6 | ||||
Total | $ | 14,521,774 | 100.0 | |||
December 31, 2015 | ||||||
U.S. government and gov’t agencies (1) | $ | 3,060,869 | 27.3 | |||
AAA | 4,000,750 | 35.7 | ||||
AA | 1,651,760 | 14.7 | ||||
A | 1,431,138 | 12.8 | ||||
BBB | 457,251 | 4.1 | ||||
BB | 203,426 | 1.8 | ||||
B | 138,770 | 1.2 | ||||
Lower than B | 130,545 | 1.2 | ||||
Not rated | 125,928 | 1.1 | ||||
Total | $ | 11,200,437 | 100.0 |
(1) | Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities. |
December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||||||||||
Severity of Unrealized Loss | Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | ||||||||||||||||||||||||||
Severity of gross unrealized losses: | Estimated Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | |||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
0-10% | $ | 6,956,754 | $ | (74,229 | ) | 54.4 | $ | 4,181,313 | $ | (55,498 | ) | 59.8 | $ | 7,078,582 | $ | (127,909 | ) | 71.6 | ||||||||||||||
10-20% | 173,441 | (28,789 | ) | 21.1 | 239,158 | (33,111 | ) | 35.7 | 155,403 | (24,219 | ) | 13.5 | ||||||||||||||||||||
20-30% | 86,997 | (26,227 | ) | 19.2 | 5,618 | (1,990 | ) | 2.1 | 89,887 | (25,929 | ) | 14.5 | ||||||||||||||||||||
Greater than 30% | 10,638 | (7,160 | ) | 5.2 | 3,437 | (2,135 | ) | 2.3 | 1,496 | (702 | ) | 0.4 | ||||||||||||||||||||
Total | $ | 7,227,830 | $ | (136,405 | ) | 100.0 | $ | 4,429,526 | $ | (92,734 | ) | 100.0 | $ | 7,325,368 | $ | (178,759 | ) | 100.0 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
0-10% | $ | 6,956,754 | $ | (74,229 | ) | 54.4 | ||||||||||||||||||||||||||
10-20% | 173,441 | (28,789 | ) | 21.1 | ||||||||||||||||||||||||||||
20-30% | 86,997 | (26,227 | ) | 19.2 | ||||||||||||||||||||||||||||
Greater than 30% | 10,638 | (7,160 | ) | 5.2 | ||||||||||||||||||||||||||||
Total | $ | 7,227,830 | $ | (136,405 | ) | 100.0 |
December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||||||||||
Severity of Unrealized Loss | Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | ||||||||||||||||||||||||||
Severity of gross unrealized losses: | Estimated Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | |||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
0-10% | $ | 176,343 | $ | (5,139 | ) | 3.8 | $ | 141,986 | $ | (3,728 | ) | 4.0 | $ | 155,258 | $ | (3,978 | ) | 2.2 | ||||||||||||||
10-20% | 28,707 | (4,807 | ) | 3.5 | 20,127 | (3,530 | ) | 3.8 | 7,727 | (1,235 | ) | 0.7 | ||||||||||||||||||||
20-30% | 12,500 | (4,410 | ) | 3.2 | 5,618 | (1,990 | ) | 2.1 | 2,313 | (727 | ) | 0.4 | ||||||||||||||||||||
Greater than 30% | 10,520 | (7,107 | ) | 5.2 | 3,434 | (2,133 | ) | 2.3 | 1,496 | (701 | ) | 0.4 | ||||||||||||||||||||
Total | $ | 228,070 | $ | (21,463 | ) | 15.7 | $ | 171,165 | $ | (11,381 | ) | 12.3 | $ | 166,794 | $ | (6,641 | ) | 3.7 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
0-10% | $ | 176,343 | $ | (5,139 | ) | 3.8 | ||||||||||||||||||||||||||
10-20% | 28,707 | (4,807 | ) | 3.5 | ||||||||||||||||||||||||||||
20-30% | 12,500 | (4,410 | ) | 3.2 | ||||||||||||||||||||||||||||
Greater than 30% | 10,520 | (7,107 | ) | 5.2 | ||||||||||||||||||||||||||||
Total | $ | 228,070 | $ | (21,463 | ) | 15.7 |
Fair Value | Credit Rating (1) | ||||
Microsoft Corporation | $ | 80,047 | AAA/Aaa | ||
Apple Inc. | 68,507 | AA+/Aa1 | |||
General Electric Co. | 58,168 | AA+/A1 | |||
MassMutual Global Funding II | 52,975 | AA+/Aa2 | |||
Wells Fargo & Company | 50,879 | A/A2 | |||
Oracle Corporation | 50,282 | AA-/A1 | |||
Royal Dutch Shell PLC | 47,017 | AA-/Aa1 | |||
Toyota Motor Corporation | 45,945 | AA-/Aa3 | |||
The Coca-Cola Company | 45,890 | AA/Aa3 | |||
Exxon Mobil Corp. | 44,392 | AAA/Aaa | |||
Total | $ | 544,102 |
Estimated Fair Value | Credit Rating (1) | ||||
Microsoft Corporation | $ | 89,820 | AAA/Aaa | ||
Apple Inc. | 72,861 | AAA/Aaa | |||
Bank of New York Mellon Corp. | 67,360 | AA+/Aa1 | |||
Oracle Corporation | 66,058 | A/A1 | |||
JPMorgan Chase & Co | 64,470 | AA-/A1 | |||
Royal Dutch Shell PLC | 58,019 | A-/A3 | |||
Daimler AG | 53,042 | A/Aa2 | |||
Bank of America Corporation | 51,193 | A/A3 | |||
MetLife, Inc. | 49,576 | BBB+/Baa1 | |||
Massmutual Global Funding II Corp | 47,767 | AA-/Aa3 | |||
Total | $ | 620,166 |
(1) |
ACGL 2016 FORM 10-K | 100 |
Fair Value | |||||||||||||||||
Issuance Year | Amortized Cost | Average Credit Quality | Total | % of Amortized Cost | % of Investable Assets | ||||||||||||
Non-agency MBS: | 2003-2008 | $ | 109,129 | CC | $ | 116,487 | 106.7 | % | 0.8 | % | |||||||
2009 | 18,895 | AAA | 18,732 | 99.1 | % | 0.1 | % | ||||||||||
2010 | 1,095 | NR | 1,173 | 107.1 | % | 0.0 | % | ||||||||||
2013 | 25,707 | AAA | 25,617 | 99.6 | % | 0.2 | % | ||||||||||
2014 | 41,080 | AA | 40,762 | 99.2 | % | 0.3 | % | ||||||||||
2015 | 48,264 | AA | 47,624 | 98.7 | % | 0.3 | % | ||||||||||
Total non-agency MBS | $ | 244,170 | BB+ | $ | 250,395 | 102.5 | % | 1.7 | % | ||||||||
Non-agency CMBS: | 2002-2008 | $ | 29,395 | BBB+ | $ | 29,583 | 100.6 | % | 0.2 | % | |||||||
2009 | 360 | BBB+ | 361 | 100.3 | % | 0.0 | % | ||||||||||
2010 | 9,521 | AAA | 9,635 | 101.2 | % | 0.1 | % | ||||||||||
2011 | 12,087 | AAA | 12,063 | 99.8 | % | 0.1 | % | ||||||||||
2012 | 68,528 | AAA | 68,816 | 100.4 | % | 0.5 | % | ||||||||||
2013 | 115,036 | AA+ | 116,659 | 101.4 | % | 0.8 | % | ||||||||||
2014 | 216,855 | AAA | 215,777 | 99.5 | % | 1.5 | % | ||||||||||
2015 | 240,788 | AAA | 236,006 | 98.0 | % | 1.6 | % | ||||||||||
Total non-agency CMBS | $ | 692,570 | AA+ | $ | 688,900 | 99.5 | % | 4.7 | % |
Non-Agency | Non-Agency | |||||
Additional Statistics: | RMBS | CMBS (1) | ||||
Weighted average loan age (months) | 85 | 27 | ||||
Weighted average life (months) (2) | 54 | 73 | ||||
Weighted average loan-to-value % (3) | 63.1 | % | 54.7 | % | ||
Total delinquencies (4) | 9.5 | % | 0.4 | % | ||
Current credit support % (5) | 13.3 | % | 39.1 | % |
Issuance Year | Amortized Cost | Average Credit Quality | Estimated Fair Value | |||||||
2004-2008 | $ | 43,603 | C+ | $ | 47,426 | |||||
2011 | 276 | AA+ | 273 | |||||||
2012 | 142 | AAA | 145 | |||||||
2013 | 85 | AAA | 75 | |||||||
2014 | 3,367 | B- | 3,368 | |||||||
2015 | 1,959 | BBB- | 1,944 | |||||||
2016 | 59,562 | AA+ | 58,258 | |||||||
Total RMBS | $ | 108,994 | BB+ | $ | 111,489 | |||||
2002-2008 | 33,973 | AA | 33,295 | |||||||
2009 | 380 | BBB- | 379 | |||||||
2010 | 374 | B+ | 367 | |||||||
2012 | 25,795 | AAA | 25,831 | |||||||
2013 | 84,090 | AAA | 85,709 | |||||||
2014 | 159,369 | AA+ | 160,202 | |||||||
2015 | 122,142 | AAA | 120,377 | |||||||
2016 | 100,666 | AA+ | 96,991 | |||||||
Total CMBS | $ | 526,789 | AA+ | $ | 523,151 |
Non-Agency | Non-Agency | |||||
Additional Statistics: | RMBS | CMBS (1) | ||||
Weighted average loan age (months) | 71 | 29 | ||||
Weighted average life (months) (2) | 90 | 80 | ||||
Weighted average loan-to-value % (3) | 60.6 | % | 56.3 | % | ||
Total delinquencies (4) | 6.9 | % | 0.3 | % | ||
Current credit support % (5) | 14.6 | % | 33.5 | % |
(1) | Loans defeased with government/agency obligations were not material to the collateral underlying our CMBS holdings. |
(2) | The weighted average life for |
(3) | The range of loan-to-values is |
(4) | Total delinquencies includes 60 days and over. |
(5) | Current credit support |
Fair Value | ||||||||||||||||||
Amortized Cost | Average Credit Quality | Weighted Average Credit Support | Total | % of Amortized Cost | % of Investable Assets | |||||||||||||
Sector: | ||||||||||||||||||
Credit cards | $ | 744,273 | AAA | 19 | % | $ | 741,580 | 99.6 | % | 5.1 | % | |||||||
Autos | 341,507 | AAA | 23 | % | 339,889 | 99.5 | % | 2.3 | % | |||||||||
Loans | 284,204 | AA- | 18 | % | 281,109 | 98.9 | % | 1.9 | % | |||||||||
Equipment | 153,072 | AA- | 11 | % | 150,703 | 98.5 | % | 1.0 | % | |||||||||
Other (1) | 107,094 | A+ | 17 | % | 107,225 | 100.1 | % | 0.7 | % | |||||||||
Total ABS (2) | $ | 1,630,150 | AA+ | $ | 1,620,506 | 99.4 | % | 11.1 | % |
ACGL 2016 FORM 10-K | 101 |
Weighted Average | |||||||||||||
Sector | Amortized Cost | Credit Quality | Credit Support | Estimated Fair Value | |||||||||
Credit cards | $ | 613,355 | AAA | 17 | % | $ | 611,492 | ||||||
Autos | 262,514 | AAA | 30 | % | 262,181 | ||||||||
Loans | 83,467 | BBB | 22 | % | 83,464 | ||||||||
Equipment | 103,985 | AA | 5 | % | 104,520 | ||||||||
Other (1) | 60,295 | BB | 16 | % | 62,330 | ||||||||
Total ABS (2) | $ | 1,123,616 | AA+ | $ | 1,123,987 |
(1) | Including rate reduction bonds, commodities, home equity, U.K. securitized and other. |
(2) | The effective duration of the total ABS was 1.5 years at December 31, |
Sovereign (2) | Financial Corporates | Other Corporates | Bank Loans (3) | Equities and Other | Total | |||||||||||||||||||||||||||||||||
Country (1) | Sovereign (2) | Corporate Bonds | Other (3) | Total | ||||||||||||||||||||||||||||||||||
Netherlands | $ | 157,735 | $ | 8,985 | $ | 61,838 | $ | 9,965 | $ | 3,917 | $ | 242,440 | $ | 90,951 | $ | 137,414 | $ | 3,712 | $ | 232,077 | ||||||||||||||||||
Germany | 86,879 | — | 15,761 | 30,957 | — | 133,597 | 74,772 | 41,520 | 7,458 | 123,750 | ||||||||||||||||||||||||||||
France | 302 | 55,972 | 11,136 | 67,410 | ||||||||||||||||||||||||||||||||||
Luxembourg | — | — | 17,500 | 10,037 | — | 27,537 | — | 23,386 | 2,522 | 25,908 | ||||||||||||||||||||||||||||
France | 1,348 | 1,468 | 4,817 | 6,226 | 8,463 | 22,322 | ||||||||||||||||||||||||||||||||
Belgium | 6,231 | — | — | — | — | 6,231 | 13,878 | 7,638 | 1 | 21,517 | ||||||||||||||||||||||||||||
Ireland | — | 1,818 | 5,905 | 7,723 | ||||||||||||||||||||||||||||||||||
Supranational (4) | 5,830 | — | — | — | — | 5,830 | 7,454 | — | — | 7,454 | ||||||||||||||||||||||||||||
Ireland | — | — | 78 | 5,527 | — | 5,605 | ||||||||||||||||||||||||||||||||
Italy | — | — | 4,403 | 4,403 | ||||||||||||||||||||||||||||||||||
Spain | — | — | 299 | 2,422 | — | 2,721 | — | — | 3,720 | 3,720 | ||||||||||||||||||||||||||||
Slovenia | 1,738 | — | — | — | — | 1,738 | ||||||||||||||||||||||||||||||||
Italy | — | — | 263 | 1,156 | — | 1,419 | ||||||||||||||||||||||||||||||||
Austria | 898 | — | — | — | — | 898 | ||||||||||||||||||||||||||||||||
Finland | — | — | 3,576 | 3,576 | ||||||||||||||||||||||||||||||||||
Greece | 472 | — | 133 | — | — | 605 | 81 | 711 | — | 792 | ||||||||||||||||||||||||||||
Total | $ | 261,131 | $ | 10,453 | $ | 100,689 | $ | 66,290 | $ | 12,380 | $ | 450,943 | $ | 187,438 | $ | 268,459 | $ | 42,433 | $ | 498,330 |
(1) | The country allocations set forth in the table are based on various assumptions made by us in assessing the country in which the underlying credit risk resides, including a review of the jurisdiction of organization, business operations and other factors. Based on such analysis, we do not believe that we have any other Eurozone investments at December 31, |
(2) |
(3) |
(4) | Includes World Bank, European Investment Bank, International Finance Corp. and European Bank for Reconstruction and Development. |
December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||
Severity of Unrealized Loss | Estimated Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | |||||||||||||||||||||||||
Severity of gross unrealized losses: | Estimated Fair Value | Gross Unrealized Losses | % of Total Gross Unrealized Losses | ||||||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||||
0-10% | $ | 176,451 | $ | (5,926 | ) | 33.3 | 127,467 | (4,973 | ) | 37.2 | $ | 214,364 | $ | (8,776 | ) | 50.1 | |||||||||||||||
10-20% | 39,728 | (6,528 | ) | 36.7 | 47,880 | (6,546 | ) | 49.0 | 52,034 | (7,100 | ) | 40.5 | |||||||||||||||||||
20-30% | 13,700 | (4,164 | ) | 23.4 | 5,328 | (1,695 | ) | 12.7 | 1,983 | (607 | ) | 3.5 | |||||||||||||||||||
Greater than 30% | 2,396 | (1,178 | ) | 6.6 | 327 | (150 | ) | 1.1 | 1,000 | (1,034 | ) | 5.9 | |||||||||||||||||||
Total | $ | 232,275 | $ | (17,796 | ) | 100.0 | $ | 181,002 | $ | (13,364 | ) | 100.0 | $ | 269,381 | $ | (17,517 | ) | 100.0 | |||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||||
0-10% | $ | 176,451 | $ | (5,926 | ) | 33.3 | |||||||||||||||||||||||||
10-20% | 39,728 | (6,528 | ) | 36.7 | |||||||||||||||||||||||||||
20-30% | 13,700 | (4,164 | ) | 23.4 | |||||||||||||||||||||||||||
Greater than 30% | 2,396 | (1,178 | ) | 6.6 | |||||||||||||||||||||||||||
Total | $ | 232,275 | $ | (17,796 | ) | 100.0 |
ACGL 2016 FORM 10-K | 102 |
December 31, | ||||||||||||||
2015 | 2014 | December 31, 2016 | December 31, 2015 | |||||||||||
Available for sale: | ||||||||||||||
Asian and emerging markets | $ | 206,861 | $ | 236,586 | $ | 84,778 | $ | 206,861 | ||||||
Investment grade fixed income | 31,370 | 59,638 | 33,923 | 31,370 | ||||||||||
Credit related funds | 22,512 | — | 7,469 | 22,512 | ||||||||||
Other | 39,733 | — | 41,800 | 39,733 | ||||||||||
Total available for sale | 300,476 | 296,224 | 167,970 | 300,476 | ||||||||||
Fair value option: | ||||||||||||||
Term loan investments (par value: $356,096 and $415,462) | 345,855 | 410,995 | ||||||||||||
Term loan investments (par value: $385,436 and $356,096) | 378,877 | 345,855 | ||||||||||||
Mezzanine debt funds | 121,589 | 121,341 | 127,943 | 121,589 | ||||||||||
Credit related funds | 219,049 | 114,436 | 218,298 | 219,049 | ||||||||||
Investment grade fixed income | 63,053 | 69,108 | 75,468 | 63,053 | ||||||||||
Asian and emerging markets | 34,761 | 25,800 | 178,568 | 34,761 | ||||||||||
Other (1) | 124,502 | 137,094 | 129,717 | 124,502 | ||||||||||
Total fair value option | 908,809 | 878,774 | 1,108,871 | 908,809 | ||||||||||
Total | $ | 1,209,285 | $ | 1,174,998 | $ | 1,276,841 | $ | 1,209,285 |
(1) | Includes fund investments with strategies in mortgage servicing rights, transportation and infrastructure assets and other. |
ACGL 2016 FORM 10-K | 103 |
December 31, | ||||||||||||||
2015 | 2014 | |||||||||||||
December 31, 2016 | December 31, 2015 | |||||||||||||
Cash | $ | 108,550 | $ | 11,455 | $ | 74,893 | $ | 108,550 | ||||||
Investments accounted for using the fair value option: | ||||||||||||||
Term loan investments (par value: $841,047 and $678,875) | 762,162 | 662,654 | ||||||||||||
Term loan investments (par value: $823,101 and $841,047) | 811,922 | 762,162 | ||||||||||||
Fixed maturities | 569,022 | 254,971 | 734,260 | 569,022 | ||||||||||
Short-term investments | 285,923 | 251,601 | 309,127 | 285,923 | ||||||||||
Equity securities | 2,314 | — | ||||||||||||
Total investments accounted for using the fair value option | 1,617,107 | 1,169,226 | 1,857,623 | 1,617,107 | ||||||||||
Securities sold but not yet purchased | (30,583 | ) | — | (33,157 | ) | (30,583 | ) | |||||||
Securities transactions entered into but not settled at the balance sheet date | 1,033 | (17,441 | ) | (41,596 | ) | 1,033 | ||||||||
Total investable assets included in ‘other’ segment | $ | 1,696,107 | $ | 1,163,240 | $ | 1,857,763 | $ | 1,696,107 |
% of Total | A.M. Best Rating (1) | |||
Everest Reinsurance Company | A+ | |||
Munich Reinsurance America, Inc. | A+ | |||
Hannover Rückversicherung AG | 4.9 | A+ | ||
Partner Reinsurance Company of the U.S. | ||||
4.8 | ||||
A | ||||
Swiss Reinsurance America Corporation | A+ | |||
Lloyd’s syndicates (2) | 4.7 | A | ||
XL | 4.4 | A | ||
Transatlantic Reinsurance Company | 4.3 | A+ | ||
Berkley Insurance Company | 4.0 | A+ | ||
Odyssey America Reinsurance Corporation (3) | A | |||
Allied World Assurance Company, Ltd. | A | |||
All other (4) | ||||
Total | 100.0 |
(1) | The financial strength ratings are as of February |
(2) | The A.M. Best group rating of “A” (Excellent) has been applied to all Lloyd’s syndicates. |
(3) | A significant portion of amounts due from Odyssey America Reinsurance Corporation is collateralized through reinsurance trusts. |
(4) | Such amount included |
ACGL 2016 FORM 10-K | 104 |
(U.S. dollars in thousands, except share data) | December 31, | ||||||
2015 | 2014 | ||||||
Calculation of book value per common share: | |||||||
Total shareholders’ equity available to Arch | $ | 6,204,881 | $ | 6,130,053 | |||
Less preferred shareholders’ equity | 325,000 | 325,000 | |||||
Common shareholders’ equity available to Arch | $ | 5,879,881 | $ | 5,805,053 | |||
Common shares outstanding, net of treasury shares (1) | 122,627,783 | 127,367,934 | |||||
Book value per common share | $ | 47.95 | $ | 45.58 |
(U.S. dollars in thousands, except share data) | December 31, | ||||||
2016 | 2015 | ||||||
Total shareholders’ equity available to Arch (2) | $ | 8,253,718 | $ | 6,166,542 | |||
Less preferred shareholders’ equity | 772,555 | 325,000 | |||||
Common shareholders’ equity available to Arch (2) | $ | 7,481,163 | $ | 5,841,542 | |||
Common shares and common share equivalents outstanding, net of treasury shares (1) | 135,550,337 | 122,627,783 | |||||
Book value per share (2) | $ | 55.19 | $ | 47.64 |
(1) | Excludes the effects of |
(2) | Balance for December 31, 2015 reflects a cumulative effect of an accounting change. See note 1, “General,” of the notes accompanying our consolidated financial statements for additional information. |
ACGL 2016 FORM 10-K | 105 |
ACGL 2016 FORM 10-K | 106 |
Year Ended | ||||||||||||||||||||||
December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Total cash provided by (used for): | ||||||||||||||||||||||
Operating activities | $ | 705,128 | $ | 997,815 | $ | 850,868 | $ | 1,109,913 | $ | 705,128 | $ | 997,815 | ||||||||||
Investing activities | (357,038 | ) | (422,879 | ) | (1,307,513 | ) | (2,602,714 | ) | (357,038 | ) | (422,879 | ) | ||||||||||
Financing activities | (367,529 | ) | (515,880 | ) | 524,018 | 1,830,042 | (367,529 | ) | (515,880 | ) | ||||||||||||
Effects of exchange rate changes on foreign currency cash | (10,031 | ) | (18,686 | ) | (4,357 | ) | (13,967 | ) | (10,031 | ) | (18,686 | ) | ||||||||||
Increase (decrease) in cash | $ | (29,470 | ) | $ | 40,370 | $ | 63,016 | $ | 323,274 | $ | (29,470 | ) | $ | 40,370 |
ACGL 2016 FORM 10-K | 107 |
ACGL 2016 FORM 10-K | 108 |
ACGL 2016 FORM 10-K | 109 |
ACGL 2016 FORM 10-K | 110 |
ACGL 2016 FORM 10-K | 111 |
ACGL 2016 FORM 10-K | 112 |
Payment due by period | Payment due by period | |||||||||||||||||||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||
Operating activities | ||||||||||||||||||||||||||||||||||||||
Estimated gross payments for losses and loss adjustment expenses (1) | $ | 8,834,253 | $ | 2,179,768 | $ | 2,607,563 | $ | 1,403,755 | $ | 2,643,167 | $ | 10,200,960 | $ | 2,636,891 | $ | 3,008,378 | $ | 1,545,090 | $ | 3,010,601 | ||||||||||||||||||
Deposit accounting liabilities (2) | 260,364 | 40,319 | 54,559 | 39,133 | 126,353 | 22,150 | 1,038 | 1,015 | 1,652 | 18,445 | ||||||||||||||||||||||||||||
Contractholder payables (3) | 1,486,296 | 422,244 | 538,289 | 244,904 | 280,859 | 1,716,435 | 565,485 | 617,697 | 239,557 | 293,696 | ||||||||||||||||||||||||||||
Operating lease obligations | 154,125 | 25,494 | 48,997 | 39,273 | 40,361 | 178,096 | 29,881 | 56,578 | 42,166 | 49,471 | ||||||||||||||||||||||||||||
Purchase obligations | 20,663 | 10,764 | 9,771 | 128 | — | 24,807 | 18,280 | 6,527 | — | — | ||||||||||||||||||||||||||||
Contingent consideration liabilities (6) | 95,193 | — | 28,303 | 66,890 | — | 95,193 | 28,215 | 33,489 | 33,489 | — | ||||||||||||||||||||||||||||
Investing activities | ||||||||||||||||||||||||||||||||||||||
Unfunded investment commitments (4) | 1,105,637 | 1,105,637 | — | — | — | 1,286,218 | 1,286,218 | — | — | — | ||||||||||||||||||||||||||||
Financing activities | ||||||||||||||||||||||||||||||||||||||
Securities lending payable (5) | 393,844 | 393,844 | — | — | — | 762,554 | 762,554 | — | — | — | ||||||||||||||||||||||||||||
Senior notes (including interest payments) | 1,928,085 | 47,770 | 95,540 | 95,540 | 1,689,235 | 3,710,810 | 93,192 | 180,929 | 180,929 | 3,255,760 | ||||||||||||||||||||||||||||
Contingent consideration liabilities (6) | 41,762 | — | 41,762 | — | — | 41,762 | 41,762 | — | — | — | ||||||||||||||||||||||||||||
Capital lease obligations | 25,420 | 10,784 | 14,636 | — | — | |||||||||||||||||||||||||||||||||
Revolving credit agreement borrowings (7) | 100,000 | 100,000 | — | — | — | 500,000 | 500,000 | — | — | — | ||||||||||||||||||||||||||||
Total | $ | 14,420,222 | $ | 4,325,840 | $ | 3,424,784 | $ | 1,889,623 | $ | 4,779,975 | $ | 18,564,405 | $ | 5,974,300 | $ | 3,919,249 | $ | 2,042,883 | $ | 6,627,973 |
(1) | The estimated expected contractual commitments related to the reserves for losses and loss adjustment expenses are presented on a gross basis (i.e., not reflecting any corresponding reinsurance recoverable amounts that would be due to us). It should be noted that until a claim has been presented to us, determined to be valid, quantified and settled, there is no known obligation on an individual transaction basis, and while estimable in the aggregate, the timing and amount contain significant uncertainty. Approximately |
(2) | The estimated expected contractual commitments related to deposit accounting liabilities have been estimated using projected cash flows from the underlying contracts. It should be noted that, due to the nature of such liabilities, the timing and amount contain significant uncertainty. |
(3) | Certain insurance policies written by our insurance operations feature large deductibles, primarily in construction and national accounts lines. Under such contracts, we are obligated to pay the claimant for the full amount of the claim and are subsequently reimbursed by the policyholder for the deductible amount. In the event we are unable to collect from the policyholder, we would be liable for such defaulted amounts. |
(4) | Unfunded investment commitments are callable by our investment managers. We have assumed that such investments will be funded in the next year but the funding may occur over a longer period of time, due to market conditions and other factors. |
(5) | As part of our securities lending program, we loan securities to third parties and receive collateral in the form of cash or securities. Such collateral is due back to the third parties at the close of the securities lending transactions, a majority of which is overnight and continuous by nature. |
(6) | Pursuant to our 2014 acquisition of the CMG Entities, we are required to make contingent consideration payments based on the closing book value of the pre-closing portfolio of the CMG Entities as re-calculated over an earn-out period and payable at the third, fifth and sixth anniversaries after closing (subject to a one time extension period of one to three years at the sellers’ discretion). The maximum amount of contingent consideration payments over the earn-out period is $136.9 million (or 150% of the closing book value of the CMG Entities less amounts paid at closing). For purposes of this table, the maximum exposure has been shown using an estimated payout pattern. |
(7) | Amounts outstanding under credit facilities include $100 million borrowed by |
ACGL 2016 FORM 10-K | 113 |
Interest Rate Shift in Basis Points | ||||||||||||||||||||||||||||||||||||||
(U.S. dollars in millions) | -100 | -50 | - | +50 | +100 | |||||||||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||
(U.S. dollars in billions) | Interest Rate Shift in Basis Points | |||||||||||||||||||||||||||||||||||||
-100 | -50 | - | +50 | +100 | ||||||||||||||||||||||||||||||||||
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||
Total fair value | $ | 14,037.3 | $ | 13,801.4 | $ | 13,570.1 | $ | 13,340.4 | $ | 13,118.9 | $ | 17.95 | $ | 17.62 | $ | 17.31 | $ | 17.00 | $ | 16.70 | ||||||||||||||||||
Change from base | 3.44 | % | 1.70 | % | (1.69 | )% | (3.32 | )% | 3.7 | % | 1.8 | % | (1.8 | )% | (3.5 | )% | ||||||||||||||||||||||
Change in unrealized value | $ | 467.2 | $ | 231.3 | $ | (229.7 | ) | $ | (451.2 | ) | $ | 0.64 | $ | 0.31 | $ | (0.31 | ) | $ | (0.61 | ) | ||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||||||||||||
Dec. 31, 2015 | ||||||||||||||||||||||||||||||||||||||
Total fair value | $ | 13,570.1 | $ | 13,350.3 | $ | 13,128.9 | $ | 12,913.2 | $ | 12,703.5 | $ | 14.04 | $ | 13.80 | $ | 13.57 | $ | 13.34 | $ | 13.12 | ||||||||||||||||||
Change from base | 3.36 | % | 1.69 | % | (1.64 | )% | (3.24 | )% | 3.4 | % | 1.7 | % | (1.7 | )% | (3.3 | )% | ||||||||||||||||||||||
Change in unrealized value | $ | 441.2 | $ | 221.4 | $ | (215.7 | ) | $ | (425.4 | ) | $ | 0.47 | $ | 0.23 | $ | (0.23 | ) | $ | (0.45 | ) |
ACGL 2016 FORM 10-K | 114 |
Credit Spread Shift in Basis Points | ||||||||||||||||||||||||||||||||||||||
(U.S. dollars in millions) | -100 | -50 | - | +50 | +100 | |||||||||||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||||||||
(U.S. dollars in billions) | Credit Spread Shift in Percentage | |||||||||||||||||||||||||||||||||||||
-100 | -50 | - | +50 | +100 | ||||||||||||||||||||||||||||||||||
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||
Total fair value | $ | 13,973.1 | $ | 13,771.6 | $ | 13,570.1 | $ | 13,368.6 | $ | 13,167.1 | $ | 17.79 | $ | 17.55 | $ | 17.31 | $ | 17.07 | $ | 16.83 | ||||||||||||||||||
Change from base | 2.97 | % | 1.48 | % | (1.48 | )% | (2.97 | )% | 2.8 | % | 1.4 | % | (1.4 | )% | (2.8 | )% | ||||||||||||||||||||||
Change in unrealized value | $ | 403.0 | $ | 201.5 | $ | (201.5 | ) | $ | (403.0 | ) | $ | 0.48 | $ | 0.24 | $ | (0.24 | ) | $ | (0.48 | ) | ||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||||||||||||
Dec. 31, 2015 | ||||||||||||||||||||||||||||||||||||||
Total fair value | $ | 13,391.6 | $ | 13,275.1 | $ | 13,128.9 | $ | 12,995.7 | $ | 12,863.4 | $ | 13.97 | $ | 13.77 | $ | 13.57 | $ | 13.37 | $ | 13.17 | ||||||||||||||||||
Change from base | 2.00 | % | 1.11 | % | (1.01 | )% | (2.02 | )% | 3.0 | % | 1.5 | % | (1.5 | )% | (3.0 | )% | ||||||||||||||||||||||
Change in unrealized value | $ | 262.7 | $ | 146.2 | $ | (133.2 | ) | $ | (265.5 | ) | $ | 0.40 | $ | 0.20 | $ | (0.20 | ) | $ | (0.40 | ) |
ACGL 2016 FORM 10-K | 115 |
(U.S. dollars in thousands, except per share data) | December 31, | December 31, 2016 | December 31, 2015 | |||||||||||
2015 | 2014 | |||||||||||||
Assets, net of insurance liabilities, denominated in foreign currencies, excluding shareholders’ equity and derivatives | $ | (163,199 | ) | $ | 35,372 | |||||||||
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives | $ | (63,077 | ) | $ | (163,199 | ) | ||||||||
Shareholders’ equity denominated in foreign currencies (1) | 328,133 | 336,565 | 290,752 | 328,133 | ||||||||||
Net foreign currency forward contracts outstanding (2) | (97,658 | ) | (308,149 | ) | (250,263 | ) | (97,658 | ) | ||||||
Net assets denominated in foreign currencies | $ | 67,276 | $ | 63,788 | ||||||||||
Net exposures denominated in foreign currencies | $ | (22,588 | ) | $ | 67,276 | |||||||||
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies: | ||||||||||||||
Shareholders’ equity | $ | (6,728 | ) | $ | (6,379 | ) | $ | 2,259 | $ | (6,728 | ) | |||
Book value per common share | $ | (0.05 | ) | $ | (0.05 | ) | ||||||||
Book value per share | $ | 0.02 | $ | (0.05 | ) | |||||||||
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies: | ||||||||||||||
Shareholders’ equity | $ | 6,728 | $ | 6,379 | $ | (2,259 | ) | $ | 6,728 | |||||
Book value per common share | $ | 0.05 | $ | 0.05 | ||||||||||
Book value per share | $ | (0.02 | ) | $ | 0.05 |
(1) | Represents capital contributions held in the foreign currencies |
(2) | Represents the net notional value of outstanding foreign currency forward contracts. |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ACGL 2016 FORM 10-K | 116 |
Index to Financial Statements | Page No. | ||
At December 31, | |||
For the years ended December 31, 2016, 2015 | |||
For the years ended December 31, 2016, 2015 | |||
For the years ended December 31, 2016, 2015 | |||
For the years ended December 31, 2016, 2015 | |||
Notes to Consolidated Financial Statements | |||
ACGL 2016 FORM 10-K | 117 |
ACGL 2016 FORM 10-K | 118 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data) | ||||||||||||||
December 31, | December 31, | |||||||||||||
2015 | 2014 | 2016 | 2015 | |||||||||||
Assets | ||||||||||||||
Investments: | ||||||||||||||
Fixed maturities available for sale, at fair value (amortized cost: $10,515,440 and $10,701,557) | $ | 10,459,353 | $ | 10,750,770 | ||||||||||
Short-term investments available for sale, at fair value (amortized cost: $591,141 and $801,758) | 587,904 | 797,226 | ||||||||||||
Collateral received under securities lending, at fair value (amortized cost: $385,984 and $40,473) | 389,336 | 44,301 | ||||||||||||
Equity securities available for sale, at fair value (cost: $543,767 and $562,534) | 618,405 | 658,182 | ||||||||||||
Other investments available for sale, at fair value (cost: $261,343 and $264,747) | 300,476 | 296,224 | ||||||||||||
Fixed maturities available for sale, at fair value (amortized cost: $13,522,671 and $10,515,440) | $ | 13,426,577 | $ | 10,459,353 | ||||||||||
Short-term investments available for sale, at fair value (amortized cost: $611,878 and $591,141) | 612,005 | 587,904 | ||||||||||||
Collateral received under securities lending, at fair value (amortized cost: $762,554 and $385,984) | 762,565 | 389,336 | ||||||||||||
Equity securities available for sale, at fair value (cost: $475,085 and $543,767) | 518,041 | 618,405 | ||||||||||||
Other investments available for sale, at fair value (cost: $149,077 and $261,343) | 167,970 | 300,476 | ||||||||||||
Investments accounted for using the fair value option | 2,894,494 | 2,425,053 | 3,421,220 | 2,894,494 | ||||||||||
Investments accounted for using the equity method | 592,973 | 349,014 | 811,273 | 592,973 | ||||||||||
Total investments | 15,842,941 | 15,320,770 | 19,719,651 | 15,842,941 | ||||||||||
Cash | 553,326 | 485,702 | 842,942 | 553,326 | ||||||||||
Accrued investment income | 87,206 | 74,316 | 124,483 | 87,206 | ||||||||||
Securities pledged under securities lending, at fair value (amortized cost: $386,411 and $52,076) | 384,081 | 50,802 | ||||||||||||
Securities pledged under securities lending, at fair value (amortized cost: $746,409 and $386,411) | 744,980 | 384,081 | ||||||||||||
Premiums receivable | 983,443 | 948,695 | 1,072,435 | 983,443 | ||||||||||
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | 1,867,373 | 1,812,845 | 2,114,138 | 1,867,373 | ||||||||||
Contractholder receivables | 1,486,296 | 1,309,192 | 1,717,436 | 1,486,296 | ||||||||||
Prepaid reinsurance premiums | 427,609 | 377,078 | ||||||||||||
Deferred acquisition costs, net | 433,477 | 414,525 | ||||||||||||
Ceded unearned premiums | 859,567 | 427,609 | ||||||||||||
Deferred acquisition costs | 447,560 | 382,829 | ||||||||||||
Receivable for securities sold | 45,505 | 78,170 | 58,284 | 45,505 | ||||||||||
Goodwill and intangible assets | 97,531 | 109,539 | 781,553 | 97,531 | ||||||||||
Other assets | 968,482 | 1,024,447 | 889,080 | 980,791 | ||||||||||
Total assets | $ | 23,177,270 | $ | 22,006,081 | $ | 29,372,109 | $ | 23,138,931 | ||||||
Liabilities | ||||||||||||||
Reserve for losses and loss adjustment expenses | $ | 9,125,250 | $ | 9,036,448 | $ | 10,200,960 | $ | 9,125,250 | ||||||
Unearned premiums | 2,333,932 | 2,231,578 | 3,406,870 | 2,333,932 | ||||||||||
Reinsurance balances payable | 224,120 | 219,312 | 300,407 | 224,120 | ||||||||||
Contractholder payables | 1,486,296 | 1,309,192 | 1,717,436 | 1,486,296 | ||||||||||
Collateral held for insured obligations | 248,982 | 184,219 | 301,406 | 248,982 | ||||||||||
Deposit accounting liabilities | 260,364 | 327,384 | 22,150 | 260,364 | ||||||||||
Senior notes | 791,306 | 791,141 | 1,732,258 | 791,306 | ||||||||||
Revolving credit agreement borrowings | 530,434 | 100,000 | 756,650 | 530,434 | ||||||||||
Securities lending payable | 393,844 | 50,529 | 762,554 | 393,844 | ||||||||||
Payable for securities purchased | 64,996 | 128,413 | 76,183 | 64,996 | ||||||||||
Other liabilities | 568,852 | 509,219 | 784,110 | 568,852 | ||||||||||
Total liabilities | 16,028,376 | 14,887,435 | 20,060,984 | 16,028,376 | ||||||||||
Commitments and Contingencies | ||||||||||||||
Redeemable noncontrolling interests | 205,182 | 219,512 | 205,553 | 205,182 | ||||||||||
Shareholders’ Equity | ||||||||||||||
Non-cumulative preferred shares | 325,000 | 325,000 | 772,555 | 325,000 | ||||||||||
Common shares ($0.0033 par, shares issued: 173,107,849 and 171,672,408) | 577 | 572 | ||||||||||||
Convertible non-voting common equivalent preferred shares | 1,101,304 | — | ||||||||||||
Common shares ($0.0033 par, shares issued: 174,644,101 and 173,107,849) | 582 | 577 | ||||||||||||
Additional paid-in capital | 467,339 | 383,073 | 531,687 | 467,339 | ||||||||||
Retained earnings | 7,370,371 | 6,854,571 | 7,996,701 | 7,332,032 | ||||||||||
Accumulated other comprehensive income (loss), net of deferred income tax | (16,502 | ) | 128,856 | (114,541 | ) | (16,502 | ) | |||||||
Common shares held in treasury, at cost (shares: 50,480,066 and 44,304,474) | (1,941,904 | ) | (1,562,019 | ) | ||||||||||
Common shares held in treasury, at cost (shares: 51,856,584 and 50,480,066) | (2,034,570 | ) | (1,941,904 | ) | ||||||||||
Total shareholders' equity available to Arch | 6,204,881 | 6,130,053 | 8,253,718 | 6,166,542 | ||||||||||
Non-redeemable noncontrolling interests | 738,831 | 769,081 | 851,854 | 738,831 | ||||||||||
Total shareholders' equity | 6,943,712 | 6,899,134 | 9,105,572 | 6,905,373 | ||||||||||
Total liabilities, noncontrolling interests and shareholders' equity | $ | 23,177,270 | $ | 22,006,081 | $ | 29,372,109 | $ | 23,138,931 |
ACGL 2016 FORM 10-K | 119 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data) | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Revenues | ||||||||||||||||||||||
Net premiums written | $ | 3,817,531 | $ | 3,891,938 | $ | 3,351,367 | $ | 4,031,391 | $ | 3,817,531 | $ | 3,891,938 | ||||||||||
Change in unearned premiums | (83,626 | ) | (298,190 | ) | (205,415 | ) | (146,569 | ) | (83,626 | ) | (298,190 | ) | ||||||||||
Net premiums earned | 3,733,905 | 3,593,748 | 3,145,952 | 3,884,822 | 3,733,905 | 3,593,748 | ||||||||||||||||
Net investment income | 348,090 | 302,585 | 267,219 | 366,742 | 348,090 | 302,585 | ||||||||||||||||
Net realized gains (losses) | (185,842 | ) | 102,917 | 74,018 | 137,586 | (185,842 | ) | 102,917 | ||||||||||||||
Other-than-temporary impairment losses | (26,152 | ) | (30,470 | ) | (3,961 | ) | (30,794 | ) | (26,152 | ) | (30,470 | ) | ||||||||||
Less investment impairments recognized in other comprehensive income, before taxes | 6,036 | 320 | 175 | 352 | 6,036 | 320 | ||||||||||||||||
Net impairment losses recognized in earnings | (20,116 | ) | (30,150 | ) | (3,786 | ) | (30,442 | ) | (20,116 | ) | (30,150 | ) | ||||||||||
Other underwriting income | 35,497 | 10,142 | 7,639 | 57,173 | 35,497 | 10,142 | ||||||||||||||||
Equity in net income of investment funds accounted for using the equity method | 25,455 | 19,883 | 35,701 | 48,475 | 25,455 | 19,883 | ||||||||||||||||
Other income (loss) | (399 | ) | (10,252 | ) | (586 | ) | (800 | ) | (399 | ) | (10,252 | ) | ||||||||||
Total revenues | 3,936,590 | 3,988,873 | 3,526,157 | 4,463,556 | 3,936,590 | 3,988,873 | ||||||||||||||||
Expenses | ||||||||||||||||||||||
Losses and loss adjustment expenses | 2,050,903 | 1,919,250 | 1,679,424 | 2,185,599 | 2,050,903 | 1,919,250 | ||||||||||||||||
Acquisition expenses | 681,476 | 657,262 | 564,103 | 678,033 | 681,476 | 657,262 | ||||||||||||||||
Other operating expenses | 657,261 | 606,224 | 500,730 | 633,025 | 607,516 | 556,280 | ||||||||||||||||
Corporate expenses | 81,746 | 49,745 | 49,944 | |||||||||||||||||||
Interest expense | 45,874 | 45,634 | 27,060 | 66,252 | 45,874 | 45,634 | ||||||||||||||||
Net foreign exchange (gains) losses | (66,118 | ) | (83,744 | ) | 12,335 | (36,651 | ) | (66,118 | ) | (83,744 | ) | |||||||||||
Total expenses | 3,369,396 | 3,144,626 | 2,783,652 | 3,608,004 | 3,369,396 | 3,144,626 | ||||||||||||||||
Income before income taxes | 567,194 | 844,247 | 742,505 | 855,552 | 567,194 | 844,247 | ||||||||||||||||
Income taxes: | ||||||||||||||||||||||
Current tax expense | 44,194 | 30,550 | 32,696 | 50,745 | 44,194 | 30,550 | ||||||||||||||||
Deferred tax (benefit) expense | (3,582 | ) | (7,563 | ) | 78 | (19,371 | ) | (3,582 | ) | (7,563 | ) | |||||||||||
Income tax expense | 40,612 | 22,987 | 32,774 | 31,374 | 40,612 | 22,987 | ||||||||||||||||
Net income | $ | 526,582 | $ | 821,260 | $ | 709,731 | $ | 824,178 | $ | 526,582 | $ | 821,260 | ||||||||||
Net (income) loss attributable to noncontrolling interests | 11,156 | 13,095 | — | (131,440 | ) | 11,156 | 13,095 | |||||||||||||||
Net income available to Arch | 537,738 | 834,355 | 709,731 | 692,738 | 537,738 | 834,355 | ||||||||||||||||
Preferred dividends | (21,938 | ) | (21,938 | ) | (21,938 | ) | (28,070 | ) | (21,938 | ) | (21,938 | ) | ||||||||||
Net income available to Arch common shareholders | $ | 515,800 | $ | 812,417 | $ | 687,793 | $ | 664,668 | $ | 515,800 | $ | 812,417 | ||||||||||
Net income per common share | ||||||||||||||||||||||
Net income per common share and common share equivalent | ||||||||||||||||||||||
Basic | $ | 4.24 | $ | 6.21 | $ | 5.24 | $ | 5.50 | $ | 4.24 | $ | 6.21 | ||||||||||
Diluted | $ | 4.09 | $ | 6.02 | $ | 5.07 | $ | 5.33 | $ | 4.09 | $ | 6.02 | ||||||||||
Weighted average common shares and common share equivalents outstanding | ||||||||||||||||||||||
Basic | 121,786,127 | 130,817,610 | 131,355,392 | 120,792,114 | 121,786,127 | 130,817,610 | ||||||||||||||||
Diluted | 126,038,743 | 134,922,322 | 135,777,183 | 124,717,493 | 126,038,743 | 134,922,322 |
ACGL 2016 FORM 10-K | 120 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands) | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Comprehensive Income | ||||||||||||||||||||||
Net income | $ | 526,582 | $ | 821,260 | $ | 709,731 | $ | 824,178 | $ | 526,582 | $ | 821,260 | ||||||||||
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 | (77,244 | ) | 146,330 | (176,403 | ) | (21,013 | ) | (77,244 | ) | 146,330 | ||||||||||||
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax | (6,036 | ) | (320 | ) | (175 | ) | (352 | ) | (6,036 | ) | (320 | ) | ||||||||||
Reclassification of net realized gains, net of income taxes, included in net income | (28,233 | ) | (65,104 | ) | (32,686 | ) | (56,361 | ) | (28,233 | ) | (65,104 | ) | ||||||||||
Foreign currency translation adjustments | (34,110 | ) | (27,014 | ) | (2,789 | ) | (20,381 | ) | (34,111 | ) | (27,014 | ) | ||||||||||
Comprehensive income | 380,959 | 875,152 | 497,678 | 726,071 | 380,958 | 875,152 | ||||||||||||||||
Net (income) loss attributable to noncontrolling interests | 11,156 | 13,095 | — | (131,440 | ) | 11,156 | 13,095 | |||||||||||||||
Other comprehensive (income) loss attributable to noncontrolling interests | 265 | — | — | 68 | 265 | — | ||||||||||||||||
Comprehensive income available to Arch | $ | 392,380 | $ | 888,247 | $ | 497,678 | $ | 594,699 | $ | 392,379 | $ | 888,247 |
ACGL 2016 FORM 10-K | 121 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in thousands) | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Non-cumulative preferred shares | ||||||||||||||||||||||
Balance at beginning and end of year | $ | 325,000 | $ | 325,000 | $ | 325,000 | ||||||||||||||||
Balance at beginning of year | $ | 325,000 | $ | 325,000 | $ | 325,000 | ||||||||||||||||
Series E preferred shares issued | 450,000 | — | — | |||||||||||||||||||
Series C preferred shares repurchased | (2,445 | ) | — | — | ||||||||||||||||||
Balance at end of year | 772,555 | 325,000 | 325,000 | |||||||||||||||||||
Convertible non-voting common equivalent preferred shares | ||||||||||||||||||||||
Balance at beginning of year | — | — | — | |||||||||||||||||||
Series D preferred shares issued | 1,101,304 | — | — | |||||||||||||||||||
Balance at end of year | 1,101,304 | — | — | |||||||||||||||||||
Common shares | ||||||||||||||||||||||
Balance at beginning of year | 572 | 565 | 561 | 577 | 572 | 565 | ||||||||||||||||
Common shares issued, net | 5 | 7 | 4 | 5 | 5 | 7 | ||||||||||||||||
Balance at end of year | 577 | 572 | 565 | 582 | 577 | 572 | ||||||||||||||||
Additional paid-in capital | ||||||||||||||||||||||
Balance at beginning of year | 383,073 | 299,517 | 227,778 | 467,339 | 383,073 | 299,517 | ||||||||||||||||
Common shares issued, net | 10,576 | 9,590 | 8,237 | 11,919 | 10,576 | 9,590 | ||||||||||||||||
Issue costs on Series E preferred shares | (15,101 | ) | — | — | ||||||||||||||||||
Exercise of stock options | 15,926 | 18,662 | 10,561 | 9,448 | 15,926 | 18,662 | ||||||||||||||||
Amortization of share-based compensation | 56,096 | 54,789 | 49,237 | 56,581 | 56,096 | 54,789 | ||||||||||||||||
Other | 1,668 | 515 | 3,704 | 1,501 | 1,668 | 515 | ||||||||||||||||
Balance at end of year | 467,339 | 383,073 | 299,517 | 531,687 | 467,339 | 383,073 | ||||||||||||||||
Retained earnings | ||||||||||||||||||||||
Balance at beginning of year | 6,854,571 | 6,042,154 | 5,354,361 | 7,332,032 | 6,816,232 | 6,042,154 | ||||||||||||||||
Cumulative effect of an accounting change (1) | — | — | (38,339 | ) | ||||||||||||||||||
Balance at beginning of year, as adjusted | 7,332,032 | 6,816,232 | 6,003,815 | |||||||||||||||||||
Net income | 526,582 | 821,260 | 709,731 | 824,178 | 526,582 | 821,260 | ||||||||||||||||
Net (income) loss attributable to noncontrolling interests | 11,156 | 13,095 | — | (131,440 | ) | 11,156 | 13,095 | |||||||||||||||
Preferred share dividends | (21,938 | ) | (21,938 | ) | (21,938 | ) | (28,070 | ) | (21,938 | ) | (21,938 | ) | ||||||||||
Balance at end of year | 7,370,371 | 6,854,571 | 6,042,154 | 7,996,701 | 7,332,032 | 6,816,232 | ||||||||||||||||
Accumulated other comprehensive income (loss) | ||||||||||||||||||||||
Balance at beginning of year | 128,856 | 74,964 | 287,017 | (16,502 | ) | 128,856 | 74,964 | |||||||||||||||
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | ||||||||||||||||||||||
Balance at beginning of year | 161,598 | 80,692 | 289,956 | 50,085 | 161,598 | 80,692 | ||||||||||||||||
Unrealized holding gains (losses) arising during period, net of reclassification adjustment | (105,477 | ) | 81,226 | (209,089 | ) | (77,374 | ) | (105,477 | ) | 81,226 | ||||||||||||
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax | (6,036 | ) | (320 | ) | (175 | ) | (352 | ) | (6,036 | ) | (320 | ) | ||||||||||
Balance at end of year | 50,085 | 161,598 | 80,692 | (27,641 | ) | 50,085 | 161,598 | |||||||||||||||
Foreign currency translation adjustments, net of deferred income tax: | ||||||||||||||||||||||
Balance at beginning of year | (32,742 | ) | (5,728 | ) | (2,939 | ) | (66,587 | ) | (32,742 | ) | (5,728 | ) | ||||||||||
Foreign currency translation adjustments | (34,110 | ) | (27,014 | ) | (2,789 | ) | (20,381 | ) | (34,111 | ) | (27,014 | ) | ||||||||||
Foreign currency translation adjustments attributable to noncontrolling interests | 265 | — | — | 68 | 266 | — | ||||||||||||||||
Balance at end of year | (66,587 | ) | (32,742 | ) | (5,728 | ) | (86,900 | ) | (66,587 | ) | (32,742 | ) | ||||||||||
Balance at end of year | (16,502 | ) | 128,856 | 74,964 | (114,541 | ) | (16,502 | ) | 128,856 | |||||||||||||
Common shares held in treasury, at cost | ||||||||||||||||||||||
Balance at beginning of year | (1,562,019 | ) | (1,094,704 | ) | (1,025,839 | ) | (1,941,904 | ) | (1,562,019 | ) | (1,094,704 | ) | ||||||||||
Shares repurchased for treasury | (379,885 | ) | (467,315 | ) | (68,865 | ) | (92,666 | ) | (379,885 | ) | (467,315 | ) | ||||||||||
Balance at end of year | (1,941,904 | ) | (1,562,019 | ) | (1,094,704 | ) | (2,034,570 | ) | (1,941,904 | ) | (1,562,019 | ) | ||||||||||
Total shareholders’ equity available to Arch | 6,204,881 | 6,130,053 | 5,647,496 | 8,253,718 | 6,166,542 | 6,091,714 | ||||||||||||||||
Non-redeemable noncontrolling interests | 738,831 | 769,081 | — | 851,854 | 738,831 | 769,081 | ||||||||||||||||
Total shareholders’ equity | $ | 6,943,712 | $ | 6,899,134 | $ | 5,647,496 | $ | 9,105,572 | $ | 6,905,373 | $ | 6,860,795 |
ACGL 2016 FORM 10-K | 122 |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Operating Activities | ||||||||||||||||||||||
Net income | $ | 526,582 | $ | 821,260 | $ | 709,731 | $ | 824,178 | $ | 526,582 | $ | 821,260 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||
Net realized losses (gains) | 149,961 | (127,511 | ) | (78,084 | ) | (178,507 | ) | 149,961 | (127,511 | ) | ||||||||||||
Net impairment losses recognized in earnings | 20,116 | 30,150 | 3,786 | 30,442 | 20,116 | 30,150 | ||||||||||||||||
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss | 3,857 | 13,340 | 52,824 | 5,644 | 3,857 | 13,340 | ||||||||||||||||
Share-based compensation | 56,096 | 54,789 | 49,237 | 56,581 | 56,096 | 54,789 | ||||||||||||||||
Changes in: | ||||||||||||||||||||||
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 181,658 | 156,211 | (29,393 | ) | 372,244 | 181,658 | 156,211 | |||||||||||||||
Unearned premiums, net of prepaid reinsurance premiums | 83,626 | 298,190 | 205,415 | |||||||||||||||||||
Unearned premiums, net of ceded unearned premiums | 146,569 | 83,626 | 298,190 | |||||||||||||||||||
Premiums receivable | (26,783 | ) | (217,035 | ) | (60,224 | ) | (71,613 | ) | (26,783 | ) | (217,035 | ) | ||||||||||
Deferred acquisition costs, net | (29,008 | ) | (81,584 | ) | (75,948 | ) | ||||||||||||||||
Deferred acquisition costs | (38,597 | ) | (29,008 | ) | (81,584 | ) | ||||||||||||||||
Reinsurance balances payable | (5,885 | ) | 26,699 | 6,830 | 31,542 | (5,885 | ) | 26,699 | ||||||||||||||
Other liabilities | 45,223 | 101,757 | (29,989 | ) | 222,069 | 45,223 | 101,757 | |||||||||||||||
Other items | (7,537 | ) | (39,136 | ) | 96,683 | (3,908 | ) | (7,537 | ) | (39,136 | ) | |||||||||||
Net Cash Provided By Operating Activities | 997,906 | 1,037,130 | 850,868 | 1,396,644 | 997,906 | 1,037,130 | ||||||||||||||||
Investing Activities | ||||||||||||||||||||||
Purchases of fixed maturity investments | (29,451,873 | ) | (28,745,279 | ) | (18,174,988 | ) | (35,532,810 | ) | (29,451,873 | ) | (28,745,279 | ) | ||||||||||
Purchases of equity securities | (515,413 | ) | (520,817 | ) | (535,857 | ) | (665,702 | ) | (515,413 | ) | (520,817 | ) | ||||||||||
Purchases of other investments | (1,749,525 | ) | (1,590,648 | ) | (994,185 | ) | (1,389,406 | ) | (1,749,525 | ) | (1,590,648 | ) | ||||||||||
Proceeds from sales of fixed maturity investments | 28,094,047 | 26,823,189 | 17,194,635 | 34,559,966 | 28,094,047 | 26,823,189 | ||||||||||||||||
Proceeds from sales of equity securities | 564,011 | 411,362 | 462,787 | 751,728 | 564,011 | 411,362 | ||||||||||||||||
Proceeds from sales, redemptions and maturities of other investments | 1,250,883 | 941,798 | 817,648 | 1,149,328 | 1,250,883 | 941,798 | ||||||||||||||||
Proceeds from redemptions and maturities of fixed maturity investments | 748,529 | 762,995 | 731,708 | 755,007 | 748,529 | 762,995 | ||||||||||||||||
Net settlements of derivative instruments | (5,056 | ) | 34,372 | 14,494 | (17,068 | ) | (5,056 | ) | 34,372 | |||||||||||||
Proceeds from investment in joint venture | 40,000 | — | — | — | 40,000 | — | ||||||||||||||||
Net sales (purchases) of short-term investments | 169,095 | 577,126 | (750,613 | ) | (123,410 | ) | 169,095 | 577,126 | ||||||||||||||
Change in cash collateral related to securities lending | (6,662 | ) | 57,470 | (55,643 | ) | (155,248 | ) | (6,662 | ) | 57,470 | ||||||||||||
Purchase of business, net of cash acquired | 818 | (237,106 | ) | — | ||||||||||||||||||
Acquisitions, net of cash | (1,992,720 | ) | 818 | (237,106 | ) | |||||||||||||||||
Purchases of fixed assets | (15,736 | ) | (19,883 | ) | (17,499 | ) | (15,303 | ) | (15,736 | ) | (19,883 | ) | ||||||||||
Change in other assets | (36,993 | ) | — | — | (45,905 | ) | (36,993 | ) | — | |||||||||||||
Net Cash Used For Investing Activities | (913,875 | ) | (1,505,421 | ) | (1,307,513 | ) | (2,721,543 | ) | (913,875 | ) | (1,505,421 | ) | ||||||||||
Financing Activities | ||||||||||||||||||||||
Proceeds from issuance of preferred shares, net | 434,899 | — | — | |||||||||||||||||||
Purchases of common shares under share repurchase program | (365,383 | ) | (454,137 | ) | (57,796 | ) | (75,256 | ) | (365,383 | ) | (454,137 | ) | ||||||||||
Proceeds from common shares issued, net | 4,861 | 6,827 | 3,051 | (2,418 | ) | 4,861 | 6,827 | |||||||||||||||
Proceeds from borrowings | 431,362 | — | 494,228 | 1,386,741 | 431,362 | — | ||||||||||||||||
Repayments of borrowings | (219,171 | ) | — | — | ||||||||||||||||||
Change in cash collateral related to securities lending | 6,662 | (57,470 | ) | 55,643 | 155,248 | 6,662 | (57,470 | ) | ||||||||||||||
Third party investment in non-redeemable noncontrolling interests | — | 796,903 | — | — | — | 796,903 | ||||||||||||||||
Third party investment in redeemable noncontrolling interests | — | 219,233 | — | — | — | 219,233 | ||||||||||||||||
Dividends paid to redeemable noncontrolling interests | (18,307 | ) | (14,448 | ) | — | (17,989 | ) | (18,307 | ) | (14,448 | ) | |||||||||||
Other | (41,913 | ) | 64,973 | 50,830 | 1,685 | (41,913 | ) | 64,973 | ||||||||||||||
Preferred dividends paid | (21,938 | ) | (21,938 | ) | (21,938 | ) | (28,070 | ) | (21,938 | ) | (21,938 | ) | ||||||||||
Net Cash Provided By (Used For) Financing Activities | (4,656 | ) | 539,943 | 524,018 | 1,635,669 | (4,656 | ) | 539,943 | ||||||||||||||
Effects of exchange rate changes on foreign currency cash | (11,751 | ) | (20,007 | ) | (4,357 | ) | (21,154 | ) | (11,751 | ) | (20,007 | ) | ||||||||||
Increase in cash | 67,624 | 51,645 | 63,016 | 289,616 | 67,624 | 51,645 | ||||||||||||||||
Cash beginning of year | 485,702 | 434,057 | 371,041 | 553,326 | 485,702 | 434,057 | ||||||||||||||||
Cash end of year | $ | 553,326 | $ | 485,702 | $ | 434,057 | $ | 842,942 | $ | 553,326 | $ | 485,702 | ||||||||||
Income taxes paid | $ | 40,273 | $ | 20,923 | $ | 15,288 | $ | 50,621 | $ | 40,273 | $ | 20,923 | ||||||||||
Interest paid | $ | 52,728 | $ | 46,429 | $ | 23,733 | $ | 63,288 | $ | 52,728 | $ | 46,429 | ||||||||||
Non-cash consideration paid in convertible non-voting common equivalent preferred shares | $ | 1,101,304 | $ | — | $ | — |
ACGL 2016 FORM 10-K | 123 |
ACGL 2016 FORM 10-K | 124 |
Total | Useful Life | |||||
Purchase price | ||||||
Cash paid | $ | 2,159,524 | ||||
Convertible non-voting common equivalent preferred shares (1) | 1,101,304 | |||||
Total purchase price (a) | $ | 3,260,828 | ||||
Assets acquired | ||||||
Cash | $ | 187,715 | ||||
Investments, at fair value | 3,404,267 | |||||
Accrued investment income | 33,770 | |||||
Premiums receivable | 34,545 | |||||
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | 27,280 | |||||
Ceded unearned premiums | 302,090 | |||||
Intangible asset -- acquired insurance contracts | 350,000 | 9 years | ||||
Intangible asset -- distribution relationships | 115,000 | 20 years | ||||
Intangible asset -- operating platform | 15,000 | 5 years | ||||
Intangible asset -- insurance licenses | 27,000 | Indefinite | ||||
Other assets acquired | 133,222 | |||||
Total assets acquired | 4,629,889 | |||||
Liabilities acquired | ||||||
Reserves for losses and loss adjustment expenses | $ | 577,268 | ||||
Unearned premiums | 837,175 | |||||
Reinsurance balances payable | 49,295 | |||||
Other liabilities acquired | 94,081 | |||||
Total liabilities acquired | 1,557,819 | |||||
Net assets acquired (b) | $ | 3,072,070 | ||||
Goodwill (a)-(b) | $ | 188,758 |
Unaudited Pro Forma | |||||||
Year Ended December 31, | |||||||
2016 | 2015 | ||||||
Total revenues | $ | 5,311,729 | $ | 4,840,084 | |||
Net income available to Arch common shareholders | $ | 913,882 | $ | 718,463 | |||
Net income per common share and common share equivalent | |||||||
Basic | $6.84 | $5.34 | |||||
Diluted | $6.65 | $5.18 |
ACGL 2016 FORM 10-K | 125 |
Total | Useful Life | |||||
Purchase price | ||||||
Cash paid | $ | 245,157 | ||||
Contingent consideration liability | 41,762 | |||||
Total purchase price (a) | $ | 286,919 | ||||
Assets acquired | ||||||
Cash | $ | 9,579 | ||||
Investments, at fair value | 312,093 | |||||
Intangible asset -- acquired insurance contracts | 46,473 | 5 years | ||||
Intangible asset -- operating platform | 29,900 | 5 years | ||||
Intangible asset -- favorable lease contract | 1,056 | 5 years | ||||
Intangible asset -- insurance licenses | 16,858 | Indefinite | ||||
Other assets acquired | 21,691 | |||||
Total assets acquired | 437,650 | |||||
Liabilities acquired | ||||||
Reserves for losses and loss adjustment expenses | $ | 121,572 | ||||
Unearned premiums | 26,261 | |||||
Intangible liability -- unfavorable service contract | 9,533 | 9 years | ||||
Other liabilities acquired | 7,217 | |||||
Total liabilities acquired | 164,583 | |||||
Net assets acquired (b) | $ | 273,067 | ||||
Goodwill (a)-(b) | $ | 13,852 |
ACGL 2016 FORM 10-K | 126 |
ACGL 2016 FORM 10-K | 127 |
ACGL 2016 FORM 10-K | 128 |
ACGL 2016 FORM 10-K | 129 |
ACGL 2016 FORM 10-K | 130 |
ACGL 2016 FORM 10-K | 131 |
ACGL 2016 FORM 10-K | 132 |
ACGL 2016 FORM 10-K | 133 |
ACGL 2016 FORM 10-K | 134 |
4. | Variable Interest Entity and Noncontrolling Interests |
December 31, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Investments accounted for using the fair value option | $ | 1,857,623 | $ | 1,617,107 | |||
Cash | 74,893 | 108,550 | |||||
Accrued investment income | 17,017 | 19,249 | |||||
Premiums receivable | 189,911 | 162,263 | |||||
Reinsurance recoverable on unpaid and paid losses and LAE | 24,420 | 14,135 | |||||
Ceded unearned premiums | 12,145 | 11,129 | |||||
Deferred acquisition costs, net | 86,379 | 75,443 | |||||
Receivable for securities sold | 1,326 | 34,095 | |||||
Goodwill and intangible assets | 7,650 | — | |||||
Other assets | 111,386 | 80,361 | |||||
Total assets of consolidated VIE | $ | 2,382,750 | $ | 2,122,332 | |||
Liabilities | |||||||
Reserves for losses and loss adjustment expenses | $ | 510,809 | $ | 290,997 | |||
Unearned premiums | 293,480 | 249,980 | |||||
Reinsurance balances payable | 12,289 | 14,005 | |||||
Revolving credit agreement borrowings | 256,650 | 430,434 | |||||
Payable for securities purchased | 42,922 | 33,062 | |||||
Other liabilities | 88,976 | 53,624 | |||||
Total liabilities of consolidated VIE | $ | 1,205,126 | $ | 1,072,102 | |||
Redeemable noncontrolling interests | $ | 220,253 | $ | 219,882 |
ACGL 2016 FORM 10-K | 135 |
December 31, | December 31, | |||||||||||||
2015 | 2014 | 2016 | 2015 | |||||||||||
Balance, beginning of year | $ | 769,081 | $ | — | $ | 738,831 | $ | 769,081 | ||||||
Sale of shares to noncontrolling interests | — | 796,904 | — | — | ||||||||||
Amounts attributable to noncontrolling interests | (29,984 | ) | (27,823 | ) | 113,091 | (29,984 | ) | |||||||
Foreign currency translation adjustments | (266 | ) | — | (68 | ) | (266 | ) | |||||||
Balance, end of year | $ | 738,831 | $ | 769,081 | $ | 851,854 | $ | 738,831 |
December 31, | |||||||
2015 | 2014 | ||||||
Balance, beginning of year | $ | 219,512 | $ | — | |||
Sale of shares to noncontrolling interests | — | 219,233 | |||||
Shares acquired by the Company (1) | (14,700 | ) | — | ||||
Accretion of preference share issuance costs | 370 | 279 | |||||
Balance, end of year | $ | 205,182 | $ | 219,512 |
December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Balance, beginning of year | $ | 205,182 | $ | 219,512 | $ | — | |||||
Sale of shares to noncontrolling interests | — | — | 219,233 | ||||||||
Shares acquired by the Company (1) | — | (14,700 | ) | — | |||||||
Accretion of preference share issuance costs | 371 | 370 | 279 | ||||||||
Balance, end of year | $ | 205,553 | $ | 205,182 | $ | 219,512 |
December 31, | December 31, | |||||||||||||||||
2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||
Amounts attributable to non-redeemable noncontrolling interests | $ | 29,984 | $ | 27,823 | $ | (113,091 | ) | $ | 29,984 | $ | 27,823 | |||||||
Dividends attributable to redeemable noncontrolling interests | (18,828 | ) | (14,728 | ) | (18,349 | ) | (18,828 | ) | (14,728 | ) | ||||||||
Net (income) loss attributable to noncontrolling interests | $ | 11,156 | $ | 13,095 | $ | (131,440 | ) | $ | 11,156 | $ | 13,095 |
ACGL 2016 FORM 10-K | 136 |
Maximum Exposure to Loss | |||||||||||||||
Total VIE Assets | On-Balance Sheet | Off-Balance Sheet | Total | ||||||||||||
Bellemeade Re I Ltd. | $ | 156,551 | $ | 401 | $ | 1,310 | $ | 1,711 | |||||||
Bellemeade Re II Ltd. | 298,578 | 9 | 1,103 | 1,112 | |||||||||||
Total | $ | 455,129 | $ | 410 | $ | 2,413 | $ | 2,823 |
ACGL 2016 FORM 10-K | 137 |
ACGL 2016 FORM 10-K | 138 |
Year Ended December 31, 2015 | Year Ended December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | |||||||||||||||||||||||||||||||||||
Gross premiums written (1) | $ | 2,944,018 | $ | 1,419,022 | $ | 295,557 | $ | 4,656,723 | $ | 488,899 | $ | 4,797,163 | $ | 3,027,049 | $ | 1,494,397 | $ | 499,725 | $ | 5,019,363 | $ | 535,094 | $ | 5,202,134 | ||||||||||||||||||||||
Premiums ceded | (898,347 | ) | (380,614 | ) | (28,064 | ) | (1,305,151 | ) | (22,940 | ) | (979,632 | ) | (954,768 | ) | (440,541 | ) | (108,259 | ) | (1,501,760 | ) | (21,306 | ) | (1,170,743 | ) | ||||||||||||||||||||||
Net premiums written | 2,045,671 | 1,038,408 | 267,493 | 3,351,572 | 465,959 | 3,817,531 | 2,072,281 | 1,053,856 | 391,466 | 3,517,603 | 513,788 | 4,031,391 | ||||||||||||||||||||||||||||||||||
Change in unearned premiums | (863 | ) | 38,727 | (53,383 | ) | (15,519 | ) | (68,107 | ) | (83,626 | ) | 1,623 | 2,376 | (104,750 | ) | (100,751 | ) | (45,818 | ) | (146,569 | ) | |||||||||||||||||||||||||
Net premiums earned | 2,044,808 | 1,077,135 | 214,110 | 3,336,053 | 397,852 | 3,733,905 | 2,073,904 | 1,056,232 | 286,716 | 3,416,852 | 467,970 | 3,884,822 | ||||||||||||||||||||||||||||||||||
Other underwriting income | 1,993 | 10,606 | 18,430 | 31,029 | 4,468 | 35,497 | — | 36,403 | 17,024 | 53,427 | 3,746 | 57,173 | ||||||||||||||||||||||||||||||||||
Losses and loss adjustment expenses | (1,292,647 | ) | (440,350 | ) | (40,247 | ) | (1,773,244 | ) | (277,659 | ) | (2,050,903 | ) | (1,359,313 | ) | (475,762 | ) | (28,943 | ) | (1,864,018 | ) | (321,581 | ) | (2,185,599 | ) | ||||||||||||||||||||||
Acquisition expenses, net | (299,317 | ) | (223,632 | ) | (45,076 | ) | (568,025 | ) | (113,451 | ) | (681,476 | ) | ||||||||||||||||||||||||||||||||||
Acquisition expenses | (304,066 | ) | (212,375 | ) | (32,065 | ) | (548,506 | ) | (129,527 | ) | (678,033 | ) | ||||||||||||||||||||||||||||||||||
Other operating expenses | (354,416 | ) | (155,811 | ) | (82,370 | ) | (592,597 | ) | (14,919 | ) | (607,516 | ) | (353,782 | ) | (143,408 | ) | (101,293 | ) | (598,483 | ) | (25,163 | ) | (623,646 | ) | ||||||||||||||||||||||
Underwriting income (loss) | $ | 100,421 | $ | 267,948 | $ | 64,847 | 433,216 | (3,709 | ) | 429,507 | $ | 56,743 | $ | 261,090 | $ | 141,439 | 459,272 | (4,555 | ) | 454,717 | ||||||||||||||||||||||||||
Net investment income | 271,680 | 76,410 | 348,090 | 277,193 | 89,549 | 366,742 | ||||||||||||||||||||||||||||||||||||||||
Net realized gains (losses) | (99,133 | ) | (86,709 | ) | (185,842 | ) | 69,586 | 68,000 | 137,586 | |||||||||||||||||||||||||||||||||||||
Net impairment losses recognized in earnings | (20,116 | ) | — | (20,116 | ) | (30,442 | ) | — | (30,442 | ) | ||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 25,455 | — | 25,455 | 48,475 | — | 48,475 | ||||||||||||||||||||||||||||||||||||||||
Other income (loss) | (399 | ) | — | (399 | ) | (800 | ) | — | (800 | ) | ||||||||||||||||||||||||||||||||||||
Other expenses | (49,745 | ) | — | (49,745 | ) | |||||||||||||||||||||||||||||||||||||||||
Corporate expenses (2) | (49,396 | ) | — | (49,396 | ) | |||||||||||||||||||||||||||||||||||||||||
UGC transaction costs and other (2) | (41,729 | ) | — | (41,729 | ) | |||||||||||||||||||||||||||||||||||||||||
Interest expense | (41,518 | ) | (4,356 | ) | (45,874 | ) | (53,464 | ) | (12,788 | ) | (66,252 | ) | ||||||||||||||||||||||||||||||||||
Net foreign exchange gains (losses) | 62,624 | 3,494 | 66,118 | 31,409 | 5,242 | 36,651 | ||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 582,064 | (14,870 | ) | 567,194 | 710,104 | 145,448 | 855,552 | |||||||||||||||||||||||||||||||||||||||
Income tax expense | (40,612 | ) | — | (40,612 | ) | (31,375 | ) | 1 | (31,374 | ) | ||||||||||||||||||||||||||||||||||||
Net income (loss) | 541,452 | (14,870 | ) | 526,582 | 678,729 | 145,449 | 824,178 | |||||||||||||||||||||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (18,828 | ) | (18,828 | ) | — | (18,349 | ) | (18,349 | ) | ||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | — | 29,984 | 29,984 | — | (113,091 | ) | (113,091 | ) | ||||||||||||||||||||||||||||||||||||||
Net income (loss) available to Arch | 541,452 | (3,714 | ) | 537,738 | 678,729 | 14,009 | 692,738 | |||||||||||||||||||||||||||||||||||||||
Preferred dividends | (21,938 | ) | — | (21,938 | ) | (28,070 | ) | — | (28,070 | ) | ||||||||||||||||||||||||||||||||||||
Net income (loss) available to Arch common shareholders | $ | 519,514 | $ | (3,714 | ) | $ | 515,800 | $ | 650,659 | $ | 14,009 | $ | 664,668 | |||||||||||||||||||||||||||||||||
Underwriting Ratios | ||||||||||||||||||||||||||||||||||||||||||||||
Loss ratio | 63.2 | % | 40.9 | % | 18.8 | % | 53.2 | % | 69.8 | % | 54.9 | % | 65.5 | % | 45.0 | % | 10.1 | % | 54.6 | % | 68.7 | % | 56.3 | % | ||||||||||||||||||||||
Acquisition expense ratio | 14.6 | % | 20.8 | % | 21.1 | % | 17.0 | % | 28.5 | % | 18.3 | % | 14.7 | % | 20.1 | % | 11.2 | % | 16.1 | % | 27.7 | % | 17.5 | % | ||||||||||||||||||||||
Other operating expense ratio | 17.3 | % | 14.5 | % | 38.5 | % | 17.8 | % | 3.7 | % | 16.3 | % | 17.1 | % | 13.6 | % | 35.3 | % | 17.5 | % | 5.4 | % | 16.1 | % | ||||||||||||||||||||||
Combined ratio | 95.1 | % | 76.2 | % | 78.4 | % | 88.0 | % | 102.0 | % | 89.5 | % | 97.3 | % | 78.7 | % | 56.6 | % | 88.2 | % | 101.8 | % | 89.9 | % | ||||||||||||||||||||||
Goodwill and intangible assets | $ | 28,810 | $ | 1,875 | $ | 66,846 | $ | 97,531 | $ | — | $ | 97,531 | $ | 25,206 | $ | 956 | $ | 747,741 | $ | 773,903 | $ | 7,650 | $ | 781,553 | ||||||||||||||||||||||
Total investable assets | $ | 14,644,831 | $ | 1,696,107 | $ | 16,340,938 | $ | 18,636,189 | $ | 1,857,763 | $ | 20,493,952 | ||||||||||||||||||||||||||||||||||
Total assets | 21,054,938 | 2,122,332 | 23,177,270 | 26,989,359 | 2,382,750 | 29,372,109 | ||||||||||||||||||||||||||||||||||||||||
Total liabilities | 14,956,274 | 1,072,102 | 16,028,376 | 18,855,858 | 1,205,126 | 20,060,984 |
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
(2) | Certain expenses have been excluded from ‘corporate expenses’ and ‘other operating expenses’ totaling $32.3 million and $9.4 million, respectively, and reflected in ‘UGC transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of the presentation of such items. |
ACGL 2016 FORM 10-K | 139 |
Year Ended December 31, 2015 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 2,944,018 | $ | 1,419,022 | $ | 295,557 | $ | 4,656,723 | $ | 488,899 | $ | 4,797,163 | |||||||||||
Premiums ceded | (898,347 | ) | (380,614 | ) | (28,064 | ) | (1,305,151 | ) | (22,940 | ) | (979,632 | ) | |||||||||||
Net premiums written | 2,045,671 | 1,038,408 | 267,493 | 3,351,572 | 465,959 | 3,817,531 | |||||||||||||||||
Change in unearned premiums | (863 | ) | 38,727 | (53,383 | ) | (15,519 | ) | (68,107 | ) | (83,626 | ) | ||||||||||||
Net premiums earned | 2,044,808 | 1,077,135 | 214,110 | 3,336,053 | 397,852 | 3,733,905 | |||||||||||||||||
Other underwriting income | 1,993 | 10,606 | 18,430 | 31,029 | 4,468 | 35,497 | |||||||||||||||||
Losses and loss adjustment expenses | (1,292,647 | ) | (440,350 | ) | (40,247 | ) | (1,773,244 | ) | (277,659 | ) | (2,050,903 | ) | |||||||||||
Acquisition expenses, net | (299,317 | ) | (223,632 | ) | (45,076 | ) | (568,025 | ) | (113,451 | ) | (681,476 | ) | |||||||||||
Other operating expenses | (354,416 | ) | (155,811 | ) | (82,370 | ) | (592,597 | ) | (14,919 | ) | (607,516 | ) | |||||||||||
Underwriting income (loss) | $ | 100,421 | $ | 267,948 | $ | 64,847 | 433,216 | (3,709 | ) | 429,507 | |||||||||||||
Net investment income | 271,680 | 76,410 | 348,090 | ||||||||||||||||||||
Net realized gains (losses) | (99,133 | ) | (86,709 | ) | (185,842 | ) | |||||||||||||||||
Net impairment losses recognized in earnings | (20,116 | ) | — | (20,116 | ) | ||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 25,455 | — | 25,455 | ||||||||||||||||||||
Other income (loss) | (399 | ) | — | (399 | ) | ||||||||||||||||||
Corporate expenses | (49,745 | ) | — | (49,745 | ) | ||||||||||||||||||
Interest expense | (41,518 | ) | (4,356 | ) | (45,874 | ) | |||||||||||||||||
Net foreign exchange gains (losses) | 62,624 | 3,494 | 66,118 | ||||||||||||||||||||
Income (loss) before income taxes | 582,064 | (14,870 | ) | 567,194 | |||||||||||||||||||
Income tax expense | (40,612 | ) | — | (40,612 | ) | ||||||||||||||||||
Net income (loss) | 541,452 | (14,870 | ) | 526,582 | |||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (18,828 | ) | (18,828 | ) | ||||||||||||||||||
Amounts attributable to noncontrolling interests | — | 29,984 | 29,984 | ||||||||||||||||||||
Net income (loss) available to Arch | 541,452 | (3,714 | ) | 537,738 | |||||||||||||||||||
Preferred dividends | (21,938 | ) | — | (21,938 | ) | ||||||||||||||||||
Net income (loss) available to Arch common shareholders | $ | 519,514 | $ | (3,714 | ) | $ | 515,800 | ||||||||||||||||
Underwriting Ratios | |||||||||||||||||||||||
Loss ratio | 63.2 | % | 40.9 | % | 18.8 | % | 53.2 | % | 69.8 | % | 54.9 | % | |||||||||||
Acquisition expense ratio | 14.6 | % | 20.8 | % | 21.1 | % | 17.0 | % | 28.5 | % | 18.3 | % | |||||||||||
Other operating expense ratio | 17.3 | % | 14.5 | % | 38.5 | % | 17.8 | % | 3.7 | % | 16.3 | % | |||||||||||
Combined ratio | 95.1 | % | 76.2 | % | 78.4 | % | 88.0 | % | 102.0 | % | 89.5 | % | |||||||||||
Goodwill and intangible assets | $ | 28,810 | $ | 1,875 | $ | 66,846 | $ | 97,531 | $ | — | $ | 97,531 | |||||||||||
Total investable assets | $ | 14,644,831 | $ | 1,696,107 | $ | 16,340,938 | |||||||||||||||||
Total assets | 21,016,599 | 2,122,332 | 23,138,931 | ||||||||||||||||||||
Total liabilities | 14,956,274 | 1,072,102 | 16,028,376 |
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
ACGL 2016 FORM 10-K | 140 |
Year Ended December 31, 2014 | Year Ended December 31, 2014 | |||||||||||||||||||||||||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | |||||||||||||||||||||||||||||||||||
Gross premiums written (1) | $ | 3,008,669 | $ | 1,527,245 | $ | 227,356 | $ | 4,760,394 | $ | 288,627 | $ | 4,840,616 | $ | 3,008,669 | $ | 1,527,245 | $ | 227,356 | $ | 4,760,394 | $ | 288,627 | $ | 4,840,616 | ||||||||||||||||||||||
Premiums ceded | (862,015 | ) | (261,254 | ) | (22,519 | ) | (1,142,912 | ) | (14,171 | ) | (948,678 | ) | (862,015 | ) | (261,254 | ) | (22,519 | ) | (1,142,912 | ) | (14,171 | ) | (948,678 | ) | ||||||||||||||||||||||
Net premiums written | 2,146,654 | 1,265,991 | 204,837 | 3,617,482 | 274,456 | 3,891,938 | 2,146,654 | 1,265,991 | 204,837 | 3,617,482 | 274,456 | 3,891,938 | ||||||||||||||||||||||||||||||||||
Change in unearned premiums | (129,284 | ) | 13,337 | (11,264 | ) | (127,211 | ) | (170,979 | ) | (298,190 | ) | (129,284 | ) | 13,337 | (11,264 | ) | (127,211 | ) | (170,979 | ) | (298,190 | ) | ||||||||||||||||||||||||
Net premiums earned | 2,017,370 | 1,279,328 | 193,573 | 3,490,271 | 103,477 | 3,593,748 | 2,017,370 | 1,279,328 | 193,573 | 3,490,271 | 103,477 | 3,593,748 | ||||||||||||||||||||||||||||||||||
Other underwriting income | 2,135 | 3,167 | 4,840 | 10,142 | — | 10,142 | 2,135 | 3,167 | 4,840 | 10,142 | — | 10,142 | ||||||||||||||||||||||||||||||||||
Losses and loss adjustment expenses | (1,260,953 | ) | (532,450 | ) | (55,674 | ) | (1,849,077 | ) | (70,173 | ) | (1,919,250 | ) | (1,260,953 | ) | (532,450 | ) | (55,674 | ) | (1,849,077 | ) | (70,173 | ) | (1,919,250 | ) | ||||||||||||||||||||||
Acquisition expenses, net | (316,308 | ) | (261,438 | ) | (49,400 | ) | (627,146 | ) | (30,116 | ) | (657,262 | ) | (316,308 | ) | (261,438 | ) | (49,400 | ) | (627,146 | ) | (30,116 | ) | (657,262 | ) | ||||||||||||||||||||||
Other operating expenses | (335,157 | ) | (147,964 | ) | (66,891 | ) | (550,012 | ) | (6,268 | ) | (556,280 | ) | (335,157 | ) | (147,964 | ) | (66,891 | ) | (550,012 | ) | (6,268 | ) | (556,280 | ) | ||||||||||||||||||||||
Underwriting income (loss) | $ | 107,087 | $ | 340,643 | $ | 26,448 | 474,178 | (3,080 | ) | 471,098 | $ | 107,087 | $ | 340,643 | $ | 26,448 | 474,178 | (3,080 | ) | 471,098 | ||||||||||||||||||||||||||
Net investment income | 284,336 | 18,249 | 302,585 | 284,336 | 18,249 | 302,585 | ||||||||||||||||||||||||||||||||||||||||
Net realized gains (losses) | 133,384 | (30,467 | ) | 102,917 | 133,384 | (30,467 | ) | 102,917 | ||||||||||||||||||||||||||||||||||||||
Net impairment losses recognized in earnings | (30,150 | ) | — | (30,150 | ) | (30,150 | ) | — | (30,150 | ) | ||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 19,883 | — | 19,883 | 19,883 | — | 19,883 | ||||||||||||||||||||||||||||||||||||||||
Other income (loss) | (10,252 | ) | — | (10,252 | ) | (10,252 | ) | — | (10,252 | ) | ||||||||||||||||||||||||||||||||||||
Other expenses | (47,615 | ) | (2,329 | ) | (49,944 | ) | ||||||||||||||||||||||||||||||||||||||||
Corporate expenses | (47,615 | ) | (2,329 | ) | (49,944 | ) | ||||||||||||||||||||||||||||||||||||||||
Interest expense | (45,634 | ) | — | (45,634 | ) | (45,634 | ) | — | (45,634 | ) | ||||||||||||||||||||||||||||||||||||
Net foreign exchange gains (losses) | 82,658 | 1,086 | 83,744 | 82,658 | 1,086 | 83,744 | ||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 860,788 | (16,541 | ) | 844,247 | 860,788 | (16,541 | ) | 844,247 | ||||||||||||||||||||||||||||||||||||||
Income tax expense | (22,987 | ) | — | (22,987 | ) | |||||||||||||||||||||||||||||||||||||||||
Income tax benefit | (22,987 | ) | — | (22,987 | ) | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 837,801 | (16,541 | ) | 821,260 | 837,801 | (16,541 | ) | 821,260 | ||||||||||||||||||||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (14,728 | ) | (14,728 | ) | — | (14,728 | ) | (14,728 | ) | ||||||||||||||||||||||||||||||||||||
Amounts attributable to noncontrolling interests | — | 27,823 | 27,823 | — | 27,823 | 27,823 | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) available to Arch | 837,801 | (3,446 | ) | 834,355 | 837,801 | (3,446 | ) | 834,355 | ||||||||||||||||||||||||||||||||||||||
Preferred dividends | (21,938 | ) | — | (21,938 | ) | (21,938 | ) | — | (21,938 | ) | ||||||||||||||||||||||||||||||||||||
Net income (loss) available to Arch common shareholders | $ | 815,863 | $ | (3,446 | ) | $ | 812,417 | $ | 815,863 | $ | (3,446 | ) | $ | 812,417 | ||||||||||||||||||||||||||||||||
Underwriting Ratios | ||||||||||||||||||||||||||||||||||||||||||||||
Loss ratio | 62.5 | % | 41.6 | % | 28.8 | % | 53.0 | % | 67.8 | % | 53.4 | % | 62.5 | % | 41.6 | % | 28.8 | % | 53.0 | % | 67.8 | % | 53.4 | % | ||||||||||||||||||||||
Acquisition expense ratio | 15.7 | % | 20.4 | % | 25.5 | % | 18.0 | % | 29.1 | % | 18.3 | % | 15.7 | % | 20.4 | % | 25.5 | % | 18.0 | % | 29.1 | % | 18.3 | % | ||||||||||||||||||||||
Other operating expense ratio | 16.6 | % | 11.6 | % | 34.6 | % | 15.8 | % | 6.1 | % | 15.5 | % | 16.6 | % | 11.6 | % | 34.6 | % | 15.8 | % | 6.1 | % | 15.5 | % | ||||||||||||||||||||||
Combined ratio | 94.8 | % | 73.6 | % | 88.9 | % | 86.8 | % | 103.0 | % | 87.2 | % | 94.8 | % | 73.6 | % | 88.9 | % | 86.8 | % | 103.0 | % | 87.2 | % | ||||||||||||||||||||||
Goodwill and intangible assets | $ | 28,331 | $ | 3,333 | $ | 77,875 | $ | 109,539 | $ | — | $ | 109,539 | $ | 28,331 | $ | 3,333 | $ | 77,875 | $ | 109,539 | $ | — | $ | 109,539 | ||||||||||||||||||||||
Total investable assets | $ | 14,599,490 | $ | 1,163,240 | $ | 15,762,730 | $ | 14,599,490 | $ | 1,163,240 | $ | 15,762,730 | ||||||||||||||||||||||||||||||||||
Total assets | 20,523,565 | 1,482,516 | 22,006,081 | 20,485,226 | 1,482,516 | 21,967,742 | ||||||||||||||||||||||||||||||||||||||||
Total liabilities | 14,488,775 | 398,660 | 14,887,435 | 14,488,775 | 398,660 | 14,887,435 |
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
ACGL 2016 FORM 10-K | 141 |
Year Ended December 31, 2013 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 2,712,509 | $ | 1,399,621 | $ | 89,570 | $ | 4,196,623 | $ | — | $ | 4,196,623 | |||||||||||
Premiums ceded | (763,713 | ) | (86,620 | ) | — | (845,256 | ) | — | (845,256 | ) | |||||||||||||
Net premiums written | 1,948,796 | 1,313,001 | 89,570 | 3,351,367 | — | 3,351,367 | |||||||||||||||||
Change in unearned premiums | (72,782 | ) | (94,329 | ) | (38,304 | ) | (205,415 | ) | — | (205,415 | ) | ||||||||||||
Net premiums earned | 1,876,014 | 1,218,672 | 51,266 | 3,145,952 | — | 3,145,952 | |||||||||||||||||
Other underwriting income | 2,122 | 5,258 | 259 | 7,639 | — | 7,639 | |||||||||||||||||
Losses and loss adjustment expenses | (1,188,445 | ) | (486,236 | ) | (4,743 | ) | (1,679,424 | ) | — | (1,679,424 | ) | ||||||||||||
Acquisition expenses, net | (311,904 | ) | (234,373 | ) | (17,826 | ) | (564,103 | ) | — | (564,103 | ) | ||||||||||||
Other operating expenses | (315,387 | ) | (134,563 | ) | (8,377 | ) | (458,327 | ) | — | (458,327 | ) | ||||||||||||
Underwriting income (loss) | $ | 62,400 | $ | 368,758 | $ | 20,579 | 451,737 | — | 451,737 | ||||||||||||||
Net investment income | 267,219 | — | 267,219 | ||||||||||||||||||||
Net realized gains (losses) | 74,018 | — | 74,018 | ||||||||||||||||||||
Net impairment losses recognized in earnings | (3,786 | ) | — | (3,786 | ) | ||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 35,701 | — | 35,701 | ||||||||||||||||||||
Other income (loss) | (586 | ) | — | (586 | ) | ||||||||||||||||||
Other expenses | (42,403 | ) | — | (42,403 | ) | ||||||||||||||||||
Interest expense | (27,060 | ) | — | (27,060 | ) | ||||||||||||||||||
Net foreign exchange gains (losses) | (12,335 | ) | — | (12,335 | ) | ||||||||||||||||||
Income (loss) before income taxes | 742,505 | — | 742,505 | ||||||||||||||||||||
Income tax benefit | (32,774 | ) | — | (32,774 | ) | ||||||||||||||||||
Net income (loss) | 709,731 | — | 709,731 | ||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | — | — | ||||||||||||||||||||
Amounts attributable to noncontrolling interests | — | — | — | ||||||||||||||||||||
Net income (loss) available to Arch | 709,731 | — | 709,731 | ||||||||||||||||||||
Preferred dividends | (21,938 | ) | — | (21,938 | ) | ||||||||||||||||||
Net income (loss) available to Arch common shareholders | $ | 687,793 | $ | — | $ | 687,793 | |||||||||||||||||
Underwriting Ratios | |||||||||||||||||||||||
Loss ratio | 63.3 | % | 39.9 | % | 9.3 | % | 53.4 | % | — | 53.4 | % | ||||||||||||
Acquisition expense ratio | 16.6 | % | 19.2 | % | 34.8 | % | 17.9 | % | — | 17.9 | % | ||||||||||||
Other operating expense ratio | 16.8 | % | 11.0 | % | 16.3 | % | 14.6 | % | — | 14.6 | % | ||||||||||||
Combined ratio | 96.7 | % | 70.1 | % | 60.4 | % | 85.9 | % | — | 85.9 | % | ||||||||||||
Goodwill and intangible assets | $ | 20,419 | $ | 6,900 | $ | — | $ | 27,319 | $ | — | $ | 27,319 | |||||||||||
Total investable assets | $ | 14,049,525 | $ | — | $ | 14,049,525 | |||||||||||||||||
Total assets | 19,557,054 | — | 19,557,054 | ||||||||||||||||||||
Total liabilities | 13,909,558 | — | 13,909,558 |
INSURANCE SEGMENT | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Net premiums written (1) | ||||||||||||||||||||||
Professional lines (2) | $ | 434,024 | $ | 476,604 | $ | 476,193 | $ | 440,149 | $ | 434,024 | $ | 476,604 | ||||||||||
Construction and national accounts | 328,997 | 299,463 | 286,994 | |||||||||||||||||||
Programs | 423,157 | 480,580 | 419,673 | 330,322 | 423,157 | 480,580 | ||||||||||||||||
Construction and national accounts | 299,463 | 286,994 | 271,110 | |||||||||||||||||||
Travel, accident and health | 224,380 | 160,132 | 145,732 | |||||||||||||||||||
Excess and surplus casualty (3) | 204,856 | 212,519 | 149,286 | 214,863 | 204,856 | 212,519 | ||||||||||||||||
Property, energy, marine and aviation | 203,186 | 244,640 | 280,551 | 175,376 | 203,186 | 244,640 | ||||||||||||||||
Travel, accident and health | 160,132 | 145,732 | 104,903 | |||||||||||||||||||
Lenders products | 106,916 | 100,407 | 101,576 | 105,650 | 106,916 | 100,407 | ||||||||||||||||
Other (4) | 213,937 | 199,178 | 145,504 | 252,544 | 213,937 | 199,178 | ||||||||||||||||
Total | $ | 2,045,671 | $ | 2,146,654 | $ | 1,948,796 | $ | 2,072,281 | $ | 2,045,671 | $ | 2,146,654 | ||||||||||
Net premiums earned (1) | ||||||||||||||||||||||
Professional lines (2) | $ | 424,968 | $ | 456,508 | $ | 491,791 | $ | 431,391 | $ | 424,968 | $ | 456,508 | ||||||||||
Construction and national accounts | 322,072 | 296,828 | 277,811 | |||||||||||||||||||
Programs | 446,512 | 460,392 | 386,840 | 357,715 | 446,512 | 460,392 | ||||||||||||||||
Construction and national accounts | 296,828 | 277,811 | 250,729 | |||||||||||||||||||
Travel, accident and health | 219,169 | 153,578 | 127,691 | |||||||||||||||||||
Excess and surplus casualty (3) | 208,091 | 182,024 | 118,395 | 219,046 | 208,091 | 182,024 | ||||||||||||||||
Property, energy, marine and aviation | 216,127 | 244,974 | 304,294 | 188,938 | 216,127 | 244,974 | ||||||||||||||||
Travel, accident and health | 153,578 | 127,691 | 97,135 | |||||||||||||||||||
Lenders products | 90,906 | 94,438 | 99,847 | 98,517 | 90,906 | 94,438 | ||||||||||||||||
Other (4) | 207,798 | 173,532 | 126,983 | 237,056 | 207,798 | 173,532 | ||||||||||||||||
Total | $ | 2,044,808 | $ | 2,017,370 | $ | 1,876,014 | $ | 2,073,904 | $ | 2,044,808 | $ | 2,017,370 | ||||||||||
Net premiums written by client location (1) | ||||||||||||||||||||||
United States | $ | 1,710,918 | $ | 1,726,181 | $ | 1,526,156 | $ | 1,718,415 | $ | 1,710,918 | $ | 1,726,181 | ||||||||||
Europe | 187,020 | 240,136 | 226,254 | 173,423 | 187,020 | 240,136 | ||||||||||||||||
Asia and Pacific | 64,638 | 79,564 | 95,970 | 93,752 | 64,638 | 79,564 | ||||||||||||||||
Other | 83,095 | 100,773 | 100,416 | 86,691 | 83,095 | 100,773 | ||||||||||||||||
Total | $ | 2,045,671 | $ | 2,146,654 | $ | 1,948,796 | $ | 2,072,281 | $ | 2,045,671 | $ | 2,146,654 | ||||||||||
Net premiums written by underwriting location (1) | ||||||||||||||||||||||
United States | $ | 1,673,867 | $ | 1,688,887 | $ | 1,478,930 | $ | 1,690,208 | $ | 1,673,867 | $ | 1,688,887 | ||||||||||
Europe | 317,998 | 394,430 | 389,763 | 327,034 | 317,998 | 394,430 | ||||||||||||||||
Other | 53,806 | 63,337 | 80,103 | 55,039 | 53,806 | 63,337 | ||||||||||||||||
Total | $ | 2,045,671 | $ | 2,146,654 | $ | 1,948,796 | $ | 2,072,281 | $ | 2,045,671 | $ | 2,146,654 |
(1) | Insurance segment results include premiums written and earned assumed through intersegment transactions and exclude premiums written and earned ceded through intersegment transactions. |
(2) | Includes professional liability, executive assurance and healthcare business. |
(3) | Includes casualty and contract binding business. |
(4) | Includes alternative markets, excess workers' compensation and surety business. |
ACGL 2016 FORM 10-K | 142 |
REINSURANCE SEGMENT | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
Net premiums written (1) | ||||||||||||||||||||||
Casualty (2) | $ | 303,093 | $ | 317,996 | $ | 306,304 | ||||||||||||||||
Other specialty (3) | 298,794 | 405,126 | 417,865 | |||||||||||||||||||
Other specialty (2) | $ | 348,852 | $ | 298,794 | $ | 405,126 | ||||||||||||||||
Casualty (3) | 305,252 | 303,093 | 317,996 | |||||||||||||||||||
Property excluding property catastrophe (4) | 280,511 | 343,043 | 292,536 | 267,548 | 280,511 | 343,043 | ||||||||||||||||
Property catastrophe | 91,620 | 137,471 | 220,749 | 75,789 | 91,620 | 137,471 | ||||||||||||||||
Marine and aviation | 50,834 | 50,444 | 64,380 | 37,790 | 50,834 | 50,444 | ||||||||||||||||
Other (5) | 13,556 | 11,911 | 11,167 | 18,625 | 13,556 | 11,911 | ||||||||||||||||
Total | $ | 1,038,408 | $ | 1,265,991 | $ | 1,313,001 | $ | 1,053,856 | $ | 1,038,408 | $ | 1,265,991 | ||||||||||
Net premiums earned (1) | ||||||||||||||||||||||
Casualty (2) | $ | 310,249 | $ | 327,518 | $ | 241,774 | ||||||||||||||||
Other specialty (3) | 311,307 | 424,725 | 387,630 | |||||||||||||||||||
Other specialty (2) | $ | 329,994 | $ | 311,307 | $ | 424,725 | ||||||||||||||||
Casualty (3) | 300,160 | 310,249 | 327,518 | |||||||||||||||||||
Property excluding property catastrophe (4) | 295,487 | 303,496 | 274,719 | 282,018 | 295,487 | 303,496 | ||||||||||||||||
Property catastrophe | 96,865 | 150,761 | 232,423 | 73,803 | 96,865 | 150,761 | ||||||||||||||||
Marine and aviation | 50,808 | 61,118 | 70,105 | 52,579 | 50,808 | 61,118 | ||||||||||||||||
Other (5) | 12,419 | 11,710 | 12,021 | 17,678 | 12,419 | 11,710 | ||||||||||||||||
Total | $ | 1,077,135 | $ | 1,279,328 | $ | 1,218,672 | $ | 1,056,232 | $ | 1,077,135 | $ | 1,279,328 | ||||||||||
Net premiums written (1) | ||||||||||||||||||||||
Pro rata | $ | 537,556 | $ | 663,135 | $ | 692,024 | $ | 558,671 | $ | 537,556 | $ | 663,135 | ||||||||||
Excess of loss | 500,852 | 602,856 | 620,977 | 495,185 | 500,852 | 602,856 | ||||||||||||||||
Total | $ | 1,038,408 | $ | 1,265,991 | $ | 1,313,001 | $ | 1,053,856 | $ | 1,038,408 | $ | 1,265,991 | ||||||||||
Net premiums earned (1) | ||||||||||||||||||||||
Pro rata | $ | 563,585 | $ | 686,201 | $ | 608,586 | $ | 561,986 | $ | 563,585 | $ | 686,201 | ||||||||||
Excess of loss | 513,550 | 593,127 | 610,086 | 494,246 | 513,550 | 593,127 | ||||||||||||||||
Total | $ | 1,077,135 | $ | 1,279,328 | $ | 1,218,672 | $ | 1,056,232 | $ | 1,077,135 | $ | 1,279,328 | ||||||||||
Net premiums written by client location (1) | ||||||||||||||||||||||
United States | $ | 470,484 | $ | 589,255 | $ | 706,388 | $ | 448,763 | $ | 470,484 | $ | 589,255 | ||||||||||
Europe | 307,165 | 355,735 | 327,059 | 337,168 | 307,165 | 355,735 | ||||||||||||||||
Asia and Pacific | 94,609 | 142,626 | 94,252 | 111,821 | 94,609 | 142,626 | ||||||||||||||||
Bermuda | 80,888 | 77,620 | 87,047 | 74,347 | 80,888 | 77,620 | ||||||||||||||||
Other | 85,262 | 100,755 | 98,255 | 81,757 | 85,262 | 100,755 | ||||||||||||||||
Total | $ | 1,038,408 | $ | 1,265,991 | $ | 1,313,001 | $ | 1,053,856 | $ | 1,038,408 | $ | 1,265,991 | ||||||||||
Net premiums written by underwriting location (1) | ||||||||||||||||||||||
United States | $ | 439,190 | $ | 492,891 | $ | 507,183 | $ | 432,683 | $ | 439,190 | $ | 492,891 | ||||||||||
Bermuda | 281,985 | 394,351 | 459,467 | 277,625 | 281,985 | 394,351 | ||||||||||||||||
Europe | 298,790 | 343,823 | 309,129 | 308,415 | 298,790 | 343,823 | ||||||||||||||||
Other | 18,443 | 34,926 | 37,222 | 35,133 | 18,443 | 34,926 | ||||||||||||||||
Total | $ | 1,038,408 | $ | 1,265,991 | $ | 1,313,001 | $ | 1,053,856 | $ | 1,038,408 | $ | 1,265,991 |
(1) | Reinsurance segment results include premiums written and earned assumed through intersegment transactions and exclude premiums written and earned ceded through intersegment transactions. |
(2) Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Reserve for Losses and Loss Adjustment Expenses The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:
2016 Prior Year Reserve Development During 2016, the Company recorded estimated net favorable development on prior year loss reserves of $270.0 million, which consisted of $218.8 million from the reinsurance segment, $33.1 million from the insurance segment, $21.2 million from the mortgage segment less adverse development of $3.1 million from the ‘other’ segment. The reinsurance segment’s net favorable development of $218.8 million, or 20.7 points of net earned premium, consisted of $133.8 million from short-tailed lines and $85.0 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $113.6 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2009 to 2015 underwriting years (i.e., losses attributable to contracts having an inception or renewal date within the given twelve-month period). Contained within this release was favorable development of $8.7 million from named catastrophic events from prior accident years. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during 2016. Net favorable development of $85.0 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $86.1 million, primarily from the 2002 to 2013 underwriting years. The insurance segment’s net favorable development of $33.1 million, or 1.6 points of net earned premium, consisted of $8.7 million of net favorable development from short-tailed lines and $24.4 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines predominantly consisted of $17.2 million of net favorable development in property lines, primarily from the 2008 to 2014 accident years (i.e., the year in which a loss occurred), partially offset by $11.1 million of adverse development on travel, accident and health business from the 2012 to 2015 accident years. Contained within the short tail release in property lines was favorable development of $11.3 million from named catastrophic events from prior accident years. Net favorable development in medium-tailed and long-tailed lines of $24.4 million included $53.8 million of net favorable development on professional lines, primarily from the 2008 to 2012 accident years, partially offset by $33.1 million of net adverse development in program business, primarily from the 2013 to 2015 accident years. The adverse development in program business was primarily driven by a few inactive programs that were non-renewed in 2015 and early in 2016.
The mortgage segment’s net favorable development of $21.2 million, or 7.4 points of net earned premium, for 2016, included $18.5 million of favorable development on AMIC business, reflecting a decrease in the number of delinquent loans and a lower claim rate on such loans. Such development was primarily from the 2004 to 2008 and 2014 origination years. The mortgage segment also experienced net favorable development of $2.7 million on U.S. mortgage reinsurance business. 2015 Prior Year Reserve Development During 2015, the Company recorded estimated net favorable development on prior year loss reserves of $285.1 million, which consisted of $224.8 million from the reinsurance segment, $47.2 million from the insurance segment, $12.3 million from the mortgage segment and $0.8 million from the ‘other’ segment. The reinsurance segment’s net favorable development of $224.8 million, or 20.9 points of net earned premium, consisted of $107.6 million from short-tailed lines and $117.2 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $80.9 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2011 to 2014 underwriting years (i.e., losses attributable to contracts having an inception or renewal date within the given twelve-month period). Contained within this release was favorable development of $11.8 million from the 2005 to 2014 named catastrophic events. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during 2015. Net favorable development of $117.2 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $99.7 million, primarily from the 2003 to 2006 underwriting years and the 2008 and 2009 underwriting years, and marine and aviation reserves of $11.7 million, primarily from the 2008 to 2012 underwriting years. The balance of net favorable development was spread across various lines and underwriting years. The insurance segment’s net favorable development of $47.2 million, or 2.3 points of net earned premium, consisted of $27.3 million of net favorable development from short-tailed lines and $19.9 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines predominantly consisted of $32.4 million of net favorable development in property lines, primarily from the 2011 to 2014 accident years (i.e., the year in which a loss occurred). Contained within this short tail release was favorable development of $5.7 million from 2005 to 2014 named catastrophic events. Net favorable development in medium-tailed and long-tailed lines of $19.9 million included $29.7 million of net favorable development on professional lines, primarily from the 2005 to 2010 accident years, partially offset by $15.0 million of net adverse development in program business, primarily from the 2013 and 2014 accident years. The adverse development in program business was driven by a few programs that were non-renewed in 2015 and early in 2016. The mortgage segment’s net favorable development of $12.3 million, or 5.7 points of net earned premium, included $11.1 million of favorable development on 2014 Prior Year Reserve Development During 2014, the Company recorded estimated net favorable development on prior year loss reserves of $326.9 million, which consisted of $267.3 million from the reinsurance segment, $58.7 million from the insurance segment and $0.9 million from the mortgage segment. The reinsurance segment’s net favorable development of $267.3 million, or 20.9 points of net earned premium, consisted of $146.7 million from short-tailed lines and $120.6 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $107.6 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2011 to 2013 underwriting years. Contained within this release was favorable development of $23.3 million from the 2005 to 2013 named catastrophic events. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during 2014. Net favorable development of $120.6 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $101.6 million, primarily from the 2003 to 2006 underwriting years and the 2009 and 2010 underwriting years, and marine and aviation reserves of $14.7 million, primarily from the 2008 to 2012 underwriting years. The balance of net favorable development was spread across various lines and underwriting years. The insurance segment’s net favorable development of $58.7 million, or 2.9 points of net earned premium, consisted of $73.5 million of net favorable development from short-tailed lines, partially offset by $14.8 million of net adverse development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines predominantly consisted of $60.5 million of net favorable development in property lines, primarily from the 2008 to 2013 accident years, with the balance emanating from lenders products, primarily from the 2012 accident year, and travel and accident, primarily from the 2012 and 2013 accident years. Contained within this short tail release
was favorable development of $7.9 million from 2005 to 2013 named catastrophic events. Net adverse development in medium-tailed and long-tailed lines of $14.8 million included a net increase of $41.3 million in construction reserves, primarily from the 2009 to 2013 accident years. The adverse development in construction was largely driven by general liability claims involving New York labor law matters. In addition, the insurance segment experienced $26.2 million of net adverse development in program business, primarily from the 2011 and 2012 accident years. Such amounts were partially offset by $39.0 million of net favorable development on professional lines, primarily from the 2003 to 2011 accident years, and $7.8 million of net favorable development on surety business, primarily from the 2011 to 2013 accident years. The Company’s reserves for losses and loss adjustment expenses primarily relate to short-duration contracts with various characteristics (e.g., type of coverage, geography, claims duration). The Company considered such information in determining the level of disaggregation for disclosures related to its short-duration contracts, as detailed in the table below:
The Company determined the following to be insignificant for disclosure purposes: (i) amounts included in the ‘other’ segment (i.e., Watford Re) as described in Note 4; (ii) certain mortgage business, including non-U.S. primary business, global mortgage reinsurance and various GSE credit risk-sharing products; and (iii) certain reinsurance business, including casualty clash and non-traditional lines. Such amounts are included as reconciling items. The Company is required to establish reserves for losses and loss adjustment expenses (“loss reserves”) that arise from the business the Company Insurance Segment Loss reserves Ultimate losses and loss adjustment expenses are generally determined by extrapolation of claim emergence and settlement patterns observed in
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS resource, developed through both industry and company experience, but cannot be relied upon in isolation. Uncertainties in estimating ultimate losses and loss adjustment expenses are magnified by the length of the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail.” During this period additional facts regarding coverages written in prior accident years, as well as about actual claims and trends, may become known and, as a result, may lead to adjustments of the related loss reserves. If the Company determines that an adjustment is appropriate, the adjustment is recorded in the accounting period in which such determination is made. Accordingly, should loss reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted respectively. The Company authorizes managing general agents, general agents and other producers to write program business on the Company’s behalf within prescribed underwriting authorities. This delegated authority process introduces additional complexity to the actuarial determination of unpaid future losses and loss adjustment expenses. In order to monitor adherence to the underwriting guidelines given to such parties, the Company periodically performs underwriting and claims due diligence reviews. In determining ultimate losses and loss adjustment expenses, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate losses and loss adjustment expenses, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and adjust for them so that the future can be projected more reliably. Because of the factors previously discussed, this process requires the substantial use of informed judgment and is inherently uncertain. Although loss reserves are initially determined based on underwriting and pricing analyses, the Company’s insurance segment applies several generally accepted actuarial methods, as discussed below, on a quarterly basis to evaluate the loss reserves, in addition to the expected loss method, in particular for loss reserves from more mature accident years (the year in which a loss occurred). Each quarter, as part of the reserving process, the segments’ actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for the projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to loss reserves may be supported. The Company places more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of loss reserves are made. These methods generally fall into one of the following categories or are hybrids of one or more of the following categories: Expected loss methods - these methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss and loss adjustment expense ratios are typically developed based upon the information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data available from organizations, such as statistical bureaus and consulting firms, where appropriate. These ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. Expected loss methods are useful for estimating ultimate losses and loss adjustment expenses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available, and is commonly applied when limited loss experience exists for a company. Historical incurred loss development methods - these methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. These methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods may be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses may be less reliable than other methods. Historical paid loss development methods - these methods, like historical incurred loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant. These methods use historical loss payments over discrete periods of time to estimate future losses and necessarily assume that factors that have affected paid losses in the past, such as inflation or the
effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use incurred losses to estimate ultimate losses, they may be more reliable than the other methods that use incurred losses in situations where there are significant changes in how incurred losses are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes in payments have a larger impact on estimates of ultimate losses) than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past. Adjusted historical paid and incurred loss development methods - these methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes. As such, these methods utilize more judgment than historical paid and incurred loss development methods. Bornhuetter-Ferguson (“B-F”) paid and incurred loss methods - these methods utilize actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of expected ultimate losses. The B-F paid and incurred loss methods are useful when there are few reported claims and a relatively less stable pattern of reported losses. Additional analyses - other methodologies are often used in the reserving process for specific types of claims or events, such as catastrophic or other specific major events. These include vendor catastrophe models, which are typically used in the estimation of loss reserves at the early stage of known catastrophic events before information has been reported to an insurer or reinsurer. In the initial reserving process for short-tail insurance lines (consisting of property, energy, marine and aviation and other exposures including travel, accident and health and lenders products), the Company relies on a combination of the reserving methods discussed above. For catastrophe-exposed business, the reserving process also includes the usage of catastrophe models for known events and a heavy reliance on analysis of individual catastrophic events and management judgment. The development of losses on short-tail business can be unstable, especially for policies characterized by high severity, low frequency losses. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in their reserving process, including that historical paid and reported development patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and underwriters’ judgment as to potential loss exposures can be relied on. The expected loss ratios used in the initial reserving process for short-tail business have varied over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, policy changes (such as attachment points, class and limits) and geographical distribution. As losses in short-tail lines are reported relatively quickly, expected loss ratios are selected for the current accident year based upon actual attritional loss ratios for earlier accident years, adjusted for rate changes, inflation, changes in reinsurance programs and expected attritional losses based on modeling. Furthermore, ultimate losses for short-tail business are known in a reasonably short period of time. In the initial reserving process for medium-tail and long-tail insurance lines (consisting ofthird party occurrence business, third party claims made business, and other exposures including surety, programs and contract binding exposures), the Company primarily relies on the expected loss method. The development of the Company’s medium-tail and long-tail business may be unstable, especially if there are high severity major events, as a portion of the Company’s casualty business is in high excess layers. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in reserving for medium-tail and long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the policy is entered into, that the loss development patterns, which are based on a combination of company and industry loss development patterns and adjusted to reflect differences in the insurance segment’s mix of business, are reasonable and that claims personnel and underwriters analyses of our exposure to major events are assumed to be the best estimate of exposure to the known claims on those events. The expected loss ratios used in the initial reserving process for medium-tail and long-tail business for recent accident years have varied over time, in some cases significantly, from earlier accident years. As the credibility of historical experience for earlier accident years increases, the experience from these accident years will be given a greater weighting in the actuarial analysis to determine future accident year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.
The following tables present information on the insurance segment’s short-duration insurance contracts:
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net
Reinsurance Segment Loss reserves for the Company’s reinsurance segment are comprised of (1) case reserves, (2) additional case reserves (“ACRs”) and (3) IBNR reserves. The Company receives reports of claims notices from ceding companies and records case reserves based upon the amount of reserves recommended by the ceding company. Case reserves may be supplemented by ACRs, which are often estimated by the Company’s claims personnel ahead of official notification from the ceding company, or when judgment regarding the size or severity of the known event differs from the ceding company. In certain instances, the Company establishes ACRs even when the ceding company does not report any liability on a known event. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert the Company to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of business, and significant changes in the frequency or severity of individual claims. Such information is often used in the process of estimating IBNR reserves. IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. The estimation of loss reserves for the reinsurance segment is subject to the same risk factors as the estimation of loss reserves for the insurance segment. In addition, the inherent uncertainties of estimating such reserves are even greater for reinsurers, due primarily to the following factors: (1) the claim-tail for reinsurers is generally longer because claims are first reported to the ceding company and then to the reinsurer through one or more intermediaries, (2) the reliance on premium estimates, where reports have not been received from the ceding company, in the reserving process, (3) the potential for writing a number of reinsurance contracts with different ceding companies with the same exposure to a single loss event, (4) the diversity of loss development patterns among different types of reinsurance contracts, (5) the necessary reliance on the ceding companies for information regarding reported claims and (6) the differing reserving practices among ceding companies. As with the insurance segment, the process of estimating loss reserves for the reinsurance segment involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. As discussed above, such uncertainty is greater for reinsurers compared to insurers. As a result, our reinsurance operations obtain information from numerous sources to assist in the process. Pricing actuaries from the reinsurance segment devote considerable effort to understanding and analyzing a ceding company’s operations and loss history during the underwriting of the business, using a combination of ceding company and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting and payment patterns, and rate change history. This analysis is used to project expected loss ratios for each treaty during the upcoming contract period. As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases and may be attributed to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant’s physical condition many years after an accident occurs, the case reserving approach of the ceding company, etc. In the reserving process, the Company assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in their actuarial methods. This means that the reinsurance segment must rely on estimates for a longer period of time than does an insurance company. Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, 2016 there were no significant backlogs related to the processing of assumed reinsurance information at our reinsurance operations. The reinsurance segment relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, underwriters, actuaries, and claims personnel often perform audits of ceding companies and regularly review information received from ceding companies for unusual or unexpected
results. Material findings are usually discussed with the ceding companies. The Company sometimes encounters situations where they determine that a claim presentation from a ceding company is not in accordance with contract terms. In these situations, the Company attempts to resolve the dispute with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, the Company will vigorously defend its position in such disputes. Although loss reserves are initially determined based on underwriting and pricing analysis, the Company applies several generally accepted actuarial methods, as discussed above, on a quarterly basis to evaluate its loss reserves in addition to the expected loss method, in particular for loss reserves from more mature underwriting years (the year in which business is underwritten). Each quarter, as part of the reserving process, the Company’s actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to loss reserves may be supported. Estimated loss reserves for more mature underwriting years are now based more on actual loss activity and historical patterns than on the initial assumptions based on pricing indications. More recent underwriting years rely more heavily on internal pricing assumptions. The Company places more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of loss reserves are made. In the initial reserving process for short-tail reinsurance lines (consisting of property excluding property catastrophe and property catastrophe exposures), the Company relies on a combination of the reserving methods discussed above. For known catastrophic events, the reserving process also includes the usage of catastrophe models and a heavy reliance on analysis which includes ceding company inquiries and management judgment. The development of patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and our underwriters’ judgment and guidance received from ceding companies as to potential loss exposures may be relied on. The expected loss ratios used in the initial reserving process for property exposures have varied over time due to changes in pricing, reinsurance structure, estimates of In the initial reserving process for medium-tail and long-tail reinsurance lines (consisting of casualty, other specialty, marine and aviation and other exposures), the Company primarily relies on the expected loss method. The development of medium-tail and long-tail business may be unstable, especially if there are high severity major events, with business written on an excess of loss basis typically having a longer tail than business written on a pro rata basis. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. Our reinsurance operations make a number of key assumptions in reserving for medium-tail and long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the contract is entered into, historical paid and reported development patterns are stable and claims personnel and underwriters analyses of our exposure to major events are assumed to be our best estimate of our exposure to the known claims on those events. The expected loss ratios used in our reinsurance operations’ initial reserving process for medium-tail and long-tail contracts have varied over time due to changes in pricing, terms and conditions and reinsurance structure. As the credibility of historical experience for earlier underwriting years increases, the experience from these underwriting years will be used in the actuarial analysis to determine future underwriting year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.
The following tables present information on the reinsurance segment’s short-duration insurance contracts:
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2016:
Mortgage Segment The Company’s mortgage segment includes (1) direct mortgage insurance in the U.S., (2) direct mortgage insurance in Europe, (3) global mortgage reinsurance and (4) various GSE credit risk-sharing products, with the latter three categories excluded on the basis of insignificance for the purposes of presenting disclosures related to short duration contracts. For direct mortgage insurance business, the Company establishes case reserves for loans that have been reported as delinquent by loan servicers as well as those that are delinquent but not reported (IBNR reserves). The Company’s U.S. mortgage insurance operations also reserve for the expenses of adjusting claims related to these delinquencies. The trigger that creates a case reserve estimate is that an insured loan is reported to us as being two payments in arrears. The actuarial reviews and documentation created in the reserving process are completed in accordance with generally accepted actuarial standards. The selected assumptions reflect the actuary’s judgment based on historical data and experience combined with information concerning current underwriting, economic, judicial, regulatory and other influences on ultimate claim settlements. Because the reserving process requires the Company to forecast future conditions, it is inherently uncertain and requires significant judgment and estimation. The use of different estimates would result in the establishment of different reserve levels. Additionally, changes in accounting estimates are likely to occur from period to period as economic conditions change and the ultimate liability may vary significantly from the
The lead methodology used by the Company is a frequency-severity method based on the inventory of pending delinquencies. Each month the loan servicers report the delinquency status of each insured loan. Using the frequency-severity method allows the Company to take advantage of its knowledge of the number of delinquent loans and the coverage provided (“risk size”) on those loans by directly relating the reserves to these amounts. The delinquencies are grouped into homogeneous cohorts for analysis, reflecting product type and age of delinquency. A claim rate is then developed for each cohort which represents the frequency with which the delinquencies become claims. The claim rates are based on an analysis of the patterns of emerging cure counts and claim counts, the foreclosure status of the pending delinquencies, the product and geographical mix of the delinquencies and our view of future economic and claim conditions, which include trends in home prices and unemployment. Claim rates can vary materially by age of delinquency, depending on the mix of delinquencies and economic conditions. Claim size estimates are determined by examining the risk sizes on the delinquent loans and estimating the portion of risk that will be paid, as well as any expenses. This is done based on a review of historical data, an assessment of economic conditions and the level of equity the borrowers may have in their homes, as well as considering loss mitigation opportunities. Mortgage insurance is generally not subject to large claim sizes, as with some other lines of insurance. A claim size over $250,000 is rare, and this helps reduce the volatility of claim size estimates. The claim rate and claim size assumptions generate case reserves for the population of reported delinquencies. The reserve for unreported delinquencies (included in IBNR reserves) is estimated by looking at historical patterns of reporting. Claim rates and claim sizes can then be assigned to estimated unreported delinquencies using assumptions made in the establishment of case reserves. Mortgage insurance reserves are short-tail, in the sense that the vast majority of delinquencies are resolved within two years of being reported. While reserves are initially analyzed by reserve cohort, as described above, they are also rolled up by underwriting year to ensure that reserve assumptions are consistent with the performance of the underwriting year. The accuracy of prior reserve assumptions is also checked in hindsight to determine if adjustments are needed. Loss reserves for the Company’s mortgage reinsurance business and GSE credit-risk sharing transactions are comprised of case reserves and IBNR reserves. The Company’s mortgage reinsurance operations receive reports of delinquent loans and claims notices from ceding companies and record case reserves based upon the amount of reserves recommended by the ceding company. In addition, specific claim and delinquency information reported by ceding companies is used in the process of estimating IBNR reserves. The tables below reflect the acquired business of UGC across all periods presented. Due to the length of time for which claims incurred typically remain outstanding prior to payment and the Company’s formation of the mortgage segment in 2014, the Company determined that five accident years
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2016:
Other Segment Loss reserves for the ‘other’ segment (i.e., Watford Re) are comprised of case reserves, ACRs and IBNR reserves. For all business assumed by Watford Re, the Company acts as reinsurance underwriting manager, provides actuarial and risk management services and recommends a level of loss reserves to Watford Re. 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 For the year ended December 31, 2016, the Company did not make any significant changes in its methodologies or assumptions as described above (a) to determine the presented amounts of IBNR reserves, (b) for expected development The Company measures claim frequency information on an individual claim count basis. Claim counts are provided for the insurance For the year ended December 31, 2016, the Company did not make any significant changes in its methodologies or assumptions as described above The following table represents a reconciliation of the
8. Reinsurance In the normal course of business, the Company’s insurance subsidiaries cede a portion of their premium through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis. The Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts. The effects of reinsurance on the Company’s written and earned premiums and losses and loss adjustment expenses with unaffiliated reinsurers were as follows:
The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At December 31, 2016, approximately 75.7% of the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) of $2.11 billion were due from carriers which had an A.M. Best rating of “A-” or better while 24.2% were from companies not rated, a substantial portion of which was collateralized through reinsurance trusts or letters of credit. The largest reinsurance recoverables from any one carrier was approximately 2.4% of the Company’s total shareholders’ equity at December 31, 2016. At December 31, 2015, approximately 77.9% of the Company’s reinsurance recoverables on paid and unpaid losses (not including On July 29, 2015, UGC entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re, a special purpose reinsurance company domiciled in Bermuda, at inception for new delinquencies on a portfolio of in-force policies issued between January 1, 2009 and March 31, 2013 through a mortgage insurance-linked notes offering by Bellemeade Re I Ltd. (“Bellemeade Re I”), a special purpose reinsurance company domiciled in Bermuda. The approximately $300 million of aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize and was $156.6 million as of December 31, 2016. For the coverage period, the ceding insurers will retain the first layer of $129.9 million of aggregate losses and Bellemeade Re will then provide second layer coverage up to the outstanding coverage amount. The ceding insurers will then retain losses in excess of the outstanding coverage limit. On May 9, 2016, UGC entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re at inception for new delinquencies on a portfolio of in-force policies issued in 2008 and prior years through a mortgage insurance-linked notes offering by Bellemeade Re II Ltd. (“Bellemeade Re II”), a special purpose reinsurance company domiciled in Bermuda. The approximately $300 million coverage amount decreases over a ten-year period as the underlying covered mortgages amortize and was $298.6 million as of December 31, 2016. For the coverage period, the ceding insurers will retain the first layer of $646.9 million of aggregate losses and Bellemeade Re II will then provide second layer coverage up to the outstanding coverage amount. The ceding insurers will then retain losses in excess of the outstanding coverage limit.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Investment Information At December 31, Available For Sale The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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:
At December 31, 2016, on a lot level basis, approximately 3,540 security lots out of a total of approximately 7,240 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 $4.6 million. The Company believes that such securities were temporarily impaired at December 31, 2016. 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 The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Lending Agreements The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short-term investments. At December 31, 2016, the fair value of the cash collateral received on securities lending was $212.4 million and the fair value of security collateral received was $550.1 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 $336.6 million. The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Investments The following table summarizes the Company’s other investments, including available for sale and fair value option components:
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:
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 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 item:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Investment Income The components of net investment income were derived from the following sources:
Net Realized Gains (Losses) Net realized gains (losses) were as follows, excluding the other-than-temporary impairment provisions:
Equity in Net Income (Loss) of Investment Funds Accounted For Using the Equity Method The Company recorded equity in net income related to investment funds accounted for using the equity method of $48.5 million for 2016, compared to $25.5 million for 2015 and $19.9 million for 2014. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair 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:
A description of the methodology and significant inputs used to measure the amount of net impairment losses recognized in earnings in Asset 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. Impairment losses primarily reflected reductions in two securities following an analysis of expected cash flows; 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. 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.
primarily on equities which were in an unrealized loss position Other investments – the Company utilized information received from fund managers and positive and negative evidence, including the business prospects, recent events, industry and market data and other factors. The Company believes that the 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:
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 The following table details the value of the Company’s restricted assets:
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:
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.
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 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 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 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. One security is included in Level 3 due to a low level of transparency on the inputs used in the pricing process. •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 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 During Derivative 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, Treasury bills and commercial paper 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)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31,
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31,
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 for
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 December 31, At December 31, carried at their cost, net of debt issuance costs, of $445.1 million and had a fair value of $476.0 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. Fair Value Measurements on a Non-Recurring Basis The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investment funds accounted for using the equity method, certain other investments, goodwill and intangible assets, and long-lived assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below: Investments accounted for using the equity method. When the Company determines that the carrying value of these assets may
not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using the techniques discussed above in “—Fair Value Measurements on a Recurring Basis.” Goodwill and Intangible Assets. The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When the Company determines goodwill and intangible assets may be impaired, the Company uses techniques including discounted expected future cash flows, to measure fair value. Long-Lived Assets. The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The Company’s investment strategy allows for the use of derivative instruments. 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 Company did not hold any derivatives which were designated as hedging instruments at December 31, 2016 or 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. Effectively, contractual close-out netting reduces derivatives credit exposure from gross to net exposure. At December 31,
included in the table above 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:
The following table presents the changes in each component of accumulated other comprehensive income (“AOCI”), net of noncontrolling interests:
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):
Following are the related tax effects allocated to each component of other comprehensive income (loss):
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The calculation of basic earnings per common share
ACGL is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to ACGL or any of its operations until March 31, 2035. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda. ACGL and its non-U.S. subsidiaries will be subject to U.S. federal income tax only to the extent that they derive U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL and its non-U.S. subsidiaries will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors (subject to reduction by any applicable income tax treaty). ACGL and its non-U.S. subsidiaries intend to conduct their operations in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, therefore, will not be required to pay U.S. federal income taxes (other than U.S. excise taxes on insurance and reinsurance premium and withholding taxes on dividends and certain other U.S. source investment income). However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no
assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL’s shareholders’ equity and earnings could be materially adversely affected. ACGL has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which ACGL’s subsidiaries and branches are subject to tax are the United States, United Kingdom, Ireland, Canada, Switzerland, Australia and Denmark. The components of income taxes attributable to operations were as follows:
The Company’s income or loss before income taxes was earned in the following jurisdictions:
The expected tax provision computed on pre-tax income or loss at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The statutory tax rates by jurisdiction were as follows: Bermuda (0.0%), United States (35.0%), United Kingdom A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate follows:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income tax assets and liabilities reflect temporary differences based on enacted tax rates between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities were as follows:
The Company provides a valuation allowance to reduce certain deferred tax assets to an amount which management expects to more likely than not be realized. As of December 31, At December 31, allowance of At December 31, At December 31, At December 31, 2016, net operating loss carryforwards in the U.S. were approximately Given the Company’s U.S. mortgage operations, the Company is eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the Code for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that the Company purchases non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the Treasury Department in an amount equal to the tax benefit derived from deducting any portion of the statutory contingency reserves. Cumulative T&L bonds purchased and subsequent redemptions are reflected in the Company’s deferred tax asset and totaled approximately $16.2 million at December 31, 2016, compared to $14.2 million at December 31,
Deferred income tax liabilities have not been accrued with respect to all of the undistributed earnings of the Company's subsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding tax in the jurisdiction of the paying entity. No withholding taxes have been accrued with respect to the earnings of the Company's U.S. and Canadian subsidiaries, as it is the intention that all such earnings will be permanently reinvested. The Company recognizes interest and penalties relating to unrecognized tax benefits in the provision for income taxes. As of December 31,
The Company or its subsidiaries or branches files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company’s examination by the tax authorities in the U.S. for the 2009 through 2011 tax years closed with no change. The following table details open tax years that are potentially subject to examination by local tax authorities, in the following major jurisdictions:
As of December 31, 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 December 31, Certain directors and executive officers of the Company own common and preference shares of Watford Re. See note 4, “Variable Interest Entity and Noncontrolling Interests,” for information about Watford Re. Concentrations of Credit Risk The creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty. The areas where significant concentrations of credit risk may exist include unpaid losses and loss adjustment expenses recoverable, contractholder receivables,
accounts lines of business. Under such contracts, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet in contractholder payables and contractholder receivables, respectively. In the event that the Company is unable to collect from the policyholder, the Company would be liable for such defaulted amounts. Collateral, primarily in the form of letters of credit, cash and trusts, is obtained from the policyholder to mitigate the Company’s credit risk. In the instances where the company receives collateral in the form of cash, the Company records a related liability in “Collateral held for insured obligations.” In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances owed to the Company. During The Company’s available for sale investment portfolio is managed in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification, which limit the allowable holdings of any single issue. There were no investments in any entity in excess of 10% of the Company’s shareholders’ equity at December 31, 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 Letter of Credit and Revolving Credit Facilities As of December 31, option to convert any or all outstanding revolving loans of The Credit Agreement contains customary representations, conditions to issuance of letters of credit and borrowings In addition, certain of ACGL’s subsidiaries had outstanding letters of credit of
and to comply with requirements of Lloyd’s of London in connection with qualifying quota share and other arrangements. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of business and the loss experience of such business. When issued, Watford Re has access to a $100 million letter of credit facility expiring on May 19, Contingent Consideration Liability Pursuant to the Company’s 2014 acquisition of the CMG Entities, the Company is required to make contingent consideration payments based on the closing book value of the pre-closing portfolio of the CMG Entities as re-calculated over an earn-out period and payable at the third, fifth and sixth anniversaries after closing (subject to a one time extension period of one to three years at the sellers’ discretion). The maximum amount of contingent consideration payments is $136.9 million over the earn-out period (or 150% of the closing book value of the CMG Entities less amounts paid at closing). To the extent that the adjusted book value of the CMG Entities drops below the cumulative amount paid by the Company, no additional payments would be due. Leases and Purchase Obligations At December 31,
All of these leases are for the rental of office space, with expiration terms that range from At December 31, 2016, the Company has entered into capital lease agreements. The future lease payments for the Company’s capital leases are expected to be $10.8 million, $10.4 million and $4.2 million for The Company has also entered into certain agreements which commit the Company to purchase goods or services, primarily related to software and computerized systems. Such purchase obligations were approximately Employment and Other Arrangements At December 31, On May 4, 2004, ACGL completed a public offering of $300.0 million principal amount of 7.35% senior notes due May 1, 2034 (“
On December 13, 2013, Arch-U.S., a wholly-owned subsidiary of ACGL, completed a public offering of $500.0 million principal amount of 5.144% senior notes due November 1, 2043 (“ On December 8, 2016, Arch Capital Finance LLC (“Arch Finance”), a wholly-owned finance subsidiary of ACGL, completed a public offering of $500.0 million principal amount of 4.011% senior notes due December 15, 2026 (“2026 notes”), fully and On December 8, 2016, Arch Finance completed a public offering of $450.0 million principal amount of 5.031% senior notes due December 15, 2046 (“2046 notes”), fully and unconditionally guaranteed by ACGL. The 2046 notes are unsecured and unsubordinated obligations of Arch Finance and ACGL, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and ACGL, respectively. Interest payments on the 2046 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2046 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The Company used the net proceeds from the offering of $445.1 million to fund a portion of the UGC acquisition. The fair value of the 2046 notes at December 31, 2016 was $476.0 million. The following table shows an analysis of goodwill and intangible assets:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the components of goodwill and intangible assets:
The expected remaining amortization expense for intangible assets with a finite life is On December 31, 2016, goodwill and intangible assets increased as a result of the completion of the UGC acquisition (see Note 2). The transaction was accounted for using the acquisition method under which the Company recorded the identifiable assets and liabilities at their acquisition date fair values, and recorded the excess of consideration transferred over the net assets acquired as goodwill and intangible assets. The Company’s impairment reviews for goodwill and intangible assets did not result in the recognition of impairment losses for 2016, 2015 Authorized and Issued The authorized share capital of ACGL consists of 600 million Common Shares, par value of $0.0033 per share, and 50 million Preferred Shares, par value of $0.01 per share. Common Shares The following table presents a roll-forward of changes in ACGL’s issued and outstanding Common Shares:
Share Repurchases The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Authorizations have consisted of a $1.0 billion authorization in February 2007, a $500.0 million authorization in May 2008, a $1.0 billion authorization in November 2009, a $1.0 billion authorization in February 2011 and a $629.2 million authorization in November 2014. Since the inception of the share repurchase program through December 31,
31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. Treasury Shares In May 2010, ACGL’s shareholders approved amendments to the bye-laws to permit ACGL to hold its own acquired shares as treasury shares in lieu of cancellation, as determined by ACGL’s board of directors. From May 5, 2010 to December 31, Convertible Non-Voting Common Equivalent Preferred Shares On December 31, 2016, the Company completed the acquisition of all of the outstanding shares of capital stock of UGC. Based upon a formula set forth in the Stock Purchase Agreement, AIG received 1,276,282 of ACGL’s Series D convertible non-voting common equivalent preferred shares (“Series D preferred shares”). Each Series D preferred share converts to 10 shares of ACGL fully paid non-assessable common stock. Conversion can only occur if there is a transfer to a third party in a Widely Dispersed Offering, which has to be a transfer to third parties. “Widely Dispersed Offering” means (i) a widespread public distribution, (ii) a transfer in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company or (iii) a transfer to a transferee that would control more than 50% of the voting securities of the Company without any transfer from the holder. Pursuant to the Investor Rights Agreement (“IRA”), transfer of the convertible preferred shares is restricted for eighteen months from December 31, 2016, as follows: (i) none may be sold prior to the six month anniversary of the closing date, (ii) one-third may be sold from June 30, 2017 through December 31, 2017; (iii) two-thirds may be sold from June 30, 2017 through June 30, 2018; and all of the Series D preferred shares may be sold from and after June 30, 2018. Common Share Equivalents The Company has determined that based on a review of the terms, features and rights of the series D preferred shares compared to the rights of the Company’s common shareholders, the underlying 12,762,820 common shares that the convertible securities convert to were common share equivalents at the time of their issuance. Series E Preferred Shares On September 29, 2016, ACGL completed a $450 million underwritten public offering of 18.0 million depositary shares (the “Depositary Shares”), each of which represents a 1/1,000th interest in a share of its 5.25% Non-Cumulative Preferred Shares, Series E, have a $0.01 par value and $25,000 liquidation preference per share (equivalent to $25 liquidation preference per Depositary Share) (the “Series E preferred shares”). Each Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series E preferred shares represented thereby (including any dividend, liquidation, redemption and voting rights). Holders of Series E preferred shares will be entitled to receive dividend payments only when, as and if declared by our board of directors or a duly authorized committee of the board. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 5.25%. Dividends on the Series E preferred shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series E preferred shares. Except in specified circumstances relating to certain tax or corporate events, the Series E preferred shares are not redeemable prior to September 29, 2021 (the fifth anniversary of the issue date). On and after that date, the Series E preferred shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series E preferred shares (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Depositary Shares will be redeemed if and to the extent the related Series E preferred shares are redeemed by the Company. Neither the Depositary Shares nor the Series E preferred shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series E preferred shares are not convertible into any other securities. The Series E preferred shares will not have voting rights, except under limited circumstances. The Company used the net proceeds from the offering of $434.9 million to fund a portion of the UGC acquisition. See Note 2 for further detail on the UGC acquisition. Series C Preferred Shares On April 2, 2012, ACGL completed the underwritten public offering of $325.0 million of its 6.75% Series C non-cumulative preferred shares (“ liquidation, dissolution or winding-up of ACGL. Dividends on the
preferred shares are non-cumulative. Consequently, in the event dividends are not declared on the In 2016, ACGL paid dividends of $28.1 million, compared to $21.9 million in 2015 and 2014, to holders of ACGL’s preferred shares. Long Term Incentive and Share Award Plans The 2015 Long Term Incentive and Share Award Plan (the (“2015 Plan”) became effective as of May 7, 2015 following approval by shareholders of the Company. The purposes of the 2015 Plan are to advance the interests of ACGL and its shareholders by providing a means to attract, retain, and motivate employees and directors of ACGL and its subsidiaries. The 2015 Plan is intended to provide for competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of performance goals, and to promote the creation of long-term value for shareholders by aligning the interests of such persons with those of shareholders. Officers, other employees and directors of ACGL and its subsidiaries will be eligible for grants of awards under the 2015 Plan. The 2015 Plan will terminate as to future awards on February 26, 2025. The number of common shares reserved for grants of awards under the 2015 Plan, subject to anti-dilution adjustments in the event of certain changes in the Company’s capital structure is 4,300,000. In addition, no more than 50% of such common shares may be issued in connection with full value awards (i.e., awards other than stock options or SARs) and no more than 2,000,000 common shares may be issued as incentive stock options under Section 422 of the Code. At December 31, The 2012 Long Term Incentive and Share Award Plan (the “2012 Plan”) became effective as of May 9, 2012 (the “Effective Date”) following approval by shareholders of the Company. The 2012 Plan is intended to provide for competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of performance goals and to promote the creation of long-term value for shareholders by aligning the interests of such persons with those of shareholders. The 2012 Plan provides for the grant to eligible employees and directors stock options, stock appreciation rights (“SARs”), restricted shares, restricted share units payable in common shares or cash, share awards in lieu of cash awards, dividend equivalents and other share-based awards. The 2012 Plan also provides the Company’s non-employee directors with the opportunity to receive the annual retainer fee for Board service in common shares. The 2012 Plan will terminate as to future awards on February 28, 2022. The 2007 Long Term Incentive and Share Award Plan (the “2007 Plan”) was merged with and into the 2012 Plan as of the Effective Date. As of the Effective Date, the 3,153,924 remaining shares available for issuance under the 2007 Plan were transferred into the 2012 Plan and as of such date no additional grants may be made under the 2007 Plan. Grants which were outstanding under the 2007 Plan as of the Effective Date will continue in accordance with their original terms (subject to such amendments as the compensation committee determines appropriate, consistent with the terms of the 2007 Plan) and will be issued or transferred under the 2012 Plan. The number of common shares reserved for grants of awards under the 2012 Plan, subject to anti-dilution adjustments in the event of certain changes in the Company’s capital structure is 7,433,924 which is the sum of (i) 4,280,000 and (ii) 3,153,924 shares remaining available for grants under the 2007 Plan. In addition, no more than 50% of such common shares may be issued in connection with full value awards (i.e., awards other than stock options or SARs) and no more than 2,000,000 common shares may be issued as incentive stock options under Section 422 of the Code. At December 31, On May 11, 2007, following shareholder approval, the Company adopted the 2007 Employee Share Purchase Plan with 2,250,000 common shares available for issuance. Upon shareholder approval on May 6, 2016, the Amended and Restated Arch Capital Group Ltd. 2007 Employee Share Purchase Plan (the “ESPP”)
The ESPP provides for consecutive six-month offering periods (or other periods of not more than 27 months as determined by the compensation committee) under which participating employees can elect to have up to 20% of their total compensation withheld and applied to the purchase of common shares of the Company at the end of the period. Unless otherwise determined by the compensation committee before an offering period commences, (1) the purchase price will be 85% of the fair market value of the common shares at the beginning of the offering period; and (2) the maximum number of common shares that may be purchased by an employee in any offering period is 3,000 shares. In addition, applicable Code limitations specify, in general, that a participant’s right to purchase stock under the ESPP cannot accumulate at a rate in excess of $25,000 (based on the value at the beginning of the applicable offering periods) per calendar year. The Company recorded With respect to certain subsidiaries, the Company may withhold, or require a participant to remit to the Company, an amount sufficient to satisfy any federal, state or local withholding tax requirements associated with awards under the Company’s share award plans. This includes the authority to withhold or receive shares or other property and to make cash payments in respect thereof. Stock Options and Stock Appreciation Rights The Company generally issues stock options and SARs to eligible employees, with exercise prices equal to the fair market values of the Company’s Common Shares on the grant dates. Such grants generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. In addition, in November 2012 the Company issued off-cycle stock options and SARs to certain employees, which will cliff vest on the fifth anniversary of the grant date. Option awards and SARs have a 10 year contractual life. Refer to Note 3(m) for details related to the Company’s accounting for stock options and SARs. The Company recorded after-tax share-based compensation expense of For purposes of determining estimated market value, the Company has computed the estimated market values of share-based compensation related to stock options and SARs using the Black-Scholes option valuation model and has applied the assumptions set forth in the following table. As described above, stock options and SARs generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. The expected life assumption (i.e., the estimated period of time between the date an option or SAR is granted and the date the option or SAR is exercised) was based on an expected term analysis which incorporated the Company’s historical exercise experience. The Company based its estimate of expected volatility for stock options and SARs granted during
The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s employee stock options and SARs have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of its employee stock options and SARs. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and which could materially impact the Company’s fair value determination.
A summary of stock option and SAR activity under the Company’s Long Term Incentive and Share Award Plans during
The weighted average grant-date fair value of stock options and SARs granted during 2016, 2015 and 2014 was $17.12, $15.90 and The aggregate intrinsic value of the Company’s outstanding and exercisable stock options and SARs at December 31, respectively. During Restricted Common Shares and Restricted Units The Company also issues restricted share and unit awards to eligible employees and directors, for which the fair value is equal to the fair market values of the Company’s Common Shares on the grant dates. Restricted share and unit awards generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. In addition, in November 2012 the Company issued off-cycle restricted share and unit awards to certain employees, which will cliff vest on the fifth anniversary of the grant date. Refer to Note 3(m) for details related to the Company’s accounting for restricted share and unit awards. The Company recorded As of December 31, A summary of unvested restricted share and unit activity under the Company’s Long Term Incentive and Share Award Plans for
During 2016, 2015 The issuance of share-based awards and amortization thereon has no effect on the Company’s consolidated shareholders’ equity. For purposes of providing employees with retirement benefits, the Company maintains defined contribution retirement plans. Contributions are based on the participants’ eligible compensation. For 2016, 2015
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. 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 December 31, The Company’s insurance and reinsurance subsidiaries are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate. These regulations include certain restrictions on the amount of dividends or other distributions available to shareholders without prior approval of the insurance regulatory authorities. The actual and required statutory capital and surplus for the Company’s principal operating subsidiaries at December 31,
The statutory net income (loss) for the Company’s principal operating subsidiaries for 2016, 2015
Statutory accounting differs from U.S. GAAP in the reporting of certain items such as acquisition costs, deferred income taxes and investments. Bermuda Under The Insurance Act 1978, as amended, and related regulations of Bermuda (the “Insurance Act”), Arch Re Bermuda, the Company’s Bermuda reinsurance and insurance subsidiary, is registered as a Class 4 insurer and long-term insurer and is required to annually prepare and file statutory financial statements and a statutory financial return with the Bermuda Monetary Authority (“BMA”). The Insurance Act also requires Arch Re Bermuda to maintain minimum share capital and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, Arch Re Bermuda is also required to file a regulatory risk based capital model that measures risks and determines enhanced capital requirements and a target capital level. In addition, all Class 4 Bermuda insurers must prepare and file with the BMA audited GAAP basis annual financial statements, which must be made publicly available. Declarations of dividends from retained earnings and distributions from additional paid-in-capital are subject to these requirements being met. For all applicable periods presented herein, Arch Re Bermuda satisfied these requirements. The Bermuda Companies Act 1981 (the “Companies Act”) limits Arch Re Bermuda’s ability to pay dividends and distributions to shareholders if there are reasonable grounds for believing that: (a) Arch Re Bermuda is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of Arch Re Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Under the Insurance Act, Arch Re Bermuda is restricted with respect to the payment of dividends. Arch Re Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins. In addition, Arch Re Bermuda is prohibited, without prior approval of the Bermuda Monetary Authority, from reducing by 15% or more its total statutory capital, as set out in its previous year’s statutory financial statements. Accordingly, Arch Re Bermuda can pay approximately 186 Watford Re is registered as a Class 4 insurer and is required to annually prepare and file statutory financial statements and a statutory financial return with the BMA. The Insurance Act also requires Watford Re to maintain minimum share capital and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, Ireland Arch Re Europe was licensed and authorized by the Central Bank of Ireland (“CBOI”) as a non-life reinsurer in October 2008 and as a life reinsurer in November 2009 while Arch MI Europe was authorized as a non-life insurer in Ireland in December 2011. Irish authorized reinsurers and insurers, such as Arch Re Europe and Arch MI Europe, are also subject to the general body of Irish laws and regulations including the provisions of the Companies Act 2014. Arch Re Europe and Arch MI Europe are subject to the supervision of the CBOI and must comply with Irish insurance acts and regulations as well as with directions and guidance issued by the CBOI. Arch Re Europe and Arch MI Europe are required to maintain reserves, particularly in respect of underwriting liabilities and a solvency margin. Assets constituting statutory reserves must comply with certain principles including obligations to secure sufficiency, liquidity, security, quality, profitability and currency matching of investments. Statutory reserves must be actuarially certified annually. Under Irish company law, Arch Re Europe and Arch MI Europe are permitted to make distributions only out of profits available for distribution. A company’s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Further, the CBOI has powers to intervene if a dividend payment were to lead to a breach of regulatory capital requirements. Dividends or distributions, if any, made by Arch Re Europe would result in an increase in available capital at Arch Re Bermuda. United States The Company’s U.S. insurance and reinsurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators. Statutory net income and statutory surplus, as reported to the insurance regulatory authorities, differ in certain respects from the amounts prepared in accordance with GAAP. The main differences between statutory net income and GAAP net income relate to deferred acquisition costs and deferred income taxes. In addition to deferred acquisition costs and deferred income tax assets, other differences between statutory surplus and GAAP shareholder’s equity are unrealized appreciation or decline in value of investments and non-admitted assets. The Company’s U.S. insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. The ability of the Company’s regulated insurance subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. Dividends or distributions, if any, made by Arch Re U.S. would result in an increase in available capital at Arch-U.S., the Company’s U.S. holding company. Arch Re U.S. can declare a maximum of approximately approved the payment within the 30-day period. Delaware insurance laws also require that the statutory surplus of Arch Re U.S. following any dividend or distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. The amount of assets required to Under the PMIERs,
2017, none of the Company’s eligible mortgage insurers are classified as a “newly-approved insurer” under PMIERs. The Company’s U.S. mortgage insurance subsidiaries are subject to detailed regulation by their domiciliary and primary regulators, the Wisconsin Office of the Commissioner of Insurance (“Wisconsin OCI”) for AMIC and Arch Mortgage Guaranty Company, and the North Carolina Department of Insurance (“NC DOI”) for United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company, and by state insurance departments in each state in which they are licensed. As mandated by state insurance laws, mortgage insurers are generally mono-line companies restricted to writing a single type of insurance business, such Mortgage insurance companies licensed in Wisconsin or North Carolina are required to establish contingency loss reserves for purposes of statutory accounting in an amount equal to at least 50% of net earned premiums. These amounts generally cannot be withdrawn for a period of 10 years and are separate liabilities for statutory accounting purposes, which affects the ability to pay dividends. However, with prior regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year. Under Wisconsin and North Carolina law, as well as that of 14 other states, a mortgage insurer must maintain a minimum amount of statutory capital relative to its risk in force in order for the mortgage insurer to continue to write new business. While formulations of minimum capital vary in certain jurisdictions, the most common measure applied allows for a maximum risk-to-capital ratio of 25 to 1. Wisconsin and North Carolina both require a mortgage insurer to maintain a “minimum policyholder position” calculated in accordance with their respective regulations. Policyholders' position consists primarily of statutory policyholders' surplus plus the statutory contingency reserve, less ceded reinsurance. While the statutory contingency reserve is reported as a liability on the statutory balance sheet, for risk-to-capital ratio calculations, it is included as capital for purposes of statutory capital. United Kingdom The Company’s European insurance operations are conducted on two platforms: Arch Insurance Company Europe and Arch Syndicate 2012 (collectively, the insurance operations are referred to as “Arch Insurance Europe”). Arch Insurance Company Europe was licensed and authorized by the Financial Services Authority (“FSA”) to underwrite all classes of general insurance in the U.K. in May 2004. In 2009, AUAL was licensed and authorized by the FSA and the Lloyd’s Franchise Board. AUAL holds the relevant permissions for the classes of insurance business which are underwritten in the U.K. by Arch Syndicate 2012. Arch Syndicate 2012 has one member, Arch Syndicate Investments Ltd. The FSA was replaced by the Prudential Regulatory Authority (“PRA”) and the Financial Conduct Authority (“FCA”) in 2013. The PRA has responsibility for the prudential regulation of banks and insurers, while the FCA has responsibility for the conduct of business regulation in the wholesale and retail markets. All U.K. companies are also subject to a range of statutory provisions, including the laws and regulations of the Companies Acts 2006 (as amended) (the “U.K. Companies Acts”). Arch Insurance Company Europe and AUAL (on behalf of itself, Arch Syndicate 2012 and ASIL) are each required to demonstrate the adequacy of its financial assets to the PRA. On a periodic basis, Arch Insurance Europe is required to provide the PRA and Lloyd’s with its own risk-based assessment of its capital needs, taking into account comprehensive risk factors, including market, credit, operational, liquidity and group risks to generate a revised calculation of its expected liabilities which, in turn, enables the PRA and Lloyd’s to provide individual capital guidance and requirements to Arch Insurance Europe. Arch Insurance Europe’s surplus is above the risk-based capital threshold allowed by the PRA's individual capital assessment of Arch Insurance Europe. The PRA requires that Arch Insurance Europe maintain a margin of solvency calculation based on the classes of business for which it is authorized and within its premium income projections applied to its worldwide general business. Under U.K. law, all U.K. companies are restricted from declaring a dividend to their shareholders unless they have “profits available for distribution.” The calculation as to whether a company has sufficient profits is based on its accumulated realized profits minus its accumulated realized losses. U.K. insurance regulatory laws do not prohibit the payment of dividends, but the PRA or FCA, as applicable, requires that insurance companies and insurance intermediaries maintain certain solvency margins and may restrict the payment of a dividend by Arch Insurance Company Europe, AUAL and
ASIL. Dividends or distributions, if any, made by Arch Insurance Europe would result in an increase in available capital at Arch Re Europe, a subsidiary of Arch Re Bermuda. Canada Arch Insurance Canada insurance companies operating in Canada. Arch Insurance Canada and Arch Re Canada are subject to regulation in the provinces and territories in which they underwrite insurance/reinsurance, and the primary goal of insurance/reinsurance regulation at the provincial and territorial levels is to govern the market conduct of insurance/reinsurance companies. Arch Insurance Canada is licensed to carry on insurance business by OSFI and in each province and territory. Arch Re Canada is licensed to carry-on reinsurance business by OSFI and in the provinces of Ontario and Quebec. Under the Insurance Companies Act (Canada), Arch Insurance Canada is required to maintain an adequate amount of capital in Canada, calculated in accordance with a test promulgated by OSFI called the Minimum Capital Test (“MCT”), and Arch Re Canada is required to maintain an adequate margin of assets over liabilities in Canada, calculated in accordance with a test promulgated by OSFI called the Branch Adequacy of Assets Test. Dividends or distributions, if any, made by Arch Insurance Canada would result in an increase in available capital at Arch Insurance Company (see “—United States” section). The following table summarizes the
25. Guarantor Financial Information In December 2016, the Company issued $950 million of senior notes through Arch Finance, a Delaware limited liability company and a 100% owned subsidiary of ACGL (see Note 17). The notes are fully and unconditionally guaranteed by ACGL. Arch Finance was formed for the sole purpose of issuing the senior notes and has no business activities. Following the closing of the offering,
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Arch Finance lent the net proceeds of the offering to Arch U.S. MI Holdings Inc., the direct parent company of AMIC and purchaser of UGC, and received an intercompany note in consideration thereof. This intercompany note is the issuer’s sole asset. Arch Finance will file a separate Form 10-K for 2016. The following tables present condensed consolidating balance sheets at December 31,
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. Subsequent Event In January 2017, the Company and Kelso & Company (“Kelso”) sponsored Premia Re, a newly-formed multi-line Bermuda reinsurance company. Premia Re’s strategy is to reinsure or acquire companies or reserve portfolios in the non-life property and casualty insurance and reinsurance run-off market. Arch Re Bermuda and certain Arch co-investors invested $100.0 million and acquired approximately 25% of Premia Re as well as warrants to purchase additional common equity. Affiliates of Kelso invested $300.0 million and acquired the balance of Premia Re as well as warrants to purchase additional common equity. Arch Re Bermuda will provide a 25% whole account quota share reinsurance treaty on business written by Premia Re, and subsidiaries of ACGL will provide certain administrative and support services to Premia Re, in each case pursuant to separate multi-year agreements. Arch Re Bermuda has appointed two directors to serve on the seven person board of directors of Premia Re. The Company has performed an analysis of Premia Re and concluded that it has significant influence over Premia Re and will therefore account for its investment in Premia Re under the equity method of accounting.
None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures In connection with the filing of this Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of December 31, We continue to enhance our operating procedures and internal controls (including information technology initiatives and controls over financial reporting) to effectively support our business and our regulatory and reporting requirements. Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, On December 31, 2016, we acquired all of the issued and outstanding capital stock of UGC. As allowed under SEC guidance, management’s assessment of and conclusion regarding the design and effectiveness of internal control over financial reporting excluded the internal control over financial reporting of UGC, which is relevant to the Company’s 2016 consolidated financial statements as of and for the year ended December 31, 2016. UGC represents 15.8% of total assets, and 0.0% of our total revenues as of and for the year ended December 31, 2016. The financial reporting systems of UGC have not yet been fully integrated into our financial reporting systems and, as such, we did not have the practical ability to perform an assessment of UGC’s internal control over financial reporting in time for this current year-end. Management expects to complete the process of integrating UGC’s internal control over financial reporting over the course of 2017. The UGC acquisition represents a material change in internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended December 31, 2016. Based on our assessment, management determined that, as of December 31,
Changes in Internal Control Over Financial Reporting There have been no changes in internal control over financial reporting that occurred in connection with our evaluation required pursuant to Rules 13a-15 and 15d-15 under the Exchange Act during the fiscal quarter ended December 31, ITEM 9B. OTHER INFORMATION Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report. Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein. As and when allowed by the applicable law and regulations, certain of our non-U.S. subsidiaries provide global marine and energy policies and global marine reinsurance which may have some exposure to Iran. The global marine policies and reinsurance provide coverage for vessels navigating into and out of ports worldwide. In light of European Union and U.S. modifications to Iran sanctions this year, including the issuance of General License H, and consistent with General License H, we have been notified by our intermediaries for this business that certain of our policyholders have begun to, or will begin to, ship cargo to and from Iran, and that such cargo may include transporting crude oil from Iran to another country. We are unable to attribute gross revenues or net profits from these policies to activities relating to Iran. To the extent permitted by applicable law, we currently intend for our non-U.S. subsidiaries to continue to provide such coverage. PART III
The information required by this item is incorporated by reference from the information to be included in our definitive proxy statement (“Proxy Statement”) for our annual meeting of shareholders to be held in 2016, which we intend to file with the SEC pursuant to Regulation 14A before
The information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC before
Other than the information set forth below, the information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC before April 30, The following information is as of December 31,
The information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC before
The information required by this item is incorporated by reference from the information to be included in our Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC before
PART IV
(a) Financial Statements, Financial Statement Schedules and Exhibits.
Included in Part II – see Item 8 of this report. 2.Financial Statement Schedules
Schedules other than those listed above are omitted for the reason that they are not applicable or the information is provided in Item 8 of this report.
3. Exhibits
† Management contract or compensatory plan or arrangement.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SCHEDULE III ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (U.S. dollars in thousands)
Note: Balance sheet items reflect the acquisition of UGC on December 31, 2016.
SCHEDULE IV ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES REINSURANCE (U.S. dollars in thousands)
SCHEDULE VI ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS (U.S. dollars in thousands)
Note: balance sheet items reflect the acquisition of UGC on December 31, 2016.
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