UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

~~September 30, 2016~~March 31, 2017

Or

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

Commission file number: ~~001-26456~~001-16209

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

~~Bermuda~~

~~(State or other jurisdiction of incorporation or organization)~~

~~Not Applicable~~

~~(I.R.S. Employer Identification No.)~~

~~Waterloo House, Ground Floor~~

~~100 Pitts Bay Road, Pembroke HM 08~~

~~(Address of principal executive offices)~~

~~(441) 278-9250~~



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

Waterloo House, Ground Floor
100 Pitts Bay Road, Pembroke HM 08, Bermuda	(441) 278-9250
(Address of principal executive offices)	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting

company oEmerging growth company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

As of ~~October 31, 2016,~~May 1, 2017, there were ~~122,694,041~~123,069,706 common shares, $0.0033 par value per share, of the registrant outstanding.

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ARCH CAPITAL GROUP LTD.

INDEX TO FORM 10-Q



Item		Page No.
	PART I.I
	Financial Information	2
Item 1.	Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4640
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7760
Item 4.	Controls and Procedures	7760

	PART ~~II.~~II
	Other Information	7961
Item 1.	Legal Proceedings	7961
Item 1A.	Risk Factors	7961
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8162
Item 5.	Other Information	8162
Item 6.	Exhibits	8263
	Signatures	8364



	ACGL 2017 FIRST QUARTER FORM 10-Q	1

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PART I. FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

the loss of key personnel;

accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through ~~September 30, 2016;~~March 31, 2017;

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

severity and/or frequency of losses;

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

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

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

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

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

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



	ACGL 2017 FIRST QUARTER FORM 10-Q	2

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

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

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

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

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

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

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

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



	ACGL 2017 FIRST QUARTER FORM 10-Q	3

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



		Page No.

Report of Independent Registered Public Accounting Firm		5

Consolidated Balance Sheets
~~September 30, 2016~~March 31, 2017 (unaudited) and December 31, ~~2015~~2016		6

Consolidated Statements of Income
For the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)		7

Consolidated Statements of Comprehensive Income
For the ~~nine~~three month periods ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)		8

Consolidated Statements of Changes in Shareholders’ Equity
For the ~~nine~~three month periods ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)		9

Consolidated Statements of Cash Flows
For the ~~nine~~three month periods ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)		10

Notes to Consolidated Financial Statements (unaudited)		11
Note 1 - General		11
Note 2 - Recent Accounting Pronouncements		11
Note 3 - ~~VIE~~Variable Interest Entities and Noncontrolling Interests		12
Note 4 - Earnings Per Common Share		14
Note 5 - Segment Information		15
Note 6 - Reserves for Losses and Loss Adjustment Expenses		18
Note 7 - Investment Information		20
Note 78 - Fair Value		2625
Note 89 - Derivative Instruments		30
Note 10 - Commitments and Contingencies		31
Note 11 - Share Transactions		31
Note 12 - Other Comprehensive Income (Loss)		32
Note 913 - ~~Commitments and Contingencies~~Guarantor Financial Information		33
Note ~~10 - Share Transactions~~		34
~~Note 11 - Other Comprehensive Income (Loss)~~		36
~~Note 12 - Guarantor Financial Information~~		37
~~Note 13~~14 - Income Taxes		4539
Note 1415 - Legal Proceedings		4539
Note 1516 - Transactions With Related Parties		45
~~Note 16 - Subsequent Events~~		4539



	ACGL 2017 FIRST QUARTER FORM 10-Q	4

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of ~~September 30, 2016,~~March 31, 2017, and the related consolidated statements of income, ~~and~~ comprehensive income, ~~for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015, and the consolidated statements of~~ changes in shareholders’ equity and cash flows for the ~~nine-month~~three-month periods ended ~~September 30, 2016~~March 31, 2017 and ~~September 30, 2015.~~March 31, 2016. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, ~~2015,~~2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated ~~February 26, 2016,~~March 1, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, ~~2015,~~2016, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

~~November 4, 2016~~May 5, 2017



	ACGL 2017 FIRST QUARTER FORM 10-Q	5

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

	(Unaudited)						(Unaudited)
	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $10,897,965 and $10,515,440)	$	11,026,929		$	10,459,353
Short-term investments available for sale, at fair value (amortized cost: $1,185,811 and $591,141)	1,184,408			587,904
Collateral received under securities lending, at fair value (amortized cost: $466,047 and $385,984)	466,055			389,336
Equity securities available for sale, at fair value (cost: $454,319 and $543,767)	521,587			618,405
Other investments available for sale, at fair value (cost: $151,430 and $261,343)	168,243			300,476
Fixed maturities available for sale, at fair value (amortized cost: $13,767,375 and $13,522,671)							$	13,745,932		$	13,426,577
Short-term investments available for sale, at fair value (amortized cost: $803,624 and $611,878)							803,619			612,005
Collateral received under securities lending, at fair value (amortized cost: $538,353 and $762,554)							538,361			762,565
Equity securities available for sale, at fair value (cost: $369,189 and $475,085)							428,594			518,041
Other investments available for sale, at fair value (cost: $197,431 and $149,077)							228,437			167,970
Investments accounted for using the fair value option	3,389,573			2,894,494			3,648,120			3,421,220
Investments accounted for using the equity method	797,542			592,973			861,607			811,273
Total investments	17,554,337			15,842,941			20,254,670			19,719,651

Cash	578,816			553,326			703,754			842,942
Accrued investment income	81,907			87,206			104,168			124,483
Securities pledged under securities lending, at fair value (amortized cost: $449,026 and $386,411)	453,757			384,081
Securities pledged under securities lending, at fair value (amortized cost: $524,758 and $746,409)							525,569			744,980
Premiums receivable	1,182,708			983,443			1,254,048			1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	2,076,248			1,867,373			2,133,148			2,114,138
Contractholder receivables	1,649,441			1,486,296			1,766,340			1,717,436
Prepaid reinsurance premiums	541,238			427,609
Deferred acquisition costs, net	469,466			433,477
Ceded unearned premiums							941,923			859,567
Deferred acquisition costs							487,925			447,560
Receivable for securities sold	285,112			45,505			239,678			58,284
Goodwill and intangible assets	90,941			97,531			750,315			781,553
Other assets	679,260			968,482			930,688			889,080
Total assets	$	25,643,231		$	23,177,270		$	30,092,226		$	29,372,109

Liabilities
Reserve for losses and loss adjustment expenses	$	9,610,189		$	9,125,250		$	10,296,821		$	10,200,960
Unearned premiums	2,671,121			2,333,932			3,631,259			3,406,870
Reinsurance balances payable	271,688			224,120			321,285			300,407
Contractholder payables	1,649,441			1,486,296			1,766,340			1,717,436
Collateral held for insured obligations	277,463			248,982			327,161			301,406
Deposit accounting liabilities	22,281			260,364
Senior notes	791,437			791,306			1,732,410			1,732,258
Revolving credit agreement borrowings	398,100			530,434			734,961			756,650
Securities lending payable	466,047			393,844			538,353			762,554
Payable for securities purchased	474,041			64,996			389,649			76,183
Other liabilities	618,834			568,852			674,313			806,260
Total liabilities	17,250,642			16,028,376			20,412,552			20,060,984

Commitments and Contingencies
Redeemable noncontrolling interests	205,459			205,182			205,644			205,553

Shareholders' Equity
Non-cumulative preferred shares	775,000			325,000			772,555			772,555
Common shares ($0.0033 par, shares issued: 174,499,023 and 173,107,849)	582			577
Convertible non-voting common equivalent preferred shares							1,101,304			1,101,304
Common shares ($0.0033 par, shares issued: 174,935,104 and 174,644,101)							583			582
Additional paid-in capital	516,204			467,339			548,053			531,687
Retained earnings	7,972,643			7,370,371			8,238,296			7,996,701
Accumulated other comprehensive income (loss), net of deferred income tax	119,752			(16,502		)	(15,677		)	(114,541		)
Common shares held in treasury, at cost (shares: 51,823,826 and 50,480,066)	(2,031,859		)	(1,941,904		)
Common shares held in treasury, at cost (shares: 51,907,618 and 51,856,584)							(2,039,270		)	(2,034,570		)
Total shareholders' equity available to Arch	7,352,322			6,204,881			8,605,844			8,253,718
Non-redeemable noncontrolling interests	834,808			738,831			868,186			851,854
Total shareholders' equity	8,187,130			6,943,712			9,474,030			9,105,572
Total liabilities, noncontrolling interests and shareholders' equity	$	25,643,231		$	23,177,270		$	30,092,226		$	29,372,109

See Notes to Consolidated Financial Statements



~~See Notes to Consolidated Financial Statements~~	ACGL 2017 FIRST QUARTER FORM 10-Q	6

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

	(Unaudited)						(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Revenues
Net premiums written	$	1,014,278		$	971,972		$	3,159,076		$	2,982,547		$	1,276,260		$	1,121,235
Change in unearned premiums	(55,875		)	(35,289		)	(243,109		)	(192,162		)	(159,243		)	(169,656		)
Net premiums earned	958,403			936,683			2,915,967			2,790,385			1,117,017			951,579
Net investment income	93,618			86,233			275,691			252,190			117,874			93,735
Net realized gains (losses)	125,105			(89,698		)	230,647			(42,075		)	34,153			37,324

Other-than-temporary impairment losses	(3,867		)	(8,901		)	(16,999		)	(17,274		)	(1,807		)	(7,737		)
Less investment impairments recognized in other comprehensive income, before taxes	—			3,033			150			4,494			—			98
Net impairment losses recognized in earnings	(3,867		)	(5,868		)	(16,849		)	(12,780		)	(1,807		)	(7,639		)

Other underwriting income	7,980			7,623			38,251			26,876			4,633			5,047
Equity in net income (loss) of investment funds accounted for using the equity method	16,662			(2,118		)	32,054			19,938			48,088			6,655
Other income (loss)	(400		)	(265		)	(432		)	52			(782		)	(25		)
Total revenues	1,197,501			932,590			3,475,329			3,034,586			1,319,176			1,086,676

Expenses
Losses and loss adjustment expenses	524,183			531,741			1,631,724			1,544,883			552,570			522,949
Acquisition expenses	163,861			171,566			509,607			510,067			182,289			167,838
Other operating expenses	155,557			146,220			467,416			445,947			174,719			150,148
Corporate expenses	18,485			10,739			45,068			37,502			27,792			9,383
Amortization of intangible assets													31,294			4,748
Interest expense	15,943			13,300			47,713			30,047			28,676			16,107
Net foreign exchange (gains) losses	2,621			(14,680		)	1,525			(61,598		)
Net foreign exchange losses (gains)													19,404			23,566
Total expenses	880,650			858,886			2,703,053			2,506,848			1,016,744			894,739

Income before income taxes	316,851			73,704			772,276			527,738			302,432			191,937
Income tax expense	(13,231		)	(9,704		)	(43,672		)	(29,162		)	(28,397		)	(16,310		)
Net income	$	303,620		$	64,000		$	728,604		$	498,576		$	274,035		$	175,627
Net (income) loss attributable to noncontrolling interests	(50,748		)	16,033			(109,879		)	(19,417		)	(20,908		)	(20,829		)
Net income available to Arch	252,872			80,033			618,725			479,159			253,127			154,798
Preferred dividends	(5,484		)	(5,484		)	(16,453		)	(16,453		)	(11,218		)	(5,484		)
Net income available to Arch common shareholders	$	247,388		$	74,549		$	602,272		$	462,706		$	241,909		$	149,314

Net income per common share
Net income per common share and common share equivalent
Basic	$	2.05		$	0.62		$	4.99		$	3.79		$	1.80		$	1.24
Diluted	$	1.98		$	0.60		$	4.84		$	3.66		$	1.74		$	1.20

Weighted average common shares and common share equivalents outstanding
Basic	120,938,916			120,567,410			120,656,420			122,151,971			134,034,927			120,428,179
Diluted	124,931,653			125,011,773			124,528,174			126,354,759			139,047,672			124,496,496

See Notes to Consolidated Financial Statements



~~See Notes to Consolidated Financial Statements~~	ACGL 2017 FIRST QUARTER FORM 10-Q	7

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

	(Unaudited)						(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Comprehensive Income
Net income	$	303,620		$	64,000		$	728,604		$	498,576		$	274,035		$	175,627
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	16,281			(53,891		)	251,722			(51,522		)	100,792			132,981
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—			(3,033		)	(150		)	(4,494		)	—			(98		)
Reclassification of net realized (gains) losses, net of income taxes, included in net income	(54,992		)	12,278			(109,309		)	(39,868		)	(5,044		)	(32,223		)
Foreign currency translation adjustments	(5,312		)	(12,083		)	(6,150		)	(23,260		)	3,124			17,313
Comprehensive income	259,597			7,271			864,717			379,432			372,907			293,600
Net (income) loss attributable to noncontrolling interests	(50,748		)	16,033			(109,879		)	(19,417		)	(20,908		)	(20,829		)
Foreign currency translation adjustments attributable to noncontrolling interests	(59		)	96			141			96			(8		)	158
Comprehensive income available to Arch	$	208,790		$	23,400		$	754,979		$	360,111		$	351,991		$	272,929

See Notes to Consolidated Financial Statements



~~See Notes to Consolidated Financial Statements~~	ACGL 2017 FIRST QUARTER FORM 10-Q	8

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

	(Unaudited)						(Unaudited)
	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2016			2015			2017			2016
Non-cumulative preferred shares
Balance at beginning of period	$	325,000		$	325,000
Series E Preferred shares issued	450,000			—
Balance at end of period	775,000			325,000
Balance at beginning and end of period							$	772,555		$	325,000

Convertible non-voting common equivalent preferred shares
Balance at beginning and end of period							1,101,304			—

Common shares
Balance at beginning of year	577			572			582			577
Common shares issued, net	5			4			1			2
Balance at end of period	582			576			583			579

Additional paid-in capital
Balance at beginning of year	467,339			383,073			531,687			467,339
Common shares issued, net	8,406			7,440			(1		)	—
Exercise of stock options	7,738			12,363			710			4,222
Amortization of share-based compensation	46,311			46,575			15,657			14,265
Issue costs on Series E preferred shares	(15,101		)	—
Other	1,511			1,497			—			117
Balance at end of period	516,204			450,948			548,053			485,943

Retained earnings
Balance at beginning of year	7,370,371			6,854,571			7,996,701			7,332,032
Cumulative effect of an accounting change (1)							(314		)	—
Balance at beginning of year, as adjusted							7,996,387			7,332,032
Net income	728,604			498,576			274,035			175,627
Net (income) loss attributable to noncontrolling interests	(109,879		)	(19,417		)	(20,908		)	(20,829		)
Preferred share dividends	(16,453		)	(16,453		)	(11,218		)	(5,484		)
Balance at end of period	7,972,643			7,317,277			8,238,296			7,481,346

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of year	(16,502		)	128,856			(114,541		)	(16,502		)
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of year	50,085			161,598			(27,641		)	50,085
Unrealized holding gains (losses) arising during period, net of reclassification adjustment	142,413			(91,390		)	95,748			100,758
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(150		)	(4,494		)	—			(98		)
Balance at end of period	192,348			65,714			68,107			150,745
Foreign currency translation adjustments:
Balance at beginning of year	(66,587		)	(32,742		)	(86,900		)	(66,587		)
Foreign currency translation adjustments	(6,150		)	(23,260		)	3,124			17,313
Foreign currency translation adjustments attributable to noncontrolling interests	141			97			(8		)	158
Balance at end of period	(72,596		)	(55,905		)	(83,784		)	(49,116		)
Balance at end of period	119,752			9,809			(15,677		)	101,629

Common shares held in treasury, at cost
Balance at beginning of year	(1,941,904		)	(1,562,019		)	(2,034,570		)	(1,941,904		)
Shares repurchased for treasury	(89,955		)	(378,776		)	(4,700		)	(77,345		)
Balance at end of period	(2,031,859		)	(1,940,795		)	(2,039,270		)	(2,019,249		)

Total shareholders’ equity available to Arch	7,352,322			6,162,815			8,605,844			6,375,248
Non-redeemable noncontrolling interests	834,808			774,162			868,186			754,915
Total shareholders’ equity	$	8,187,130		$	6,936,977		$	9,474,030		$	7,130,163


(1)	See Note 2, “Recent Accounting Pronouncements,” for details.

See Notes to Consolidated Financial Statements



~~See Notes to Consolidated Financial Statements~~	ACGL 2017 FIRST QUARTER FORM 10-Q	9

Table of Contents

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

	(Unaudited)						(Unaudited)
	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2016			2015			2017			2016
Operating Activities
Net income	$	728,604		$	498,576		$	274,035		$	175,627
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(262,112		)	21,980			(40,855		)	(43,034		)
Net impairment losses recognized in earnings	16,849			12,780			1,807			7,639
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	8,157			3,983			(36,141		)	3,243
Amortization of intangible assets							31,294			4,748
Share-based compensation	46,311			46,575			15,657			14,265
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	277,277			139,577			53,027			111,255
Unearned premiums, net of prepaid reinsurance premiums	243,109			192,162
Unearned premiums, net of ceded unearned premiums							159,243			169,656
Premiums receivable	(198,909		)	(108,741		)	(176,350		)	(217,348		)
Deferred acquisition costs, net	(40,906		)	(41,722		)
Deferred acquisition costs							(41,728		)	(30,050		)
Reinsurance balances payable	49,198			4,242			20,114			51,929
Other liabilities	139,596			6,638
Other items	29,965			31,529
Other items, net							(51,985		)	74,613
Net Cash Provided By Operating Activities	1,037,139			807,579			208,118			322,543
Investing Activities
Purchases of fixed maturity investments	(27,840,555		)	(22,382,104		)	(10,476,918		)	(8,133,537		)
Purchases of equity securities	(377,767		)	(485,526		)	(143,833		)	(128,263		)
Purchases of other investments	(1,008,774		)	(1,320,250		)	(427,039		)	(305,198		)
Proceeds from sales of fixed maturity investments	26,731,924			21,411,554			10,386,746			7,827,536
Proceeds from sales of equity securities	464,904			509,008			253,347			216,012
Proceeds from sales, redemptions and maturities of other investments	879,330			858,368			317,518			211,125
Proceeds from redemptions and maturities of fixed maturity investments	540,823			630,397			174,718			163,894
Net settlements of derivative instruments	23,396			81,114			(3,921		)	21,091
Proceeds from investment in joint venture	—			40,000
Net (purchases) sales of short-term investments	(604,162		)	181,741			(397,851		)	(65,594		)
Change in cash collateral related to securities lending	(27,935		)	28,685			180,946			(43,118		)
Acquisitions, net of cash	(20,911		)	818
Purchases of fixed assets	(11,565		)	(10,901		)	(5,194		)	(3,952		)
Change in other assets	(3,816		)	(43,654		)
Other							19,603			6,737
Net Cash Provided By (Used For) Investing Activities	(1,255,108		)	(500,750		)	(121,878		)	(233,267		)
Financing Activities
Proceeds from issuance of preferred shares, net	434,899			—
Purchases of common shares under share repurchase program	(75,256		)	(365,383		)	—			(75,256		)
Proceeds from common shares issued, net	(3,785		)	697			(3,990		)	202
Proceeds from borrowings	46,000			239,077
Repayments of borrowings	(179,171		)	—			(22,000		)	(74,171		)
Change in cash collateral related to securities lending	27,935			(28,685		)	(180,946		)	43,118
Dividends paid to redeemable noncontrolling interests	(13,491		)	(13,810		)	(4,497		)	(4,497		)
Other	33,113			50,463			(5,018		)	29,115
Preferred dividends paid	(16,453		)	(16,453		)	(11,218		)	(5,484		)
Net Cash Provided By (Used For) Financing Activities	253,791			(134,094		)	(227,669		)	(86,973		)

Effects of exchange rate changes on foreign currency cash	(10,332		)	(8,658		)	2,241			2,332

Increase (decrease) in cash	25,490			164,077			(139,188		)	4,635
Cash beginning of year	553,326			485,702			842,942			553,326
Cash end of period	$	578,816		$	649,779		$	703,754		$	557,961

Income taxes paid	$	40,742		$	35,460		$	711		$	2,504
Interest paid	$	35,234		$	25,195		$	5,829		$	3,813

See Notes to Consolidated Financial Statements



~~See Notes to Consolidated Financial Statements~~	ACGL 2017 FIRST QUARTER FORM 10-Q	10

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. General

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

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

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 (“~~2015~~2016 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.

The Company has reclassified the presentation of certain prior year information to conform to the current ~~presentation.~~presentation, including the presentation of ‘amortization of intangible assets’ on its consolidated statements of income to split out such item (previously reflected in acquisition expenses and/or other operating expenses). Such reclassifications had no effect on the

Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

2. Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted

The Company adopted ~~a new accounting standard in the 2016 first quarter that provided targeted improvements~~Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to ~~consolidation guidance for limited partnerships and other similarly structured entities. The adoption of this standard resulted in the Company concluding that it no longer had a~~

~~variable interest in Alternative Re Ltd.~~Employee Share-Based Payment Accounting,” and, as a result, no longer is required to consolidate Alternative Re Ltd. in its financial statements. Alternative Re Ltd. is a Bermuda-domiciled company that provides collateralized segregated accounts to its clients. The Company applied this new standard on a modified retrospective basis as ofeffective January 1, ~~2016. Such adoption did not impact the Company’s shareholders’ equity or net income.~~

~~The adoption of the new standard also resulted in a review of certain funds within the Company’s investment portfolio where the Company has a limited partnership interest. See Note~~ 20176. ~~for disclosures on limited partnership interests.~~

The Company also adopted new accounting guidance pertaining to hybrid instruments. The new guidance clarified the evaluation of whether the nature of a host contract within a hybrid instrument issued in the form of a share is more akin to debt or equity. The Company has adopted this new guidance on a modified retrospective basis as of January 1, 2016. Based on a review of hybrid instruments issued in the form of a share (both held in its investment portfolio and issued as part of capital raising), the Company determined the new accounting guidance had no impact on the classification or accounting for its existing hybrid instruments.

~~Recently Issued Accounting Standards Not Yet Adopted~~

An accounting standard was issued in the 2015 second quarter requiring new disclosures about the reserve for losses and loss adjustment expenses for short-duration insurance contracts. These disclosures will provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. This accounting guidance is effective for the 2016 annual reporting period and interim periods thereafter and should be applied retrospectively. The Company is assessing the impact the implementation of this standard will have on the disclosures included in its consolidated financial statements.

~~An accounting standard~~ASU was issued in the 2016 first quarter to improve and simplify the accounting for employee share-based payment transactions. ~~The new standard~~This ASU provides simplifications with respect to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows for these types of transactions. With respect to the forfeiture accounting policy election, the Company has elected to account for forfeitures as they occur, which did not result in a material cumulative effect adjustment. With respect to the change in presentation in the statement of cash flows related to excess tax benefits, the Company has applied the guidance prospectively and prior periods have not been adjusted.

Recently Issued Accounting Standards Not Yet Adopted

ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash " was issued in the 2016 fourth quarter. The ~~standard~~ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. As a result, transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. The ASU also requires a reconciliation of the statement of the cash flows to the balance sheet if the balance sheet includes more than one line item of cash, cash equivalents, and restricted cash. The ASU is effective, ~~in the~~with retrospective adoption, for interim and annual periods beginning after December 15, 2017, ~~first quarter and~~with early adoption is permitted. ~~The application of the new standard is dependent on the specific area that is amended.~~ The Company is currently assessing the impact the implementation of this ~~standard~~ASU will have on its consolidated financial statements.

~~New accounting guidance~~

ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” was issued in the ~~2016~~2017 first ~~quarter pertaining~~quarter.The ASU amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the ~~accounting~~earliest call date. The ASU will be effective for ~~leases by~~the Company on January 1, 2019 and is required to be applied using a ~~lessee. The new accounting guidance requires that~~modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the ~~lessee recognize an~~beginning of the first reporting period in



	ACGL 2017 FIRST QUARTER FORM 10-Q	11

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~asset and a liability for leases with a lease term greater than 12 months regardless of whether~~which the ~~lease is classified as operating or financing. Under current accounting, operating leases are not reflected in the balance sheet. This accounting~~ guidance is ~~effective for the 2019 first quarter, though early application is permitted, and should be applied on a modified retrospective basis.~~effective. The Company is currently assessing the impact the implementation of this ~~standard~~ASU will have on its consolidated financial statements.

An accounting standard was issued in the 2016 second quarter that changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. This accounting guidance is effective for the 2020 first quarter, though early application is permitted in the 2019 first quarter, and should be applied on a modified retrospective basis for the majority of the provisions. The Company is assessing the impact the implementation of this standard will have on its consolidated financial statements.

An accounting standard was issued in the 2016 third quarter addressing several clarifications on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. Among several other cash flow issues, the new guidance specifically addresses the classification of debt prepayment or debt issuance costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The new guidance also provides a broader principle on identifying the type of activity of the cash flow item by focusing on the cash flow item’s nature and the predominant source or use of that item. This accounting guidance is effective in the 2018 first quarter and should be applied retrospectively. Early adoption is permitted. The Company is assessing the impact the implementation of this standard will have on the classification and presentation of its statement of cash flows.


3.	Variable Interest Entities and Noncontrolling Interests

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

the VIE that could potentially be significant to the VIE. If a company is determined to be the primary beneficiary, it is required to consolidate the VIE in its financial statements.

Watford Holdings Ltd.

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

The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.

The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford Re are reported:


	September 30,		December 31,		March 31,		December 31,
	2016		2015		2017		2016
Assets
Investments accounted for using the fair value option	$	1,872,342	$	1,617,107	$	1,976,466	$	1,857,623
Cash	67,032		108,550		47,566		74,893
Accrued investment income	16,891		19,249		14,066		17,017
Premiums receivable	211,444		162,263		196,866		189,911
Reinsurance recoverable on unpaid and paid losses and LAE	25,822		14,135		25,673		24,420
Prepaid reinsurance premiums	11,556		11,129
Deferred acquisition costs, net	87,490		75,443
Ceded unearned premiums					16,383		12,145
Deferred acquisition costs					93,227		86,379
Receivable for securities sold	94,965		34,095		19,235		1,326
Goodwill and intangible assets	7,650		—		7,650		7,650
Other assets	122,641		80,361		116,336		111,386
Total assets of consolidated VIE	$	2,517,833	$	2,122,332	$	2,513,468	$	2,382,750

Liabilities
Reserves for losses and loss adjustment expenses	$	460,600	$	290,997	$	566,175	$	510,809
Unearned premiums	308,063		249,980		319,677		293,480
Reinsurance balances payable	12,315		14,005		15,171		12,289
Revolving credit agreement borrowings	298,100		430,434		234,961		256,650
Payable for securities purchased	145,135		33,062		81,216		42,922
Other liabilities	135,248		53,624		100,198		88,976
Total liabilities of consolidated VIE	$	1,359,461	$	1,072,102	$	1,317,398	$	1,205,126

Redeemable noncontrolling interests	$	220,159	$	219,882	$	220,344	$	220,253

For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, Watford Re generated ~~$207.0~~$62.2 million of cash provided by operating activities, ~~$124.0~~$60.5 million of cash used for investing activities and ~~$119.6~~$29.0 million of cash used for financing activities,

~~Table of Contents~~

~~ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

compared to ~~$204.3~~$65.3 million of cash provided by operating activities, ~~$354.5~~$43.7 million of cash used for investing activities and ~~$268.3~~$51.3 million of cash ~~provided by~~used for financing activities for the ~~nine~~three months ended ~~September 30, 2015.~~March 31, 2016.

Non-redeemable noncontrolling interests

The Company accounts for the portion of Watford Re’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford Re’s common shares was approximately 89% at ~~September 30, 2016.~~March 31, 2017. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’



	ACGL 2017 FIRST QUARTER FORM 10-Q	12

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	September 30,						March 31,
	2016			2015			2017		2016
Three Months Ended
Balance, beginning of period	$	788,589		$	794,880		$	851,854	$	738,831
Amounts attributable to noncontrolling interests	46,160			(20,621		)	16,324		16,242
Foreign currency translation adjustments attributable to noncontrolling interests	59			(97		)	8		(158		)
Balance, end of period	$	834,808		$	774,162		$	868,186	$	754,915

Nine Months Ended
Balance, beginning of year	$	738,831		$	769,081
Amounts attributable to noncontrolling interests	96,118			5,178
Foreign currency translation adjustments attributable to noncontrolling interests	(141		)	(97		)
Balance, end of period	$	834,808		$	774,162

Redeemable noncontrolling interests

The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests relate to the 9,065,200 cumulative redeemable preference shares (“Watford Preference Shares”) issued in March 2014 with a

par value of $0.01 per share and a liquidation preference of $25.00 per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.

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


	September 30,					March 31,
	2016		2015			2017		2016
Three Months Ended
Balance, beginning of period	$	205,366	$	204,996		$	205,553	$	205,182
Shares acquired by the Company	—		—
Accretion of preference share issuance costs	93		93			91		92
Balance, end of period	$	205,459	$	205,089		$	205,644	$	205,274

Nine Months Ended
Balance, beginning of year	$	205,182	$	219,512
Shares acquired by the Company	—		(14,700		)
Accretion of preference share issuance costs	277		277
Balance, end of period	$	205,459	$	205,089

The portion of Watford Re’s income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:


	September 30,						March 31,
	2016			2015			2017			2016
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	(46,160	)	$	20,621		$	(16,324	)	$	(16,242	)
Dividends attributable to redeemable noncontrolling interests	(4,588		)	(4,588		)	(4,584		)	(4,587		)
Net (income) loss attributable to noncontrolling interests	$	(50,748	)	$	16,033		$	(20,908	)	$	(20,829	)

Nine Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	(96,118	)	$	(5,178	)
Dividends attributable to redeemable noncontrolling interests	(13,761		)	(14,239		)
Net (income) loss attributable to noncontrolling interests	$	(109,879	)	$	(19,417	)

Bellemeade Re I and II

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

As a result of the evaluation of the Bellemeade Agreements, the Company concluded that both Bellemeade I and Bellemeade II are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to the economic performance of Bellemeade I and Bellemeade II, the Company does not consolidate Bellemeade I and Bellemeade II in its consolidated financial statements. The following table presents total assets of Bellemeade I and Bellemeade II as well as the Company’s maximum exposure to loss associated with these VIEs:



			Maximum Exposure to Loss
	Total VIE Assets		On-Balance Sheet		Off-Balance Sheet		Total
Bellemeade I	$	146,200	$	351	$	1,310	$	1,661
Bellemeade II	283,777		54		1,103		1,157
Total	$	429,977	$	405	$	2,413	$	2,818

Irving Partners Limited Partnership

Upon closing of the UGC acquisition, the Company acquired a limited partnership interest in Irving Partners Limited Partnership (“Irving Partners”), which owns and operates an office building in Greensboro, North Carolina in which the Company is the main tenant. The Company concluded that Irving Partners is a VIE but that it is not the primary beneficiary. The Company’s maximum exposure to loss is approximately $14.5 million at March 31, 2017.



	ACGL 2017 FIRST QUARTER FORM 10-Q	13

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. Earnings Per Common Share

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Numerator:
Net income	$	303,620		$	64,000		$	728,604		$	498,576		$	274,035		$	175,627
Net (income) loss attributable to noncontrolling interests	(50,748		)	16,033			(109,879		)	(19,417		)
Amounts attributable to noncontrolling interests													(20,908		)	(20,829		)
Net income available to Arch	252,872			80,033			618,725			479,159			253,127			154,798
Preferred dividends	(5,484		)	(5,484		)	(16,453		)	(16,453		)	(11,218		)	(5,484		)
Net income available to Arch common shareholders	$	247,388		$	74,549		$	602,272		$	462,706		$	241,909		$	149,314

Denominator:
Weighted average common shares outstanding — basic	120,938,916			120,567,410			120,656,420			122,151,971
Weighted average common shares outstanding													121,272,107			120,428,179
Series D preferred shares (1)													12,762,820			—
Weighted average common shares and common share equivalents outstanding — basic													134,034,927			120,428,179
Effect of dilutive common share equivalents:
Nonvested restricted shares	1,313,025			1,322,053			1,295,825			1,260,247			1,646,555			1,460,654
Stock options (1)	2,679,712			3,122,310			2,575,929			2,942,541
Stock options (2)													3,366,190			2,607,663
Weighted average common shares and common share equivalents outstanding — diluted	124,931,653			125,011,773			124,528,174			126,354,759			139,047,672			124,496,496

Earnings per common share:
Basic	$	2.05		$	0.62		$	4.99		$	3.79		$	1.80		$	1.24
Diluted	$	1.98		$	0.60		$	4.84		$	3.66		$	1.74		$	1.20


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

(2)

Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the ~~2016 third~~2017 first quarter and ~~2015 third~~2016 first quarter, the number of stock options excluded were ~~334,203~~263,475 and ~~390,406, respectively. For the nine months ended September 30, 2016 and 2015, the number of stock options excluded were 842,105 and 957,838,~~607,208, respectively.



	ACGL 2017 FIRST QUARTER FORM 10-Q	14

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Segment Information

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

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

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

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

The mortgage segment includes the ~~results of~~Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company, ~~(“Arch~~United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company (combined “Arch MI U.S.”) ~~and Arch Mortgage Insurance Designated Activity Company, leading providers of mortgage insurance products and services to the U.S. and European markets, respectively. Arch MI U.S. is~~are approved as an eligible mortgage ~~insurer~~insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a ~~government sponsored enterprise, or “GSE.” The mortgage segment also includes GSE credit risk-sharing transactions and mortgage reinsurance for the U.S. and Australian markets.~~GSE.

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, UGC transaction costs and other, interest expense, dividends related to the Company’s non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income ~~taxes and items related to the Company’s non-cumulative preferred shares.~~taxes. Such amounts exclude the results of the ‘other’ segment.

The ‘other’ segment includes the results of Watford Re (see Note 3). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.



	ACGL 2017 FIRST QUARTER FORM 10-Q	15

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:


	Three Months Ended																		Three Months Ended
	September 30, 2016																		March 31, 2017
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total			Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	758,934		$	324,361		$	131,726		$	1,214,765		$	163,736		$	1,278,765		$	782,281		$	475,782		$	348,623		$	1,606,686		$	154,120		$	1,657,990
Premiums ceded	(217,446		)	(89,551		)	(51,182		)	(357,923		)	(6,300		)	(264,487		)	(234,095		)	(166,092		)	(73,925		)	(474,112		)	(10,434		)	(381,730		)
Net premiums written	541,488			234,810			80,544			856,842			157,436			1,014,278			548,186			309,690			274,698			1,132,574			143,686			1,276,260
Change in unearned premiums	(22,410		)	17,117			(3,582		)	(8,875		)	(47,000		)	(55,875		)	(42,540		)	(64,839		)	(30,175		)	(137,554		)	(21,689		)	(159,243		)
Net premiums earned	519,078			251,927			76,962			847,967			110,436			958,403			505,646			244,851			244,523			995,020			121,997			1,117,017
Other underwriting income	—			2,216			4,740			6,956			1,024			7,980			—			(306		)	4,123			3,817			816			4,633
Losses and loss adjustment expenses	(332,845		)	(105,924		)	(11,107		)	(449,876		)	(74,307		)	(524,183		)	(332,641		)	(105,454		)	(29,065		)	(467,160		)	(85,410		)	(552,570		)
Acquisition expenses, net	(77,148		)	(50,217		)	(7,757		)	(135,122		)	(28,739		)	(163,861		)	(74,868		)	(46,147		)	(28,766		)	(149,781		)	(32,508		)	(182,289		)
Other operating expenses	(87,517		)	(35,589		)	(25,416		)	(148,522		)	(7,035		)	(155,557		)	(88,126		)	(37,533		)	(41,870		)	(167,529		)	(7,190		)	(174,719		)
Underwriting income (loss)	$	21,568		$	62,413		$	37,422		121,403			1,379			122,782			$	10,011		$	55,411		$	148,945		214,367			(2,295		)	212,072

Net investment income										66,282			27,336			93,618												95,812			22,062			117,874
Net realized gains (losses)										95,946			29,159			125,105												28,512			5,641			34,153
Net impairment losses recognized in earnings										(3,867		)	—			(3,867		)										(1,807		)	—			(1,807		)
Equity in net income (loss) of investment funds accounted for using the equity method										16,662			—			16,662												48,088			—			48,088
Other income (loss)										(400		)	—			(400		)										(782		)	—			(782		)
Corporate expenses(2)										(18,485		)	—			(18,485		)										(12,208		)	—			(12,208		)
UGC transaction costs and other (2)																												(15,584		)	—			(15,584		)
Amortization of intangible assets																												(31,294		)	—			(31,294		)
Interest expense										(12,924		)	(3,019		)	(15,943		)										(25,756		)	(2,920		)	(28,676		)
Net foreign exchange gains (losses)										(4,232		)	1,611			(2,621		)										(19,845		)	441			(19,404		)
Income (loss) before income taxes										260,385			56,466			316,851												279,503			22,929			302,432
Income tax expense										(13,232		)	1			(13,231		)										(28,397		)	—			(28,397		)
Net income (loss)										247,153			56,467			303,620												251,106			22,929			274,035
Dividends attributable to redeemable noncontrolling interests										—			(4,588		)	(4,588		)										—			(4,584		)	(4,584		)
Amounts attributable to noncontrolling interests										—			(46,160		)	(46,160		)										—			(16,324		)	(16,324		)
Net income (loss) available to Arch										247,153			5,719			252,872												251,106			2,021			253,127
Preferred dividends										(5,484		)	—			(5,484		)										(11,218		)	—			(11,218		)
Net income (loss) available to Arch common shareholders										$	241,669		$	5,719		$	247,388											$	239,888		$	2,021		$	241,909

Underwriting Ratios
Loss ratio	64.1		%	42.0		%	14.4		%	53.1		%	67.3		%	54.7		%	65.8		%	43.1		%	11.9		%	46.9		%	70.0		%	49.5		%
Acquisition expense ratio	14.9		%	19.9		%	10.1		%	15.9		%	26.0		%	17.1		%	14.8		%	18.8		%	11.8		%	15.1		%	26.6		%	16.3		%
Other operating expense ratio	16.9		%	14.1		%	33.0		%	17.5		%	6.4		%	16.2		%	17.4		%	15.3		%	17.1		%	16.8		%	5.9		%	15.6		%
Combined ratio	95.9		%	76.0		%	57.5		%	86.5		%	99.7		%	88.0		%	98.0		%	77.2		%	40.8		%	78.8		%	102.5		%	81.4		%

Goodwill and intangible assets	$	26,367		$	1,228		$	55,696		$	83,291		$	7,650		$	90,941		$	24,371		$	773		$	717,521		$	742,665		$	7,650		$	750,315


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.


(2)	Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’



	ACGL 2017 FIRST QUARTER FORM 10-Q	16

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Three Months Ended
	March 31, 2016
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	798,553		$	481,390		$	111,280		$	1,391,061		$	148,606		$	1,437,966
Premiums ceded	(248,789		)	(160,566		)	(4,767		)	(413,960		)	(4,472		)	(316,731		)
Net premiums written	549,764			320,824			106,513			977,101			144,134			1,121,235
Change in unearned premiums	(36,675		)	(59,616		)	(44,748		)	(141,039		)	(28,617		)	(169,656		)
Net premiums earned	513,089			261,208			61,765			836,062			115,517			951,579
Other underwriting income	—			325			3,793			4,118			929			5,047
Losses and loss adjustment expenses	(323,609		)	(111,598		)	(8,629		)	(443,836		)	(79,113		)	(522,949		)
Acquisition expenses, net	(74,348		)	(54,758		)	(5,793		)	(134,899		)	(32,939		)	(167,838		)
Other operating expenses	(85,058		)	(36,258		)	(23,494		)	(144,810		)	(5,338		)	(150,148		)
Underwriting income (loss)	$	30,074		$	58,919		$	27,642		116,635			(944		)	115,691

Net investment income										70,409			23,326			93,735
Net realized gains (losses)										31,862			5,462			37,324
Net impairment losses recognized in earnings										(7,639		)	—			(7,639		)
Equity in net income (loss) of investment funds accounted for using the equity method										6,655			—			6,655
Other income (loss)										(25		)	—			(25		)
Corporate expenses										(9,383		)	—			(9,383		)
Amortization of intangible assets										(4,748		)	—			(4,748		)
Interest expense										(12,627		)	(3,480		)	(16,107		)
Net foreign exchange gains (losses)										(22,041		)	(1,525		)	(23,566		)
Income (loss) before income taxes										169,098			22,839			191,937
Income tax expense										(16,310		)	—			(16,310		)
Net income (loss)										152,788			22,839			175,627
Dividends attributable to redeemable noncontrolling interests										—			(4,587		)	(4,587		)
Amounts attributable to noncontrolling interests										—			(16,242		)	(16,242		)
Net income (loss) available to Arch										152,788			2,010			154,798
Preferred dividends										(5,484		)	—			(5,484		)
Net income (loss) available to Arch common shareholders										$	147,304		$	2,010		$	149,314

Underwriting Ratios
Loss ratio	63.1		%	42.7		%	14.0		%	53.1		%	68.5		%	55.0		%
Acquisition expense ratio	14.5		%	21.0		%	9.4		%	16.1		%	28.5		%	17.6		%
Other operating expense ratio	16.6		%	13.9		%	38.0		%	17.3		%	4.6		%	15.8		%
Combined ratio	94.2		%	77.6		%	61.4		%	86.5		%	101.6		%	88.4		%

Goodwill and intangible assets	$	27,825		$	1,713		$	63,132		$	92,670		$	—		$	92,670


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.



	ACGL 2017 FIRST QUARTER FORM 10-Q	1617

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Reserve for Losses and Loss Adjustment Expenses

Three Months Ended
September 30, 2015
Insurance Reinsurance Mortgage Sub-Total Other Total

Gross premiums written (1) $ 752,438
$ 329,327
$ 74,657
$ 1,158,451
$ 131,165
$ 1,189,192
Premiums ceded (209,443 ) (92,182 ) (7,832 ) (311,486 ) (6,158 ) (217,220 )
Net premiums written 542,995
237,145
66,825
846,965
125,007
971,972
Change in unearned premiums (20,451 ) 23,286
(12,277 ) (9,442 ) (25,847 ) (35,289 )
Net premiums earned 522,544
260,431
54,548
837,523
99,160
936,683
Other underwriting income 519
2,783
3,565
6,867
756
7,623
Losses and loss adjustment expenses (339,859 ) (115,780 ) (9,562 ) (465,201 ) (66,540 ) (531,741 )
Acquisition expenses, net (77,076 ) (55,416 ) (10,428 ) (142,920 ) (28,646 ) (171,566 )
Other operating expenses (84,620 ) (37,131 ) (21,048 ) (142,799 ) (3,421 ) (146,220 )
Underwriting income (loss) $ 21,508
$ 54,887
$ 17,075
93,470
1,309
94,779

Net investment income 67,251
18,982
86,233
Net realized gains (losses) (53,480 ) (36,218 ) (89,698 )
Net impairment losses recognized in earnings (5,868 ) —
(5,868 )
Equity in net income (loss) of investment funds accounted for using the equity method (2,118 ) —
(2,118 )
Other income (loss) (265 ) —
(265 )
Corporate expenses (10,739 ) —
(10,739 )
Interest expense (12,014 ) (1,286 ) (13,300 )
Net foreign exchange gains (losses) 16,056
(1,376 ) 14,680
Income (loss) before income taxes 92,293
(18,589 ) 73,704
Income tax expense (9,704 ) —
(9,704 )
Net income (loss) 82,589
(18,589 ) 64,000
Dividends attributable to redeemable noncontrolling interests —
(4,588 ) (4,588 )
Amounts attributable to noncontrolling interests —
20,621
20,621
Net income (loss) available to Arch 82,589
(2,556 ) 80,033
Preferred dividends (5,484 ) —
(5,484 )
Net income (loss) available to Arch common shareholders $ 77,105
$ (2,556 ) $ 74,549

Underwriting Ratios

Loss ratio 65.0 % 44.5 % 17.5 % 55.5 % 67.1 % 56.8 %
Acquisition expense ratio 14.8 % 21.3 % 19.1 % 17.1 % 28.9 % 18.3 %
Other operating expense ratio 16.2 % 14.3 % 38.6 % 17.1 % 3.4 % 15.6 %
Combined ratio 96.0 % 80.1 % 75.2 % 89.7 % 99.4 % 90.7 %

Goodwill and intangible assets $ 29,834
$ 2,149
$ 71,637
$ 103,620
$ —
$ 103,620


~~(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.



		17

~~Table~~The following table represents an analysis of ~~Contents~~

~~ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:

Nine Months Ended
September 30, 2016
Insurance Reinsurance Mortgage Sub-Total Other Total

Gross premiums written (1) $ 2,319,530
$ 1,217,804
$ 361,440
$ 3,898,025
$ 421,627
$ 4,046,667
Premiums ceded (713,110 ) (370,068 ) (62,918 ) (1,145,347 ) (15,229 ) (887,591 )
Net premiums written 1,606,420
847,736
298,522
2,752,678
406,398
3,159,076
Change in unearned premiums (46,603 ) (43,345 ) (93,283 ) (183,231 ) (59,878 ) (243,109 )
Net premiums earned 1,559,817
804,391
205,239
2,569,447
346,520
2,915,967
Other underwriting income —
22,659
12,670
35,329
2,922
38,251
Losses and loss adjustment expenses (1,011,087 ) (363,613 ) (20,102 ) (1,394,802 ) (236,922 ) (1,631,724 )
Acquisition expenses, net (228,819 ) (160,800 ) (24,665 ) (414,284 ) (95,323 ) (509,607 )
Other operating expenses (265,749 ) (109,159 ) (74,022 ) (448,930 ) (18,486 ) (467,416 )
Underwriting income (loss) $ 54,162
$ 193,478
$ 99,120
346,760
(1,289 ) 345,471

Net investment income 207,088
68,603
275,691
Net realized gains (losses) 168,735
61,912
230,647
Net impairment losses recognized in earnings (16,849 ) —
(16,849 )
Equity in net income (loss) of investment funds accounted for using the equity method 32,054
—
32,054
Other income (loss) (432 ) —
(432 )
Corporate expenses (45,068 ) —
(45,068 )
Interest expense (37,983 ) (9,730 ) (47,713 )
Net foreign exchange gains (losses) (3,812 ) 2,287
(1,525 )
Income (loss) before income taxes 650,493
121,783
772,276
Income tax expense (43,673 ) 1
(43,672 )
Net income (loss) 606,820
121,784
728,604
Dividends attributable to redeemable noncontrolling interests —
(13,761 ) (13,761 )
Amounts attributable to noncontrolling interests —
(96,118 ) (96,118 )
Net income (loss) available to Arch 606,820
11,905
618,725
Preferred dividends (16,453 ) —
(16,453 )
Net income (loss) available to Arch common shareholders $ 590,367
$ 11,905
$ 602,272

Underwriting Ratios
Loss ratio 64.8 % 45.2 % 9.8 % 54.3 % 68.4 % 56.0 %
Acquisition expense ratio 14.7 % 20.0 % 12.0 % 16.1 % 27.5 % 17.5 %
Other operating expense ratio 17.0 % 13.6 % 36.1 % 17.5 % 5.3 % 16.0 %
Combined ratio 96.5 % 78.8 % 57.9 % 87.9 % 101.2 % 89.5 %



	Three Months Ended March 31,
	2017			2016
Reserve for losses and loss adjustment expenses at beginning of year	$	10,200,960		$	9,125,250
Unpaid losses and loss adjustment expenses recoverable	2,083,575			1,828,837
Net reserve for losses and loss adjustment expenses at beginning of year	8,117,385			7,296,413

Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year	635,775			578,978
Prior years	(83,205		)	(56,029		)
Total net incurred losses and loss adjustment expenses	552,570			522,949

Net foreign exchange losses (gains)	31,278			33,575

Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year	(34,957		)	(49,079		)
Prior years	(464,585		)	(362,595		)
Total net paid losses and loss adjustment expenses	(499,542		)	(411,674		)

Net reserve for losses and loss adjustment expenses at end of year	8,201,691			7,441,263
Unpaid losses and loss adjustment expenses recoverable	2,095,130			1,937,724
Reserve for losses and loss adjustment expenses at end of period	$	10,296,821		$	9,378,987

2017 Prior Year Development


~~(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.

During the 2017 first quarter, the Company recorded net favorable development on prior year loss reserves of $83.2 million, which consisted of $57.2 million from the reinsurance segment, $2.1 million from the insurance segment, $23.6 million from the mortgage segment and $0.3 million from the ‘other’ segment.

The reinsurance segment’s net favorable development of $57.2 million, or 23.4 points, for the 2017 first quarter consisted of $40.8 million from short-tailed lines and $16.4 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $34.0 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed and medium-tailed lines reflected reductions in casualty reserves of $5.5 million based on varying levels of reported and paid claims activity, primarily from the 2003 to 2013 underwriting years, and favorable development in marine reserves of $9.9 million across most underwriting years.

The insurance segment’s net favorable development of $2.1 million, or 0.4 points, for the 2017 first quarter consisted of $7.0 million of net favorable development in long-tailed lines and $1.9 million of net favorable development in short-tailed

lines, partially offset by $6.8 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2014 accident years (i.e., the year in which a loss occurred). Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2011 to 2016 accident years. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $14.2 million stemming in part from development on a small number of programs in the 2013 and 2014 accident years, partially offset by net favorable development of $7.5 million in other medium-tailed lines, primarily in professional liability and surety.

The mortgage segment’s net favorable development was $23.6 million, or 9.6 points, for the 2017 first quarter. The 2017 first quarter development was primarily driven by continued lower than expected claim emergence across most origination years and also reflected $8.2 million related to subrogation recoveries on second lien and other portfolios.

2016 Prior Year Reserve Development

During the 2016 first quarter, the Company recorded net favorable development on prior year loss reserves of $56.0 million, which consisted of $47.4 million from the reinsurance segment, $6.2 million from the insurance segment, $2.7 million from the mortgage segment less adverse development of $0.2 million from the ‘other’ segment.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The reinsurance segment’s net favorable development of $47.4 million, or 18.1 points, for the 2016 first quarter consisted of $36.5 million from short-tailed lines and $10.9 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $29.8 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2013 to 2015 underwriting years, reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $14.2 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2005 underwriting years and 2009 to 2011 underwriting years. Such amounts were partially offset by net adverse development on marine reserves of $2.0 million, partially offset by favorable development from most other underwriting years.

The insurance segment’s net favorable development of $6.2 million, or 1.2 points, for the 2016 first quarter consisted of $9.9 million of net favorable development in long-tailed lines and $3.7 million of net favorable development in short-tailed lines, partially offset by $7.4 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected favorable development in casualty reserves of $6.9 million, primarily from the 2008 and 2012 accident years. Net favorable development in short-tailed lines primarily resulted from reductions in property (including special risk other than marine) reserves from the 2012 to 2014 accident years, primarily due to varying levels of reported claims activity. Net adverse development in medium tailed lines primarily resulted from an increase in programs of $6.1 million with approximately 30% stemming from terminated programs.

The mortgage segment’s net favorable development was $2.7 million, or 4.4 points, for the 2016 first quarter. The 2016 first quarter development was primarily driven by lower than expected claim rates across most origination years.

Nine Months Ended
September 30, 2015
Insurance Reinsurance Mortgage Sub-Total Other Total

Gross premiums written (1) $ 2,263,401
$ 1,156,540
$ 203,770
$ 3,625,382
$ 387,752
$ 3,730,423
Premiums ceded (669,336 ) (318,197 ) (23,404 ) (1,012,608 ) (17,979 ) (747,876 )
Net premiums written 1,594,065
838,343
180,366
2,612,774
369,773
2,982,547
Change in unearned premiums (53,782 ) (24,230 ) (22,992 ) (101,004 ) (91,158 ) (192,162 )
Net premiums earned 1,540,283
814,113
157,374
2,511,770
278,615
2,790,385
Other underwriting income 1,467
6,870
14,969
23,306
3,570
26,876
Losses and loss adjustment expenses (978,681 ) (339,495 ) (33,010 ) (1,351,186 ) (193,697 ) (1,544,883 )
Acquisition expenses, net (228,877 ) (170,380 ) (31,046 ) (430,303 ) (79,764 ) (510,067 )
Other operating expenses (261,793 ) (114,182 ) (61,096 ) (437,071 ) (8,876 ) (445,947 )
Underwriting income (loss) $ 72,399
$ 196,926
$ 47,191
316,516
(152 ) 316,364

Net investment income 204,710
47,480
252,190
Net realized gains (losses) (14,831 ) (27,244 ) (42,075 )
Net impairment losses recognized in earnings (12,780 ) —
(12,780 )
Equity in net income (loss) of investment funds accounted for using the equity method 19,938
—
19,938
Other income (loss) 52
—
52
Corporate expenses (37,502 ) —
(37,502 )
Interest expense (28,761 ) (1,286 ) (30,047 )
Net foreign exchange gains (losses) 60,338
1,260
61,598
Income (loss) before income taxes 507,680
20,058
527,738
Income tax expense (29,162 ) —
(29,162 )
Net income (loss) 478,518
20,058
498,576
Dividends attributable to redeemable noncontrolling interests —
(14,239 ) (14,239 )
Amounts attributable to noncontrolling interests —
(5,178 ) (5,178 )
Net income (loss) available to Arch 478,518
641
479,159
Preferred dividends (16,453 ) —
(16,453 )
Net income (loss) available to Arch common shareholders $ 462,065
$ 641
$ 462,706

Underwriting Ratios
Loss ratio 63.5 % 41.7 % 21.0 % 53.8 % 69.5 % 55.4 %
Acquisition expense ratio 14.9 % 20.9 % 19.7 % 17.1 % 28.6 % 18.3 %
Other operating expense ratio 17.0 % 14.0 % 38.8 % 17.4 % 3.2 % 16.0 %
Combined ratio 95.4 % 76.6 % 79.5 % 88.3 % 101.3 % 89.7 %


~~(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.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.7. Investment Information

At ~~September 30, 2016,~~March 31, 2017, total investable assets of ~~$17.88~~$20.74 billion included ~~$16.04~~$18.83 billion managed by the Company and ~~$1.84~~$1.90 billion attributable to Watford Re.

Available For Sale Investments

The following table summarizes the fair value and cost or amortized cost of the Company’s investments classified as available for sale:


	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Cost or Amortized Cost		OTTI Unrealized Losses (2)			Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Cost or Amortized Cost		OTTI Unrealized Losses (2)
September 30, 2016
March 31, 2017
Fixed maturities (1):
Corporate bonds	$	2,956,514	$	54,901	$	(14,297	)	$	2,915,910	$	(2,286	)	$	4,546,756	$	31,033	$	(36,615	)	$	4,552,338	$	(1,876	)
Mortgage backed securities	557,913		11,716		(1,518		)	547,715		(3,327		)	412,023		5,210		(2,712		)	409,525		(3,323		)
Municipal bonds	1,893,728		36,567		(1,743		)	1,858,904		—			2,519,112		14,332		(17,411		)	2,522,191		(201		)
Commercial mortgage backed securities	618,235		9,217		(1,015		)	610,033		—			590,521		3,485		(6,040		)	593,076		—
U.S. government and government agencies	3,014,830		17,195		(1,745		)	2,999,380		—			3,266,908		7,940		(11,152		)	3,270,120		—
Non-U.S. government securities	1,186,639		45,372		(33,218		)	1,174,485		—			1,295,366		26,017		(39,356		)	1,308,705		—
Asset backed securities	1,241,169		11,463		(2,068		)	1,231,774		(69		)	1,638,347		8,984		(4,910		)	1,634,273		(22		)
Total	11,469,028		186,431		(55,604		)	11,338,201		(5,682		)	14,269,033		97,001		(118,196		)	14,290,228		(5,422		)
Equity securities	533,245		76,733		(6,597		)	463,109		—			431,062		66,628		(6,660		)	371,094		—
Other investments	168,243		17,871		(1,058		)	151,430		—			228,437		31,844		(838		)	197,431		—
Short-term investments	1,184,408		553		(1,956		)	1,185,811		—			803,619		120		(125		)	803,624		—
Total	$	13,354,924	$	281,588	$	(65,215	)	$	13,138,551	$	(5,682	)	$	15,732,151	$	195,593	$	(125,819	)	$	15,662,377	$	(5,422	)

December 31, 2015
December 31, 2016
Fixed maturities (1):
Corporate bonds	$	2,725,729	$	15,978	$	(60,508	)	$	2,770,259	$	(3,553	)	$	4,392,373	$	27,606	$	(46,905	)	$	4,411,672	$	(2,285	)
Mortgage backed securities	754,870		9,872		(5,334		)	750,332		(3,350		)	490,093		4,794		(8,357		)	493,656		(3,323		)
Municipal bonds	1,626,281		27,014		(1,534		)	1,600,801		—			3,713,434		8,554		(29,154		)	3,734,034		(201		)
Commercial mortgage backed securities	764,152		3,269		(6,978		)	767,861		—			536,051		2,876		(6,508		)	539,683		—
U.S. government and government agencies	2,423,455		6,228		(9,978		)	2,427,205		—			2,804,540		9,319		(24,437		)	2,819,658		—
Non-U.S. government securities	917,664		10,414		(39,122		)	946,372		—			1,096,440		19,036		(56,872		)	1,134,276		—
Asset backed securities	1,620,506		3,307		(12,951		)	1,630,150		(22		)	1,123,987		6,897		(6,526		)	1,123,616		(22		)
Total	10,832,657		76,082		(136,405		)	10,892,980		(6,925		)	14,156,918		79,082		(178,759		)	14,256,595		(5,831		)
Equity securities	629,182		94,341		(17,796		)	552,637		—			532,680		62,627		(17,517		)	487,570		—
Other investments	300,476		43,798		(4,665		)	261,343		—			167,970		21,358		(2,465		)	149,077		—
Short-term investments	587,904		187		(3,425		)	591,142		—			612,005		272		(145		)	611,878		—
Total	$	12,350,219	$	214,408	$	(162,291	)	$	12,298,102	$	(6,925	)	$	15,469,573	$	163,339	$	(198,886	)	$	15,505,120	$	(5,831	)


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

(2)

Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At ~~September 30, 2016,~~March 31, 2017, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $2.0 million, compared to a net unrealized ~~loss~~gain of ~~$1.4~~$2.8 million at December 31, ~~2015.~~2016.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:


	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
September 30, 2016
March 31, 2017
Fixed maturities (1):
Corporate bonds	$	566,387	$	(4,281	)	$	111,303	$	(10,016	)	$	677,690	$	(14,297	)	$	1,832,009	$	(34,331	)	$	26,288	$	(2,284	)	$	1,858,297	$	(36,615	)
Mortgage backed securities	104,159		(1,249		)	13,230		(269		)	117,389		(1,518		)	137,291		(2,652		)	4,150		(60		)	141,441		(2,712		)
Municipal bonds	415,130		(1,274		)	8,348		(469		)	423,478		(1,743		)	1,043,998		(16,890		)	25,004		(521		)	1,069,002		(17,411		)
Commercial mortgage backed securities	89,999		(778		)	26,710		(237		)	116,709		(1,015		)	304,022		(5,890		)	3,928		(150		)	307,950		(6,040		)
U.S. government and government agencies	1,233,737		(1,745		)	—		—			1,233,737		(1,745		)	1,803,247		(11,152		)	—		—			1,803,247		(11,152		)
Non-U.S. government securities	336,149		(13,113		)	133,652		(20,105		)	469,801		(33,218		)	914,310		(39,153		)	13,924		(203		)	928,234		(39,356		)
Asset backed securities	178,769		(781		)	104,273		(1,287		)	283,042		(2,068		)	662,917		(4,257		)	40,477		(653		)	703,394		(4,910		)
Total	2,924,330		(23,221		)	397,516		(32,383		)	3,321,846		(55,604		)	6,697,794		(114,325		)	113,771		(3,871		)	6,811,565		(118,196		)
Equity securities	167,172		(6,597		)	—		—			167,172		(6,597		)	134,646		(6,660		)	—		—			134,646		(6,660		)
Other investments	24,740		(1,058		)	—		—			24,740		(1,058		)	25,189		(838		)	—		—			25,189		(838		)
Short-term investments	28,506		(1,956		)	—		—			28,506		(1,956		)	43,717		(125		)	—		—			43,717		(125		)
Total	$	3,144,748	$	(32,832	)	$	397,516	$	(32,383	)	$	3,542,264	$	(65,215	)	$	6,901,346	$	(121,948	)	$	113,771	$	(3,871	)	$	7,015,117	$	(125,819	)

December 31, 2015
December 31, 2016
Fixed maturities (1):
Corporate bonds	$	1,810,988	$	(37,445	)	$	129,896	$	(23,063	)	$	1,940,884	$	(60,508	)	$	1,700,813	$	(43,011	)	$	46,902	$	(3,894	)	$	1,747,715	$	(46,905	)
Mortgage backed securities	487,018		(4,508		)	48,991		(826		)	536,009		(5,334		)	402,699		(8,134		)	6,105		(223		)	408,804		(8,357		)
Municipal bonds	269,015		(1,303		)	9,692		(231		)	278,707		(1,534		)	1,513,308		(28,504		)	29,636		(650		)	1,542,944		(29,154		)
Commercial mortgage backed securities	511,261		(6,639		)	20,596		(339		)	531,857		(6,978		)	231,374		(6,331		)	5,635		(177		)	237,009		(6,508		)
U.S. government and government agencies	1,991,163		(9,978		)	—		—			1,991,163		(9,978		)	1,888,018		(24,437		)	—		—			1,888,018		(24,437		)
Non-U.S. government securities	458,414		(13,494		)	138,792		(25,628		)	597,206		(39,122		)	807,598		(56,872		)	—		—			807,598		(56,872		)
Asset backed securities	1,217,163		(9,328		)	134,841		(3,623		)	1,352,004		(12,951		)	627,557		(5,465		)	65,723		(1,061		)	693,280		(6,526		)
Total	6,745,022		(82,695		)	482,808		(53,710		)	7,227,830		(136,405		)	7,171,367		(172,754		)	154,001		(6,005		)	7,325,368		(178,759		)
Equity securities	232,275		(17,796		)	—		—			232,275		(17,796		)	269,381		(17,517		)	—		—			269,381		(17,517		)
Other investments	93,614		(4,665		)	—		—			93,614		(4,665		)	39,299		(2,465		)	—		—			39,299		(2,465		)
Short-term investments	30,625		(3,425		)	—		—			30,625		(3,425		)	29,146		(145		)	—		—			29,146		(145		)
Total	$	7,101,536	$	(108,581	)	$	482,808	$	(53,710	)	$	7,584,344	$	(162,291	)	$	7,509,193	$	(192,881	)	$	154,001	$	(6,005	)	$	7,663,194	$	(198,886	)


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

At ~~September 30, 2016,~~March 31, 2017, on a lot level basis, approximately ~~1,660~~3,350 security lots out of a total of approximately ~~6,440~~7,720 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 ~~$3.8~~$4.4 million. At December 31, ~~2015,~~2016, on a lot level basis, approximately ~~3,560~~3,540 security lots out of a total of approximately ~~5,550~~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 ~~$3.1~~$4.6 million.



	ACGL 2017 FIRST QUARTER FORM 10-Q	21

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2016				December 31, 2015				March 31, 2017				December 31, 2016
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	287,716	$	285,210	$	337,898	$	341,595	$	633,926	$	632,468	$	560,830	$	557,675
Due after one year through five years	5,305,049		5,278,946		4,644,516		4,677,230		7,197,090		7,217,033		6,158,148		6,211,099
Due after five years through 10 years	2,732,834		2,677,238		2,214,413		2,228,638		3,337,574		3,339,974		4,676,847		4,710,017
Due after 10 years	726,112		707,285		496,302		497,174		459,552		463,879		610,962		620,849
	9,051,711		8,948,679		7,693,129		7,744,637		11,628,142		11,653,354		12,006,787		12,099,640
Mortgage backed securities	557,913		547,715		754,870		750,332		412,023		409,525		490,093		493,656
Commercial mortgage backed securities	618,235		610,033		764,152		767,861		590,521		593,076		536,051		539,683
Asset backed securities	1,241,169		1,231,774		1,620,506		1,630,150		1,638,347		1,634,273		1,123,987		1,123,616
Total (1)	$	11,469,028	$	11,338,201	$	10,832,657	$	10,892,980	$	14,269,033	$	14,290,228	$	14,156,918	$	14,256,595


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

Securities Lending Agreements

The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan byfrom the Company.

The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short-term investments. At ~~September 30,~~March 31, 2017, the fair value of the cash collateral received on securities lending was $31.5 million and the fair value of security collateral received was $506.9 million. At December 31, 2016, the fair value of the cash collateral received on securities lending was ~~$85.1~~$212.5 million, and the fair value of security collateral received was $380.9 million. At December 31, 2015, the fair value of the cash collateral received on securities lending was $52.7 million, which included $3.0 million that was reinvested in sub-prime mortgage backed securities, and the fair value of security collateral received was $336.7$550.1 million.

The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:


	Remaining Contractual Maturity of the Agreements											Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Less than 30 Days		30-90 Days		90 Days or More		Total			Overnight and Continuous		Less than 30 Days		30-90 Days		90 Days or More		Total
September 30, 2016
March 31, 2017
U.S. government and government agencies	$	324,936	$	—	$	71,130	$	12,538	$	408,604		$	358,293	$	—	$	139,416	$	8,501	$	506,210
Corporate bonds	45,770		—		—		—		45,770			29,624		—		—		—		29,624
Equity securities	11,673		—		—		—		11,673			2,519		—		—		—		2,519
Total	$	382,379	$	—	$	71,130	$	12,538	$	466,047		$	390,436	$	—	$	139,416	$	8,501	$	538,353
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 8									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 8									$	466,047
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9											Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 9											Amounts related to securities lending not included in offsetting disclosure in Note 9									$	538,353

December 31, 2015
December 31, 2016
U.S. government and government agencies	$	235,728	$	—	$	82,286	$	9,598	$	327,612		$	556,015	$	31,244	$	126,093	$	5,140	$	718,492
Corporate bonds	55,086		—		—		—		55,086			29,078		—		—		—		29,078
Equity securities	6,722		4,424		—		—		11,146			14,984		—		—		—		14,984
Total	$	297,536	$	4,424	$	82,286	$	9,598	$	393,844		$	600,077	$	31,244	$	126,093	$	5,140	$	762,554
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 8									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 8									$	393,844
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9											Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9									$	—
Amounts related to securities lending not included in offsetting disclosure in Note 9											Amounts related to securities lending not included in offsetting disclosure in Note 9									$	762,554



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Other Investments

The following table summarizes the Company’s other investments, including available for sale and fair value option components:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Available for sale:
Asian and emerging markets	$	88,731	$	206,861	$	109,084	$	84,778
Investment grade fixed income	34,536		31,370		52,016		33,923
Credit related funds	6,478		22,512		11,003		7,469
Other	38,498		39,733		56,334		41,800
Total available for sale	168,243		300,476		228,437		167,970
Fair value option:
Term loan investments (par value: $1,152,530 and $1,197,143)	1,106,707		1,108,017
Term loan investments (par value: $1,145,832 and $1,208,537)					1,123,568		1,190,799
Mezzanine debt funds	122,528		121,589		109,334		127,943
Credit related funds	219,161		219,049		208,707		218,298
Investment grade fixed income	73,264		63,053		82,718		75,468
Asian and emerging markets	142,298		34,761		205,150		178,568
Other (1)	126,405		124,502		165,837		129,717
Total fair value option	1,790,363		1,670,971		1,895,314		1,920,793
Total	$	1,958,606	$	1,971,447	$	2,123,751	$	2,088,763


(1)	Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure and other.

Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.

Fair Value Option

The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Fixed maturities	$	1,182,909	$	936,802	$	1,112,945	$	1,099,116
Other investments	1,790,363		1,670,971		1,895,314		1,920,793
Short-term investments	388,125		285,923		581,508		373,669
Equity securities	28,176		798		58,353		27,642
Investments accounted for using the fair value option	$	3,389,573	$	2,894,494	$	3,648,120	$	3,421,220

Limited partnership interests

In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ ~~Based on the new accounting guidance for consolidation, the Company determined that these~~ ~~limited partnership interests represented variable interests in the funds because the~~ ~~general partner did not have a significant interest in the fund.~~ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.

The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Investments accounted for using the equity method (1)	$	787,456	$	584,158	$	861,607	$	800,970
Investments accounted for using the fair value option (2)	81,341		90,969		89,726		90,804
Total	$	868,797	$	675,127	$	951,333	$	891,774


(1)	Aggregate unfunded commitments were ~~$798.8~~$797.6 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$535.4~~$776.6 million at December 31, ~~2015.~~2016.


(2)	Aggregate unfunded commitments were ~~$27.7~~$66.7 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$22.7~~$16.7 million at December 31, ~~2015.~~2016.



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Net Investment Income

The components of net investment income were derived from the following sources:


	September 30,						March 31,
	2016			2015			2017			2016
Three Months Ended
Fixed maturities	$	71,366		$	70,626		$	94,393		$	73,673
Term loan investments	28,630			16,922			21,170			20,012
Equity securities (dividends)	3,311			3,486			2,643			3,435
Short-term investments	1,703			127			1,759			496
Other (1)	8,836			10,277			18,410			13,743
Gross investment income	113,846			101,438			138,375			111,359
Investment expenses	(20,228		)	(15,205		)	(20,501		)	(17,624		)
Net investment income	$	93,618		$	86,233		$	117,874		$	93,735

Nine Months Ended
Fixed maturities	$	223,033		$	210,497
Term loan investments	67,250			49,699
Equity securities (dividends)	10,409			8,743
Short-term investments	3,015			548
Other (1)	30,839			33,513
Gross investment income	334,546			303,000
Investment expenses	(58,855		)	(50,810		)
Net investment income	$	275,691		$	252,190


(1)	Includes income distributions from investment funds and other items.

Net Realized Gains (Losses)

Net realized gains (losses) were as follows, excluding other than-temporary impairment provision.


	September 30,						March 31,
	2016			2015			2017			2016
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	84,451		$	51,933		$	69,175		$	107,819
Gross losses on investment sales	(22,985		)	(53,953		)	(61,362		)	(63,131		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	43,935			(41,236		)	20,541			(333		)
Other investments	46,428			(75,251		)	17,248			(21,548		)
Equity securities	(52		)	71			3,545			36
Short-term investments	1,150			(9		)	4			(422		)
Derivative instruments (1)	(16,964		)	35,889			(9,181		)	20,732
Other (2)	(10,858		)	(7,142		)	(5,817		)	(5,829		)
Net realized gains (losses)	$	125,105		$	(89,698	)	$	34,153		$	37,324

Nine Months Ended
Available for sale securities:
Gross gains on investment sales	$	266,965		$	231,757
Gross losses on investment sales	(129,409		)	(168,087		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	62,234			(49,729		)
Other investments	38,016			(68,179		)
Equity securities	385			—
Short-term investments	107			1,462
Derivative instruments (1)	24,102			31,069
Other (2)	(31,753		)	(20,368		)
Net realized gains (losses)	$	230,647		$	(42,075	)


(1)	See Note 89 for information on the Company’s derivative instruments.


(2)	Includes the re-measurement of contingent consideration liability amounts.

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method

The Company recorded ~~$16.7~~$48.1 million of equity in net income related to investment funds accounted for using the equity method in the ~~2016 third~~2017 first quarter, compared to ~~$2.1~~$6.7 million of loss for the ~~2015 third quarter, and $32.1 million of equity in net income related to investment funds accounted for using the equity method for the nine months ended September 30,~~ 2016 ~~compared to $19.9 million of equity in net income for the 2015 period.~~first quarter. 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 market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.

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:


	September 30,						March 31,
	2016			2015			2017			2016
Three Months Ended
Fixed maturities:
Mortgage backed securities	$	(233	)	$	(85	)	$	(1,319	)	$	(473	)
Corporate bonds	—			(4,282		)	(1		)	(4,880		)
Non-U.S. government securities	(545		)	—			(198		)	(181		)
Asset backed securities	—			—			—			(6		)
Total	(778		)	(4,367		)	(1,518		)	(5,540		)
Short-term investments	—			—
Equity securities	(557		)	(1,501		)	(186		)	(1,102		)
Other investments	(2,532		)	—			(103		)	(997		)
Net impairment losses recognized in earnings	$	(3,867	)	$	(5,868	)	$	(1,807	)	$	(7,639	)

Nine Months Ended
Fixed maturities:
Mortgage backed securities	$	(788	)	$	(1,483	)
Corporate bonds	(5,655		)	(6,268		)
Non-U.S. government securities	(777		)	—
Asset backed securities	(2,506		)	—
Total	(9,726		)	(7,751		)
Short-term investments	—			(2,341		)
Equity securities	(3,594		)	(1,754		)
Other investments	(3,529		)	(934		)
Net impairment losses recognized in earnings	$	(16,849	)	$	(12,780	)



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~~A description of the methodology and significant inputs used to measure the amount of net~~Net impairment losses recognized in earnings in the ~~2016 periods is as follows:~~

Corporate bonds — the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain corporate bonds. Impairment losses primarily resulted from reductions on non-investment grade corporate bonds in the energy sector, reflecting current market conditions;

Equity securities — the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. Impairment losses2017 first quarter were primarily on ~~equities which~~mortgage backed securities and reflected the Company’s decision to liquidate a portfolio of mortgage backed securities in April 2017. The Company recorded impairment losses on securities in such portfolio that were in an unrealized loss position ~~for a significant length of time;~~at March 31, 2017.

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 a reduction on one security following an analysis of expected cash flows.

Other investments — the Company utilized information received from asset managers on investment funds, including the business prospects, recent events, industry and market data and other factors. Impairment losses reflected a reduction on certain funds which were in an unrealized loss position for a significant length of time;

Mortgage backed securities — the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis includes a review of cash flow projections under base case and stress case scenarios which modify the expected default expectations and loss severities and slow down prepayment assumptions. The significant inputs in the models include the expected default rates, delinquency rates and foreclosure costs. Impairment losses resulted from relatively small adjustments on a number of mortgage backed securities;

~~Non-U.S. government securities — impairment losses related to foreign currency impacts on securities which were in an unrealized loss position for a significant length of time.~~

The Company believes that the ~~$5.7~~$5.4 million of OTTI included in accumulated other comprehensive income at ~~September 30, 2016~~March 31, 2017 on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At ~~September 30, 2016,~~March 31, 2017, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.



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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:


	September 30,						March 31,
	2016			2015			2017			2016
Three Months Ended
Balance at start of period	$	14,847		$	20,906		$	13,138		$	26,875
Credit loss impairments recognized on securities not previously impaired	38			4,024			—			1,063
Credit loss impairments recognized on securities previously impaired	60			41			23			522
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—			—			—
Reductions for securities sold during the period	(1,166		)	—			(624		)	(10,169		)
Balance at end of period	$	13,779		$	24,971		$	12,537		$	18,291

Nine Months Ended
Balance at start of year	$	26,875		$	20,196
Credit loss impairments recognized on securities not previously impaired	1,388			8,794
Credit loss impairments recognized on securities previously impaired	582			175
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—
Reductions for securities sold during the period	(15,066		)	(4,194		)
Balance at end of period	$	13,779		$	24,971

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 910 for further details.



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The following table details the value of the Company’s restricted assets:



	March 31, 2017		December 31, 2016
Assets used for collateral or guarantees:
Affiliated transactions	$	3,991,217	$	3,871,971
Third party agreements	1,545,255		1,513,079
Deposits with U.S. regulatory authorities	528,594		472,890
Deposits with non-U.S. regulatory authorities	45,332		44,399
Total restricted assets	$	6,110,398	$	5,902,339

September 30,
2016 December 31,
2015
Assets used for collateral or guarantees:

Affiliated transactions $ 3,908,206
$ 3,810,104
Third party agreements 1,524,785
1,286,257
Deposits with U.S. regulatory authorities 473,094
391,458
Deposits with non-U.S. regulatory authorities 42,354
38,230
Total restricted assets $ 5,948,439
$ 5,526,049

7.8. Fair Value

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:


Level 1:	Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets


Level 2:	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument


Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.

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.,



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comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used ~~(i.e.~~(i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at ~~September 30, 2016.~~March 31, 2017.

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 ~~$16.94~~$19.62 billion of financial assets and liabilities measured at fair value at ~~September 30, 2016,~~March 31, 2017, approximately ~~$511.6~~$177.9 million, or ~~3.1%~~0.9%, were priced using non-binding broker-dealer quotes. Of the ~~$15.40~~$19.10 billion of financial assets and liabilities measured at fair value at December 31, ~~2015,~~2016, approximately ~~$317.8~~$234.0 million, or ~~2.1%~~1.2%, were priced using non-binding broker-dealer quotes.

Fixed maturities

The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from



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broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:

•U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

•Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. 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



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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



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classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

Equity securities

The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy.

Other investments

The Company determined that exchange-traded investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair

values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

Derivative instruments

The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in

the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.

Short-term investments

The Company determined that certain of its short-term investments held in highly liquid money market-type funds, 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) include amounts related to the acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies and other acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at ~~September 30, 2016:~~March 31, 2017:


				Estimated Fair Value Measurements Using:											Estimated Fair Value Measurements Using:
	Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	2,956,514		$	—	$	2,937,542		$	18,972		$	4,546,756		$	—	$	4,528,155		$	18,601
Mortgage backed securities	557,913			—		557,913			—			412,023			—		412,023			—
Municipal bonds	1,893,728			—		1,893,728			—			2,519,112			—		2,519,112			—
Commercial mortgage backed securities	618,235			—		618,235			—			590,521			—		590,521			—
U.S. government and government agencies	3,014,830			2,891,078		123,752			—			3,266,908			3,192,592		74,316			—
Non-U.S. government securities	1,186,639			—		1,186,639			—			1,295,366			—		1,295,366			—
Asset backed securities	1,241,169			—		1,214,393			26,776			1,638,347			—		1,627,710			10,637
Total	11,469,028			2,891,078		8,532,202			45,748			14,269,033			3,192,592		11,047,203			29,238

Equity securities	533,245			532,118		1,127			—			431,062			427,762		3,300			—

Short-term investments	1,184,408			1,162,900		21,508			—			803,619			796,075		7,544			—

Other investments	87,189			87,189		—			—			126,112			122,773		3,339			—
Other investments measured at net asset value (2)	81,054											102,325
Total other investments	168,243			87,189		—			—			228,437			122,773		3,339			—

Derivative instruments (4)	20,054			—		20,054			—			29,059			—		29,059			—

Fair value option:
Corporate bonds	830,484			—		830,484			—			817,690			—		817,690			—
Non-U.S. government bonds	110,642			—		110,642			—			55,504			—		55,504			—
Mortgage backed securities	19,184			—		19,184			—			16,489			—		16,489			—
Asset backed securities	29,258			—		29,258			—			16,198			—		16,198			—
U.S. government and government agencies	193,341			193,341		—			—			207,064			207,064		—			—
Short-term investments	388,125			388,125		—			—			581,508			580,315		1,193			—
Equity securities	28,176			27,644		532			—			58,353			55,311		3,042			—
Other investments	1,182,619			75,912		1,106,707			—			1,338,661			90,475		1,223,186			25,000
Other investments measured at net asset value (2)	607,744											556,653
Total	3,389,573			685,022		2,096,807			—			3,648,120			933,165		2,133,302			25,000

Total assets measured at fair value	$	16,764,551		$	5,358,307	$	10,671,698		$	45,748		$	19,409,330		$	5,472,367	$	13,223,747		$	54,238

Liabilities measured at fair value:
Contingent consideration liabilities	$	(116,377	)	$	—	$	—		$	(116,377	)	$	(125,544	)	$	—	$	—		$	(125,544	)
Securities sold but not yet purchased (3)	(52,195		)	—		(52,195		)	—			(59,430		)	—		(59,430		)	—
Derivative instruments (4)	(10,311		)	—		(10,311		)	—			(22,227		)	—		(22,227		)	—
Total liabilities measured at fair value	$	(178,883	)	$	—	$	(62,506	)	$	(116,377	)	$	(207,201	)	$	—	$	(81,657	)	$	(125,544	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 6,7, “Investment Information—Securities Lending Agreements.”

(2)

In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.


(3)	Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.


(4)	See Note 8,9, “Derivative Instruments.”



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, ~~2015:~~2016:


				Estimated Fair Value Measurements Using:											Estimated Fair Value Measurements Using:
	Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	2,725,729		$	—	$	2,709,361		$	16,368		$	4,392,373		$	—	$	4,374,029		$	18,344
Mortgage backed securities	754,870			—		754,870			—			490,093			—		490,093			—
Municipal bonds	1,626,281			—		1,626,281			—			3,713,434			—		3,713,434			—
Commercial mortgage backed securities	764,152			—		764,152			—			536,051			—		536,051			—
U.S. government and government agencies	2,423,455			2,378,662		44,793			—			2,804,540			2,691,575		112,965			—
Non-U.S. government securities	917,664			—		917,664			—			1,096,440			—		1,096,440			—
Asset backed securities	1,620,506			—		1,563,006			57,500			1,123,987			—		1,112,698			11,289
Total	10,832,657			2,378,662		8,380,127			73,868			14,156,918			2,691,575		11,435,710			29,633

Equity securities	629,182			627,441		1,741			—			532,680			529,695		2,985			—

Short-term investments	587,904			572,604		15,300			—			612,005			608,862		3,143			—

Other investments	99,159			99,159		—			—			112,313			112,313		—			—
Other investments measured at net asset value (2)	201,317											55,657
Total other investments	300,476			99,159		—			—			167,970			112,313		—			—

Derivative instruments (4)	20,022			—		20,022			—			28,410			—		28,410			—

Fair value option:
Corporate bonds	771,733			—		771,733			—			790,935			—		790,935			—
Non-U.S. government bonds	81,824			—		81,824			—			61,747			—		61,747			—
Mortgage backed securities	57,687			—		57,687			—			18,624			—		18,624			—
Asset backed securities	25,444			—		25,444			—			30,324			—		30,324			—
U.S. government and government agencies	114			114		—			—			197,486			197,486		—			—
Short-term investments	285,923			285,923		—			—			373,669			309,127		64,542			—
Equity securities	798			798		—			—			27,642			25,328		2,314			—
Other investments	1,176,312			68,295		1,108,017			—			1,226,242			80,706		1,120,536			25,000
Other investments measured at net asset value (2)	494,659											694,551
Total	2,894,494			355,130		2,044,705			—			3,421,220			612,647		2,089,022			25,000

Total assets measured at fair value	$	15,264,735		$	4,032,996	$	10,461,895		$	73,868		$	18,919,203		$	4,555,092	$	13,559,270		$	54,633

Liabilities measured at fair value:
Contingent consideration liabilities	$	(96,048	)	$	—	$	—		$	(96,048	)	$	(122,350	)	$	—	$	—		$	(122,350	)
Securities sold but not yet purchased (3)	(30,583		)	—		(30,583		)	—			(33,157		)	—		(33,157		)	—
Derivative instruments (4)	(11,863		)	—		(11,863		)	—			(26,049		)	—		(26,049		)	—
Total liabilities measured at fair value	$	(138,494	)	$	—	$	(42,446	)	$	(96,048	)	$	(181,556	)	$	—	$	(59,206	)	$	(122,350	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 6,7, “Investment Information—Securities Lending Agreements.”

(2)


(3)	Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.


(4)	See Note 8,9, “Derivative Instruments.”



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:


	Assets								Liabilities			Assets											Liabilities
s	Available For Sale			Fair Value Option								Available For Sale						Fair Value Option
	Asset Backed Securities			Corporate Bonds		Total			Contingent Consideration Liabilities			Asset Backed Securities			Corporate Bonds			Other Investments		Total			Contingent Consideration Liabilities
Three Months Ended September 30, 2016
Three Months Ended March 31, 2017
Balance at beginning of period	$	49,211		$	17,305	$	66,516		$	(111,670	)	$	11,289		$	18,344		$	25,000	$	54,633		$	(122,350	)
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	—			1,667		1,667			(4,795		)	707			257			—		964			(3,646		)
Included in other comprehensive income	—			—		—			88			—			—			—		—			—
Purchases, issuances, sales and settlements
Purchases	—			—		—			—			—			—			—		—			—
Issuances	—			—		—			—			—			—			—		—			—
Sales	—			—		—			—			—			—			—		—			—
Settlements	(22,435		)	—		(22,435		)	—			(1,359		)	—			—		(1,359		)	452
Transfers in and/or out of Level 3	—			—		—			—			—			—			—		—			—
Balance at end of period	$	26,776		$	18,972	$	45,748		$	(116,377	)	$	10,637		$	18,601		$	25,000	$	54,238		$	(125,544	)

Three Months Ended September 30, 2015
Three Months Ended March 31, 2016
Balance at beginning of period	$	57,500		$	—	$	57,500		$	(71,256	)	$	57,500		$	16,368		$	—	$	73,868		$	(96,048	)
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	—			—		—			(9,596		)	—			(1,202		)	—		(1,202		)	(5,198		)
Included in other comprehensive income	—			—		—			—			—			—			—		—			—
Purchases, issuances, sales and settlements
Purchases	—			—		—			—			—			—			—		—			—
Issuances	—			—		—			—			—			—			—		—			—
Sales	—			—		—			—			—			—			—		—			—
Settlements	—			—		—			—			—			—			—		—			536
Transfers in and/or out of Level 3	—			—		—			—			—			—			—		—			—
Balance at end of period	$	57,500		$	—	$	57,500		$	(80,852	)	$	57,500		$	15,166		$	—	$	72,666		$	(100,710	)

Nine Months Ended September 30, 2016
Balance at beginning of year	$	57,500		$	16,368	$	73,868		$	(96,048	)
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	(2,500		)	1,828		(672		)	(20,916		)
Included in other comprehensive income	—			—		—			51
Purchases, issuances, sales and settlements
Purchases	—			776		776			—
Issuances	—			—		—			—
Sales	—			—		—			—
Settlements	(28,224		)	—		(28,224		)	536
Transfers in and/or out of Level 3	—			—		—			—
Balance at end of period	$	26,776		$	18,972	$	45,748		$	(116,377	)

Nine Months Ended September 30, 2015
Balance at beginning of year	$	57,500		$	—	$	57,500		$	(61,845	)
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	—			—		—			(17,939		)
Included in other comprehensive income	—			—		—			—
Purchases, issuances, sales and settlements
Purchases	—			—		—			—
Issuances	—			—		—			(1,068		)
Sales	—			—		—			—
Settlements	—			—		—			—
Transfers in and/or out of Level 3	—			—		—			—
Balance at end of period	$	57,500		$	—	$	57,500		$	(80,852	)


(1)	Gains or losses on asset backed securities were included in net impairment losses recognized in earnings while gains or losses on corporate bonds and contingent consideration liabilities were included in net realized gains (losses).



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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

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 ~~September 30, 2016,~~March 31, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At ~~September 30, 2016,~~March 31, 2017, the senior notes of ACGL were carried at their cost, net of debt issuance costs, of ~~$296.9~~$297.0 million and had a fair value of ~~$407.3~~$394.7 million, while the senior notes of Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) were carried at their cost, net of debt issuance costs, of $494.5 million and had a fair value of ~~$552.4~~$535.6 million. The senior notes of Arch Capital Finance LLC due in 2026 were carried at their cost, net of debt issuance costs, of $495.8 million and had a fair value of $515.2 million, while the senior notes due in 2046 were carried at their cost, net of debt issuance costs, of $445.1 million and had a fair value of $488.0 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~~values of the senior notes isare classified within Level 2.

8.9. Derivative Instruments

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



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.

The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:


	Estimated Fair Value							Estimated Fair Value
	Asset Derivatives		Liability Derivatives			Notional Value (1)		Asset Derivatives		Liability Derivatives			Notional Value (1)
September 30, 2016
March 31, 2017
Futures contracts (2)	$	1,297	$	(2,710	)	$	1,549,238	$	3,550	$	(4,489	)	$	2,276,070
Foreign currency forward contracts (2)	5,430		(4,539		)	1,019,946		7,363		(11,435		)	1,264,235
TBAs (3)	92,301		(102,861		)	183,559		32,011		(32,791		)	63,966
Other (2)	13,327		(3,062		)	1,328,628		18,146		(6,303		)	1,552,009
Total	$	112,355	$	(113,172	)			$	61,070	$	(55,018	)

December 31, 2015
December 31, 2016
Futures contracts (2)	$	2,816	$	(1,202	)	$	1,797,115	$	360	$	(9,398	)	$	1,655,530
Foreign currency forward contracts (2)	9,336		(6,344		)	773,619		9,354		(12,941		)	1,186,386
TBAs (3)	6,525		—			6,316		—		—			—
Other (2)	7,870		(4,317		)	1,694,935		20,287		(3,710		)	1,014,863
Total	$	26,547	$	(11,863	)			$	30,001	$	(26,049	)


(1)	Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.


(2)	The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’


(3)	The fair value of TBAs are included in ‘fixed maturities available for sale, at fair value.’

The Company did not hold any derivatives which were designated as hedging instruments at ~~September 30, 2016~~March 31, 2017 or December 31, ~~2015.~~2016.

The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure.

At ~~September 30, 2016,~~March 31, 2017, asset derivatives and liability derivatives of ~~$111.2~~$59.3 million and ~~$113.2~~$54.6 million, respectively, were subject to a master netting agreement, compared to ~~$26.5~~$28.4 million and ~~$11.9~~

$26.0 million, respectively, at December 31, ~~2015.~~2016. The remaining derivatives included



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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

in the preceding table were not subject to a master netting agreement.

All realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in net realized gains (losses) in the consolidated statements of income, as summarized in the following table:


Derivatives not designated as	September 30,						March 31,
hedging instruments:	2016			2015			2017			2016

Three Months Ended
Net realized gains (losses):
Futures contracts	$	(15,368	)	$	28,562		$	7,720		$	26,451
Foreign currency forward contracts	4,583			5,395			(11,766		)	(4,752		)
TBAs	(23		)	1,064			(65		)	297
Other	(6,156		)	868			(5,070		)	(1,264		)
Total	$	(16,964	)	$	35,889		$	(9,181	)	$	20,732

Nine Months Ended
Net realized gains (losses):
Futures contracts	$	45,954		$	16,442
Foreign currency forward contracts	(13,951		)	13,490
TBAs	311			1,368
Other	(8,212		)	(231		)
Total	$	24,102		$	31,069

9.10. Commitments and Contingencies

~~Letter of Credit and Revolving Credit Facilities~~

As of September 30, 2016, ACGL and its wholly-owned subsidiaries had a $300.0 million unsecured revolving loan and letter of credit facility and a $500.0 million secured letter of credit facility (the “Credit Agreement”). Under the terms of the Credit Agreement, Arch Reinsurance Company and Arch Reinsurance Ltd. are limited to issuing an aggregate of $100.0 million of unsecured letters of credit as part of the unsecured revolving loan. The Credit Agreement expires on June 30, 2019. In addition, certain of ACGL’s subsidiaries had outstanding letters of credit of $175.6 million as of September 30, 2016, which were issued on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). ACGL and its’ subsidiaries which are party to the LOC Facilities were in compliance with all covenants contained in the LOC Facilities at September 30, 2016. At such date, $334.2 million in letters of credit under the LOC Facilities were outstanding, which were secured by investments with a fair value of $386.2 million, and had $100.0 million of borrowings outstanding under the Credit Agreement. Under the $500.0 million secured letter of credit facility, ACGL’s subsidiaries had remaining capacity of $341.4 million (outstanding letters of credit of $158.6 million) at September 30, 2016. See Note 16, “Subsequent Events.”

As of September 30, 2016, Watford Re had a $100.0 million letter of credit facility expiring on May 19, 2017 and an $800.0 million secured credit facility expiring on June 4, 2018, that provides for borrowings and the issuance of letters of credit not to exceed $400.0 million. Borrowings of revolving loans may be made by Watford Re at a variable rate based on LIBOR or an alternative base rate at the option of Watford Re. At September 30, 2016, Watford Re had $207.8 million in outstanding letters of credit under the two facilities and $298.1 million of borrowings outstanding under the secured credit facility, backed by Watford Re’s investment portfolio. Watford Re was in compliance with all covenants contained in both of its credit facilities at September 30, 2016. The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions.

Investment Commitments

The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately ~~$1.34~~$1.45 billion at ~~September 30, 2016, compared to $1.11 billion at December 31, 2015.~~

~~Acquisition of United Guaranty Corporation~~

On August 15, 2016, ACGL entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with American International Group, Inc. (“AIG”) pursuant to which, upon the terms and subject to the conditions thereof, ACGL agreed to purchase from AIG all of the issued and outstanding shares of capital stock of United Guaranty Corporation, a North Carolina corporation (“UG Corp”), and AIG United Guaranty (Asia) Limited (“AIG UG Asia” and, together with UG Corp, “UGC”). The acquisition under the Stock Purchase Agreement is referred to herein as the “UGC Acquisition.” As consideration in the UGC Acquisition, ACGL will pay to AIG aggregate consideration of approximately $3.43 billion (using the ACGL closing share price as of October 27, 2016), consisting of the following: (i) cash consideration of approximately $2.20 billion (the “Base Cash Consideration”); (ii) a number of shares of ACGL’s convertible non-voting common-equivalent preference shares (the “Series D Preferred Shares”) which are subject to a formula and a collar and an estimated fair value (using the ACGL closing share price as of October 27, 2016 of $77.03 per share) of approximately $983.1 million, subject to adjustment and subject to certain restrictions on transfer within the first 18 months; and (iii) an additional amount (or if such amount is negative $0) in cash equal to $250.0 million less the Company Dividend Amount (as defined below), if any, less the value of Perpetual Preferred Shares (as defined below) issued to AIG, if any. The Stock Purchase Agreement entitles AIG to take dividends or other



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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

distributions from UGC in an amount not to exceed $250.0 million between the signing of the Stock Purchase Agreement and the closing date of the UGC Acquisition (the amount of any such dividends or distributions, the “Company Dividend Amount”). As an additional component of the consideration for the transaction, ACGL can require AIG to accept up to $250.0 million of Perpetual Preferred Shares (which will have the same terms as ACGL’s 5.25% Non-Cumulative Preferred Shares, Series E (the “Perpetual Preferred Shares”) less the Company Dividend Amount.

In connection with the UGC Acquisition, the 50% quota share reinsurance agreement between United Guaranty Residential Insurance Company and three subsidiaries of AIG relating to policy years 2014, 2015 and 2016 will be amended to terminate on a run-off basis as of 12:01 a.m. on January 1, 2017.

~~The Stock Purchase Agreement may be terminated under certain circumstances, including: (i) the parties’ mutual agreement; (ii) by either ACGL or AIG, if the closing has not occurred on or before~~ March 31, 2017, subject to an extension at the request of either party of up to three months for the receipt of certain approvals (such date, as may be extended, the “Outside Date”); (iii) by either ACGL or AIG, in the event of the issuance of a final, non-appealable governmental order restraining or prohibiting the consummation of the transaction contemplated by the Stock Purchase Agreement or in the event that any law has been enacted, promulgated or issued by any governmental authority that restrains, enjoins or prohibits the transaction contemplated by the Stock Purchase Agreement or that would render the consummation of such transaction illegal; or (iv) the non-terminating party’s material uncured breach of the Stock Purchase Agreement. In the event that either ACGL or AIG terminates the Stock Purchase Agreement due to a failure to obtain the necessary regulatory approvals on or before the Outside Date and specified ACGL conditions to closing are otherwise satisfied, ACGL will pay a termination fee of $150.0 million to AIG.

~~Bridge Credit Agreement~~

In connection with the UGC Acquisition, the Company entered into a bridge credit agreement with Credit Suisse AG, Cayman Islands Branch (“CS”), as administrative agent and initial lender (the ‘‘Bridge Credit Agreement’’). The Bridge Credit Agreement provides for commitments by the lenders thereunder to provide up to $1.375 billion of term loans (the “Bridge Loans”) to fund a portion of the cash consideration portion required in the UGC Acquisition and to pay related fees and expenses.

Commitments under the Bridge Credit Agreement (or, to the extent funded, the Bridge Loans) may be voluntarily reduced (or prepaid) by ACGL without premium or penalty, other than payment of customary breakage costs. Commitments under the Bridge Credit Agreement (or, to the extent funded, Bridge Loans) will be subject to mandatory reduction (or, in the case

of Bridge Loans, mandatory prepayment), by an amount equal to the net cash proceeds of certain debt incurrences, equity issuances and asset sales. The commitments under the Bridge Credit Agreement will expire five business days after the Outside Date if the closing of the acquisition has not occurred on or prior to such date.

Conditions to borrowing under the Bridge Credit Agreement include the absence of a Material Adverse Effect (as defined in the Stock Purchase Agreement) in United Guaranty after December 31, 2015, the concurrent consummation of the acquisition in accordance with the Stock Purchase Agreement, and other conditions customary for bridge financings of this type.

The Bridge Loans, if funded, will mature on the date that is 364 days after funding. Bridge Loans will bear interest at a rate based on LIBOR or the base rate plus, in each case, an applicable margin. The applicable margin for LIBOR loans would range from 0.875% to 1.625% per annum and for base rate loans would range from 0.0% to 0.625% per annum, in each case, depending on the public debt rating of ACGL then in effect, increasing by 0.25% (with respect to each level of public debt rating) every 90 days after funding. In addition, customary fees will be payable under the Bridge Credit Agreement and related documents.

The Bridge Credit Agreement contains financial covenants that require ACGL to maintain a minimum consolidated tangible net worth and a maximum ratio of total consolidated debt to the sum of total consolidated debt plus consolidated net worth. The Bridge Credit Agreement also includes customary affirmative covenants, negative covenants and events of default. These provisions are generally consistent with those in ACGL’s existing revolving credit agreement.

Arch-U.S. will provide a guaranty of the obligations under the Bridge Credit Agreement. ACGL has the ability under the Bridge Loan Agreement to designate one of its subsidiaries to be the borrower pursuant to the terms thereof. In such case, ACGL would guarantee the obligations of the subsidiary borrower.

~~As a result of the preferred share offering in September 2016 (see note 10), the outstanding commitments under the Bridge Credit Agreement were reduced to $938.5 million at September 30, 2016.~~2017.

~~10.~~11. Share Transactions

~~Preferred Share Offering~~

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



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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

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). In April 2012, the Company issued $325 million of Series C Non-Cumulative Preferred Shares that are on parity with the Series E Preferred Shares with respect to payment of dividends and the distribution of assets upon a liquidation, dissolution or winding-up of ACGL.

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%. If declared, the first dividend payment date will be January 3, 2017. 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 intends to use the net proceeds from the offering of $434.9 million to fund a portion of the UGC Acquisition, to pay related costs and expenses and for general corporate purposes. See Note 9 for further detail on the UGC Acquisition.

Share Repurchases

The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Since the inception of the share repurchase program, ACGL has repurchased approximately 125.2 million common shares for an aggregate purchase price of $3.68 billion. ~~For~~During the ~~nine months ended September 30,~~2017 first quarter, the Company did not repurchase any shares under the share repurchase program. During the 2016 first quarter, ACGL repurchased 1.1 million common shares ~~(no repurchases in the 2016 third quarter)~~ for an aggregate purchase price of $75.3 million. During the 2015 third quarter and nine months ended September 30, 2015, ACGL repurchased 0.1 million and 5.9 million common shares, respectively, for an aggregate purchase price of $3.5 million and $365.4 million, respectively. At ~~September 30, 2016,~~March 31, 2017, $446.5 million of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~11.~~12. Other Comprehensive Income (Loss)

The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):


			Amounts Reclassified from AOCI														Amounts Reclassified from AOCI
		Consolidated Statement of Income	Three Months Ended						Nine Months Ended							Consolidated Statement of Income	Three Months Ended
Details About		Line Item That Includes	September 30,						September 30,							Line Item That Includes	March 31,
AOCI Components		Reclassification	2016			2015			2016			2015				Reclassification	2017			2016

Unrealized appreciation on available-for-sale investments	Unrealized appreciation on available-for-sale investments														Unrealized appreciation on available-for-sale investments
		Net realized gains (losses)	$	61,464		$	(2,019	)	$	137,555		$	63,671			Net realized gains (losses)	$	7,813		$	44,687
		Other-than-temporary impairment losses	(3,867		)	(8,901		)	(16,999		)	(17,274		)		Other-than-temporary impairment losses	(1,807		)	(7,737		)
		Total before tax	57,597			(10,920		)	120,556			46,397				Total before tax	6,006			36,950
		Income tax (expense) benefit	(2,605		)	(1,358		)	(11,247		)	(6,529		)		Income tax (expense) benefit	(962		)	(4,727		)
		Net of tax	$	54,992		$	(12,278	)	$	109,309		$	39,868			Net of tax	$	5,044		$	32,223


	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)		Net of Tax Amount
Three Months Ended September 30, 2016
Three Months Ended March 31, 2017
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	11,692		$	(4,589	)	$	16,281		$	111,472		$	10,680	$	100,792
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	—			—			—			—			—		—
Less reclassification of net realized gains (losses) included in net income	57,597			2,605			54,992			6,006			962		5,044
Foreign currency translation adjustments	(5,407		)	(95		)	(5,312		)	3,165			41		3,124
Other comprehensive income (loss)	$	(51,312	)	$	(7,289	)	$	(44,023	)	$	108,631		$	9,759	$	98,872

Three Months Ended September 30, 2015
Three Months Ended March 31, 2016
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(44,687	)	$	9,204		$	(53,891	)	$	152,174		$	19,193	$	132,981
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	(3,033		)	—			(3,033		)	(98		)	—		(98		)
Less reclassification of net realized gains (losses) included in net income	(10,920		)	1,358			(12,278		)	36,950			4,727		32,223
Foreign currency translation adjustments	(12,639		)	(556		)	(12,083		)	17,860			547		17,313
Other comprehensive income (loss)	$	(49,439	)	$	7,290		$	(56,729	)	$	132,986		$	15,013	$	117,973

Nine Months Ended September 30, 2016
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	281,770		$	30,048		$	251,722
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	(150		)	—			(150		)
Less reclassification of net realized gains (losses) included in net income	120,556			11,247			109,309
Foreign currency translation adjustments	(5,733		)	417			(6,150		)
Other comprehensive income (loss)	$	155,331		$	19,218		$	136,113

Nine Months Ended September 30, 2015
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(46,930	)	$	4,592		$	(51,522	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	(4,494		)	—			(4,494		)
Less reclassification of net realized gains (losses) included in net income	46,397			6,529			39,868
Foreign currency translation adjustments	(24,568		)	(1,308		)	(23,260		)
Other comprehensive income (loss)	$	(122,389	)	$	(3,245	)	$	(119,144	)



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~12.~~13. Guarantor Financial Information

The following tables present condensed financial information for ACGL, Arch-U.S., a 100% owned subsidiary of ACGL, and ACGL’s other subsidiaries.


		September 30, 2016												March 31, 2017
Condensed Consolidating Balance Sheet	Condensed Consolidating Balance Sheet	ACGL (Parent Guarantor)		Arch-U.S. (Subsidiary Issuer)		Other ACGL Subsidiaries		Consolidating Adjustments and Eliminations			ACGL Consolidated		Condensed Consolidating Balance Sheet	ACGL (Parent Guarantor)		Arch-U.S. (Subsidiary Issuer)		Other ACGL Subsidiaries		Consolidating Adjustments and Eliminations			ACGL Consolidated
Assets	Assets												Assets
Total investments	Total investments	$	538,713	$	54,483	$	16,975,841	$	(14,700	)	$	17,554,337	Total investments	$	256	$	41,715	$	20,227,399	$	(14,700	)	$	20,254,670
Cash	Cash	2,041		19,392		557,383		—			578,816		Cash	10,177		42,745		650,832		—			703,754
Investments in subsidiaries	Investments in subsidiaries	7,316,435		1,815,833		—		(9,132,268		)	—		Investments in subsidiaries	8,992,903		3,843,774		—		(12,836,677		)	—
Due from subsidiaries and affiliates	Due from subsidiaries and affiliates	4		51,036		391,026		(442,066		)	—		Due from subsidiaries and affiliates	1,626		52,032		1,868,171		(1,921,829		)	—
Premiums receivable	Premiums receivable	—		—		1,726,846		(544,138		)	1,182,708		Premiums receivable	—		—		1,891,983		(637,935		)	1,254,048
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	—		—		6,074,812		(3,998,564		)	2,076,248		Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	—		—		6,209,021		(4,075,873		)	2,133,148
Contractholder receivables	Contractholder receivables	—		—		1,649,441		—			1,649,441		Contractholder receivables	—		—		1,766,340		—			1,766,340
Prepaid reinsurance premiums		—		—		1,723,344		(1,182,106		)	541,238
Deferred acquisition costs, net		—		—		469,466		—			469,466
Ceded unearned premiums													Ceded unearned premiums	—		—		2,201,994		(1,260,071		)	941,923
Deferred acquisition costs													Deferred acquisition costs	—		—		638,415		(150,490		)	487,925
Goodwill and intangible assets													Goodwill and intangible assets	—		—		750,315		—			750,315
Other assets	Other assets	17,348		48,285		1,695,117		(169,773		)	1,590,977		Other assets	14,730		55,658		1,893,742		(164,027		)	1,800,103
	Total assets	$	7,874,541	$	1,989,029	$	31,263,276	$	(15,483,615	)	$	25,643,231	Total assets	$	9,019,692	$	4,035,924	$	38,098,212	$	(21,061,602	)	$	30,092,226

Liabilities	Liabilities												Liabilities
Reserve for losses and loss adjustment expenses	Reserve for losses and loss adjustment expenses	$	—	$	—	$	13,582,475	$	(3,972,286	)	$	9,610,189	Reserve for losses and loss adjustment expenses	$	—	$	—	$	14,337,192	$	(4,040,371	)	$	10,296,821
Unearned premiums	Unearned premiums	—		—		3,853,227		(1,182,106		)	2,671,121		Unearned premiums	—		—		4,891,330		(1,260,071		)	3,631,259
Reinsurance balances payable	Reinsurance balances payable	—		—		815,826		(544,138		)	271,688		Reinsurance balances payable	—		—		959,221		(637,936		)	321,285
Contractholder payables	Contractholder payables	—		—		1,649,441		—			1,649,441		Contractholder payables	—		—		1,766,340		—			1,766,340
Collateral held for insured obligations	Collateral held for insured obligations	—		—		277,463					277,463		Collateral held for insured obligations	—		—		327,161					327,161
Deposit accounting liabilities		—		—		22,281		—			22,281
Senior notes	Senior notes	296,936		494,501		—		—			791,437		Senior notes	296,979		494,548		940,883		—			1,732,410
Revolving credit agreement borrowings	Revolving credit agreement borrowings	100,000		—		298,100		—			398,100		Revolving credit agreement borrowings	100,000		—		634,961		—			734,961
Due to subsidiaries and affiliates	Due to subsidiaries and affiliates	270		35,003		406,793		(442,066		)	—		Due to subsidiaries and affiliates	2,044		541,400		1,378,384		(1,921,828		)	—
Other liabilities ~~(1)~~	Other liabilities ~~(1)~~	125,013		57,753		1,572,207		(196,051		)	1,558,922		Other liabilities ~~(1)~~	14,825		61,055		1,876,454		(350,019		)	1,602,315
	Total liabilities	522,219		587,257		22,477,813		(6,336,647		)	17,250,642		Total liabilities	413,848		1,097,003		27,111,926		(8,210,225		)	20,412,552

Redeemable noncontrolling interests	Redeemable noncontrolling interests	—		—		220,159		(14,700		)	205,459		Redeemable noncontrolling interests	—		—		220,344		(14,700		)	205,644

Shareholders’ Equity	Shareholders’ Equity												Shareholders’ Equity
Total shareholders’ equity available to Arch	Total shareholders’ equity available to Arch	7,352,322		1,401,772		7,730,496		(9,132,268		)	7,352,322		Total shareholders’ equity available to Arch	8,605,844		2,938,921		9,897,756		(12,836,677		)	8,605,844
Non-redeemable noncontrolling interests	Non-redeemable noncontrolling interests	—		—		834,808		—			834,808		Non-redeemable noncontrolling interests	—		—		868,186		—			868,186
	Total shareholders’ equity	7,352,322		1,401,772		8,565,304		(9,132,268		)	8,187,130		Total shareholders’ equity	8,605,844		2,938,921		10,765,942		(12,836,677		)	9,474,030

	Total liabilities, noncontrolling interests and shareholders’ equity	$	7,874,541	$	1,989,029	$	31,263,276	$	(15,483,615	)	$	25,643,231	Total liabilities, noncontrolling interests and shareholders’ equity	$	9,019,692	$	4,035,924	$	38,098,212	$	(21,061,602	)	$	30,092,226

~~(1) Includes payable for securities purchased.~~



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2015
Condensed Consolidating Balance Sheet ACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Assets
Total investments $ 50
$ 42,210
$ 15,815,381
$ (14,700 ) $ 15,842,941
Cash 6,809
17,023
529,494
—
553,326
Investments in subsidiaries 6,609,174
1,712,757
—
(8,321,931 ) —
Due from subsidiaries and affiliates 23
48,811
384,469
(433,303 ) —
Premiums receivable —
—
1,376,310
(392,867 ) 983,443
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses —
—
5,783,452
(3,916,079 ) 1,867,373
Contractholder receivables —
—
1,486,296
—
1,486,296
Prepaid reinsurance premiums —
—
1,511,795
(1,084,186 ) 427,609
Deferred acquisition costs, net —
—
433,477
—
433,477
Other assets 4,138
45,522
2,119,279
(586,134 ) 1,582,805
Total assets $ 6,620,194
$ 1,866,323
$ 29,439,953
$ (14,749,200 ) $ 23,177,270

Liabilities
Reserve for losses and loss adjustment expenses $ —
$ —
$ 13,010,608
$ (3,885,358 ) $ 9,125,250
Unearned premiums —
—
3,418,118
(1,084,186 ) 2,333,932
Reinsurance balances payable —
—
603,586
(379,466 ) 224,120
Contractholder payables —
—
1,486,296
—
1,486,296
Collateral held for insured obligations —
—
248,982
—
248,982
Deposit accounting liabilities —
—
463,507
(203,143 ) 260,364
Senior notes 296,874
494,432
—
—
791,306
Revolving credit agreement borrowings 100,000
—
430,434
—
530,434
Due to subsidiaries and affiliates 26
35,000
398,277
(433,303 ) —
Other liabilities (1) 18,413
50,890
1,385,500
(427,111 ) 1,027,692
Total liabilities 415,313
580,322
21,445,308
(6,412,567 ) 16,028,376

Redeemable noncontrolling interests —
—
219,882
(14,700 ) 205,182

Shareholders’ Equity
Total shareholders’ equity available to Arch 6,204,881
1,286,001
7,035,932
(8,321,933 ) 6,204,881
Non-redeemable noncontrolling interests —
—
738,831
—
738,831
Total shareholders’ equity 6,204,881
1,286,001
7,774,763
(8,321,933 ) 6,943,712

Total liabilities, noncontrolling interests and shareholders’ equity $ 6,620,194
$ 1,866,323
$ 29,439,953
$ (14,749,200 ) $ 23,177,270

~~(1) Includes payable for securities purchased.~~



		December 31, 2016
Condensed Consolidating Balance Sheet		ACGL (Parent Guarantor)		Arch-U.S. (Subsidiary Issuer)		Other ACGL Subsidiaries		Consolidating Adjustments and Eliminations			ACGL Consolidated
Assets
Total investments		$	2,612	$	41,672	$	19,690,067	$	(14,700	)	$	19,719,651
Cash		1,687		71,955		769,300		—			842,942
Investments in subsidiaries		8,660,586		3,716,681		—		(12,377,267		)	—
Due from subsidiaries and affiliates		14,297		51,298		1,866,681		(1,932,276		)	—
Premiums receivable		—		—		1,579,865		(507,430		)	1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses		—		—		6,114,518		(4,000,380		)	2,114,138
Contractholder receivables		—		—		1,717,436		—			1,717,436
Ceded unearned premiums		—		—		1,985,311		(1,125,744		)	859,567
Deferred acquisition costs		—		—		577,461		(129,901		)	447,560
Goodwill and intangible assets		—		—		781,553		—			781,553
Other assets		15,725		49,244		1,901,786		(149,928		)	1,816,827
	Total assets	$	8,694,907	$	3,930,850	$	36,983,978	$	(20,237,626	)	$	29,372,109

Liabilities
Reserve for losses and loss adjustment expenses		$	—	$	—	$	14,164,191	$	(3,963,231	)	$	10,200,960
Unearned premiums		—		—		4,532,614		(1,125,744		)	3,406,870
Reinsurance balances payable		—		—		807,837		(507,430		)	300,407
Contractholder payables		—		—		1,717,436		—			1,717,436
Collateral held for insured obligations		—		—		301,406		—			301,406
Deposit accounting liabilities		—		—		22,150		—			22,150
Senior notes		296,957		494,525		940,776		—			1,732,258
Revolving credit agreement borrowings		100,000		—		656,650		—			756,650
Due to subsidiaries and affiliates		26,270		535,584		1,370,422		(1,932,276		)	—
Other liabilities		17,962		54,823		1,867,040		(316,978		)	1,622,847
	Total liabilities	441,189		1,084,932		26,380,522		(7,845,659		)	20,060,984

Redeemable noncontrolling interests		—		—		220,253		(14,700		)	205,553

Shareholders’ Equity
Total shareholders’ equity available to Arch		8,253,718		2,845,918		9,531,349		(12,377,267		)	8,253,718
Non-redeemable noncontrolling interests		—		—		851,854		—			851,854
	Total shareholders’ equity	8,253,718		2,845,918		10,383,203		(12,377,267		)	9,105,572

	Total liabilities, noncontrolling interests and shareholders’ equity	$	8,694,907	$	3,930,850	$	36,983,978	$	(20,237,626	)	$	29,372,109



	ACGL 2017 FIRST QUARTER FORM 10-Q	3834

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


		Three Months Ended September 30, 2016																Three Months Ended March 31, 2017
Condensed Consolidating Statement of Income and Comprehensive Income	Condensed Consolidating Statement of Income and Comprehensive Income	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated			Condensed Consolidating Statement of Income and Comprehensive Income	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated
Revenues	Revenues																Revenues
Net premiums earned	Net premiums earned	$	—		$	—		$	958,403		$	—		$	958,403		Net premiums earned	$	—		$	—		$	1,117,017		$	—		$	1,117,017
Net investment income	Net investment income	6			803			99,654			(6,845		)	93,618			Net investment income	5			816			137,981			(20,928		)	117,874
Net realized gains (losses)	Net realized gains (losses)	—			—			125,105			—			125,105			Net realized gains (losses)	—			—			34,153			—			34,153
Net impairment losses recognized in earnings	Net impairment losses recognized in earnings	—			—			(3,867		)	—			(3,867		)	Net impairment losses recognized in earnings	—			—			(1,807		)	—			(1,807		)
Other underwriting income	Other underwriting income	—			—			7,980			—			7,980			Other underwriting income	—			—			4,633			—			4,633
Equity in net income (loss) of investment funds accounted for using the equity method	Equity in net income (loss) of investment funds accounted for using the equity method	—			—			16,662			—			16,662			Equity in net income (loss) of investment funds accounted for using the equity method	—			—			48,088			—			48,088
Other income (loss)	Other income (loss)	71			—			(471		)	—			(400		)	Other income (loss)	171			—			(953		)	—			(782		)
	Total revenues	77			803			1,203,466			(6,845		)	1,197,501			Total revenues	176			816			1,339,112			(20,928		)	1,319,176

Expenses	Expenses																Expenses
Losses and loss adjustment expenses	Losses and loss adjustment expenses	—			—			524,183			—			524,183			Losses and loss adjustment expenses	—			—			552,570			—			552,570
Acquisition expenses	Acquisition expenses	—			—			163,861			—			163,861			Acquisition expenses	—			—			182,289			—			182,289
Other operating expenses	Other operating expenses	—			—			155,557			—			155,557			Other operating expenses	—			—			174,719			—			174,719
Corporate expenses	Corporate expenses	18,488			608			(611		)	—			18,485			Corporate expenses	17,247			2,008			8,537			—			27,792
Amortization of intangible assets																	Amortization of intangible assets	—			—			31,294			—			31,294
Interest expense	Interest expense	5,948			6,627			9,890			(6,522		)	15,943			Interest expense	6,015			11,930			31,336			(20,605		)	28,676
Net foreign exchange (gains) losses	Net foreign exchange (gains) losses	—			—			2,723			(102		)	2,621			Net foreign exchange (gains) losses	—			—			15,348			4,056			19,404
	Total expenses	24,436			7,235			855,603			(6,624		)	880,650			Total expenses	23,262			13,938			996,093			(16,549		)	1,016,744

Income (loss) before income taxes	Income (loss) before income taxes	(24,359		)	(6,432		)	347,863			(221		)	316,851			Income (loss) before income taxes	(23,086		)	(13,122		)	343,019			(4,379		)	302,432
Income tax (expense) benefit	Income tax (expense) benefit	—			2,116			(15,347		)	—			(13,231		)	Income tax (expense) benefit	—			4,873			(33,270		)	—			(28,397		)
Income (loss) before equity in net income of subsidiaries	Income (loss) before equity in net income of subsidiaries	(24,359		)	(4,316		)	332,516			(221		)	303,620			Income (loss) before equity in net income of subsidiaries	(23,086		)	(8,249		)	309,749			(4,379		)	274,035
Equity in net income of subsidiaries	Equity in net income of subsidiaries	277,231			21,945			—			(299,176		)	—			Equity in net income of subsidiaries	276,213			77,373			—			(353,586		)	—
Net income	Net income	252,872			17,629			332,516			(299,397		)	303,620			Net income	253,127			69,124			309,749			(357,965		)	274,035
Net (income) loss attributable to noncontrolling interests	Net (income) loss attributable to noncontrolling interests	—			—			(51,071		)	323			(50,748		)	Net (income) loss attributable to noncontrolling interests	—			—			(21,231		)	323			(20,908		)
Net income available to Arch	Net income available to Arch	252,872			17,629			281,445			(299,074		)	252,872			Net income available to Arch	253,127			69,124			288,518			(357,642		)	253,127
Preferred dividends	Preferred dividends	(5,484		)	—			—			—			(5,484		)	Preferred dividends	(11,218		)	—			—			—			(11,218		)
Net income available to Arch common shareholders	Net income available to Arch common shareholders	$	247,388		$	17,629		$	281,445		$	(299,074	)	$	247,388		Net income available to Arch common shareholders	$	241,909		$	69,124		$	288,518		$	(357,642	)	$	241,909

Comprehensive income (loss) available to Arch	Comprehensive income (loss) available to Arch	$	208,790		$	2,019		$	237,555		$	(239,574	)	$	208,790		Comprehensive income (loss) available to Arch	$	351,991		$	87,781		$	224,173		$	(311,954	)	$	351,991



	ACGL 2017 FIRST QUARTER FORM 10-Q	3935

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


		Three Months Ended September 30, 2015																Three Months Ended March 31, 2016
Condensed Consolidating Statement of Income and Comprehensive Income	Condensed Consolidating Statement of Income and Comprehensive Income	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated			Condensed Consolidating Statement of Income and Comprehensive Income	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated
Revenues	Revenues																Revenues
Net premiums earned	Net premiums earned	$	—		$	—		$	936,683		$	—		$	936,683		Net premiums earned	$	—		$	—		$	951,579		$	—		$	951,579
Net investment income	Net investment income	—			764			92,773			(7,304		)	86,233			Net investment income	1			773			100,261			(7,300		)	93,735
Net realized gains (losses)	Net realized gains (losses)	—			—			(89,698		)	—			(89,698		)	Net realized gains (losses)	—			—			37,324			—			37,324
Net impairment losses recognized in earnings	Net impairment losses recognized in earnings	—			—			(5,868		)	—			(5,868		)	Net impairment losses recognized in earnings	—			—			(7,639		)	—			(7,639		)
Other underwriting income	Other underwriting income	—			—			7,623			—			7,623			Other underwriting income	—			—			5,319			(272		)	5,047
Equity in net income (loss) of investment funds accounted for using the equity method	Equity in net income (loss) of investment funds accounted for using the equity method	—			—			(2,118		)	—			(2,118		)	Equity in net income (loss) of investment funds accounted for using the equity method	—			—			6,655			—			6,655
Other income (loss)	Other income (loss)	—			—			(265		)	—			(265		)	Other income (loss)	206			—			(231		)	—			(25		)
	Total revenues	—			764			939,130			(7,304		)	932,590			Total revenues	207			773			1,093,268			(7,572		)	1,086,676

Expenses	Expenses																Expenses
Losses and loss adjustment expenses	Losses and loss adjustment expenses	—			—			531,741			—			531,741			Losses and loss adjustment expenses	—			—			522,949			—			522,949
Acquisition expenses	Acquisition expenses	—			—			171,566			—			171,566			Acquisition expenses	—			—			167,838			—			167,838
Other operating expenses	Other operating expenses	—			—			146,220			—			146,220			Other operating expenses	—			—			150,148			—			150,148
Corporate expenses	Corporate expenses	10,536			720			(517		)	—			10,739			Corporate expenses	9,355			582			(554		)	—			9,383
Amortization of intangible assets																	Amortization of intangible assets	—			—			4,748			—			4,748
Interest expense	Interest expense	5,863			6,689			7,734			(6,986		)	13,300			Interest expense	5,934			6,672			10,752			(7,251		)	16,107
Net foreign exchange (gains) losses	Net foreign exchange (gains) losses	—			—			(11,762		)	(2,918		)	(14,680		)	Net foreign exchange (gains) losses	—			—			16,495			7,071			23,566
	Total expenses	16,399			7,409			844,982			(9,904		)	858,886			Total expenses	15,289			7,254			872,376			(180		)	894,739

Income (loss) before income taxes	Income (loss) before income taxes	(16,399		)	(6,645		)	94,148			2,600			73,704			Income (loss) before income taxes	(15,082		)	(6,481		)	220,892			(7,392		)	191,937
Income tax (expense) benefit	Income tax (expense) benefit	—			2,324			(12,028		)	—			(9,704		)	Income tax (expense) benefit	—			2,244			(18,554		)	—			(16,310		)
Income (loss) before equity in net income of subsidiaries	Income (loss) before equity in net income of subsidiaries	(16,399		)	(4,321		)	82,120			2,600			64,000			Income (loss) before equity in net income of subsidiaries	(15,082		)	(4,237		)	202,338			(7,392		)	175,627
Equity in net income of subsidiaries	Equity in net income of subsidiaries	96,432			13,620			—			(110,052		)	—			Equity in net income of subsidiaries	169,880			22,866			—			(192,746		)	—
Net income	Net income	80,033			9,299			82,120			(107,452		)	64,000			Net income	154,798			18,629			202,338			(200,138		)	175,627
Net (income) loss attributable to noncontrolling interests	Net (income) loss attributable to noncontrolling interests	—			—			15,712			321			16,033			Net (income) loss attributable to noncontrolling interests	—			—			(21,150		)	321			(20,829		)
Net income available to Arch	Net income available to Arch	80,033			9,299			97,832			(107,131		)	80,033			Net income available to Arch	154,798			18,629			181,188			(199,817		)	154,798
Preferred dividends	Preferred dividends	(5,484		)	—			—			—			(5,484		)	Preferred dividends	(5,484		)	—			—			—			(5,484		)
Net income available to Arch common shareholders	Net income available to Arch common shareholders	$	74,549		$	9,299		$	97,832		$	(107,131	)	$	74,549		Net income available to Arch common shareholders	$	149,314		$	18,629		$	181,188		$	(199,817	)	$	149,314

Comprehensive income (loss) available to Arch	Comprehensive income (loss) available to Arch	$	23,400		$	15,705		$	44,127		$	(59,832	)	$	23,400		Comprehensive income (loss) available to Arch	$	272,929		$	58,649		$	292,251		$	(350,900	)	$	272,929



	ACGL 2017 FIRST QUARTER FORM 10-Q	40

~~Table of Contents~~

~~ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Nine Months Ended September 30, 2016
Condensed Consolidating Statement of Income and Comprehensive Income ACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Revenues
Net premiums earned $ —
$ —
$ 2,915,967
$ —
$ 2,915,967
Net investment income 7
2,351
294,012
(20,679 ) 275,691
Net realized gains (losses) —
—
230,647
—
230,647
Net impairment losses recognized in earnings —
—
(16,849 ) —
(16,849 )
Other underwriting income —
—
54,749
(16,498 ) 38,251
Equity in net income (loss) of investment funds accounted for using the equity method —
—
32,054
—
32,054
Other income (loss) 270
—
(702 ) —
(432 )
Total revenues 277
2,351
3,509,878
(37,177 ) 3,475,329

Expenses
Losses and loss adjustment expenses —
—
1,631,724
—
1,631,724
Acquisition expenses —
—
509,607
—
509,607
Other operating expenses —
—
467,416
—
467,416
Corporate expenses 45,284
1,549
(1,765 ) —
45,068
Interest expense 17,811
19,946
46,169
(36,213 ) 47,713
Net foreign exchange (gains) losses —
—
5,093
(3,568 ) 1,525
Total expenses 63,095
21,495
2,658,244
(39,781 ) 2,703,053

Income (loss) before income taxes (62,818 ) (19,144 ) 851,634
2,604
772,276
Income tax (expense) benefit —
6,446
(50,118 ) —
(43,672 )
Income (loss) before equity in net income of subsidiaries (62,818 ) (12,698 ) 801,516
2,604
728,604
Equity in net income of subsidiaries 681,543
64,684
—
(746,227 ) —
Net income 618,725
51,986
801,516
(743,623 ) 728,604
Net (income) loss attributable to noncontrolling interests —
—
(110,844 ) 965
(109,879 )
Net income available to Arch 618,725
51,986
690,672
(742,658 ) 618,725
Preferred dividends (16,453 ) —
—
—
(16,453 )
Net income available to Arch common shareholders $ 602,272
$ 51,986
$ 690,672
$ (742,658 ) $ 602,272

Comprehensive income (loss) available to Arch $ 754,979
$ 89,204
$ 830,348
$ (919,552 ) $ 754,979



		41

~~Table of Contents~~

~~ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Nine Months Ended September 30, 2015
Condensed Consolidating Statement of Income and Comprehensive Income ACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Revenues
Net premiums earned $ —
$ —
$ 2,790,385
$ —
$ 2,790,385
Net investment income —
1,569
265,937
(15,316 ) 252,190
Net realized gains (losses) —
1
(42,076 ) —
(42,075 )
Net impairment losses recognized in earnings —
—
(12,780 ) —
(12,780 )
Other underwriting income —
—
26,876
—
26,876
Equity in net income (loss) of investment funds accounted for using the equity method —
—
19,938
—
19,938
Other income (loss) —
—
52
—
52
Total revenues —
1,570
3,048,332
(15,316 ) 3,034,586

Expenses
Losses and loss adjustment expenses —
—
1,544,883
—
1,544,883
Acquisition expenses —
—
510,067
—
510,067
Other operating expenses —
—
445,947
—
445,947
Corporate expenses 36,068
2,991
(1,557 ) —
37,502
Interest expense 17,581
19,824
7,476
(14,834 ) 30,047
Net foreign exchange (gains) losses —
—
(44,450 ) (17,148 ) (61,598 )
Total expenses 53,649
22,815
2,462,366
(31,982 ) 2,506,848

Income (loss) before income taxes (53,649 ) (21,245 ) 585,966
16,666
527,738
Income tax (expense) benefit —
7,434
(36,596 ) —
(29,162 )
Income (loss) before equity in net income of subsidiaries (53,649 ) (13,811 ) 549,370
16,666
498,576
Equity in net income of subsidiaries 532,808
42,192
—
(575,000 ) —
Net income 479,159
28,381
549,370
(558,334 ) 498,576
Net (income) loss attributable to noncontrolling interests —
—
(19,902 ) 485
(19,417 )
Net income available to Arch 479,159
28,381
529,468
(557,849 ) 479,159
Preferred dividends (16,453 ) —
—
—
(16,453 )
Net income available to Arch common shareholders $ 462,706
$ 28,381
$ 529,468
$ (557,849 ) $ 462,706

Comprehensive income (loss) available to Arch $ 360,111
$ 13,950
$ 427,569
$ (441,519 ) $ 360,111



		4236

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


		Nine Months Ended September 30, 2016																Three Months Ended March 31, 2017
Condensed Consolidating Statement of Cash Flows	Condensed Consolidating Statement of Cash Flows	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated			Condensed Consolidating Statement of Cash Flows	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated
Operating Activities	Operating Activities																Operating Activities
	Net Cash Provided By (Used For) Operating Activities	$	94,250		$	14,448		$	1,096,443		$	(168,002	)	$	1,037,139		Net Cash Provided By (Used For) Operating Activities	$	701		$	(3,257	)	$	264,088		$	(53,414	)	$	208,118
Investing Activities	Investing Activities																Investing Activities
Purchases of fixed maturity investments	Purchases of fixed maturity investments	—			—			(27,840,555		)	—			(27,840,555		)	Purchases of fixed maturity investments	—			—			(10,476,918		)	—			(10,476,918		)
Purchases of equity securities	Purchases of equity securities	—			—			(377,767		)	—			(377,767		)	Purchases of equity securities	—			—			(143,833		)	—			(143,833		)
Purchases of other investments	Purchases of other investments	—			—			(1,008,774		)	—			(1,008,774		)	Purchases of other investments	—			—			(427,039		)	—			(427,039		)
Proceeds from the sales of fixed maturity investments	Proceeds from the sales of fixed maturity investments	—			—			26,731,924			—			26,731,924			Proceeds from the sales of fixed maturity investments	—			—			10,386,746			—			10,386,746
Proceeds from the sales of equity securities	Proceeds from the sales of equity securities	—			—			464,904			—			464,904			Proceeds from the sales of equity securities	—			—			253,347			—			253,347
Proceeds from the sales, redemptions and maturities of other investments	Proceeds from the sales, redemptions and maturities of other investments	—			—			879,330			—			879,330			Proceeds from the sales, redemptions and maturities of other investments	—			—			317,518			—			317,518
Proceeds from redemptions and maturities of fixed maturity investments	Proceeds from redemptions and maturities of fixed maturity investments	—			41,500			499,323			—			540,823			Proceeds from redemptions and maturities of fixed maturity investments	—			—			174,718			—			174,718
Net settlements of derivative instruments	Net settlements of derivative instruments	—			—			23,396			—			23,396			Net settlements of derivative instruments	—			—			(3,921		)	—			(3,921		)
Net (purchases) sales of short-term investments	Net (purchases) sales of short-term investments	(436,830		)	(53,779		)	(113,553		)	—			(604,162		)	Net (purchases) sales of short-term investments	2,356			(43		)	(400,164		)	—			(397,851		)
Change in cash collateral related to securities lending	Change in cash collateral related to securities lending	—			—			(27,935		)	—			(27,935		)	Change in cash collateral related to securities lending	—			—			180,946			—			180,946
Contributions to subsidiaries	Contributions to subsidiaries	(3,585		)	—			(9,247		)	12,832			—			Contributions to subsidiaries	—			(25,900		)	(60,050		)	85,950			—
Intercompany loans issued		—			—			—			—			—
Acquisitions, net of cash		—			—			(20,911		)	—			(20,911		)
Purchases of fixed assets	Purchases of fixed assets	(8		)	—			(11,557		)	—			(11,565		)	Purchases of fixed assets	—			(10		)	(5,184		)	—			(5,194		)
Change in other assets		2,000			—			(5,816		)	—			(3,816		)
Other																	Other	20,641			—			19,603			(20,641		)	19,603
	Net Cash Provided By (Used For) Investing Activities	(438,423		)	(12,279		)	(817,238		)	12,832			(1,255,108		)	Net Cash Provided By (Used For) Investing Activities	22,997			(25,953		)	(184,231		)	65,309			(121,878		)
Financing Activities	Financing Activities																Financing Activities
Proceeds from issuance of preferred shares, net		434,899			—			—			—			434,899
Purchases of common shares under share repurchase program		(75,256		)	—			—			—			(75,256		)
Proceeds from common shares issued, net	Proceeds from common shares issued, net	(3,785		)	—			12,832			(12,832		)	(3,785		)	Proceeds from common shares issued, net	(3,990		)	—			85,950			(85,950		)	(3,990		)
Proceeds from borrowings	Proceeds from borrowings	—			—			46,000			—			46,000			Proceeds from borrowings	—			—			—			—			—
Repayments of borrowings	Repayments of borrowings	—			—			(179,171		)	—			(179,171		)	Repayments of borrowings	—			—			(22,000		)	—			(22,000		)
Change in cash collateral related to securities lending	Change in cash collateral related to securities lending	—			—			27,935			—			27,935			Change in cash collateral related to securities lending	—			—			(180,946		)	—			(180,946		)
Dividends paid to redeemable noncontrolling interests	Dividends paid to redeemable noncontrolling interests	—			—			(14,448		)	957			(13,491		)	Dividends paid to redeemable noncontrolling interests	—			—			(4,816		)	319			(4,497		)
Dividends paid to parent (1)	Dividends paid to parent (1)	—			—			(167,045		)	167,045			—			Dividends paid to parent (1)	—			—			(53,095		)	53,095			—
Other	Other	—			200			32,913			—			33,113			Other	—			—			(25,659		)	20,641			(5,018		)
Preferred dividends paid	Preferred dividends paid	(16,453		)	—			—			—			(16,453		)	Preferred dividends paid	(11,218		)	—			—			—			(11,218		)
	Net Cash Provided By (Used For) Financing Activities	339,405			200			(240,984		)	155,170			253,791			Net Cash Provided By (Used For) Financing Activities	(15,208		)	—			(200,566		)	(11,895		)	(227,669		)
Effects of exchange rates changes on foreign currency cash	Effects of exchange rates changes on foreign currency cash	—			—			(10,332		)	—			(10,332		)	Effects of exchange rates changes on foreign currency cash	—			—			2,241			—			2,241
Increase (decrease) in cash	Increase (decrease) in cash	(4,768		)	2,369			27,889			—			25,490			Increase (decrease) in cash	8,490			(29,210		)	(118,468		)	—			(139,188		)
Cash beginning of year	Cash beginning of year	6,809			17,023			529,494			—			553,326			Cash beginning of year	1,687			71,955			769,300			—			842,942
Cash end of period	Cash end of period	$	2,041		$	19,392		$	557,383		$	—		$	578,816		Cash end of period	$	10,177		$	42,745		$	650,832		$	—		$	703,754

(1) Dividends paid are included in net cash provided by (used for) operating activities in the ACGL (Parent Guarantor) and/or Arch-U.S. (Subsidiary Issuer) columns.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


		Nine Months Ended September 30, 2015																Three Months Ended March 31, 2016
Condensed Consolidating Statement of Cash Flows	Condensed Consolidating Statement of Cash Flows	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated			Condensed Consolidating Statement of Cash Flows	ACGL (Parent Guarantor)			Arch-U.S. (Subsidiary Issuer)			Other ACGL Subsidiaries			Consolidating Adjustments and Eliminations			ACGL Consolidated
Operating Activities	Operating Activities																Operating Activities
	Net Cash Provided By (Used For) Operating Activities	$	382,329		$	10,622		$	859,525		$	(444,897	)	$	807,579		Net Cash Provided By (Used For) Operating Activities	$	83,892		$	(4,740	)	$	340,558		$	(97,167	)	$	322,543
Investing Activities	Investing Activities																Investing Activities
Purchases of fixed maturity investments	Purchases of fixed maturity investments	—			(3,505		)	(22,378,599		)	—			(22,382,104		)	Purchases of fixed maturity investments	—			—			(8,133,537		)	—			(8,133,537		)
Purchases of equity securities	Purchases of equity securities	(8,070		)	—			(477,456		)	—			(485,526		)	Purchases of equity securities	—			—			(128,263		)	—			(128,263		)
Purchases of other investments	Purchases of other investments	—			—			(1,320,250		)	—			(1,320,250		)	Purchases of other investments	—			—			(305,198		)	—			(305,198		)
Proceeds from the sales of fixed maturity investments	Proceeds from the sales of fixed maturity investments	—			23,507			21,388,047			—			21,411,554			Proceeds from the sales of fixed maturity investments	—			—			7,827,536			—			7,827,536
Proceeds from the sales of equity securities	Proceeds from the sales of equity securities	—			—			509,008			—			509,008			Proceeds from the sales of equity securities	—			—			216,012			—			216,012
Proceeds from the sales, redemptions and maturities of other investments	Proceeds from the sales, redemptions and maturities of other investments	—			—			858,368			—			858,368			Proceeds from the sales, redemptions and maturities of other investments	—			—			211,125			—			211,125
Proceeds from redemptions and maturities of fixed maturity investments	Proceeds from redemptions and maturities of fixed maturity investments	—			—			630,397			—			630,397			Proceeds from redemptions and maturities of fixed maturity investments	—			—			163,894			—			163,894
Net settlements of derivative instruments	Net settlements of derivative instruments	—			—			81,114			—			81,114			Net settlements of derivative instruments	—			—			21,091			—			21,091
Proceeds from investment in joint venture		—			—			40,000			—			40,000
Net (purchases) sales of short-term investments	Net (purchases) sales of short-term investments	73			(12,183		)	193,851			—			181,741			Net (purchases) sales of short-term investments	(60		)	(30		)	(65,504		)	—			(65,594		)
Change in cash collateral related to securities lending	Change in cash collateral related to securities lending	—			—			28,685			—			28,685			Change in cash collateral related to securities lending	—			—			(43,118		)	—			(43,118		)
Contributions to subsidiaries	Contributions to subsidiaries	—			—			(9,290		)	9,290			—			Contributions to subsidiaries	(3,300		)	—			(2,779		)	6,079			—
Intercompany loans issued		—			(39,500		)	(41,523		)	81,023			—
Acquisitions, net of cash		—			—			818			—			818
Purchases of fixed assets	Purchases of fixed assets	(53		)	—			(10,848		)	—			(10,901		)	Purchases of fixed assets	(8		)	—			(3,944		)	—			(3,952		)
Change in other assets		—			—			(43,654		)	—			(43,654		)
Other																	Other	—			—			6,737			—			6,737
	Net Cash Provided By (Used For) Investing Activities	(8,050		)	(31,681		)	(551,332		)	90,313			(500,750		)	Net Cash Provided By (Used For) Investing Activities	(3,368		)	(30		)	(235,948		)	6,079			(233,267		)
Financing Activities	Financing Activities																Financing Activities
Purchases of common shares under share repurchase program	Purchases of common shares under share repurchase program	(365,383		)	—			—			—			(365,383		)	Purchases of common shares under share repurchase program	(75,256		)	—			—			—			(75,256		)
Proceeds from common shares issued, net	Proceeds from common shares issued, net	697			—			9,290			(9,290		)	697			Proceeds from common shares issued, net	202			—			6,079			(6,079		)	202
Proceeds from intercompany borrowings		14,023			27,500			39,500			(81,023		)	—
Proceeds from borrowings		—			—			239,077			—			239,077
Repayments of borrowings																	Repayments of borrowings	—			—			(74,171		)	—			(74,171		)
Change in cash collateral related to securities lending	Change in cash collateral related to securities lending	—			—			(28,685		)	—			(28,685		)	Change in cash collateral related to securities lending	—			—			43,118			—			43,118
Dividends paid to redeemable noncontrolling interests	Dividends paid to redeemable noncontrolling interests	—			—			(14,447		)	637			(13,810		)	Dividends paid to redeemable noncontrolling interests	—			—			(4,816		)	319			(4,497		)
Dividends paid to parent (1)	Dividends paid to parent (1)	—			—			(444,260		)	444,260			—			Dividends paid to parent (1)	—			—			(96,848		)	96,848			—
Other	Other	—			28			50,435			—			50,463			Other	—			184			28,931			—			29,115
Preferred dividends paid	Preferred dividends paid	(16,453		)	—			—			—			(16,453		)	Preferred dividends paid	(5,484		)	—			—			—			(5,484		)
	Net Cash Provided By (Used For) Financing Activities	(367,116		)	27,528			(149,090		)	354,584			(134,094		)	Net Cash Provided By (Used For) Financing Activities	(80,538		)	184			(97,707		)	91,088			(86,973		)
Effects of exchange rates changes on foreign currency cash	Effects of exchange rates changes on foreign currency cash	—			—			(8,658		)	—			(8,658		)	Effects of exchange rates changes on foreign currency cash	—			—			2,332			—			2,332
Increase (decrease) in cash	Increase (decrease) in cash	7,163			6,469			150,445			—			164,077			Increase (decrease) in cash	(14		)	(4,586		)	9,235			—			4,635
Cash beginning of year	Cash beginning of year	3,218			2,787			479,697			—			485,702			Cash beginning of year	6,809			17,023			529,494			—			553,326
Cash end of period	Cash end of period	$	10,381		$	9,256		$	630,142		$	—		$	649,779		Cash end of period	$	6,795		$	12,437		$	538,729		$	—		$	557,961

(1) Dividends paid are included in net cash provided by (used for) operating activities in the ACGL (Parent Guarantor) and/or Arch-U.S. (Subsidiary Issuer) columns.



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~13.~~14. Income Taxes

The Company’s income tax provision on income before income taxes resulted in an expense of ~~5.7%~~9.4% for the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, compared to an expense of ~~5.5%~~8.5% for the ~~2015~~2016 period. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. For interim reporting purposes, the Company has calculated its effective tax rate for the full year of 2017 by treating any excess tax benefits that arise from the accounting for stock based compensation as a discrete item. As such, this amount is not included when projecting the Company’s full year effective tax rate but rather is accounted for at the U.S. Federal statutory rate of 35% after applying the projected full year effective tax rate to actual three-month results before the discrete item. The impact of the discrete item resulted in a benefit of 0.8% for the three months ended March 31, 2017.

The Company had a net deferred tax asset of ~~$124.1~~$227.5 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$135.7~~$221.2 million at December 31, ~~2015.~~2016. In addition, the Company paid ~~$40.7~~$0.7 million and ~~$35.5~~$2.5 million of income taxes for the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively.

~~14.~~15. 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 ~~September 30, 2016,~~March 31, 2017, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

~~15.~~16. Transactions with Related Parties

Kewsong Lee, a director of ACGL, is a Managing Director and Deputy Chief Investment Officer for Corporate Private Equity of The Carlyle Group (“Carlyle”). As part of its investment philosophy, the Company invests a portion of its investment portfolio in alternative investment funds. As of ~~September 30, 2016,~~March 31, 2017, the total value of the Company’s investments in funds or other investments managed by Carlyle was approximately $200.5 million, and the Company had aggregate unfunded commitments ~~of $770.9 million~~ to funds managed by Carlyle of ~~which $524.5 million was unfunded.~~$510.0 million. The Company may make additional commitments to funds managed by Carlyle from time to time. During the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ the Company made aggregate capital contributions to funds managed by Carlyle of ~~$50.1~~$7.9 million and ~~$97.7~~$40.1 million, respectively, and received aggregate cash distributions from funds managed by Carlyle of ~~$17.9~~$23.3 million and ~~$30.3~~$8.8 million, respectively.

~~16. Subsequent Events~~

On October 26, 2016, ACGL and certain of its subsidiaries amended the existing Credit Agreement (the “Amended Credit Agreement”) (see Note 9). The Amended Credit Agreement provides for a $350.0 million secured facility for letters of credit and $500.0 million unsecured facility for revolving loans and letters of credit. Obligations of each borrower under the secured facility for letters of credit are

secured by cash and eligible securities of such borrower held in collateral accounts. ACGL has a one-time option to convert any or all outstanding revolving loans of ACGL and/or Arch-U.S. to term loans with the same terms as the revolving loans except that any prepayments may not be reborrowed. Arch-U.S. guarantees the obligations of ACGL, and ACGL guarantees the obligations of Arch-U.S.

Commitments under the Amended Credit Agreement will expire on October 26, 2021, and all loans then outstanding under the Amended Credit Agreement must be repaid. Letters of credit issued under the Amended Credit Agreement will not have an expiration date later than October 26, 2022. The Amended Credit Agreement contains customary representations and warranties, conditions to credit extensions, affirmative and negative covenants, and events of default.



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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 (“~~2015~~2016 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our ~~2015~~2016 Form 10-K. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

Arch Capital Group Ltd. (“ACGL” and, together with its subsidiaries, “we” or “us”) is a Bermuda public limited liability company with approximately ~~$8.24~~$10.84 billion in capital at ~~September 30, 2016~~March 31, 2017 and, through operations in Bermuda, the United States, Europe and Canada, writes specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis.

CURRENT OUTLOOK

The broad property casualty insurance market environment continues to be competitive in our business, consistent with our view in prior ~~quarters. In our insurance segment, we experienced a~~quarters, reflecting slight deterioration in rates across certain ~~sectors, while there are signs that reinsurance terms, especially ceding commissions, have bottomed out.~~sectors. This has led us to ~~continue to reduce~~flat or lower writings in certain property casualty lines in the ~~2016 third~~2017 first quarter. With the continued low interest rate environment, additional price increases are needed in many lines in order for us to achieve our return requirements. Our underwriting teams continue to execute a disciplined strategy by emphasizing small and medium-sized accounts over large accounts and by utilizing reinsurance purchases to reduce volatility on large account, high capacity business.

Our mortgage segment continues to experience favorable market conditions. ~~Within the~~The mortgage segment includes our U.S. primary mortgage insurance ~~sector, Arch Mortgage Insurance Company~~operations, international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“~~Arch MI U.S.”~~GSE”) continues to expand into the marketplace. Our market share continued to increase, reflecting growth in the bank channel and the impact of RateStar, our risk-based pricing program, which has met with wide acceptance from bank and credit union clients. In addition, international business and credit risk-sharing transactions continue to provide growth opportunities for our mortgage operations.

~~In addition, on August 15,~~credit-risk sharing transactions. On December 31, 2016, we ~~entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with American International Group, Inc. (“AIG”) pursuant to which, upon~~completed the ~~terms and subject to the conditions thereof, we agreed to purchase from AIG all of the issued and~~

~~outstanding shares of capital stock~~acquisition of United Guaranty Corporation, a North Carolina corporation ~~and AIG United Guaranty (Asia) Limited (combined, “United Guaranty”~~(“UGC”) from American International Group, Inc. (“AIG”). The acquisition ~~under the Stock Purchase Agreement is referred to herein~~of UGC expanded our U.S. primary mortgage insurance operations by combining UGC’s position as the ~~“UGC Acquisition.”~~

~~The UGC Acquisition is subject to certain closing conditions, including, among others, (i) expiration or early termination~~market leader in the U.S. private mortgage insurance industry with Arch’s financial strength and history of the waiting period required by the HSR Act, which has occurred, (ii) the receipt of certain approvals of regulatory authorities and government-sponsored entities, (iii) the execution of an excess of loss agreement between subsidiaries of AIG and United Guaranty and (iv) receipt by AIG of confirmation from the Board of Governors of the Federal Reserve System that none of us, United Guaranty or any of their respective subsidiaries will be subject to “Systemically Important Financial Institutions” rules and regulations. There is no financing condition for the UGC Acquisition. For a complete description of the UGC Acquisition, please refer to our Form 8-K filed on August 15, 2016 and other documents on file with the SEC.innovation.

Our objective is to achieve an average operating return on average equity of 15% or greater over the insurance cycle,

which we believe to be an attractive return to our common shareholders given the risks we assume. We continue to look for opportunities to find acceptable books of business to underwrite without sacrificing underwriting discipline and continue to write a portion of our overall book in catastrophe-exposed business which has the potential to increase the volatility of our operating results.

Changing economic conditions could have a material impact on the frequency and severity of claims and, therefore, could negatively impact our underwriting returns. In addition, volatility in the financial markets could continue to significantly affect our investment returns, reported results and shareholders’ equity. We consider the potential impact of economic trends in the estimation process for establishing unpaid losses and loss adjustment expenses and in determining our investment strategies. In addition, weakness of the U.S., European countries and other key economies, projected budget deficits for the U.S., European countries and other governments and the consequences associated with potential downgrades of securities of the U.S., European countries and other governments by credit rating agencies is inherently unpredictable and could have a material adverse effect on financial markets and economic conditions in the U.S. and throughout the world. In turn, this could have a material adverse effect on our business, financial condition and results of operations and, in particular, this could have a material adverse effect on the value and liquidity of securities in our investment portfolio.



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NATURAL CATASTROPHE RISK

We monitor our natural catastrophe risk globally for all perils and regions, in each case, where we believe there is significant exposure. Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. Currently, we seek to limit our 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders’ equity available to Arch. We reserve the right to change this threshold at any time.

Based on in-force exposure estimated as of ~~October~~April 1, ~~2016,~~2017, our modeled peak zone catastrophe exposure was a windstorm affecting the Northeastern U.S., with a net probable maximum pre-tax loss of ~~$488~~$473 million, followed by windstorms affecting Florida Tri-County and the Gulf of Mexico ~~and Florida Tri-County~~ regions with net probable maximum pre-tax losses of ~~$418~~$386 million and ~~$405~~$383 million , respectively. Our exposures to other perils, such as



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U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of ~~October~~April 1, ~~2016,~~2017, our modeled peak zone earthquake exposure (Los Angeles earthquake) represented approximately 63% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Japan earthquake) was substantially less than both our peak zone windstorm and earthquake exposures.

Net probable maximum pre-tax loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. Loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our loss estimates include clash estimates from other zones. The loss estimates shown above do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer a net loss greater than 25% of total shareholders’ equity available to Arch from one or more catastrophic events due to several factors, including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders’ equity exposed to a single catastrophic event. Actual losses may also increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—~~Risk~~Risks Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Natural and Man-Made Catastrophic Events” in our ~~2015~~2016 Form 10-K.

FINANCIAL MEASURES

Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for ACGL’s common shareholders:

Book Value per Common Share

Book value per common share represents total common shareholders’ equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per common share as a key measure of the value generated for our common shareholders each period and believes that book value per common share is the key driver of ACGL’s share price over time. Book value per common share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per common share depending on the purchase price.

Book value per common share was ~~$53.62~~$57.69 at ~~September 30, 2016,~~March 31, 2017, compared to ~~$52.04~~$55.19 at ~~June 30,~~December 31, 2016 and ~~$47.68~~$49.55 at ~~September 30, 2015.~~March 31, 2016. The ~~3.0%~~4.5% increase in the ~~2016 third~~2017 first quarter and the ~~12.5%~~16.4% increase over the trailing twelve months reflected strong underwriting and investment returns.

Operating Return on Average Common Equity

Operating return on average common equity (“Operating ROAE”) represents annualized after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a non-GAAP financial measure as defined in Regulation G, represents net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, ~~and~~ net foreign exchange gains or losses, ~~net of~~UGC transaction costs and other and income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders and has set an objective to achieve an average Operating ROAE of 15% or greater over the insurance cycle, which it believes to be an attractive return to common shareholders given the risks we assume.shareholders. See “Comment on Non-GAAP Financial Measures.”

Our Operating ROAE was ~~8.8%~~10.3% for the 2017 first quarter, compared to 9.8% for the 2016 ~~third~~first quarter, ~~compared to 8.6% for the 2015 third quarter,~~reflecting strong underwriting and ~~9.2% for the nine months ended September 30, 2016, compared to 9.7% for the 2015 period.~~investment returns.



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Total Return on Investments

The following table summarizes our total return compared to the benchmark return against which we measured our portfolio during the periods. See “Comment on Non-GAAP Financial Measures.”

Arch
Portfolio

Benchmark
Return
2016 Third Quarter 0.88 % 0.83 %
2015 Third Quarter (0.31 )% (0.21 )%

Nine Months Ended September 30, 2016 4.03 % 4.43 %
Nine Months Ended September 30, 2015 0.76 % (0.07 )%



	Arch Portfolio		Benchmark Return
2017 First Quarter	1.70	%	1.49	%
2016 First Quarter	1.82	%	2.43	%

Excluding the effects of foreign exchange, total return was ~~0.91%~~1.64% for the ~~2016 third quarter and 4.07% for the nine months ended September 30, 2016.~~2017 first quarter. Total return for the ~~2016 periods~~2017 first quarter reflected strong returns on ~~equities~~alternative investments and ~~alternatives, dampened by the impact of lower returns on investment-grade~~non-investment grade fixed income ~~securities compared to the 2015 periods.~~securities.



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The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. At ~~September 30, 2016,~~March 31, 2017, the benchmark return index had an average credit quality of “Aa2” by Moody’s Investors Service (“Moody’s”), and an estimated duration of ~~3.43~~3.69 years.

The benchmark return index included weightings to the following indices, which are primarily from The Bank of America Merrill Lynch (“BoAML”):



	%
BoAML 1-10 Year AA U.S. Corporate & All Yankees, A - AAA Rated Index	~~21.25~~20.00	%
BoAML 1-5 Year U.S. Treasury Index	13.00
BoAML 1-10 Year U.S. ~~Mortgage Backed~~Municipal Securities Index	~~10.00~~17.00
BoAML 3-5 Year Fixed Rate Asset Backed Securities Index	7.00
BoAML ~~1-10~~5-10 Year U.S. ~~Municipal Securities Index~~	~~7.00~~
~~BoAML U.S. High Yield Constrained Index~~	~~5.50~~
~~BoAML 0-3 Month U.S.~~ Treasury ~~Bill~~ Index	5.00
Barclays CMBS Inv. Grade, AAA Rated ~~Index~~	~~5.00~~
~~Barclays Agency Bullet, 1-10 Year~~ Index	5.00
MSCI All Country World Gross Total Return Index	5.00
BoAML ~~1-10 Year Euro~~German Government Index	4.50
BoAML ~~5-10 Year~~ U.S. ~~Treasury~~Mortgage Backed Securities Index	~~3.25~~4.00
Hedge Fund Research HFRX Fixed Income Credit Index	2.50
Hedge Fund Research HFRX Equal Weighted Strategies	2.50
BoAML U.S. High Yield Constrained Index	2.50
BoAML 1-5 Year U.K. Gilt Index	~~3.00~~2.50
BoAML 1-10 Year Australian Governments Index	2.50
S&P Leveraged Loan Index	2.50
BoAML 0-3 Month U.S. Treasury Bill Index	2.00
BoAML 1-5 Year Canada Government Index	1.50
BoAML ~~Euro Government~~U.K. Gilt 25+ Year Index	~~1.00~~0.50
BoAML 20+ Year Canada Government Index	0.50
Total	100.00	%

COMMENT ON NON-GAAP FINANCIAL MEASURES

Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses recognized

in earnings, equity in net income or loss of investment funds accounted for using the equity method, ~~and~~ net foreign exchange gains or losses ~~net of~~and UGC transaction costs and other and income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included under “Results of Operations” below.

We believe that net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, ~~and~~ net foreign exchange gains or losses and UGC transaction costs and other in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are



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an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way we account for our other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. UGC transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to the UGC acquisition. The Company believes that UGC transaction costs and other, due to their non-recurring nature, are not indicative of the



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performance of, or trends in, the Company’s business performance. Due to these reasons, we exclude net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, ~~and~~ net foreign exchange gains or losses and UGC transaction costs and other from the calculation of after-tax operating income available to Arch common shareholders.

We believe that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.

Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the ‘other’ segment. Such measures represent the pre-tax profitability of our underwriting operations and include net premiums earned plus other underwriting income, less losses

and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in our corporate (non-underwriting) segment. While these measures are presented in Note 5, “Segment Information,” of the notes accompanying our consolidated financial statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a subtotal before the contribution from the ‘other’ segment, in accordance with Regulation G, is shown in Note 5, “Segment Information” of the notes accompanying our consolidated financial statements.

We measure segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment ~~with the exception of goodwill and intangible assets,~~ and, accordingly, investment income and other non-underwriting related items are not allocated to each underwriting segment. For the ‘other’ segment, performance is measured based on net income or loss.

Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution

from the ‘other’ segment. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and we concluded that we are the primary beneficiary of Watford Re. As such, we consolidate the results of Watford Re in our consolidated financial statements, although we only own approximately 11% of Watford Re’s common equity. Watford Re has its own management and board of directors that is responsible for its overall profitability. In addition, we do not guarantee or provide credit support for Watford Re. Since Watford Re is an independent company, the assets of Watford Re can be used only to settle obligations of Watford Re and Watford Re is solely responsible for its own liabilities and commitments. Our financial exposure to Watford Re is limited to our investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. We believe that presenting certain information excluding the ‘other’ segment enables investors and other users of our financial information to analyze our performance in a manner similar to how our management analyzes performance

Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis



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of the underwriting performance of each of our underwriting segments.

Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders on the capital held in the business, and compares the return generated by our investment portfolio against benchmark returns which we measured our portfolio against during the periods.



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RESULTS OF OPERATIONS

The following table summarizes our consolidated financial data, including a reconciliation of net income available to Arch common shareholders to after-tax operating income available to Arch common shareholders. Each line item reflects the impact of our approximate 11% ownership of Watford Re’s common equity.


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Net income available to Arch common shareholders	$	247,388		$	74,549		$	602,272		$	462,706		$	241,909		$	149,314
Net realized (gains) losses	(99,159		)	57,472			(175,558		)	17,834			(29,134		)	(32,464		)
Net impairment losses recognized in earnings	3,867			5,868			16,849			12,780			1,807			7,639
Equity in net (income) loss of investment funds accounted for using the equity method	(16,662		)	2,118			(32,054		)	(19,939		)	(48,088		)	(6,655		)
Net foreign exchange (gains) losses	4,054			(15,904		)	3,560			(60,478		)	19,796			22,209
Income tax expense	2,970			1,695			13,705			8,697
UGC transaction costs and other													15,584			—
Income tax (benefit) expense (1)													(3,909		)	5,699
After-tax operating income available to Arch common shareholders	$	142,458		$	125,798		$	428,774		$	421,600		$	197,965		$	145,742

Beginning common shareholders’ equity	$	6,378,922		$	5,812,515		$	5,879,881		$	5,805,053		$	7,481,163		$	5,841,542
Ending common shareholders’ equity	6,577,322			5,837,815			6,577,322			5,837,815			7,833,289			6,050,248
Average common shareholders’ equity	$	6,478,122		$	5,825,165		$	6,228,602		$	5,821,434		$	7,657,226		$	5,945,895

Annualized return on average common equity %	15.3			5.1			12.9			10.6			12.6			10.0
Annualized operating return on average common equity %	8.8			8.6			9.2			9.7			10.3			9.8


(1)	Income tax on net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and UGC transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.

Segment Information

We classify our businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — corporate (non-underwriting) and ‘other.’ Our insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to our chief operating decision makers, the Chairman and Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for our three underwriting segments based on underwriting income or loss. We do not



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manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.

We determined our reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

Insurance Segment

The following tables set forth our insurance segment’s underwriting results:

Three Months Ended September 30,
2016 2015 % Change
Gross premiums written $ 758,934
$ 752,438
0.9
Premiums ceded (217,446 ) (209,443 )
Net premiums written 541,488
542,995
(0.3 )
Change in unearned premiums (22,410 ) (20,451 )
Net premiums earned 519,078
522,544
(0.7 )
Other underwriting income —
519

Losses and loss adjustment expenses (332,845 ) (339,859 )
Acquisition expenses, net (77,148 ) (77,076 )
Other operating expenses (87,517 ) (84,620 )
Underwriting income $ 21,568
$ 21,508
0.3

Underwriting Ratios

% Point
Change
Loss ratio 64.1 % 65.0 % (0.9 )
Acquisition expense ratio 14.9 % 14.8 % 0.1
Other operating expense ratio 16.9 % 16.2 % 0.7
Combined ratio 95.9 % 96.0 % (0.1 )


	Nine Months Ended September 30,								Three Months Ended March 31,
	2016			2015			% Change		2017			2016			% Change
Gross premiums written	$	2,319,530		$	2,263,401		2.5		$	782,281		$	798,553		(2.0	)
Premiums ceded	(713,110		)	(669,336		)			(234,095		)	(248,789		)
Net premiums written	1,606,420			1,594,065			0.8		548,186			549,764			(0.3	)
Change in unearned premiums	(46,603		)	(53,782		)			(42,540		)	(36,675		)
Net premiums earned	1,559,817			1,540,283			1.3		505,646			513,089			(1.5	)
Other underwriting income	—			1,467					—			—
Losses and loss adjustment expenses	(1,011,087		)	(978,681		)			(332,641		)	(323,609		)
Acquisition expenses, net	(228,819		)	(228,877		)
Acquisition expenses									(74,868		)	(74,348		)
Other operating expenses	(265,749		)	(261,793		)			(88,126		)	(85,058		)
Underwriting income	$	54,162		$	72,399		(25.2	)	$	10,011		$	30,074		(66.7	)

Underwriting Ratios							% Point Change								% Point Change
Loss ratio	64.8		%	63.5		%	1.3		65.8		%	63.1		%	2.7
Acquisition expense ratio	14.7		%	14.9		%	(0.2	)	14.8		%	14.5		%	0.3
Other operating expense ratio	17.0		%	17.0		%	—		17.4		%	16.6		%	0.8
Combined ratio	96.5		%	95.4		%	1.1		98.0		%	94.2		%	3.8

The insurance segment consists of our insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).

•Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.

•Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.



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•Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.

•Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting



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program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.

•Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.

•Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.

•Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.

Premiums Written.

The following table sets forth our insurance segment’s net premiums written by major line of business:


	Three Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
	Amount		%	Amount		%	Amount		%	Amount		%
Professional lines	$	119,198	22.0	$	118,563	21.8	$	108,468	19.8	$	109,467	19.9
Construction and national accounts	65,105		12.0	60,320		11.1	99,977		18.2	104,474		19.0
Programs	91,165		16.8	120,028		22.1	99,957		18.2	89,784		16.3
Travel, accident and health							65,528		12.0	57,263		10.4
Excess and surplus casualty	54,075		10.0	51,170		9.4	45,832		8.4	53,657		9.8
Travel, accident and health	63,453		11.7	49,386		9.1
Property, energy, marine and aviation	42,092		7.8	51,802		9.5	40,104		7.3	49,975		9.1
Lenders products	28,633		5.3	29,212		5.4	24,705		4.5	24,784		4.5
Other	77,767		14.4	62,514		11.5	63,615		11.6	60,360		11.0
Total	$	541,488	100.0	$	542,995	100.0	$	548,186	100.0	$	549,764	100.0

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter. Gross premiums written by the insurance segment in the ~~2016 third~~2017 first quarter were ~~0.9% higher~~2.0% lower than in the ~~2015 third~~2016 first quarter, while net premiums written were 0.3% lower than in the ~~2015 third~~2016 first quarter. The decrease in net premiums written reflected reductions in ~~programs~~property, energy, marine and ~~property lines,~~aviation and excess and surplus casualty, both reflecting weak market conditions, partially offset by growth in programs and travel, accident and health. Growth in ~~‘other’ lines including alternative markets and high excess comp business. The reduction in~~

program business primarily reflected the ~~continued~~ impact of the non-renewal of a large program in the latter part of 2015 while the lower level in property lines reflected continued weak market conditions. The growth in travel and alternative markets reflected bothtwo new ~~business and continued expansion in existing accounts~~programs while the increase ~~in high excess comp primarily reflected new business.~~

Nine Months Ended September 30,
2016 2015
Amount % Amount %
Professional lines $ 336,184
20.9
$ 329,841
20.7
Construction and national accounts 254,839
15.9
233,919
14.7
Programs 256,369
16.0
344,404
21.6
Excess and surplus casualty 168,144
10.5
154,511
9.7
Travel, accident and health 175,172
10.9
123,714
7.8
Property, energy, marine and aviation 142,261
8.9
172,518
10.8
Lenders products 78,671
4.9
76,039
4.8
Other 194,780
12.1
159,119
10.0
Total $ 1,606,420
100.0
$ 1,594,065
100.0

~~Nine Months Ended September 30, 2016 versus 2015 period~~. Gross premiums written by the insurance segment for the nine months ended September 30, 2016 were 2.5% higher than in the 2015 period, while net premiums written were 0.8% higher than in the 2015 period. The increase in net premiums written reflected growth in travel, accident and health, construction and national accounts and alternative markets business, partially offset by a reduction in programs and property lines. The growth in travel, accident and health reflected ~~both new business and~~ continued expansion in existing travel accounts. The increase in construction and national accounts primarily reflected new business and audit premiums while the increase in alternative markets resulted from new accounts, exposure growth and audit premiums. The reduction in program business primarily reflected the continued impact of the non-renewal of a large program in the latter part of 2015 while the lower level of net premiums written in property lines reflected continued weak market conditions.



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Net Premiums Earned.

The following tables set forth our insurance segment’s net premiums earned by major line of business:

Three Months Ended September 30,
2016 2015
Amount % Amount %
Professional lines $ 110,614
21.3
$ 106,283
20.3
Construction and national accounts 80,090
15.4
75,256
14.4
Programs 84,889
16.4
115,502
22.1
Excess and surplus casualty 54,687
10.5
53,366
10.2
Travel, accident and health 57,097
11.0
39,918
7.6
Property, energy, marine and aviation 45,304
8.7
55,106
10.5
Lenders products 25,090
4.8
23,956
4.6
Other 61,307
11.8
53,157
10.2
Total $ 519,078
100.0
$ 522,544
100.0


	Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
	Amount		%	Amount		%	Amount		%	Amount		%
Professional lines	$	324,114	20.8	$	321,575	20.9	$	108,638	21.5	$	104,944	20.5
Construction and national accounts	241,547		15.5	219,066		14.2	77,423		15.3	77,043		15.0
Programs	273,985		17.6	344,408		22.4	85,180		16.8	98,501		19.2
Travel, accident and health							58,481		11.6	47,545		9.3
Excess and surplus casualty	166,807		10.7	157,422		10.2	51,007		10.1	54,965		10.7
Travel, accident and health	164,463		10.5	113,629		7.4
Property, energy, marine and aviation	141,417		9.1	164,012		10.6	38,078		7.5	49,037		9.6
Lenders products	72,499		4.6	68,074		4.4	24,099		4.8	24,402		4.8
Other	174,985		11.2	152,097		9.9	62,740		12.4	56,652		11.0
Total	$	1,559,817	100.0	$	1,540,283	100.0	$	505,646	100.0	$	513,089	100.0

Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months.



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Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned in the ~~2016 third~~2017 first quarter were ~~0.7%~~1.5% lower than in the ~~2015 third quarter and 1.3% higher for the nine months ended September 30,~~ 2016 ~~than in the 2015 period.~~first quarter.

Losses and Loss Adjustment Expenses.

The table below shows the components of the insurance segment’s loss ratio:

Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Current year 66.7 % 66.9 % 66.4 % 65.9 %
Prior period reserve development (2.6 )% (1.9 )% (1.6 )% (2.4 )%
Loss ratio 64.1 % 65.0 % 64.8 % 63.5 %



	Three Months Ended
	March 31,
	2017		2016
Current year	66.2	%	64.3	%
Prior period reserve development	(0.4	)%	(1.2	)%
Loss ratio	65.8	%	63.1	%

Current Year Loss Ratio.

The insurance segment’s current year loss ratio in the ~~2016 third~~2017 first quarter was ~~0.2 points lower than in the 2015 third quarter and the current year loss ratio for the nine months ended September 30, 2016 was 0.5~~1.9 points higher than in the ~~2015 period.~~2016 first quarter. The ~~2016 third~~2017 first quarter loss ratio reflected ~~0.3~~0.5 points of current year catastrophic activity, compared to ~~1.6~~0.1 points in the ~~2015 third quarter, and 1.5 points for the nine months ended September 30,~~ 2016 ~~compared to 1.2 points for the 2015 period.~~first quarter. The current year loss ratio for the ~~2016 periods~~2017 first quarter reflected, ~~a higher level of large attritional losses than~~in part, from deteriorating market conditions and changes in the ~~2015 period.~~mix of business.

Prior Period Reserve Development.

~~2016 Third Quarter:~~The insurance segment’s net favorable development ~~of $13.7~~was $2.1 million, or ~~2.6~~0.4 points, consisted of $18.2 million of net favorable development in long-tailed lines, partially offset by $2.4 million of net adverse development in short-tailed lines and $2.0 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves fromfor the ~~2008~~2017 first quarter, compared to ~~2015 accident years (i.e.~~, the year in which a loss occurred), and net reductions in casualty reserves from the 2007 and 2008 accident years. Net adverse development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2015 accident year, primarily due to a small number of attritional losses. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $6.2 million, ~~stemming in part from terminated programs, partially offset by favorable development of $4.2 million in other medium-tailed lines, primarily in professional liability and surety.~~

~~2015 Third Quarter: The insurance segment’s net favorable development of $9.9 million,~~ or ~~1.9~~1.2 points, consisted of $12.9 million of net favorable development in medium-tailed lines and long-tailed lines partially offset by $3.0 million of net adverse development in short-tailed lines. Net favorable development in medium-tailed and long-tailed lines reflected favorable development in professional lines of $14.5 million, which included $10.8 million of favorable development in executive assurance reserves primarily from the 2007 to 2012 accident years (i.e., the year in which a loss occurred) with the remainder in professional liability and healthcare reserves. Such amounts were partially offset by $2.4 million of adverse development in programs, primarily from the 2014 accident year. Adverse development in short-tailed lines primarily resulted from travel, accident and health business in the 2014 accident year, partially offset by a reduction in property (including special risk other than marine) reserves from the 2012 to 2014 accident years. Development on the 2005 to 2014 named catastrophic events was adverse by $0.6 million in the quarter.

~~Nine Months Ended September 30, 2016:~~ ~~The insurance segment’s net favorable development of $24.8 million, or 1.6 points, consisted of $36.2 million of net favorable~~



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development in long-tailed lines and $7.7 million of net favorable development in short-tailed lines, partially offset by $19.1 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2009 accident years and 2011 to 2013 accident years, and net reductions in casualty reserves across most accident years, partially offset by a large energy casualty claim from the 2015 accident year. Net favorable development in short-tailed lines primarily resulted from reductions in property (including special risk other than marine) reserves from the 2009 to 2014 accident years, primarily due to varying levels of reported claims activity. Such amount included $9.2 million of favorable development on the 2005 to 2015 named catastrophic events. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $28.6 million stemming in part from terminated programs, partially offset by favorable development of $9.5 million in other medium-tailed lines, primarily in professional liability and surety.

~~Nine Months Ended September 30, 2015~~: The insurance segment’s net favorable development of $37.2 million, or 2.4 points, consisted of $22.6 million of net favorable development in short-tailed lines and $14.6 million of net favorable development in medium-tailed and long-tailed lines. Favorable development in short-tailed lines primarily consisted of reductions in property (including special risk other than marine) reserves from the 2011 to 2014 accident years, primarily due to varying levels of reported claims activity. Development on the 2005 to 2014 named catastrophic events was favorable by $2.3 million for the ~~2015 period. Net favorable development in medium-tailed~~2016 first quarter. See note 6, “Reserve for Losses and ~~long-tailed lines reflected favorable development in marine reserves, primarily from~~Loss Adjustment Expenses,” of the ~~2010 to 2014 accident years, and in surety reserves, primarily from the 2013 to 2014 accident years. In addition,~~notes accompanying our consolidated financial statements for information about the insurance segment’s results reflected net favorable development in professional lines of $17.5 million, including favorable development in healthcare reserves, primarily from the 2005 to 2011 accident years, and in executive assurance reserves, primarily from the 2010 to 2012 accident years, partially offset by an increase in reserves on professional liability reserves, primarily in the 2011 and 2012 accident years. In addition, the insurance segment’s results reflected net adverse development in programs of $13.4 million, primarily from the 2014 accident year.prior year reserve development.

Underwriting Expenses.

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter: The insurance segment’s underwriting expense ratio was ~~31.8%~~32.2% in the 2017 first quarter, compared to 31.1% in the 2016 ~~third quarter, compared to 31.0% in the 2015 third~~first quarter. The comparison of the underwriting expense ratios and the underlying acquisition expense and other operating expense ratios reflects changes in the level of reinsurance ceded on a quota share basis and changes in the mix of business.

~~Nine Months Ended September 30, 2016 versus 2015 period:~~ The insurance segment’s underwriting expense ratio was 31.7% for the nine months ended September 30, 2016, compared to 31.9% for the 2015 period. The comparison of the underwriting expense ratios and the underlying acquisition expense and other operating expense ratios reflects changes in the level of reinsurance ceded on a quota share basis and changes in the mix of business.

Reinsurance Segment

The following tables set forth our reinsurance segment’s underwriting results:


	Three Months Ended September 30,								Three Months Ended March 31,
	2016			2015			% Change		2017			2016			% Change
Gross premiums written	$	324,361		$	329,327		(1.5	)	$	475,782		$	481,390		(1.2	)
Premiums ceded	(89,551		)	(92,182		)			(166,092		)	(160,566		)
Net premiums written	234,810			237,145			(1.0	)	309,690			320,824			(3.5	)
Change in unearned premiums	17,117			23,286					(64,839		)	(59,616		)
Net premiums earned	251,927			260,431			(3.3	)	244,851			261,208			(6.3	)
Other underwriting income	2,216			2,783					(306		)	325
Losses and loss adjustment expenses	(105,924		)	(115,780		)			(105,454		)	(111,598		)
Acquisition expenses, net	(50,217		)	(55,416		)
Acquisition expenses									(46,147		)	(54,758		)
Other operating expenses	(35,589		)	(37,131		)			(37,533		)	(36,258		)
Underwriting income	$	62,413		$	54,887		13.7		$	55,411		$	58,919		(6.0	)

Underwriting Ratios							% Point Change								% Point Change
Loss ratio	42.0		%	44.5		%	(2.5	)	43.1		%	42.7		%	0.4
Acquisition expense ratio	19.9		%	21.3		%	(1.4	)	18.8		%	21.0		%	(2.2	)
Other operating expense ratio	14.1		%	14.3		%	(0.2	)	15.3		%	13.9		%	1.4
Combined ratio	76.0		%	80.1		%	(4.1	)	77.2		%	77.6		%	(0.4	)

Nine Months Ended September 30,
2016 2015 % Change
Gross premiums written $ 1,217,804
$ 1,156,540
5.3
Premiums ceded (370,068 ) (318,197 )
Net premiums written 847,736
838,343
1.1
Change in unearned premiums (43,345 ) (24,230 )
Net premiums earned 804,391
814,113
(1.2 )
Other underwriting income 22,659
6,870

Losses and loss adjustment expenses (363,613 ) (339,495 )
Acquisition expenses, net (160,800 ) (170,380 )
Other operating expenses (109,159 ) (114,182 )
Underwriting income $ 193,478
$ 196,926
(1.8 )

Underwriting Ratios % Point
Change
Loss ratio 45.2 % 41.7 % 3.5
Acquisition expense ratio 20.0 % 20.9 % (0.9 )
Other operating expense ratio 13.6 % 14.0 % (0.4 )
Combined ratio 78.8 % 76.6 % 2.2



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The reinsurance segment consists of our reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.

•Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.

•Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.

•Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.



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•Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.

•Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.

Premiums Written.

The following table sets forth our reinsurance segment’s net premiums written by major line of business:


	Three Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017					2016
	Amount		%	Amount		%	Amount			%		Amount			%
Other specialty	$	74,169	31.6	$	63,293	26.7	$	114,418		36.9		$	100,820		31.4
Casualty							110,620			35.7		126,483			39.4
Property excluding property catastrophe	70,733		30.1	72,456		30.6	75,387			24.3		73,723			23.0
Casualty	59,242		25.2	63,395		26.7
Property catastrophe	19,793		8.4	21,366		9.0	(7,477		)	(2.4	)	(2,295		)	(0.7	)
Marine and aviation	5,435		2.3	12,221		5.2	9,541			3.1		17,540			5.5
Other	5,438		2.3	4,414		1.9	7,201			2.3		4,553			1.4
Total	$	234,810	100.0	$	237,145	100.0	$	309,690		100.0		$	320,824		100.0

Pro rata	$	147,280	62.7	$	138,367	58.3	$	129,016		41.7		$	112,209		35.0
Excess of loss	87,530		37.3	98,778		41.7	180,674			58.3		208,615			65.0
Total	$	234,810	100.0	$	237,145	100.0	$	309,690		100.0		$	320,824		100.0

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter. Gross premiums written by the reinsurance segment in the ~~2016 third~~2017 first quarter were ~~1.5%~~1.2% lower than in the ~~2015 third~~2016 first quarter, while net premiums written were ~~1.0%~~3.5% lower than in the ~~2015 third~~2016 first quarter. The ~~decrease in~~lower level of net premiums written in the 2017 first quarter reflected ~~reductions~~decreases in casualty, marine and aviation and property catastrophe lines. The reduction in casualty business and marine and aviation ~~lines, due~~business both reflected share decreases and non-renewals. Property catastrophe net premiums written in ~~part to reductions~~both periods reflects the impact of retrocessional portfolio transactions, with a higher level of cessions in ~~premium estimates reflecting current market conditions.~~the 2017 first quarter. Such amounts were partially offset by growth in other specialty ~~business, reflecting additional agriculture business and strong renewals on pro rata U.K. motor~~ business.

Nine Months Ended September 30,
2016 2015
Amount % Amount %
Other specialty $ 288,932
34.1
$ 236,575
28.2
Property excluding property catastrophe 214,287
25.3
219,385
26.2
Casualty 247,280
29.2
246,031
29.3
Property catastrophe 59,269
7.0
82,855
9.9
Marine and aviation 24,438
2.9
42,526
5.1
Other 13,530
1.6
10,971
1.3
Total $ 847,736
100.0
$ 838,343
100.0

Pro rata $ 405,720
47.9
$ 397,578
47.4
Excess of loss 442,016
52.1
440,765
52.6
Total $ 847,736
100.0
$ 838,343
100.0

~~Nine Months Ended September 30, 2016 versus 2015 period~~. Gross premiums written by the reinsurance segment for the nine months ended September 30, 2016 were 5.3% higher than in the 2015 period, while net premiums written were 1.1% higher than in the 2015 period. Premiums written reflects the 2016 second quarter loss portfolio transfer in the other specialty line which resulted in $52.1 million of gross premiums written and $40.2 million of net premiums written. Such premium was substantially earned in the period and resulted in a corresponding increase to losses and loss adjustment expenses, partially offset by decreases in



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~~property catastrophe and marine and aviation lines, reflecting competitive market conditions and a higher level of ceded premiums.~~

Net Premiums Earned.

The following tables set forth our reinsurance segment’s net premiums earned by major line of business:

Three Months Ended September 30,
2016 2015
Amount % Amount %
Other specialty $ 76,686
30.4
$ 72,337
27.8
Property excluding property catastrophe 72,550
28.8
72,267
27.7
Casualty 69,414
27.6
75,061
28.8
Property catastrophe 17,582
7.0
23,325
9.0
Marine and aviation 10,336
4.1
13,708
5.3
Other 5,359
2.1
3,733
1.4
Total $ 251,927
100.0
$ 260,431
100.0

Pro rata $ 132,649
52.7
$ 132,090
50.7
Excess of loss 119,278
47.3
128,341
49.3
Total $ 251,927
100.0
$ 260,431
100.0


	Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
	Amount		%	Amount		%	Amount		%	Amount		%
Other specialty	$	260,428	32.4	$	236,391	29.0	$	69,965	28.6	$	74,249	28.4
Casualty							72,968		29.8	76,053		29.1
Property excluding property catastrophe	209,990		26.1	221,631		27.2	69,852		28.5	71,953		27.5
Casualty	225,624		28.0	231,628		28.5
Property catastrophe	55,358		6.9	74,920		9.2	16,177		6.6	17,953		6.9
Marine and aviation	40,773		5.1	39,744		4.9	9,490		3.9	17,878		6.8
Other	12,218		1.5	9,799		1.2	6,399		2.6	3,122		1.2
Total	$	804,391	100.0	$	814,113	100.0	$	244,851	100.0	$	261,208	100.0

Pro rata	$	426,275	53.0	$	429,440	52.7	$	133,092	54.4	$	139,693	53.5
Excess of loss	378,116		47.0	384,673		47.3	111,759		45.6	121,515		46.5
Total	$	804,391	100.0	$	814,113	100.0	$	244,851	100.0	$	261,208	100.0

Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Net premiums earned for the ~~2016 third~~2017 first quarter were ~~3.3%~~6.3% lower than in the ~~2015 third quarter and 1.2% lower for the nine months ended September 30,~~ 2016 ~~than in the 2015 period.~~first quarter. Net premiums earned reflects ~~the loss portfolio transfer noted above along with~~ changes in net premiums written over the previous five quarters.

~~Other Underwriting Income~~.

Other underwriting income was $2.2 million for the 2016 third quarter, compared to $2.8 million for the 2015 third quarter, and $22.7 million for the nine months ended September 30, 2016, compared to $6.9 million for the 2015 period. The 2016 period included $19.1 million related to a contract which was commuted during the 2016 second quarter. This contract had been reflected as a deposit accounting liability (i.e., a contract that, in accordance with GAAP, does not pass risk transfer) prior to the commutation.

Losses and Loss Adjustment Expenses.

The table below shows the components of the reinsurance segment’s loss ratio:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2016		2015		2016		2015		2017		2016
Current year	65.6	%	63.7	%	67.2	%	62.1	%	66.5	%	60.8	%
Prior period reserve development	(23.6	)%	(19.2	)%	(22.0	)%	(20.4	)%	(23.4	)%	(18.1	)%
Loss ratio	42.0	%	44.5	%	45.2	%	41.7	%	43.1	%	42.7	%

Current Year Loss Ratio.

The reinsurance segment’s current year loss ratio in the ~~2016 third~~2017 first quarter was ~~1.9~~5.7 points higher than in the ~~2015 third quarter, and 5.1 points higher for the nine months ended September 30,~~ 2016 ~~than in the 2015 period.~~first quarter. The ~~2016 third~~2017 first quarter loss ratio reflected ~~4.1~~4.0 points of current year catastrophic activity, compared to ~~4.2~~1.4 points in the ~~2015 third quarter, and 3.9 points for~~2016 first quarter. The balance of the ~~nine months ended September 30, 2016, compared to 2.8 points~~change in the ~~2015 period. In addition, the~~2017 first quarter loss ratio ~~for the nine months ended September 30, 2016 reflects the impact~~resulted, in part, from a higher level of ~~the~~large loss portfolio transfer noted above (net premiums earned at a high loss ratio), which increased the current year loss ratio by 2.8 points for the nine months ended September 30, 2016. The 2016 ratios also reflected the impact of higher attritional losses thanactivity and changes in the ~~2015 periods.~~mix of business.

Prior Period Reserve Development.

~~2016 Third Quarter~~: The reinsurance segment’s net favorable development ~~of $59.5~~was $57.2 million, or ~~23.6~~23.4 points, ~~consisted~~for the 2017 first quarter, compared to $47.4 million, or 18.1 points, for the 2016 first quarter. See note 6, “Reserve for Losses and Loss Adjustment Expenses,” of $27.7 million from short-tailed lines and $31.8 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $23.2 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years (~~i.e., all premiums and losses attributable to contracts having an inception or renewal date within~~ the ~~given twelve-month period). The net reduction of loss estimates~~notes accompanying our consolidated financial statements for information about 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 the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $29.3 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2010 underwriting years and 2012 to 2013 underwriting years.

~~2015 Third Quarter~~: The reinsurance segment’s net favorable development of $49.9 million, or 19.2 points, consisted of $19.2 million from short-tailed lines and $30.7 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $15.6 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2012 to 2014 underwriting years. Development from the 2005 to 2014 named catastrophicprior year reserve development.



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events was negligible in the 2015 third quarter. 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 the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $26.2 million based on varying levels of reported and paid claims activity, primarily from the 2003 to 2009 underwriting years.

~~Nine Months Ended September 30, 2016~~: The reinsurance segment’s net favorable development of $176.7 million, or 22.0 points, consisted of $113.1 million from short-tailed lines and $63.6 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $92.6 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years. Such amount included $3.9 million of favorable development from the 2005 to 2015 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 the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $66.4 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2013 underwriting years. Such amounts were partially offset by net adverse development on marine reserves, primarily from the 2002 and 2015 underwriting years, partially offset by favorable development from most other underwriting years.

~~Nine Months Ended September 30, 2015~~: The reinsurance segment’s net favorable development of $165.8 million, or 20.4 points, consisted of $80.0 million from short-tailed lines and $85.8 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $61.5 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2012 to 2014 underwriting years. Contained within this release was favorable development from the 2005 to 2014 named catastrophic events of $10.3 million. 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 the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $74.7 million, primarily from the 2003 to 2009 underwriting years based on varying levels of reported and paid claims activity, and a reduction of $6.8 million in marine and aviation reserves, across most underwriting years.

Underwriting Expenses.

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter: The underwriting expense ratio for the reinsurance segment was ~~34.0%~~34.1% in the 2017 first quarter, compared to 34.9% in the 2016 ~~third quarter, compared to 35.6% in the 2015 third~~first quarter. The acquisition expense ratio for the ~~2016 third~~2017 first quarter was ~~19.9%~~18.8%, compared to ~~21.3%~~21.0% for the ~~2015~~

~~third~~2016 first quarter. The operating expense ratio for the ~~2016 third~~2017 first quarter was ~~14.1%~~15.3%, compared to ~~14.3%~~13.9% in the ~~2015 third~~2016 first quarter.

~~Nine Months Ended September 30, 2016 versus 2015 period:~~ The underwriting expense ratio for the reinsurance segment was 33.6% for the nine months ended September 30, 2016, compared to 34.9% for the 2015 period. The ratio for the nine months ended September 30, 2016 reflected approximately 1.7 points of benefit from the loss portfolio transfer noted above (net premiums earned with no related expenses). The acquisition expense ratio for the nine months ended September 30, 2016 was 20.0%, compared to 20.9% for the 2015 period. The operating expense ratio for the nine months ended September 30, 2016 was 13.6%, compared to 14.0% for the 2015 period.

Mortgage Segment

The following tables set forth our mortgage segment’s underwriting ~~results:~~results. On December 31, 2016, we completed the acquisition of UGC. As such, the 2017 first quarter results reflect the combination of Arch and UGC while the 2016 first quarter does not reflect UGC activity.

Three Months Ended September 30,
2016 2015 % Change
Gross premiums written $ 131,726
$ 74,657
76.4
Premiums ceded (51,182 ) (7,832 )
Net premiums written 80,544
66,825
20.5
Change in unearned premiums (3,582 ) (12,277 )
Net premiums earned 76,962
54,548
41.1
Other underwriting income 4,740
3,565

Losses and loss adjustment expenses (11,107 ) (9,562 )
Acquisition expenses, net (7,757 ) (10,428 )
Other operating expenses (25,416 ) (21,048 )
Underwriting income $ 37,422
$ 17,075
119.2

Underwriting Ratios

% Point
Change
Loss ratio 14.4 % 17.5 % (3.1 )
Acquisition expense ratio 10.1 % 19.1 % (9.0 )
Other operating expense ratio 33.0 % 38.6 % (5.6 )
Combined ratio 57.5 % 75.2 % (17.7 )



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	Nine Months Ended September 30,								Three Months Ended March 31,
	2016			2015			% Change		2017			2016			% Change
Gross premiums written	$	361,440		$	203,770		77.4		$	348,623		$	111,280		213.3
Premiums ceded	(62,918		)	(23,404		)			(73,925		)	(4,767		)
Net premiums written	298,522			180,366			65.5		274,698			106,513			157.9
Change in unearned premiums	(93,283		)	(22,992		)			(30,175		)	(44,748		)
Net premiums earned	205,239			157,374			30.4		244,523			61,765			295.9
Other underwriting income	12,670			14,969					4,123			3,793
Losses and loss adjustment expenses	(20,102		)	(33,010		)			(29,065		)	(8,629		)
Acquisition expenses, net	(24,665		)	(31,046		)
Acquisition expenses									(28,766		)	(5,793		)
Other operating expenses	(74,022		)	(61,096		)			(41,870		)	(23,494		)
Underwriting income	$	99,120		$	47,191		110.0		$	148,945		$	27,642		438.8

Underwriting Ratios							% Point Change								% Point Change
Loss ratio	9.8		%	21.0		%	(11.2	)	11.9		%	14.0		%	(2.1	)
Acquisition expense ratio	12.0		%	19.7		%	(7.7	)	11.8		%	9.4		%	2.4
Other operating expense ratio	36.1		%	38.8		%	(2.7	)	17.1		%	38.0		%	(20.9	)
Combined ratio	57.9		%	79.5		%	(21.6	)	40.8		%	61.4		%	(20.6	)

The mortgage segment includes the results of ~~Arch MI~~our U.S. ~~and~~primary mortgage insurance operations, including Arch Mortgage Insurance ~~Designated Activity~~ Company, ~~leading providers of mortgage insurance products~~United Guaranty Residential Insurance Company and ~~services to the U.S. and European markets, respectively. Arch~~United Guaranty Mortgage Indemnity Company (combined “Arch MI U.S. is”), which are approved as an eligible mortgage ~~insurer~~insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a ~~government sponsored enterprise, or “GSE.”~~GSE. Arch MI U.S. and Arch Mortgage Insurance Designated Activity Company are leading providers of mortgage insurance products and services to the U.S. and European markets, respectively. The mortgage segment also includes GSE credit risk-sharing transactions and mortgage reinsurance for the U.S. and Australian markets.

Premiums Written.

The following table sets forth our mortgage segment’s net premiums written by client location and underwriting location (i.e., where the business is underwritten):


	Three Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
	Amount		%	Amount		%	Amount		%	Amount		%
Client location:
United States	$	77,488	96.2	$	48,611	72.7	$	241,136	87.8	$	55,803	52.4
Other	3,056		3.8	18,214		27.3	33,562		12.2	50,710		47.6
Total	$	80,544	100.0	$	66,825	100.0	$	274,698	100.0	$	106,513	100.0

Underwriting location:
United States	$	50,236	62.4	$	33,298	49.8	$	216,729	78.9	$	35,330	33.2
Other	30,308		37.6	33,527		50.2	57,969		21.1	71,183		66.8
Total	$	80,544	100.0	$	66,825	100.0	$	274,698	100.0	$	106,513	100.0

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter. Gross premiums written by the mortgage segment in the ~~2016 third~~2017 first quarter were ~~76.4%~~213.3% higher than in the ~~2015 third~~2016 first quarter, reflecting growth in ~~Australian mortgage reinsurance, in~~ U.S. primary ~~business and from GSE credit risk-sharing transactions receiving insurance accounting treatment.~~business. The lower increase in net premiums written of ~~20.5%~~157.9% primarily reflected cessions to AIG under the 50% quota share reinsurance agreement, which covers 2014 to 2016 policy years on a ~~$45.4 million retrocession on Australian mortgage~~run-off basis.

~~reinsurance business covering exposures written since May 2015. Roughly three fourths of the 2016 third quarter retrocession represented catch up premiums.~~ The persistency rate, which represents the percentage of mortgage insurance in force at the beginning of a 12-month period that remains in force at the end of such period, of the Arch MI U.S. portfolio of mortgage loans was ~~75.4%~~76.6% at ~~September 30, 2016,~~March 31, 2017, compared to ~~75.6%~~76.1% at ~~June 30,~~December 31, 2016. The higher persistency ~~rates continue to reflect~~rate at March 31, 2017 reflects changes in level of mortgage refinance activity and ~~the low~~mortgage interest ~~rate environment.~~

Nine Months Ended September 30,
2016 2015
Amount % Amount %
Client location:
United States 199,552
66.8
141,893
78.7
Other 98,970
33.2
38,473
21.3
Total $ 298,522
100.0
$ 180,366
100.0

Underwriting location:
United States $ 128,008
42.9
$ 91,843
50.9
Other 170,514
57.1
88,523
49.1
Total $ 298,522
100.0
$ 180,366
100.0

~~Nine Months Ended September 30, 2016 versus 2015 period~~. Net premiums written for the nine months ended September 30, 2016 were 65.5% higher than for the 2015 period, reflecting growth in Australian mortgage reinsurance and in U.S. primary business and from GSE credit risk-sharing transactions receiving insurance accounting treatment.rates.

Arch MI U.S. generated ~~$8.75~~$12.66 billion of new insurance written (“NIW”) ~~during~~in the 2017 first quarter, compared to $2.91 billion in the 2016 ~~third quarter, of which approximately 79% was from banks and other non-credit union mortgage originators.~~first quarter. NIW represents the original principal balance of all loans that received coverage during the period. Our NIW for the 2017 first quarter reflected the combination of Arch and UGC, a higher percentage of monthly premium business and a lower level of refinance activity, as detailed in the following table.



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The following table provides details on the NIW generated by Arch MI U.S.:



(U.S. Dollars in millions)	Three Months Ended March 31,
(U.S. Dollars in millions)	2017			2016
	Amount		%	Amount		%
Total new insurance written (NIW) (1)	$	12,660		$	2,906

Credit quality (FICO):
>=740	$	7,184	56.7	$	1,808	62.2
680-739	4,615		36.5	959		33.0
620-679	861		6.8	139		4.8
Total	$	12,660	100.0	$	2,906	100.0

Loan-to-value (LTV):
95.01% and above	$	972	7.7	$	175	6.0
90.01% to 95.00%	5,985		47.3	1,233		42.4
85.01% to 90.00%	4,061		32.1	1,021		35.1
85.01% and below	1,642		13.0	477		16.4
Total	$	12,660	100.0	$	2,906	100.0

Monthly vs. single:
Monthly	$	10,368	81.9	$	2,189	75.3
Single	2,292		18.1	717		24.7
Total	$	12,660	100.0	$	2,906	100.0

Purchase vs. refinance:
Purchase	$	10,720	84.7	$	2,055	70.7
Refinance	1,940		15.3	851		29.3
Total	$	12,660	100.0	$	2,906	100.0


(1)	Represents the original principal balance of all loans that received coverage during the period.

Net Premiums Earned.

The following tables set forth our mortgage segment’s net premiums earned by client location and underwriting location:

Three Months Ended September 30,
2016 2015
Amount % Amount %
Client Location:
United States $ 64,616
84.0
$ 51,623
94.6
Other 12,346
16.0
2,925
5.4
Total $ 76,962
100.0
$ 54,548
100.0

Underwriting location:
United States $ 40,498
52.6
$ 29,620
54.3
Other 36,464
47.4
24,928
45.7
Total $ 76,962
100.0
$ 54,548
100.0


	Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2017			2016
	Amount		%	Amount		%	Amount		%	Amount		%
Client Location:
United States	$	182,794	89.1	$	149,707	95.1	$	236,031	96.5	$	57,132	92.5
Other	22,445		10.9	7,667		4.9	8,492		3.5	4,633		7.5
Total	$	205,239	100.0	$	157,374	100.0	$	244,523	100.0	$	61,765	100.0

Underwriting location:
United States	$	107,142	52.2	$	82,589	52.5	$	208,699	85.3	$	32,520	52.7
Other	98,097		47.8	74,785		47.5	35,824		14.7	29,245		47.3
Total	$	205,239	100.0	$	157,374	100.0	$	244,523	100.0	$	61,765	100.0

Net premiums earned for the ~~2016 periods~~2017 first quarter were higher than in the ~~2015 periods,~~2016 first quarter, primarily due to the UGC acquisition and growth in insurance in force for Arch MI U.S. along with a higher earned contribution from the mortgage segment’s reinsurance business.

Other Underwriting Income.

Other underwriting income, which is primarily related to older GSE risk-sharing transactions receiving derivative accounting

treatment, was ~~$4.7~~$4.1 million for the 2017 first quarter, compared to $3.8 million for the 2016 ~~third quarter, compared to $3.6 million~~first quarter. The higher level of income for the ~~2015 third~~2017 first quarter and $12.7 million for the nine months ended September 30, 2016, compared to $15.0 million for the 2015 period (which included approximately $3.4 million of catch up income due to the timing of the insurance product and securitization transactions).was primarily driven by mark-to-market adjustments.

Losses and Loss Adjustment Expenses.

Unlike property and casualty business for which we estimate ultimate losses on premiums earned, losses on mortgage insurance business are only recorded at the time a borrower is delinquent on their mortgage, in accordance with mortgage insurance industry practice. Because our mortgage insurance reserving process does not take into account the impact of future losses from loans that are not in default, mortgage insurance loss reserves are not an estimate of ultimate losses. In addition to establishing loss reserves for loans in default,

under GAAP, we are required to establish a premium deficiency reserve for our mortgage insurance products if the amount of expected future losses for a particular product and maintenance costs for such product exceeds expected future premiums, existing reserves and the anticipated investment income for such product. We evaluate whether a premium deficiency exists quarterly. No such reserve was established in the 2016 third quarter.

The table below shows the components of the mortgage segment’s loss ratio:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2016		2015		2016		2015		2017		2016
Current year	17.6	%	24.8	%	17.7	%	25.9	%	21.5	%	18.4	%
Prior period reserve development	(3.2	)%	(7.3	)%	(7.9	)%	(4.9	)%	(9.6	)%	(4.4	)%
Loss ratio	14.4	%	17.5	%	9.8	%	21.0	%	11.9	%	14.0	%

Current Year Loss Ratio.

The mortgage segment’s current year loss ratio was ~~7.2~~3.1 points ~~lower~~higher in the ~~2016 third~~2017 first quarter than in the ~~2015 third quarter, and 8.2 points lower for the nine months ended September 30,~~ 2016 ~~than in the 2015 period.~~first quarter. The current year loss ratio for the ~~2016 periods reflect higher premiums driven by~~2017 first quarter reflects the UGC acquisition and growth in insurance in ~~force, the impact of a low number of delinquent loans and a lower claim rate on such loans.~~force.

Prior Period Reserve Development.

The mortgage segment’s net favorable development was ~~$2.5~~$23.6 million, or ~~3.2~~9.6 points, for the 2017 first quarter, compared to $2.7 million, or 4.4 points, for the 2016 ~~third quarter, compared to $4.0 million, or 7.3 points,~~first quarter. See note 6, “Reserve for Losses and Loss Adjustment Expenses,” of the ~~2015 third quarter, and $16.3 million, or 7.9 points,~~notes accompanying our consolidated financial statements for information about the nine months ended September 30, 2016, compared to $7.7 million, or 4.9 points, for the 2015 period. The reduction in all periods was primarily driven by continued lower than expected claim rates across certain origination years.mortgage segment’s prior year reserve development.

Underwriting Expenses.

~~2016 Third~~2017 First Quarter versus ~~2015 Third~~2016 First Quarter. The underwriting expense ratio for the mortgage segment was ~~43.1%~~28.9% in the 2017 first quarter, compared to 47.4% in the 2016 ~~third quarter, compared to 57.7% in the 2015 third~~first quarter, with the improvement primarily resulting from a higher level of net premiums earned in the ~~2016 third~~2017 first quarter. The acquisition expense ratio was ~~10.1%~~11.8% for the 2017 first quarter, compared to 9.4% for the 2016 ~~third quarter, compared to 19.1% for the 2015 third~~first quarter while the operating expense ratio was ~~33.0%~~17.1% for the ~~2016 third~~2017 first quarter, compared to ~~38.6% in the 2015 third quarter.~~

~~Nine Months Ended September 30, 2016 versus 2015 period~~. The underwriting expense ratio for the mortgage segment was 48.1% for the nine months ended September 30, 2016, compared to 58.5% for the 2015 period, with the improvement primarily resulting from a higher level of net premiums earned38.0% in the 2016 ~~period. The acquisition expense ratio was 12.0% for the nine months ended September 30,~~first quarter.



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~~2016, compared to 19.7% for the 2015 period. The operating expense ratio was 36.1% for the nine months ended September 30, 2016, compared to 38.8% for the 2015 period.~~

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, UGC transaction costs and other, amortization of intangible assets, interest expense, dividends on our non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income ~~taxes and items related to our non-cumulative preferred shares.~~taxes. Such amounts exclude the results of the ‘other’ segment.



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Net Investment Income.

The components of net investment income were derived from the following sources:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Fixed maturities	$	58,542		$	58,888		$	181,908		$	182,447		$	82,781		$	59,001
Term loan investments	6,397			4,810			16,924			13,651			3,114			4,858
Equity securities	3,633			3,807			11,373			9,228			2,966			3,756
Short-term investments	823			75			1,899			453			1,441			458
Other (1)	8,706			10,253			30,530			33,462			18,120			13,672
Gross investment income	78,101			77,833			242,634			239,241			108,422			81,745
Investment expenses (2)	(11,819		)	(10,582		)	(35,546		)	(34,531		)	(12,610		)	(11,336		)
Net investment income	$	66,282		$	67,251		$	207,088		204,710			$	95,812		$	70,409


(1)	Amounts include dividends and interest distributions on investment funds and other items.


(2)	Investment expenses were approximately ~~0.31%~~0.28% of average invested assets for the ~~2016 third~~2017 first quarter, compared to ~~0.31%~~0.33% for the ~~2015 third quarter, and 0.32% for the nine months ended September 30,~~ 2016 ~~compared to 0.36% for the 2015 period.~~first quarter.

The 2017 first quarter net investment income reflected income on the acquired UGC portfolio and higher returns on fund investments. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was ~~1.81%~~2.13% for the 2017 first quarter, compared to 2.13% for the 2016 third quarter, compared to 2.04% for the 2015 third quarter, and 1.95% for the nine months ended September 30, 2016, compared to 2.06% for the 2015 period. The comparability of net investment income between the periods was influenced by our share repurchase program, as well as the effects of low prevailing interest rates available in the market. Yields in the future may vary based on financial market conditions, investment allocation decisions and other factors.first quarter.

Corporate Expenses.

Corporate expenses were ~~$18.5~~$12.2 million for the 2017 first quarter, compared to $9.4 million for the 2016 ~~third quarter, compared to $10.7 million for the 2015 third quarter, and $45.1 million for the nine months ended September 30, 2016, compared to $37.5 million for the 2015 period.~~first quarter. The

higher level of corporate expenses in the ~~2016 third~~2017 first quarter was primarily due to ~~nonrecurrent~~higher incentive compensation costs.

UGC Transaction Costs and Other.

UGC transaction costs and other were $15.6 million for the 2017 first quarter, compared to $34.6 million in the 2016 fourth quarter. UGC transaction costs and other include advisory, financing, legal and other transaction costs related to the UGC ~~Acquisition.~~acquisition. Amounts for the 2017 first quarter reflected $8.2 million of severance and severance related costs, with the remainder primarily due to incentive compensation paid in conjunction with the UGC acquisition.

Amortization of Intangible Assets.

Amortization of intangible assets for the 2017 first quarter was $31.3 million, compared to $4.7 million for the 2016 first quarter. During the 2017 first quarter, we reclassified our income statement presentation of amortization of intangible assets to reflect such item separately (previously reflected in acquisition and/or other operating expenses). The higher level of expense for the 2017 first quarter reflects the amortization of intangible assets included in the UGC acquisition, including

intangible assets related to acquired insurance contracts and distribution relationships.

Interest Expense.

Interest expense was ~~$12.9~~$25.8 million for the 2017 first quarter, compared to $12.6 million for the 2016 ~~third~~first quarter, ~~compared to $12.0 million for~~with the ~~2015 third quarter,~~increase primarily reflecting the impact of the issuance of the Company’s 2026 and ~~$38.0 million for~~2046 senior notes in December 2016 and the ~~nine months ended September 30, 2016, compared to $28.8 million for the 2015 period. The lower~~higher level of interest expense for the nine months ended September 30, 2015 primarily resulted from a reduction in interest expense in the 2015 second quarter on a deposit accounting liability contract. Such contract was commuted in the 2016 second quarter (see the reinsurance segment discussion above). Interest expense reflects amounts related toborrowings outstanding under our ~~outstanding senior notes,~~ revolving credit ~~agreement borrowings and other.~~agreement.

Net Realized Gains or Losses.

We recorded net realized gains of ~~$95.9~~$28.5 million for the ~~2016 third~~2017 first quarter, compared to net realized ~~losses~~gains of ~~$53.5~~$31.9 million for the ~~2015 third quarter, and net realized gains of $168.7 million for the nine months ended September 30,~~ 2016 ~~compared to net realized losses of $14.8 million for the 2015 period.~~first quarter. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations. Net realized gains or losses also includes realized and unrealized contract gains and losses on our derivative instruments, changes in the fair value of assets and liabilities accounted for using the fair value option along with re-measurement of contingent consideration liability amounts.

Net Impairment Losses Recognized in Earnings.

We recorded ~~$3.9~~$1.8 million of impairment losses for the ~~2016 third~~2017 first quarter, compared to ~~$5.9~~$7.6 million for the ~~2015 third~~2016 first quarter. For the 2017 first quarter, ~~and $16.8 million for the nine months ended September 30, 2016, compared to $12.8 million for the 2015 period. The~~ impairment losses primarily resulted from our decision to liquidate a portfolio of mortgage backed securities in April 2017. We recorded ~~for the 2016 periods primarily related to corporate bonds, equities and other investments, with smaller contributions from other sectors.~~impairment losses on securities in such portfolio that were in an unrealized loss position at March 31, 2017. See note 6,7, “Investment Information—Other-Than-Temporary Impairments,” of the notes accompanying our consolidated financial statements for additional information.

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method.

We recorded ~~$16.7~~$48.1 million of equity in net income related to investment funds accounted for using the equity method in the ~~2016 third~~2017 first quarter, compared to ~~$2.1~~$6.7 million loss for the ~~2015 third~~2016 first quarter. Investment funds accounted for using the equity method totaled $861.6 million at March 31, 2017, compared to $811.3 million at December 31, 2016.

Net Foreign Exchange Gains or Losses.

Net foreign exchange losses for the 2017 first quarter ~~and $32.1~~were $19.8 million, compared to net foreign exchange losses for the 2016 first quarter of ~~equity~~$22.0 million. Amounts in ~~net income~~such periods



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for the nine months ended September 30, 2016, compared to $19.9 million of equity in net income for the 2015 period. Investment funds accounted for using the equity method totaled $797.5 million at September 30, 2016, compared to $593.0 million at December 31, 2015.

~~Net Foreign Exchange Gains or Losses.~~

Net foreign exchange losses for the 2016 third quarter were $4.2 million, compared to net foreign exchange gains for the 2015 third quarter of $16.1 million. Net foreign exchange losses for the nine months ended September 30, 2016 were $3.8 million, compared to net foreign exchange gains for the 2015 period of $60.3 million. Amounts in such periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.

Income Tax Expense.

Our income tax provision on income before income taxes resulted in an expense of ~~5.1%~~10.2% for the ~~2016 third~~2017 first quarter, ~~and 6.7% for the nine months ended September 30, 2016,~~ compared to an expense of ~~10.5%~~9.6% for the ~~2015 third~~2016 first quarter. The 2017 first quarter ~~and 5.7%~~effective tax rate includes a discrete $2.5 million income tax benefit arising from the change in accounting for ~~the 2015 period.~~stock based compensation. Our effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.

Other Segment

The ‘other’ segment includes the results of Watford Re. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and we concluded that we are the primary beneficiary of Watford Re. As such, we consolidate the results of Watford Re in our consolidated financial statements, although we only own approximately 11% of Watford Re’s common equity. See note 3, “Variable Interest Entities and Noncontrolling Interests” and note 5, “Segment Information,” of the notes accompanying our consolidated financial statements for additional information on Watford Re.

CRITICAL ACCOUNTING POLICIES,

ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our ~~2015~~2016 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including note 2, “Recent Accounting Pronouncements.”

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Investable Assets

At ~~September 30, 2016,~~March 31, 2017, total investable assets of ~~$17.88~~$20.74 billion included ~~$16.04~~$18.83 billion ~~managed~~held by Arch and ~~$1.84~~$1.90 billion included in the ‘other’ segment (i.e., attributable to Watford Re).

Investable Assets ~~Managed~~Held by Arch

The finance, investment and risk management (“FI&R”) committee of our board of directors establishes our investment policies and sets the parameters for creating guidelines for our investment managers. The FI&R committee reviews the implementation of the investment strategy on a regular basis. Our current approach stresses preservation of capital, market liquidity and diversification of risk. While maintaining our emphasis on preservation of capital and liquidity, we expect our portfolio to become more diversified and, as a result, we may expand into areas which are not currently part of our investment strategy. Our Chief Investment Officer administers the investment portfolio, oversees our investment managers and formulates investment strategy in conjunction with the FI&R committee.



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The following table summarizes the fair value of the investable assets ~~managed~~held by Arch:


Investable assets (1):	Estimated Fair Value			% of Total		Estimated Fair Value			% of Total
September 30, 2016
March 31, 2017
Fixed maturities (2)	$	11,892,761		74.1		$	14,678,019		77.9
Short-term investments	1,184,408			7.4		879,178			4.7
Cash	511,784			3.2		656,188			3.5
Equity securities (2)	560,889			3.5		486,373			2.6
Other investments (2)	1,234,096			7.7		1,360,234			7.2
Investments accounted for using the equity method	797,542			5.0		861,607			4.6
Securities transactions entered into but not settled at the balance sheet date	(138,760		)	(0.9	)	(87,990		)	(0.5	)
Total investable assets managed by Arch	$	16,042,720		100.0
Total investable assets held by Arch						$	18,833,609		100.0

December 31, 2015
December 31, 2016
Fixed maturities (2)	$	11,200,437		76.5		$	14,521,774		77.9
Short-term investments	587,904			4.0		676,547			3.6
Cash	444,776			3.0		768,049			4.1
Equity securities (2)	629,980			4.3		558,008			3.0
Other investments (2)	1,209,285			8.3		1,276,841			6.9
Investments accounted for using the equity method	592,973			4.0		811,273			4.4
Securities transactions entered into but not settled at the balance sheet date	(20,524		)	(0.1	)	23,697			0.1
Total investable assets managed by Arch	$	14,644,831		100.0
Total investable assets held by Arch						$	18,636,189		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.


(2)	Includes investments carried as available for sale, at fair value and at fair value under the fair value option.

At ~~September 30, 2016,~~March 31, 2017, our fixed income portfolio, which includes fixed maturity securities and short-term investments, had average credit quality ratings from Standard & Poor’s Rating Services (“S&P”)/Moody’s of “AA/Aa2” and an average yield to maturity (embedded book yield), before investment expenses, of ~~1.78%~~2.23%. At December 31, ~~2015,~~2016, our fixed income portfolio had average credit quality ratings from S&P/Moody’s of ~~“AA/Aa2”~~“AA-/Aa3” and an average yield to maturity of ~~2.16%~~2.03%. Our investment portfolio had an average effective duration of ~~3.31~~3.36 years at ~~September 30, 2016,~~March 31, 2017, compared to ~~3.43~~3.64 years at December 31, ~~2015.~~2016. At ~~September 30, 2016,~~March 31, 2017, approximately ~~$11.46~~$13.18 billion, or ~~71%~~70%, of total investable assets ~~managed~~held by Arch were internally managed, compared to ~~$10.01~~$13.90 billion, or ~~68%~~75%, at December 31, ~~2015.~~2016.



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The following table summarizes our fixed maturities and fixed maturities pledged under securities lending agreements (“Fixed Maturities”) by type:


	Estimated Fair Value		% of Total	Estimated Fair Value		% of Total
September 30, 2016
March 31, 2017
Corporate bonds	$	3,250,421	27.3	$	4,902,600	33.4
Mortgage backed securities	577,097		4.9	425,235		2.9
Municipal bonds	1,893,728		15.9	2,519,112		17.2
Commercial mortgage backed securities	618,235		5.2	590,521		4.0
U.S. government and government agencies	3,014,830		25.4	3,266,908		22.3
Non-U.S. government securities	1,297,281		10.9	1,335,296		9.1
Asset backed securities	1,241,169		10.4	1,638,347		11.2
Total	$	11,892,761	100.0	$	14,678,019	100.0

December 31, 2015
December 31, 2016
Corporate bonds	$	2,960,694	26.4	$	4,696,079	32.3
Mortgage backed securities	812,557		7.3	504,677		3.5
Municipal bonds	1,626,281		14.5	3,713,434		25.6
Commercial mortgage backed securities	764,152		6.8	536,051		3.7
U.S. government and government agencies	2,423,455		21.6	2,804,811		19.3
Non-U.S. government securities	992,792		8.9	1,142,735		7.9
Asset backed securities	1,620,506		14.5	1,123,987		7.7
Total	$	11,200,437	100.0	$	14,521,774	100.0

At September 30, 2016, below-investment grade securities comprised approximately 6% of our Fixed Maturities, compared to 5% at December 31, 2015. In accordance with our investment strategy, we invest in high yield fixed income securities which are included in “Corporate bonds.” Upon issuance, these securities are typically rated below investment grade (i.e., rating assigned by the major rating agencies of “BB+” or less). At September 30, 2016, corporate bonds represented 62% of the total below investment grade securities at fair value, mortgage backed securities represented 17% of the total and 21% were in other classes. At December 31, 2015, corporate bonds represented 70% of the total below investment grade securities at fair value, mortgage backed securities represented 13% of the total and 17% were in other classes. Unrealized losses include the impact of foreign exchange movements on certain securities denominated in foreign currencies and, as such, the amount of securities in an unrealized loss position fluctuates due to foreign currency movements.



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The following table provides the credit quality distribution of our Fixed Maturities. 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.


	Estimated Fair Value		% of Total	Estimated Fair Value		% of Total
September 30, 2016
March 31, 2017
U.S. government and gov’t agencies (1)	$	3,579,338	30.1	$	3,583,161	24.4
AAA	3,383,665		28.5	4,665,048		31.8
AA	2,137,615		18.0	2,700,952		18.4
A	1,581,646		13.3	2,108,293		14.4
BBB	470,613		4.0	860,615		5.9
BB	277,589		2.3	298,703		2.0
B	163,327		1.4	154,028		1.0
Lower than B	101,602		0.9	87,373		0.6
Not rated	197,366		1.7	219,846		1.5
Total	$	11,892,761	100.0	$	14,678,019	100.0

December 31, 2015
December 31, 2016
U.S. government and gov’t agencies (1)	$	3,060,869	27.3	$	3,210,899	22.1
AAA	4,000,750		35.7	3,918,739		27.0
AA	1,651,760		14.7	3,148,226		21.7
A	1,431,138		12.8	2,338,834		16.1
BBB	457,251		4.1	1,203,942		8.3
BB	203,426		1.8	226,321		1.6
B	138,770		1.2	156,405		1.1
Lower than B	130,545		1.2	90,833		0.6
Not rated	125,928		1.1	227,574		1.6
Total	$	11,200,437	100.0	$	14,521,774	100.0


(1)	Includes U.S. government-sponsored agency ~~mortgage backed~~residential mortgage-backed securities and agency commercial ~~mortgage backed~~mortgage-backed securities.

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all Fixed Maturities which were in an unrealized loss position:

Severity of gross unrealized losses: Estimated Fair Value
Gross
Unrealized
Losses

% of
Total Gross
Unrealized
Losses
September 30, 2016
0-10% $ 3,140,113
$ (21,597 ) 38.8
10-20% 174,218
(31,687 ) 57.0
20-30% 6,996
(2,040 ) 3.7
Greater than 30% 519
(280 ) 0.5
Total $ 3,321,846
$ (55,604 ) 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

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for non-investment grade Fixed Maturities which were in an unrealized loss position:

Severity of gross unrealized losses: Estimated Fair Value Gross Unrealized Losses
% of
Total Gross
Unrealized
Losses
September 30, 2016
0-10% $ 93,569
$ (2,364 ) 4.3
10-20% 13,168
(2,011 ) 3.6
20-30% 280
(84 ) 0.2
Greater than 30% 458
(235 ) 0.4
Total $ 107,475
$ (4,694 ) 8.4

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

We determine estimated recovery values for our Fixed Maturities following a review of the business prospects, credit ratings, estimated loss given default factors and information received from asset managers and rating agencies for each security. For structured securities, we utilize underlying data, where available, for each security provided by asset managers and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis provided by the asset managers includes expected cash flow projections under base case and stress case scenarios which modify expected default expectations and loss severities and slow down prepayment assumptions.



Severity of gross unrealized losses:	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
March 31, 2017
0-10%	$	6,645,673	$	(82,518	)	69.8
10-20%	93,996		(15,585		)	13.2
20-30%	70,753		(19,427		)	16.4
Greater than 30%	1,143		(666		)	0.6
Total	$	6,811,565	$	(118,196	)	100.0

December 31, 2016
0-10%	$	7,078,582	$	(127,909	)	71.6
10-20%	155,403		(24,219		)	13.5
20-30%	89,887		(25,929		)	14.5
Greater than 30%	1,496		(702		)	0.4
Total	$	7,325,368	$	(178,759	)	100.0

The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at ~~September 30, 2016,~~March 31, 2017, excluding guaranteed amounts and covered bonds:

Estimated Fair Value
Credit
Rating (1)
Microsoft Corporation $ 78,481
AAA/Aaa
Oracle Corporation 70,545
AA-/A1
JPMorgan Chase & Co 66,728
A-/A3
Siemens AG 64,642
A+/A1
Bank of New York Mellon Corp. 61,648
A/A1
Wells Fargo & Company 58,658
A+/Aa3
Royal Dutch Shell PLC 58,424
A/Aa2
MassMutual Global Funding II 48,999
AA+/Aa2
Coca-Cola Co 48,803
AA-/Aa3
Apple Inc. 48,491
AA+/Aa1
Total $ 605,419



	Estimated Fair Value		Credit Rating (1)
Microsoft Corporation	$	148,440	AAA/Aaa
Apple Inc.	121,246		AA+/Aa1
JPMorgan Chase & Co.	109,874		A-/A3
The Bank of New York Mellon Corporation	103,531		A/A1
Wells Fargo & Company	87,047		A/A2
Citigroup Inc.	76,039		A-/Baa1
Daimler AG	71,214		A/A2
Bayerische Motoren Werke Aktiengesellschaft	71,278		A+/A1
MetLife, Inc.	65,844		AA-/Aa3
Honda Motor Co., Ltd.	58,897		A+/A1
Total	$	913,410


(1)	Average credit ratings as assigned by S&P and Moody’s, respectively.

Our portfolio includes investments, such as mortgage-backed securities, which are subject to prepayment risk. At September 30, 2016, our investments in residential mortgage-backed securities (“RMBS”) amounted to approximately $577.1 million, or 3.6% of total investable



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assets managed by Arch, compared to $812.6 million, or 5.5%, at December 31, 2015. As with other fixed income investments, the fair value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose us to changes in the prepayment rate on these investments. In periods of declining interest rates, mortgage prepayments generally increase and RMBS are prepaid more quickly, requiring us to reinvest the proceeds at the then current market rates. Conversely, in periods of rising rates, mortgage prepayments generally fall, preventing us from taking full advantage of the higher level of rates. However, economic conditions may curtail prepayment activity if refinancing becomes more difficult, thus limiting prepayments on RMBS.

The residential mortgage market in the U.S has experienced a variety of difficulties in certain underwriting periods and is only recently recovering from a period of severe home price depreciation. It is uncertain whether this recovery will continue. A decline or an extended flattening in residential property values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to or greater than the related property values. These developments may have a significant adverse effect on the prices of loans and securities, including those in our investment portfolio. The situation continues to have wide ranging consequences, including downward pressure on economic growth and the potential for increased insurance and reinsurance exposures, which could have an adverse impact on our results of operations, financial condition, business and operations.

Our portfolio also includes commercial mortgage backed securities (“CMBS”). At September 30, 2016, CMBS constituted approximately $618.2 million, or 3.9% of total investable assets managed by Arch, compared to $764.2 million, or 5.2%, at December 31, 2015. The commercial real estate market may experience price deterioration, which could lead to delinquencies and losses on commercial real estate mortgages.

The following table provides information on our non-agency RMBS and non-agency CMBS at September 30, 2016 by issuance year, excluding amounts guaranteed by U.S. government agencies. Non-agency RMBS and non-agency CMBS were 0.5% and 3.4% of total investable assets managed by Arch, respectively.

Issuance
Year

Amortized
Cost

Average
Credit
Quality
Estimated Fair Value
2004-2008 $ 59,493
CC- $ 65,431
2009 444
AA 452
2010 1,063
NR 1,281
2014 1,642
NR 1,626
2015 3,168
D 3,160
2016 6,098
C- 6,125
Total RMBS $ 71,908
C+ $ 78,075

2002-2008 27,012
A- 27,141
2009 531
A- 531
2010 8,276
AAA 8,492
2011 431
AAA 432
2012 34,898
AAA 35,385
2013 83,486
AA 85,987
2014 121,901
AA+ 124,030
2015 111,950
AA+ 113,347
2016 156,293
AA+ 157,404
Total CMBS $ 544,778
AA+ $ 552,749

Non-Agency Non-Agency
Additional Statistics: RMBS CMBS (1)
Weighted average loan age (months) 112
32
Weighted average life (months) (2) 41
80
Weighted average loan-to-value % (3) 57.5 % 54.1 %
Total delinquencies (4) 16.4 % 0.7 %
Current credit support % (5) 3.8 % 36.6 %


~~(1)~~	~~Loans defeased with government/agency obligations were not material to the collateral underlying our CMBS holdings.~~


~~(2)~~	The weighted average life for RMBS is based on the interest rates in effect at September 30, 2016. The weighted average life for CMBS reflects the average life of the collateral underlying our CMBS holdings.


~~(3)~~	~~The range of loan-to-values is 16% to 93% on RMBS and 3% to 266% on CMBS.~~


~~(4)~~	~~Total delinquencies includes 60 days and over.~~


~~(5)~~	~~Current credit support percentage represents the percentage for a collateralized mortgage obligation (“CMO”) or CMBS class/tranche from other subordinate classes in the same CMO or CMBS deal.~~



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The following table provides information on our ~~asset backed~~structured securities, which includes residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) ~~at September 30, 2016. ABS were 7.7% of total investable assets managed by Arch, respectively.~~:

Weighted Average
Sector
Amortized
Cost

Credit
Quality
Credit Support Estimated Fair Value
Credit cards $ 650,579
AAA 19 % $ 657,109
Autos 256,996
AAA 27 % 258,244
Loans 140,373
A- 8 % 140,631
Equipment 105,975
AA- 2 % 105,786
Other (1) 77,851
A- 20 % 79,399
Total ABS (2) $ 1,231,774
AA+ $ 1,241,169



	Agencies		Investment Grade		Below Investment Grade		Total
March 31, 2017
RMBS	$	311,538	$	66,226	$	47,471	$	425,235
CMBS	4,717		569,206		16,598		590,521
ABS	—		1,529,991		108,356		1,638,347
Total	$	316,255	$	2,165,423	$	172,425	$	2,654,103

December 31, 2016
RMBS	$	393,188	$	60,600	$	50,889	$	504,677
CMBS	12,900		513,266		9,885		536,051
ABS	—		1,077,614		46,373		1,123,987
Total	$	406,088	$	1,651,480	$	107,147	$	2,164,715


~~(1)~~	~~Including rate reduction bonds, commodities, home equity, U.K. securitized and other.~~


~~(2)~~	~~The effective duration of the total ABS was 2.1 years at September 30, 2016.~~

At ~~September 30, 2016,~~March 31, 2017, our ~~fixed income portfolio~~structured securities included ~~$40.3~~$49.9 million par value in sub-prime securities with a fair value of ~~$30.9~~$43.4 million and average credit quality ratings from S&P/Moody’s of “CCC-/Ca.” At December 31, 2016, our fixed income portfolio included $25.3 million par value in sub-prime securities with a fair value of $23.3 million and average credit quality ratings from S&P/Moody’s of “CCC/Caa3.”

At March 31, 2017, our equity portfolio included $486.4 million of equity securities, compared to $558.0 million at December 31, ~~2015, our fixed income~~2016. Our equity portfolio ~~included $45.5 million par value in sub-prime securities with a fair value of $35.9 million and average credit quality ratings from S&P/Moody’s of “CCC/Caa3.” Such amounts were primarily~~includes publicly traded common stocks in the ~~home equity sector of our ABS, with~~natural resources, energy, consumer staples and other sectors.

The following table provides information on the ~~balance in other ABS, RMBS and CMBS sectors. We define sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more~~severity of the ~~following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios.~~unrealized loss position as a percentage of cost for all equity securities classified as available for sale which were in an unrealized loss position:



Severity of gross unrealized losses:	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
March 31, 2017
0-10%	$	121,148	$	(2,809	)	42.2
10-20%	9,568		(1,498		)	22.5
20-30%	1,929		(565		)	8.5
Greater than 30%	2,001		(1,788		)	26.8
Total	$	134,646	$	(6,660	)	100.0

December 31, 2016
0-10%	$	214,364	$	(8,776	)	50.1
10-20%	52,034		(7,100		)	40.5
20-30%	1,983		(607		)	3.5
Greater than 30%	1,000		(1,034		)	5.9
Total	$	269,381	$	(17,517	)	100.0

The following table provides information on the fair value of our Eurozone investments at ~~September 30, 2016:~~March 31, 2017:


Country (1)	Sovereign (2)		Corporate Bonds		Other (3)		Total		Sovereign (2)		Corporate Bonds		Other (3)		Total
Netherlands	$	106,241	$	149,864	$	12,131	$	268,236	$	87,779	$	129,512	$	3,589	$	220,880
Germany	74,122		39,040		32,977		146,139		101,884		42,375		9,775		154,034
France	15,198		42,819		18,307		76,324		—		36,889		24,410		61,299
Luxembourg	—		24,728		6,783		31,511		1,088		31,528		3,552		36,168
Belgium	6,965		8,683		—		15,648		27,580		7,634		1		35,215
Austria									16,558		—		—		16,558
Ireland									—		10,634		4,373		15,007
Spain									—		1,088		11,700		12,788
Supranational (4)	8,875		—		—		8,875		7,417		—		—		7,417
Finland	—		—		6,541		6,541
Spain	—		—		6,502		6,502
Ireland	—		1,538		4,042		5,580
Italy	—		—		2,776		2,776		—		—		6,515		6,515
Austria	—		902		—		902
Portugal									—		—		552		552
Greece	366		—		—		366		81		235		—		316
Total	$	211,767	$	267,574	$	90,059	$	569,400	$	242,387	$	259,895	$	64,467	$	566,749


(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 ~~September 30, 2016.~~March 31, 2017.


(2)	Includes securities issued and/or guaranteed by Eurozone governments.


(3)	Includes bank loans, equities and other.


(4)	Includes World Bank, European Investment Bank, International Finance Corp. and European Bank for Reconstruction and Development.

At September 30, 2016, our equity portfolio included $560.9 million of equity securities, compared to $630.0 million at December 31, 2015. Our equity portfolio includes publicly traded common stocks in the natural resources, energy, consumer staples and other sectors.

The following table provides information on the severity of the unrealized loss position as a percentage of cost for all equity securities classified as available for sale which were in an unrealized loss position:

Severity of gross unrealized losses: Estimated Fair Value
Gross
Unrealized
Losses

% of
Total Gross
Unrealized
Losses
September 30, 2016
0-10% $ 148,265
$ (3,667 ) 55.6
10-20% 15,999
(2,201 ) 33.4
20-30% 2,908
(729 ) 11.1
Total $ 167,172
$ (6,597 ) 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

On a quarterly basis, we evaluate the unrealized losses of our equity securities by issuer and forecast a reasonable period of time by which the fair value of the securities would increase and we would recover the cost basis. All of the



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unrealized losses on equity securities were on holdings which have been in a continual unrealized loss position for less than 12 months at September 30, 2016. We believe that a reasonable period of time exists to allow for recovery of the cost basis of our equity securities that are in an unrealized loss position at September 30, 2016.

The following table summarizes our other investments:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Available for sale:
Asian and emerging markets	$	88,731	$	206,861	$	109,084	$	84,778
Investment grade fixed income	34,536		31,370		52,016		33,923
Credit related funds	6,478		22,512		11,003		7,469
Other	38,498		39,733		56,334		41,800
Total available for sale	168,243		300,476		228,437		167,970
Fair value option:
Term loan investments (par value: $367,880 and $356,096)	382,197		345,855
Term loan investments (par value: $393,384 and $385,436)					360,051		378,877
Mezzanine debt funds	122,528		121,589		109,334		127,943
Credit related funds	219,161		219,049		208,707		218,298
Investment grade fixed income	73,264		63,053		82,718		75,468
Asian and emerging markets	142,298		34,761		205,150		178,568
Other (1)	126,405		124,502		165,837		129,717
Total fair value option	1,065,853		908,809		1,131,797		1,108,871
Total	$	1,234,096	$	1,209,285	$	1,360,234	$	1,276,841


(1)	Includes fund investments with strategies in mortgage servicing rights, transportation and infrastructure assets and other.

Certain of our other investments are in investment funds for which we have 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 our 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 our investment is eligible to be redeemed, the time to redeem such investment can take weeks or months following the notification.

Certain of our investment managers may use leverage to achieve a higher rate of return on their assets under management, primarily those included in “other investments available for sale, at fair value,” “investments accounted for using the fair value option” and “investments accounted for using the equity method” on our balance sheet. While

leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Accordingly, any event that adversely affects the value of the underlying holdings would be magnified to the extent leverage is used and our potential losses would be magnified. In addition, the structures used to generate leverage may lead to such investments being required to meet covenants based on market valuations and asset coverage. Market valuation declines could force the sale of investments into a depressed market, which may result in significant additional losses. Alternatively, the levered investments may attempt to delever by raising additional equity or potentially changing the terms of the established financing arrangements. We may choose to participate in the additional funding of such investments.

Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See note 8, “Derivative Instruments,” of the notes accompanying our consolidated financial statements for additional disclosures concerning derivatives.

Investable Assets in the ‘Other’ Segment

Investable assets in the ‘other’ segment are managed by Watford Re. The board of directors of Watford Re establishes their investment policies and guidelines. Watford Re’s investments are accounted for using the fair value option with changes in ~~the carrying value of such investments recorded in net realized gains or losses.~~



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the carrying value of such investments recorded in net realized gains or losses.

The following table summarizes investable assets in the ‘other’ segment:


	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Cash	$	67,032		$	108,550
Investments accounted for using the fair value option:
Term loan investments (par value: $784,650 and $841,047)	724,510			762,162
Other investments							$	763,517		$	811,922
Fixed maturities	759,176			569,022			703,959			734,260
Short-term investments	388,125			285,923			505,949			309,127
Equity securities	532			—			3,042			2,314
Total investments accounted for using the fair value option	1,872,343			1,617,107
Total							1,976,467			1,857,623
Cash							47,566			74,893
Securities sold but not yet purchased	(52,195		)	(30,583		)	(59,430		)	(33,157		)
Securities transactions entered into but not settled at the balance sheet date	(50,169		)	1,033			(61,981		)	(41,596		)
Total investable assets included in ‘other’ segment	$	1,837,011		$	1,696,107		$	1,902,622		$	1,857,763

Premiums Receivable and Reinsurance Recoverables

At ~~September 30, 2016, 85.7%~~March 31, 2017, 81.8% of premiums receivable of ~~$1.18~~$1.25 billion represented amounts not yet due, while amounts in excess of 90 days overdue were ~~4.8%~~4.0% of the total. At December 31, ~~2015, 80.8%~~2016, 81.0% of premiums receivable of ~~$983.4 million~~$1.07 billion represented amounts not yet due, while amounts in excess of 90 days overdue were ~~5.3%~~5.2% of the total. Our reserves for doubtful accounts were approximately ~~$19.6~~$22.6 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$15.7~~$21.0 million at December 31, ~~2015.~~2016.

At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, approximately ~~73.6%~~74.9% and ~~77.9%~~75.7% of reinsurance recoverables on paid and unpaid losses (not including ~~prepaid reinsurance~~ceded unearned premiums) of ~~$2.08~~$2.13 billion and ~~$1.87~~$2.11 billion, respectively, were due from carriers which had an A.M. Best rating of “A-” or better while ~~26.4%~~25.1% and ~~22.1%~~24.3%, respectively, were from companies not rated. For items not rated, over 90% of such amount was collateralized through reinsurance trusts or letters of credit at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016. The largest reinsurance recoverables from any one carrier was approximately ~~2.8%~~2.2% and ~~3.4%~~2.4%, respectively, of total shareholders’ equity available to ~~Arch.~~Arch at March 31, 2017 and December 31, 2016.

Approximately ~~7.4%~~3.3% of the ~~$26.5~~$38.0 million of paid losses and loss adjustment expenses recoverable at ~~September 30, 2016~~March 31, 2017 were more than 90 days overdue, compared to ~~3.9%~~6.7% of the ~~$38.5~~$30.6 million of paid losses and loss adjustment expenses recoverable at December 31, ~~2015.~~2016. No collection issues were indicated on the amount in excess of 90 days overdue at ~~September 30, 2016.~~March 31, 2017.

The effects of reinsurance on written and earned premiums and losses and loss adjustment expenses (“LAE”) with unaffiliated reinsurers were as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2016			2015			2016			2015			2017			2016
Premiums written:
Direct	$	841,119		$	786,248		$	2,539,073		$	2,357,677		$	1,096,755		$	858,110
Assumed	437,646			402,944			1,507,594			1,372,746			561,235			579,856
Ceded	(264,487		)	(217,220		)	(887,591		)	(747,876		)	(381,730		)	(316,731		)
Net	$	1,014,278		$	971,972		$	3,159,076		$	2,982,547		$	1,276,260		$	1,121,235

Premiums earned:
Direct	$	807,656		$	762,794		$	2,382,784		$	2,243,848		$	1,023,452		$	779,770
Assumed	413,960			403,982			1,308,349			1,229,487			416,345			421,058
Ceded	(263,213		)	(230,093		)	(775,166		)	(682,950		)	(322,780		)	(249,249		)
Net	$	958,403		$	936,683		$	2,915,967		$	2,790,385		$	1,117,017		$	951,579

Losses and LAE:
Direct	$	490,420		$	482,150		$	1,471,472		$	1,375,958		$	507,118		$	455,333
Assumed	172,490			177,614			630,271			551,262			186,956			192,460
Ceded	(138,727		)	(128,023		)	(470,019		)	(382,337		)	(141,504		)	(124,844		)
Net	$	524,183		$	531,741		$	1,631,724		$	1,544,883		$	552,570		$	522,949

Reserves for Losses and Loss Adjustment Expenses

We establish reserves for losses and loss adjustment expenses (“Loss Reserves”) which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of losses incurred. Estimating Loss Reserves is inherently difficult, which is exacerbated by the fact that we have relatively limited historical experience upon which to base such estimates. We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to assist in the establishment of Loss Reserves. Actual losses and loss adjustment expenses paid will deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.



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At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Insurance segment:
Case reserves	$	1,397,207	$	1,434,986	$	1,417,387	$	1,414,603
IBNR reserves	3,206,127		3,080,122		3,232,482		3,187,451
Total net reserves	4,603,334		4,515,108		4,649,869		4,602,054
Reinsurance segment:
Case reserves	764,469		699,860		786,740		762,730
Additional case reserves	105,339		99,343		79,446		92,524
IBNR reserves	1,548,053		1,593,186		1,524,737		1,517,983
Total net reserves	2,417,861		2,392,389		2,390,923		2,373,237
Mortgage segment:
Case reserves	67,430		86,278		547,405		593,222
IBNR reserves	34,242		23,211		70,611		59,791
Total net reserves(1)	101,672		109,489		618,016		653,013
Other segment:
Case reserves	105,412		64,875		146,571		125,703
Additional case reserves	9,731		5,199		8,092		9,513
IBNR reserves	322,410		209,353		388,220		353,865
Total net reserves	437,553		279,427		542,883		489,081
Total:
Case reserves	2,334,518		2,285,999		2,898,103		2,896,258
Additional case reserves	115,070		104,542		87,538		102,037
IBNR reserves	5,110,832		4,905,872		5,216,050		5,119,090
Total net reserves	$	7,560,420	$	7,296,413	$	8,201,691	$	8,117,385


(1)	Includes $566.2 million of net reserves from U.S. primary mortgage insurance business, of which 75.8% represents policy years 2007 and prior, 11.9% from 2008 and the remainder from later policy years.

At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Insurance segment:
Professional lines (1)	$	1,331,600	$	1,346,882	$	1,315,038	$	1,293,667
Construction and national accounts	945,681		876,278		1,006,271		976,109
Excess and surplus casualty (2)	688,607		682,286		690,956		687,305
Programs	672,369		687,405		659,737		667,677
Property, energy, marine and aviation	301,002		330,104		278,158		302,057
Travel, accident and health	73,268		64,537		75,571		72,726
Lenders products	43,782		44,273		44,823		42,147
Other (3)	547,025		483,343		579,315		560,366
Total net reserves	$	4,603,334	$	4,515,108	$	4,649,869	$	4,602,054


(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.

At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Reinsurance segment:
Casualty (1)	$	1,384,459	$	1,386,084	$	1,375,775	$	1,355,362
Other specialty (2)	445,370		420,865		438,494		428,205
Property excluding property catastrophe (3)	306,337		301,757		296,054		297,200
Marine and aviation	145,702		137,969		139,786		147,700
Property catastrophe	77,617		94,991		79,564		86,026
Other (4)	58,376		50,723		61,250		58,744
Total net reserves	$	2,417,861	$	2,392,389	$	2,390,923	$	2,373,237


(1)	Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.


(2)	Includes non-excess motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.


(3)	Includes facultative business.


(4)	Includes life, casualty clash and other.

Mortgage Operations Supplemental Information

Arch MI U.S. generated $8.75 billion of new insurance written (“NIW”) during the 2016 third quarter, of which approximately 79% was from banks and other non-credit union mortgage originators. NIW represents the original principal balance of all loans that received coverage during the period.

~~The following tables provide details on the NIW generated by Arch MI U.S. for the last two quarters by credit quality and loan-to-value (“LTV”):~~

(U.S. Dollars in millions) Three Months Ended
September 30, 2016 June 30, 2016
Amount % Amount %
Total new insurance written (NIW) $ 8,753
$ 6,420

Total NIW by credit quality (FICO score):
>=740 $ 5,187
59.3
$ 3,950
61.5
680-739 3,074
35.1
2,162
33.7
620-679 492
5.6
307
4.8
<620 —
—
1
—
  Total $ 8,753
100.0
$ 6,420
100.0

Total NIW by LTV:
95.01% and above $ 507
5.8
$ 551
8.6
90.01% to 95.00% 4,261
48.7
2,983
46.5
85.01% to 90.00% 2,883
32.9
2,078
32.4
85.01% and below 1,102
12.6
808
12.6
  Total $ 8,753
100.0
$ 6,420
100.0

Total NIW purchase vs. refinance:
Purchase $ 7,264
83.0
$ 5,309
82.7
Refinance 1,489
17.0
1,111
17.3
  Total $ 8,753
100.0
$ 6,420
100.0



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The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at the end of the last two quarters:


(U.S. Dollars in millions)	September 30, 2016			June 30, 2016			March 31, 2017			December 31, 2016
(U.S. Dollars in millions)	Amount		%	Amount		%	Amount		%	Amount		%
Insurance In Force (IIF) (1):
U.S. mortgage insurance	$	40,258	34.7	$	33,367	30.7
U.S. primary mortgage insurance							$	237,769	73.1	$	234,518	74.3
Mortgage reinsurance	22,071		19.0	22,242		20.5	25,846		7.9	24,315		7.7
Other (3)	53,826		46.3	52,926		48.8
Other (2)							61,596		18.9	56,776		18.0
Total	$	116,155	100.0	$	108,535	100.0	$	325,211	100.0	$	315,609	100.0

Risk In Force (RIF) (2):
U.S. mortgage insurance	$	10,168	68.6	$	8,396	64.8
Risk In Force (RIF) (3):
U.S. primary mortgage insurance							$	60,591	92.5	$	59,712	92.7
Mortgage reinsurance	2,557		17.2	2,567		19.8	2,494		3.8	2,489		3.9
Other (3)	2,104		14.2	1,993		15.4
Other (2)							2,409		3.7	2,242		3.5
Total	$	14,829	100.0	$	12,956	100.0	$	65,494	100.0	$	64,443	100.0

Ending number of policies in force	199,661			172,666


(1)	Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance.


(2)	Includes GSE credit risk-sharing transactions and international insurance business.


(3)	Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for credit risk-sharing or reinsurance transactions.



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The insurance in force and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at March 31, 2017:



(U.S. Dollars in millions)	IIF			RIF			Delinquency
(U.S. Dollars in millions)	Amount		%	Amount		%	Rate (1)
Policy year:
2007 and prior	$	24,317	10.2	$	5,568	9.2	10.70	%
2008	6,503		2.7	1,603		2.6	7.11	%
2009	1,556		0.7	368		0.6	2.37	%
2010	1,641		0.7	440		0.7	1.71	%
2011	4,780		2.0	1,304		2.2	1.10	%
2012	16,367		6.9	4,464		7.4	0.62	%
2013	26,639		11.2	7,202		11.9	0.68	%
2014	27,507		11.6	7,286		12.0	0.66	%
2015	48,717		20.5	12,413		20.5	0.34	%
2016	67,162		28.2	16,803		27.7	0.13	%
2017	12,580		5.3	3,140		5.2	0.01	%
Total	$	237,769	100.0	$	60,591	100.0	2.25	%


~~(3)~~(1)	~~Includes GSE credit risk-sharing products and international insurance business.~~Represents the ending percentage of loans in default.

The following tables provide supplemental disclosures on risk in force for our ~~mortgage segment’s~~ U.S. primary mortgage insurance ~~operations related to RIF~~business at the end of the last two quarters:


(U.S. Dollars in millions)	September 30, 2016				June 30, 2016				March 31, 2017				December 31, 2016
(U.S. Dollars in millions)	Amount			%	Amount			%	Amount			%	Amount			%
Total RIF by credit quality (FICO):
Credit quality (FICO):
>=740	$	5,817		57.2	$	4,766		56.8	$	35,396		58.4	$	34,867		58.4
680-739	3,425			33.7	2,779			33.1	19,343			31.9	18,976			31.8
620-679	834			8.2	753			9.0	5,065			8.4	5,050			8.5
<620	92			0.9	98			1.2	787			1.3	819			1.4
Total	$	10,168		100.0	$	8,396		100.0	$	60,591		100.0	$	59,712		100.0
Weighted average FICO score	742				741				743				743

Total RIF by LTV:
Loan-to-value (LTV):
95.01% and above	$	1,221		12.0	$	1,135		13.5	$	5,808		9.6	$	5,781		9.7
90.01% to 95.00%	5,430			53.4	4,379			52.2	33,617			55.5	32,986			55.2
85.01% to 90.00%	2,982			29.3	2,438			29.0	18,346			30.3	18,140			30.4
85.00% and below	535			5.3	444			5.3	2,820			4.7	2,805			4.7
Total	$	10,168		100.0	$	8,396		100.0	$	60,591		100.0	$	59,712		100.0
Weighted average LTV	92.9		%		92.9		%		92.9		%		92.9		%

Total RIF, net of external reinsurance									$	43,606			$	42,183


(U.S. Dollars in millions)	September 30, 2016				June 30, 2016				March 31, 2017			December 31, 2016
(U.S. Dollars in millions)	Amount			%	Amount			%	Amount		%	Amount		%
Total RIF by State:
Texas									$	4,995	8.2	$	4,961	8.3
California	$	865		8.5	$	727		8.7	3,333		5.5	3,222		5.4
Wisconsin	661			6.5	620			7.4
Texas	583			5.7	469			5.6
Virginia									2,625		4.3	2,586		4.3
Florida	544			5.4	422			5.0	2,467		4.1	2,367		4.0
Massachusetts	434			4.3	330			3.9
Washington									2,313		3.8	2,331		3.9
North Carolina									2,278		3.8	2,245		3.8
Georgia									2,153		3.6	2,111		3.5
Illinois									2,109		3.5	2,090		3.5
Maryland									2,107		3.5	2,080		3.5
Minnesota	388			3.8	351			4.2	2,003		3.3	1,986		3.3
Virginia	377			3.7	300			3.6
Illinois	348			3.4	279			3.3
Ohio	312			3.1	260			3.1
Washington	302			3.0	279			3.3
Others	5,354			52.7	4,359			51.9	34,208		56.5	33,733		56.5
Total	$	10,168		100.0	$	8,396		100.0	$	60,591	100.0	$	59,712	100.0

Coverage ratio (1)	25.3		%		25.2		%
Analysts’ persistency (2)	75.4		%		75.6		%
Risk-to-capital ratio (3)	15.4:1				12.4:1


~~(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 Arch MI U.S. only (estimate for September 30, 2016).~~

The following table provides supplemental disclosures for our ~~mortgage segment’s~~ U.S. primary mortgage insurance ~~operations~~business related to insured loans and loss ~~metrics for the last two quarters:~~metrics:


(U.S. Dollars in thousands, except loan count)	Three Months Ended
	September 30, 2016			June 30, 2016
(U.S. Dollars in thousands, except policy, loan and claim count)							Three Months Ended
							March 31, 2017			December 31, 2016
Roll-forward of insured loans in default:
Beginning delinquent number of loans	2,245			2,325			29,691			2,423
New notices	1,251			1,033			9,863			1,161
Cures	(925		)	(919		)	(11,707		)	(1,028		)
Paid claims	(151		)	(193		)	(1,613		)	(153		)
Delinquent rescissions and denials	3			(1		)
Acquired delinquent loans							—			27,288
Ending delinquent number of loans(1)	2,423			2,245			26,234			29,691

Ending percentage of loans in default	1.2		%	1.3		%
Ending number of policies in force (1)							1,164,929			1,153,630

Delinquency rate (1)							2.25		%	2.57		%

Losses:
Number of claims paid	151			193			1,613			153
Total paid claims	$	5,513		$	7,744		$	70,784		$	6,080
Average per claim	$	36.5		$	40.1		$	43.9		$	39.7
Severity (1)	90.4		%	94.8		%
Average reserve per default (in thousands)	$	25.2		$	27.8
Severity (2)							102.0		%	92.3		%
Average reserve per default (in thousands) (1)							$	20.4		$	20.5


(1)	Includes first lien primary and pool policies.


(2)	Represents total paid claims divided by RIF of loans for which claims were paid.

The risk-to-capital ratio, which represents total current (non-delinquent) risk in force, net of reinsurance, divided by total statutory capital, for Arch MI U.S. was approximately 12.4 to 1 at March 31, 2017, compared to 12.4 to 1 at December 31, 2016.

Shareholders’ Equity and Book Value per ~~Common~~ Share

Total shareholders’ equity available to Arch was ~~$7.35~~$8.61 billion at ~~September 30, 2016,~~March 31, 2017, compared to ~~$6.20~~$8.25 billion at December 31, ~~2015.~~2016. The increase was primarily attributable to net income, reflecting contributions from both underwriting and investing activities.



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The following table presents the calculation of book value per ~~common~~ share:


(U.S. dollars in thousands, except share data)	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Total shareholders’ equity available to Arch	$	7,352,322	$	6,204,881	$	8,605,844	$	8,253,718
Less preferred shareholders’ equity	775,000		325,000		772,555		772,555
Common shareholders’ equity available to Arch	$	6,577,322	$	5,879,881	$	7,833,289	$	7,481,163
Common shares outstanding, net of treasury shares (1)	122,675,197		122,627,783
Book value per common share	$	53.62	$	47.95
Common shares and common share equivalents outstanding, net of treasury shares (1)					135,790,306		135,550,337
Book value per share					$	57.69	$	55.19


(1)	Excludes the effects of ~~7,018,749~~6,664,166 and ~~7,482,462~~6,872,494 stock options and ~~404,754~~375,687 and ~~413,364~~381,461 restricted stock units outstanding at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively.

Liquidity and Capital Resources

~~We have~~Refer to the ‘Liquidity and Capital Resources’ section contained in Item 7 of our 2016 Form 10-K for a general discussion of our liquidity and capital resources. This section does not ~~included~~include information specific to Watford ~~Re in the following section as we~~Re. We do not guarantee or provide credit support for Watford Re, and our financial exposure to Watford Re is limited to our investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance ~~transactions.~~transactions with Watford Re.

~~ACGL is a holding company whose assets primarily consist~~The following table provided an analysis of the shares in its subsidiaries. Generally, ACGL depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to the non-cumulative preferred shares and common shares. ACGL’s readily available cash, short-term investments and marketable securities, excluding amounts held by our ~~regulated insurance and reinsurance subsidiaries, totaled $438.9 million at September 30, 2016, compared to $6.9 million at December 31, 2015.~~ capital structure:



(U.S. dollars in thousands, except share data)	March 31, 2017		December 31, 2016
Debt:
ACGL senior notes, due May 2034	$	296,979	$	296,957
Arch-U.S. senior notes, due Nov 2043 (1)	494,548		494,525
ACF senior notes, due Dec 2026 (2)	495,778		495,689
ACF senior notes, due Dec 2046 (2)	445,105		445,087
Revolving credit agreement borrowings due Oct 2021	500,000		500,000
Total	$	2,232,410	$	2,232,258

Shareholders’ equity available to Arch:
Series C non-cumulative preferred shares	$	322,555	$	322,555
Series E non-cumulative preferred shares	450,000		450,000
Common shareholders’ equity	7,833,289		7,481,163
Total	$	8,605,844	$	8,253,718

Total capital available to Arch	$	10,838,254	$	10,485,976

Debt to total capital (%)	20.6		21.3
Debt and prefered to total capital (%)	27.7		28.7


(1)	Issued by Arch Capital Group (U.S.) Inc., a wholly owned subsidiary of ACGL, and fully and unconditionally guaranteed by ACGL.


(2)	Issued by Arch Capital Finance LLC (“ACF”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by ACGL.

For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, ACGL received dividends of ~~$142.0~~$30.1 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda-based reinsurer and ~~insurer.~~

The ability of our regulated insurance and reinsurance subsidiaries to pay dividends or make distributions or other payments to us is dependent on their ability to meet applicable regulatory standards. Under Bermuda law, Arch Re Bermuda is required to maintain statutory capital (i.e., the amount byinsurer, which the value of its statutory assets exceed its statutory liabilities) equal to or in excess of its minimum solvency margin equal to the greatest of (1) $100.0 million, (2) 50% of net premiums written (being gross premiums written less any premiums ceded by Arch Re Bermuda, but Arch Re Bermuda may not deduct more than 25% of gross premiums when computing net premiums written), (3) 15% of net aggregated losses and loss expense provisions and other insurance reserves and (4) 25% of its enhanced capital requirement (“ECR”) as reported at the end of the relevant year. Arch Re Bermuda is prohibited from declaring or paying any dividends during any financial year if it is not in

compliance with its ECR, minimum solvency margin or minimum liquidity ratio. In addition, 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 (“BMA”) an affidavit stating that it will continue to meet the required margins. In addition, Arch Re Bermuda is prohibited, without prior approval of the BMA, from reducing by 15% or more its total statutory capital, as set out in its previous year’s statutory financial statements. As a Class 4 insurer, Arch Re Bermuda is required to maintain available statutory capital and surplus pertaining to its general business at a level equal to or in excess of its ECR which is established by reference to either the BSCR model (“BSCR”) or an approved internal capital model. At December 31, 2015, as determined under Bermuda law, Arch Re Bermuda had statutory capital of $2.45 billion ($2.40 billion at December 31, 2014) and statutory capital and surplus of $5.43 billion ($5.42 billion at December 31, 2014), which amounts were in compliance with Arch Re Bermuda’s ECR at such date. Such amounts include ownership interests in U.S. insurance and reinsurance subsidiaries. Accordingly, Arch Re Bermuda can pay approximately ~~$1.22~~$1.94 billion to ACGL during the remainder of ~~2016~~2017 without providing an affidavit to the BMA, as discussed above. Under BMA guidelines, the value of the assets of our insurance group (i.e., the group of companies that conducts exclusively, or mainly, insurance business) must exceed the amount of the group’s liabilities by the aggregate minimum margin of solvency of each qualifying member of the group (the “Group MSM”Bermuda Monetary Authority (“BMA”). A member is a qualifying member of the insurance group if it is subject to solvency requirements in the jurisdiction in which it is registered. We were in compliance with the Group MSM at December 31, 2015.

Our U.S. insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. The ability of our 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 Capital Group (U.S.) Inc. (“Arch-U.S.”), a subsidiary of ACGL. For the nine months ended September 30, 2016, Arch-U.S. received dividends of $25 million from Arch Re U.S. Arch Re U.S. can declare a maximum of approximately $95 million of dividends during the remainder of 2016 subject to the approval of the Commissioner of the Delaware Department of Insurance (“Commissioner”).

In addition, ~~with respect~~Arch MI U.S. is required to dividends in excess of the $95 million (extraordinary dividend), no payment can be made until (1) 30 days after the Commissioner has received notice of the declaration thereof and has not within such period disapproved such



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payment; or (2) the Commissioner shall have 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.

~~In April 2015,~~maintain compliance with the GSEs ~~published comprehensive, revised~~ requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The PMIERs became effective December 31, 2015 and apply to Arch MI U.S., which is a GSE-approved mortgage insurer. They do not apply to Arch Mortgage Guaranty Company, which insures mortgages that are not intended to be sold to the GSEs, and it is therefore not approved by either GSE asfinancial requirements require an eligible mortgage ~~insurer. In addition to extensive requirements relating to~~insurer’s available assets, which generally include only the ~~operation~~most liquid assets of our mortgage insurance business, the PMIERs include revised financial requirements for mortgage insurers. No later than March 1, 2016, mortgage insurers were required to certify to the GSEs that they meet all of the requirements of the PMIERs or identify specific requirements that they do not meet. If a mortgagean insurer, ~~is unable~~ to meet or exceed “minimum required assets” as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the ~~financial requirements~~delinquency status of ~~the PMIERs, it was required to submit by March 31, 2016 a transition plan to the GSEs for their review~~non-performing loans) and ~~approval. Mortgage insurers that have not met the financial requirements of the PMIERs by June 30, 2017 will be~~are subject to ~~remediation actions by the GSEs.~~

The amount of assets required to satisfy the revised financial requirements of the PMIERs at any point in time will be affected by many factors, including macro-economic conditions, the size and composition of Arch MI U.S.’s mortgage insurance portfolio at the point in time, and the amount of risk ceded to reinsurers that may be deducted by Arch MI U.S. in its calculation of “minimum required assets.”a minimum amount. Arch MI U.S. satisfied the PMIERs’ financial requirements as of ~~September 30, 2016. Under the PMIERs, Arch MI U.S. is deemed to be a “newly-approved insurer.” As a result~~March 31, 2017 with an estimated PMIER sufficiency ratio of this status, until January 2017, Arch MI U.S. is subject to additional PMIER requirements, including that Arch MI U.S. is prohibited from paying dividends to affiliates or making any investment, contribution or loan to any affiliate.

In addition to meeting applicable regulatory standards, the ability of our insurance and reinsurance subsidiaries to pay dividends to intermediate parent companies owned by Arch Re Bermuda is also constrained by our dependence on the financial strength ratings of our insurance and reinsurance subsidiaries from independent rating agencies. The ratings from these agencies depend to a large extent on the capitalization levels of our insurance and reinsurance subsidiaries. We believe that ACGL has sufficient cash resources and available dividend capacity to service its indebtedness and other current outstanding obligations.

~~Our insurance and reinsurance subsidiaries are required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support their~~

operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. Our 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. At September 30, 2016 and December 31, 2015, such amounts approximated $5.65 billion and $5.20 billion, respectively, excluding amounts related to the ‘other’ segment.

Our non-U.S. operations account for a significant percentage of our net premiums written. In general, the business written by our non-U.S. operations, which is heavily weighted towards reinsurance business, has been more profitable than the business written in our U.S. operations, which is weighted more towards insurance business. In general, our reinsurance segment has operated at a higher margin than our insurance segment, which is due to prevailing market conditions and the mix and type of business written. Historically, the most profitable line of business has been catastrophe-exposed property reinsurance, which is written primarily in our non-U.S. operations. Additionally, a significant component of our pre-tax income is generated through our investment performance. We hold a substantial amount of our investable assets in our non-U.S. operations and, accordingly, a large portion of our investment income is produced in our non-U.S. operations. In addition, ACGL, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements beneficial to the ratings of such subsidiaries. Our U.S.-based insurance and reinsurance groups enter into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business. For the 2015 calendar year, the U.S. groups ceded business to Arch Re Bermuda at an aggregate net cession rate (~~i.e., net of third party reinsurance) of approximately 53%~~122%, compared to 53% for 2014. All of the above factors have resulted in the non-U.S. group providing a higher contribution to our overall pre-tax income in the current period than the percentage of net premiums written would indicate.116% at December 31, 2016.

Except as described in the above paragraph, or where express reinsurance, guarantee or other financial support contractual arrangements are in place, each of ACGL’s subsidiaries or affiliates is solely responsible for its own liabilities and commitments (and no other ACGL subsidiary or affiliate is so responsible). Any reinsurance arrangements, guarantees or other financial support contractual arrangements that are in place are solely for the benefit of the ACGL subsidiary or affiliate involved and third parties (creditors or insureds of such entity) are not express beneficiaries of such arrangements.



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The following table summarizes our cash flows from operating, investing and financing activities, excluding amounts related to the ‘other’ segment (i.e., Watford Re). See Note 3, “Variable Interest Entities,” for cash flows related to Watford Re.


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2016			2015			2017			2016
Total cash provided by (used for):
Operating activities	$	831,086		$	606,607		$	146,194		$	257,279
Investing activities	(1,131,150		)	(146,219		)	(61,334		)	(189,559		)
Financing activities	372,393			(402,406		)	(198,961		)	(35,664		)
Effects of exchange rate changes on foreign currency cash	(5,322		)	(7,773		)	2,240			2,199
Increase (decrease) in cash	$	67,007		$	50,209		$	(111,861	)	$	34,255

•Cash provided by operating activities for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 was ~~higher~~lower than in the ~~2015~~2016 period, primarily reflecting alower premiums collected and higher ~~level of premiums collected. The 2015 period also reflected a higher level of outflows related to the Company’s mortgage operations.~~retrocessional activity.

•Cash used for investing activities for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 was ~~higher~~lower than in the 2015 period. Activity for the 2016 period reflected higher net purchases of investments than in the 2015 period, reflecting the investment of operating cash flows and proceeds from our preferred share offering. Cash flows also reflect a lower level of repurchases under our share repurchase program in the 2016 period, ~~than~~reflecting changes in ~~the 2015 period.~~

•~~Cash provided by financing activities~~cash collateral related to securities lending. In addition, activity for the ~~nine months ended September 30, 2016 was~~2017 period reflected higher than in the 2015 period, primarily reflecting the issuance of preferred shares in September 2016 ($434.9 million of net proceeds) and a lower level of repurchases under our share repurchase program in the 2016 period. We repurchased $75.3 million of our common shares in the 2016 period, compared to $365.4 million in the 2015 period.

Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. Sources of liquidity include cash flows from operations, financing arrangements or routine sales of investments.

As part of our investment strategy, we seek to establish a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed by us to be adequate to meet our foreseeable payment obligations. However, due to the nature of our operations, cash flows are affected by claim payments that may comprise large payments on a limited number of claims and which can fluctuate from year to year. We believe that our liquid investments and cash flow will provide us with sufficient liquidity in order to meet our claim payment obligations. However, the timing and amounts of actual claim

payments related to recorded Loss Reserves vary based on many factors, including large individual losses, changes in the legal environment, as well as general market conditions. The ultimate amount of the claim payments could differ materially from our estimated amounts. Certain lines of business written by us, such as excess casualty, have loss experience characterized as low frequency and high severity. The foregoing may result in significant variability in loss payment patterns. The impact of this variability can be exacerbated by the fact that the timing of the receipt of reinsurance recoverables owed to us may be slower than anticipated by us. Therefore, the irregular timing of claim payments can create significant variations in cash flows from operations between periods and may require us to utilize other sources of liquidity to make these payments, which may include the sale of investments or utilization of existing or new credit facilities or capital market transactions. If the source of liquidity is the sale of investments, we may be forced to sell such investments at a loss, which may be material.

Our investments in certain securities, including certain fixed income and structured securities, investments in funds accounted for using the equity method, other alternative investments and investments in ventures such as Watford Re and others may be illiquid due to contractual provisions or investment market conditions. If we require significant amounts of cash on short notice in excess of anticipated cash requirements, then we may have difficulty selling these investments in a timely manner or may be forced to sell or terminate them at unfavorable values. Our unfunded investment commitments totaled approximately $1.34 billion at September 30, 2016 .

At September 30, 2016, our investable assets were $16.04 billion (excluding the $1.84 billion of investable assets related to the ‘other’ segment). The primary goals of our asset liability management process are to satisfy the insurance liabilities, manage the interest rate risk embedded in those insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows, including debt service obligations. Generally, the expected principal and interest payments produced by our fixed income portfolio adequately fund the estimated runoff of our insurance reserves. Although this is not an exact cash flow match in each period, the substantial degree by which the fair value of the fixed income portfolio exceeds the expected present value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, provide assurance of our ability to fund the payment of claims and to service our outstanding debt without having to sell securities at distressed prices or access credit facilities.

Changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, could have a material adverse effect on financial markets and economic conditions in the U.S. and throughout the world.



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~~In turn, this could have a material adverse effect on our business, financial condition and results~~net purchases of ~~operations and,~~investments than in ~~particular, this could have a material adverse effect on~~ the ~~value and liquidity~~2016 period, including re-balancing of the UGC portfolio.

•Cash used for financing activities for the three months ended March 31, 2017 was higher than in the 2016 period, reflecting changes in cash collateral related to securities ~~in our investment portfolio. Our investment portfolio as of September 30,~~lending. Activity for the 2016 ~~included $211.8~~period reflected $75.3 million of ~~securities issued and/or guaranteed by Eurozone governments at fair value, $3.01~~repurchases under our share repurchase program.

At March 31, 2017, our investable assets were $18.83 billion (excluding the $1.90 billion of ~~obligations of~~investable assets related to the ~~U.S. government and government agencies~~‘other’ segment). Our unfunded investment commitments totaled approximately $1.45 billion at ~~fair value and $1.89 billion of municipal bonds at fair value.~~March 31, 2017. Please refer to Item 1A “Risk Factors” of our ~~2015~~2016 Form 10-K for a discussion of other risks relating to our business and investment portfolio.

On August 15, 2016, we entered into a Stock Purchase Agreement with AIG pursuant to which, upon the terms and subject to the conditions thereof, ACGL agreed to purchase from AIG all of the issued and outstanding shares of capital stock of UGC. As consideration in the UGC Acquisition, ACGL will pay to AIG aggregate consideration of approximately $3.43 billion (using the ACGL closing share price as of October 27, 2016), consisting of the following: (i) cash consideration of approximately $2.20 billion; (ii) a number of shares of ACGL’s convertible non-voting common-equivalent preference shares which are subject to a formula and a collar and an estimated fair value (using the ACGL closing share price as of October 27, 2016 of $77.03 per share) of approximately $983.1 million, subject to adjustment and subject to certain restrictions on transfer within the first 18 months; and (iii) an additional amount (or if such amount is negative $0) in cash equal to $250.0 million less the Company Dividend Amount (as defined below), if any, less the value of Perpetual Preferred Shares (as defined below) issued to AIG, if any. The Stock Purchase Agreement entitles AIG to take dividends or other distributions from UGC in an amount not to exceed $250.0 million between the signing of the Stock Purchase Agreement and the closing date of the UGC Acquisition. If such event does not occur, ACGL will pay an additional amount in cash equal to $250 million, less the value of certain depositary shares issued to AIG, if any.

The closing of the UGC Acquisition is targeted to occur late in the 2016 fourth quarter. The Stock Purchase Agreement may be terminated under certain circumstances, including: (i) the parties’ mutual agreement; (ii) by either ACGL or AIG, if the closing has not occurred on or before March 31, 2017, subject to an extension at the request of either party of up to three months for the receipt of certain approvals (such date, as may be extended, the “Outside Date”); (iii) by either ACGL or AIG, in the event of the issuance of a final, non-appealable governmental order restraining or prohibiting the consummation of the transaction contemplated by the Stock Purchase Agreement or in the event that any law has been enacted, promulgated or issued by any governmental authority that restrains, enjoins or prohibits the transaction contemplated by the Stock Purchase Agreement or that would render the consummation of such transaction illegal; or (iv) the non-terminating party’s material uncured breach of the Stock Purchase Agreement. In the event that either ACGL or

AIG terminates the Stock Purchase Agreement due to a failure to obtain the necessary regulatory approvals on or before the Outside Date and specified ACGL conditions to closing are otherwise satisfied, ACGL will pay a termination fee of $150.0 million to AIG.

On September 29, 2016, ACGL completed a $450.0 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). Except in specified circumstances relating to certain tax or corporate events, the Series E Preferred Shares are not redeemable prior to September 29, 2021. We intend to use the net proceeds from the offering of $434.9 million to fund a portion of the UGC Acquisition, to pay related costs and expenses and for general corporate purposes.

On October 26, 2016, ACGL and certain of its subsidiaries amended the existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $350.0 million secured facility for letters of credit and $500.0 million unsecured facility for revolving loans and letters of credit. Obligations of each borrower under the secured facility for letters of credit are secured by cash and eligible securities of such borrower held in collateral accounts. ACGL has a one-time option to convert any or all outstanding revolving loans of ACGL and/or Arch-U.S. to term loans with the same terms as the revolving loans except that any prepayments may not be reborrowed. Arch-U.S. guarantees the obligations of ACGL, and ACGL guarantees the obligations of Arch-U.S.

In connection with the UGC Acquisition, we entered into the Bridge Credit Agreement, which provides for commitments by the lenders thereunder to provide up to $1.375 billion of term loans (the “Bridge Loans”) to fund a portion of the cash consideration portion required in the UGC Acquisition and to pay related fees and expenses. The Bridge Loans, if funded, will mature on the date that is 364 days after funding.

~~The Bridge Credit Agreement contains financial covenants that require ACGL to maintain a minimum consolidated~~



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tangible net worth and a maximum ratio of total consolidated debt to the sum of total consolidated debt plus consolidated net worth. The Bridge Credit Agreement also includes customary affirmative covenants, negative covenants and events of default. These provisions are generally consistent with those in ACGL’s existing revolving credit agreement.

Commitments under the Bridge Credit Agreement (or, to the extent funded, Bridge Loans) will be subject to mandatory reduction (or, in the case of Bridge Loans, mandatory prepayment), by an amount equal to the net cash proceeds of certain debt incurrences, equity issuances and asset sales. The outstanding commitments under the Bridge Credit Agreement were $938.5 million at September 30, 2016, reflecting the preferred offering discussed above.

To provide funding for the $2.20 billion cash consideration portion of the UGC Acquisition, we expect to sell certain investments, use the net proceeds from the September 2016 preferred share offering and utilize the unsecured revolving loan facility under the Amended Credit Agreement. In addition, we anticipate that we raise additional capital before closing, further reducing the need to use the Bridge Credit Agreement. We can provide no assurance that we will be able to obtain the required funds through financing and may be required to utilize the Bridge Credit Agreement.

Pursuant to our January 2014 acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies (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 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). We currently expect that the maximum amount will be paid over the earn-out period and that the first payment, due in April 2017, will be approximately $70 million. To the extent that the adjusted book value of the CMG Entities drops below the cumulative amount paid by us, no additional payments would be due.

We expect that our liquidity needs, ~~excluding the UGC Acquisition noted above,~~ including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, at a minimum, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.

In addition, we monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by several ratings agencies, at a level considered necessary by management to enable our key operating subsidiaries to compete; (2) sufficient capital to enable our underwriting subsidiaries to meet the capital adequacy tests performed by statutory agencies in the U.S. and other key markets; and (3) our non-U.S. operating companies are required to post letters of credit and other forms of collateral that are necessary for them to operate as they are “non-admitted” under U.S. state insurance regulations.

As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our shareholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of our board of directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements and such other factors as our board of directors deems relevant.

The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Since the inception of the share repurchase program through September 30, 2016, ACGL has repurchased 125.2 million common shares for an aggregate purchase price of $3.68 billion. At September 30, 2016, approximately $446.5 million of share repurchases were available under the program. Repurchases under this authorization may be effected from time to time in open market or privately negotiated transactions. 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. We will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, we will consider share repurchases on an opportunistic basis.

To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. We can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all. Adverse developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result in realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial



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~~position and our businesses, and may also limit our access to capital required to operate our business.~~

If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our operating subsidiaries, which could place those operating subsidiaries at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our operating subsidiaries are able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of bank credit and letters of credit. In addition, under certain of the reinsurance agreements assumed by our reinsurance operations, upon the occurrence of a ratings downgrade or other specified triggering event with respect to our reinsurance operations, such as a reduction in surplus by specified amounts during specified periods, our ceding company clients may be provided with certain rights, including, among other things, the right to terminate the subject reinsurance agreement and/or to require that our reinsurance operations post additional collateral.

In addition to common share capital, we depend on external sources of finance to support our underwriting activities, which can be in the form (or any combination) of debt securities, preference shares, common equity and bank credit facilities providing loans and/or letters of credit. As noted above, equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities.

In March 2015, ACGL and Arch-U.S. filed a universal shelf registration statement with the SEC. This registration statement allows for the possible future offer and sale by us of various types of securities, including unsecured debt securities, preference shares, common shares, warrants, share purchase contracts and units and depositary shares. The shelf registration statement enables us to efficiently access the public debt and/or equity capital markets in order to meet our future capital needs. The shelf registration statement also allows selling shareholders to resell common shares that they own in one or more offerings from time to time. We will not receive any proceeds from any shares offered by the selling shareholders. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

~~At September 30, 2016, total capital available to Arch of $8.24 billion consisted of $791.4 million of senior notes, representing 9.6% of the total, $100.0 million of revolving~~

credit agreement borrowings due in June 2019, representing 1.2% of the total, $775.0 million of preferred shares, representing 9.4% of the total, and common shareholders’ equity of $6.58 billion, representing 79.8% of the total. At December 31, 2015, total capital available to Arch of $7.10 billion consisted of $791.3 million of senior notes, representing 11.2% of the total, $100.0 million of revolving credit agreement borrowings, representing 1.4% of the total, $325.0 million of preferred shares, representing 4.6% of the total, and common shareholders’ equity of $5.88 billion, representing 82.9% of the total.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our ~~2015~~2016 Form ~~10-K, as updated in “Liquidity and Capital Resources” to reflect our Amended Credit Agreement and the UGC Acquisition and related Bridge Loan Facility.~~10-K.

Market Sensitive Instruments and Risk Management

In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of ~~September 30, 2016.~~March 31, 2017. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. We have not included Watford Re in the following analyses as we do not guarantee or provide credit support for Watford Re, and our financial exposure to Watford Re is limited to our investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.

An analysis of material changes in market risk exposures at ~~September 30, 2016~~March 31, 2017 that affect the quantitative and qualitative disclosures presented in our ~~2015~~2016 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management”) were as follows:

Investment Market Risk

Fixed Income ~~Securities~~

Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of

interest rate movements on the fair value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments which invest in fixed income securities and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our interest rate sensitive securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Accordingly, the actual



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effect of interest rate movements may differ materially from the amounts set forth in the following tables.

The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our fixed income securities:


(U.S. dollars in billions)	Interest Rate Shift in Basis Points														Interest Rate Shift in Basis Points
(U.S. dollars in billions)	-100			-50			—		+50			+100			-100			-50			—		+50			+100
Sep. 30, 2016
Mar. 31, 2017
Total fair value	$	15.44		$	15.21		$	14.97	$	14.71		$	14.47		$	18.31		$	17.99		$	17.69	$	17.41		$	17.12
Change from base	3.15		%	1.60		%			(1.74		)%	(3.36		)%	3.50		%	1.70		%			(1.60		)%	(3.20		)%
Change in unrealized value	$	0.47		$	0.24				$	(0.26	)	$	(0.50	)	$	0.62		$	0.30				$	(0.28	)	$	(0.57	)

Dec. 31, 2015
Dec. 31, 2016
Total fair value	$	14.04		$	13.80		$	13.57	$	13.34		$	13.12		$	17.95		$	17.62		$	17.31	$	17.00		$	16.70
Change from base	3.44		%	1.70		%			(1.69		)%	(3.32		)%	3.70		%	1.80		%			(1.80		)%	(3.50		)%
Change in unrealized value	$	0.47		$	0.23				$	(0.23	)	$	(0.45	)	$	0.64		$	0.31				$	(0.31	)	$	(0.61	)

In addition, we consider the effect of credit spread movements on the fair value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments and investment funds accounted for using the equity method which invest in fixed income securities and the corresponding change in unrealized appreciation. As credit spreads widen, the fair value of our fixed income securities falls, and the converse is also true.

The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on our fixed income securities:


(U.S. dollars in billions)	Credit Spread Shift in Basis Points														Credit Spread Shift in Percentage Points
(U.S. dollars in billions)	-100			-50			—		+50			+100			-100			-50			—		+50			+100
Sep. 30, 2016
Mar. 31, 2017
Total fair value	$	15.33		$	15.15		$	14.97	$	14.79		$	14.61		$	18.15		$	17.92		$	17.69	$	17.46		$	17.23
Change from base	2.39		%	1.20		%			(1.20		)%	(2.39		)%	2.60		%	1.30		%			(1.30		)%	(2.60		)%
Change in unrealized value	$	0.36		$	0.18				$	(0.18	)	$	(0.36	)	$	0.46		$	0.23				$	(0.23	)	$	(0.46	)

Dec. 31, 2015
Dec. 31, 2016
Total fair value	$	13.97		$	13.77		$	13.57	$	13.37		$	13.17		$	17.79		$	17.55		$	17.31	$	17.07		$	16.83
Change from base	2.97		%	1.48		%			(1.48		)%	(2.97		)%	2.80		%	1.40		%			(1.40		)%	(2.80		)%
Change in unrealized value	$	0.40		$	0.20				$	(0.20	)	$	(0.40	)	$	0.48		$	0.24				$	(0.24	)	$	(0.48	)

Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR attempts to take into account a broad cross-section of risks facing a portfolio by utilizing relevant securities volatility data skewed towards the most recent



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months and quarters. VaR measures the amount of a portfolio at risk for outcomes 1.65 standard deviations from the mean based on normal market conditions over a one year time horizon and is expressed as a percentage of the portfolio’s initial value. In other words, 95% of the time, should the risks taken into account in the VaR model perform per their historical tendencies, the portfolio’s loss in any one year period is expected to be less than or equal to the

calculated VaR, stated as a percentage of the measured portfolio’s initial value. As of ~~September 30, 2016,~~March 31, 2017, our portfolio’s VaR was estimated to be ~~3.34%, or $500.0 million,~~3.78% compared to an estimated ~~3.01%, or $408.5 million,~~3.75% at December 31, ~~2015.~~2016.

~~Certain Other Investments and~~ Equity ~~Securities~~

~~Our investment portfolio includes certain other investments which do not invest in fixed income securities along with equity holdings.~~Securities. At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the fair value of ~~such~~our investments in equity securities totaled ~~$560.9~~$486.4 million and ~~$630.0~~$558.0 million, respectively. These investments are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately ~~$56.1~~$48.6 million and ~~$63.0~~$55.8 million at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively, and would have decreased book value per common share by approximately ~~$0.46~~$0.36 and ~~$0.51,~~$0.41, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately ~~$56.1~~$48.6 million and ~~$63.0~~$55.8 million at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively, and would have increased book value per common share by approximately ~~$0.46~~$0.36 and ~~$0.51,~~$0.41, respectively.

Investment-Related ~~Derivatives~~

Derivatives. At ~~September 30, 2016,~~March 31, 2017, the notional value of all derivative instruments (excluding to-be-announced mortgage backed securities which are included in the fixed income securities analysis above and foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was ~~$2.29~~$3.30 billion, compared to ~~$2.81~~$2.12 billion at December 31, ~~2015.~~2016. If the underlying exposure of each investment-related derivative held at ~~September 30, 2016~~March 31, 2017 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately ~~$22.9~~$33.0 million, and a decrease in book value per common share of approximately ~~$0.19~~$0.24 per share, compared to ~~$28.1~~$21.2 million and ~~$0.23~~$0.16 per share, respectively, on investment-related derivatives held at December 31, ~~2015.~~2016. If the underlying exposure of each investment-related derivative held at ~~September 30, 2016~~March 31, 2017 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately ~~$22.9~~$33.0 million, and an increase in book value per common share of approximately ~~$0.19~~$0.24 per share, compared to ~~$28.1~~$21.2 million and ~~$0.23~~$0.16 per share, respectively, on investment-related derivatives held at December 31, ~~2015.~~2016. See note 8,9, “Derivative Instruments,” of the notes accompanying our consolidated financial statements for additional disclosures concerning derivatives.

~~For further discussion on investment activity, please refer to “—Financial Condition, Liquidity and Capital Resources—Financial Condition—Investable Assets.”~~



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Foreign Currency Exchange Risk

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than the U.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance ~~liabilities. We may~~liabilities and also utilize foreign currency forward contracts and currency options as part of our investment strategy. ~~See~~From time to time, we may elect to over or underweight one or more currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility of our shareholders’ equity.

For further discussion on foreign exchange activity, please refer to “—Results of Operations” and note 8,9, “Derivative Instruments,” of the notes accompanying our consolidated financial ~~statements for additional information.~~statements.

The following table provides a summary of our net foreign currency exchange exposures, as well as foreign currency derivatives in place to manage these exposures:


(U.S. dollars in thousands, except per share data)	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives	$	8,599		$	(163,199	)	$	(94,663	)	$	(63,077	)
Shareholders’ equity denominated in foreign currencies (1)	304,536			328,133			295,185			290,752
Net foreign currency forward contracts outstanding (2)	21,254			(97,658		)	(169,480		)	(250,263		)
Net exposures denominated in foreign currencies	$	334,389		$	67,276		$	31,042		$	(22,588	)

Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	(33,439	)	$	(6,728	)	$	(3,104	)	$	2,259
Book value per common share	$	(0.27	)	$	(0.05	)	$	(0.02	)	$	0.02

Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	33,439		$	6,728		$	3,104		$	(2,259	)
Book value per common share	$	0.27		$	0.05		$	0.02		$	(0.02	)


(1)	Represents capital contributions held in the foreign currencies of our operating units.


(2)	Represents the net notional value of outstanding foreign currency forward contracts.

Although the Company generally attempts to match the currency of its projected liabilities with investments in the same currencies, from time to time the Company may elect to over or underweight one or more currencies, which could increase the Company’s exposure to foreign currency fluctuations and increase the volatility of the Company’s shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. ~~For further discussion on foreign exchange activity, please refer to “—Results~~



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Table of ~~Operations.”~~Contents

Other Financial Information

The consolidated financial statements as of ~~September 30, 2016~~March 31, 2017 and for the three month period ended March 31, 2017 and ~~nine month periods ended September 30,~~ 2016 ~~and 2015~~ have been reviewed by PricewaterhouseCoopers LLP, the registrant's independent public accountants, whose report is included as an exhibit to this filing. The report of PricewaterhouseCoopers LLP states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which information is hereby incorporated by reference.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to applicable Exchange Act



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Rules as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to information being recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to ACGL and its consolidated subsidiaries.

We continue to enhance our operating procedures and internal controls 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.

Changes in Internal Controls Over Financial Reporting

We acquired all of the issued and outstanding capital stock of UGC on December 31, 2016. 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 consolidated financial statements as of and for the three months ended March 31, 2017. UGC represents 16% of total assets as of March 31, 2017 and 14% of our total revenues for the three months ended March 31, 2017. 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 the current quarter-end. Management expects to complete the process of integrating UGC’s internal control over financial reporting during 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 March 31, 2017.

There have been no changes in internal control over financial reporting that occurred during the ~~fiscal~~ quarter ended ~~September 30, 2016~~March 31, 2017 that have materially affected, or are reasonably likely to materially affect, internal control over financial ~~reporting.~~reporting, other than the UGC acquisition as described in the preceding paragraph.



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of ~~September 30, 2016,~~March 31, 2017, we were not a party to any litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.

ITEM 1A. RISK FACTORS

~~Our business is subject to a number of risks, including those identified~~There were no material changes from the risk factors previously disclosed in ~~Item 1A. of Part I of~~ our ~~2015~~Annual Report on Form 10-K that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in our 2015 Form 10-K are notfor the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.

~~Risks Relating to Our Company~~

~~Recent developments relating to the United Kingdom’s referendum vote in favor of leaving the European Union could adversely affect us~~.

On June 23, 2016, a referendum was held in the U.K. in which it was decided that the U.K. would leave the EU (“Brexit”). As a result of this vote, negotiations are expected to commence to determine the terms of the U.K.’s withdrawal from the EU, including the terms of trade between the U.K. and the EU. The effects of Brexit have been, and are expected to continue to be, far reaching. The perceptions as to the impact of Brexit may adversely affect business activity and economic conditions in Europe and globally and could continue to contribute to instability in global financial and foreign exchange markets. Brexit could also have the effect of disrupting the free movement of goods, services and people between the U.K. and the EU. The full effects of Brexit are uncertain and will depend on any agreements the U.K. may make to retain access to EU markets. Lastly, as a result of the Brexit, other European countries may seek to conduct referenda with respect to their continuing membership with the EU. Given these possibilities and others we may not anticipate, as well as the lack of comparable precedent, the full extent to which our business, results of operations and financial condition could be adversely affected by Brexit is uncertain.

The proposed UGC Acquisition, as well as any future acquisitions, growth of our operations through the addition of new lines of insurance or reinsurance business through our existing subsidiaries or through the formation of new subsidiaries, expansion into new geographic regions and/or joint ventures or partnerships may expose us to risks.

We may in the future make acquisitions either of other companies or selected blocks of business, expand our business lines or enter into joint ventures. The proposed UGC Acquisition, as well as any future acquisitions, may expose us to challenges and risks, including: integrating financial and operational reporting systems and establishing satisfactory budgetary and other financial controls; funding increased capital needs, overhead expenses or cash flow shortages that may occur if anticipated sales and revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties; obtaining management personnel required for expanded operations; obtaining necessary regulatory permissions; the value of assets acquired may be lower than expected or may diminish due to credit defaults or changes in interest rates and liabilities assumed may be greater than expected; the assets and liabilities we may acquire may be subject to foreign currency exchange rate fluctuation; and financial exposures in the event that the sellers of the entities we acquire are unable or unwilling to meet their indemnification, reinsurance and other obligations to us.

Our failure to manage successfully these operational challenges and risks may impact our results of operations. In addition, if the reserves established by us, as they relate to any acquired book of business, prove to be inadequate, then subject to whatever recourse we may have against the seller or reinsurers, we may be responsible for adverse development in such reserves.

~~We may fail to realize the growth prospects and other benefits anticipated as a result of the UGC Acquisition.~~

The success of the UGC Acquisition will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from acquiring United Guaranty. We may never realize these business opportunities and growth prospects. Integrating United Guaranty will require significant efforts and expenditures. Our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures and the cost of integration may exceed our expectations.year ended December 31, 2016.



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We may also be required to make unanticipated capital expenditures or investments in order to maintain, improve or sustain the acquired operations or take writeoffs or impairment charges and may be subject to unanticipated or unknown liabilities relating to United Guaranty. We might experience increased competition that limits our ability to expand our business, and we might not be able to capitalize on expected business opportunities. It is possible that, following the closing of the UGC Acquisition, we may determine to reduce certain types of businesses that United Guaranty currently writes, which may result in lower revenues for the combined Arch MI U.S. and United Guaranty businesses following the UGC Acquisition. If any of these factors limit our ability to integrate United Guaranty successfully or on a timely basis, the expectations of future results of operations following the UGC Acquisition might not be met.

In addition, Arch MI U.S. and United Guaranty have operated and, until the completion of the UGC Acquisition, will continue to operate separately. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to achieve the anticipated benefits of the UGC Acquisition and could harm our financial performance.

~~We will incur significant transaction and acquisition‑related integration costs in connection with the UGC Acquisition.~~

We are currently developing a plan to integrate United Guaranty after the completion of the UGC Acquisition. Although we anticipate achieving synergies in connection with the UGC Acquisition, we also expect to incur costs to implement such cost savings measures. We cannot identify the timing, nature and amount of all such charges as of the date of this filing. The significant transaction costs and acquisition-related integration costs could materially adversely affect our results of operations in the period in which such charges are recorded or our cash flow in the period in which any related costs are actually paid. Although we believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of United Guaranty, will offset incremental transaction and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all. We have identified some, but not all, of the actions necessary to achieve our anticipated cost and operational savings. Accordingly, the cost and operational savings may not be achievable in our anticipated amount or time frame or at all. Investors should not place undue reliance on the anticipated benefits of the UGC Acquisition in making their investment decision.

~~We will be subject to business uncertainties while the UGC Acquisition is pending that could adversely affect our current and anticipated business.~~

Uncertainty about the effect of the UGC Acquisition on employees and customers may have an adverse effect on us. Although we intend to take actions to reduce any adverse effects, these uncertainties may impair our and their ability to attract, retain and motivate key personnel until the UGC Acquisition is completed and for a period of time thereafter. These uncertainties could cause customers, suppliers and others that deal with us to seek to change existing business relationships. Employee retention could be reduced while the UGC Acquisition is pending, as employees may experience uncertainty about their future roles. If, despite our retention efforts, key employees depart because of concerns relating to the uncertainty and difficulty of the integration process or a desire not to remain with us, our business could be harmed.

~~If we are unable to continue to implement our U.S. mortgage insurance growth strategy through the UGC Acquisition or otherwise, our financial results could be adversely affected.~~

On January 30, 2014, our U.S.-based subsidiaries completed the acquisition of CMG Mortgage Insurance Company (renamed Arch MI U.S.). Prior to the acquisition, CMG Mortgage Insurance Company had been a GSE-approved mortgage insurance company limited to only credit union customers. Our growth strategy, which we are now in the third year of implementing, is to broaden Arch MI U.S.’s customer base to national and regional banks and other mortgage lenders, while maintaining and increasing Arch MI U.S.’s share of the mortgage insurance credit union market. The failure to consummate the UGC Acquisition may adversely affect our ability to implement our growth strategy in the mortgage insurance industry. The ultimate success of our strategy will depend upon, among other factors, our ability to: continue to maintain and develop business relationships with national and regional banks and other mortgage lenders, particularly the large lenders that originate a significant majority of low down payment mortgages in the U.S., and obtain their approvals as an authorized mortgage insurance provider; continue to develop and implement necessary e‑commerce connectivity with new customers’ mortgage origination systems; maintain and expand business relationships with existing credit union customers; and retain and attract a capable workforce at Arch MI U.S. necessary to implement our U.S. mortgage insurance strategy.

Because of these factors, economic conditions and competitive dynamics, the extent to which we will be successful implementing our U.S. mortgage insurance strategy is uncertain. If we are unable to continue to attract new, and retain existing, customers and process business efficiently and reliably, our results of operations and financial condition could be adversely affected.



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~~We cannot assure you that the proposed UGC Acquisition will be completed. Failure to close the UGC Acquisition could adversely affect us.~~

There are a number of risks and uncertainties relating to the UGC Acquisition. For example, the UGC Acquisition may not be completed, or may not be completed in the time frame, on the terms or in the manner currently anticipated. There can be no assurance that the conditions to closing of the UGC Acquisition will be satisfied or waived or that other events will not intervene to delay or result in the failure to close the UGC Acquisition. Our ability to consummate the UGC Acquisition is subject to various closing conditions, many of which are beyond our control. In the event that the UGC Acquisition does not occur because of an inability to obtain required regulatory approvals, under certain circumstances we will be required under the Stock Purchase Agreement to pay AIG a termination fee equal to $150 million.

The UGC Acquisition is subject to receipt of consent or approval from governmental authorities that could delay or prevent the completion of the UGC Acquisition or that could cause the abandonment of the UGC Acquisition.

To complete the UGC Acquisition, we need to obtain approvals or consents from, and make filings with, certain applicable governmental authorities. While we believe that we will receive all required approvals for the UGC Acquisition, there can be no assurance as to the receipt or timing of receipt of these approvals. A substantial delay in obtaining any required authorizations, approvals or consents, or the imposition of unfavorable terms, conditions or restrictions contained in such authorizations, approvals or consents, could prevent the completion of the UGC Acquisition or have an adverse effect on the anticipated benefits of the UGC Acquisition, thereby adversely impacting our business, financial condition or results of operations.

~~The proposed UGC Acquisition may expose us to unknown liabilities.~~

Because we have agreed to acquire all the outstanding equity interests of United Guaranty, our acquisition will generally be subject to all of United Guaranty’s liabilities. If there are unknown liabilities or other obligations, including contingent liabilities, our business could be materially affected. We may learn additional information about United Guaranty that adversely affects us, such as unknown liabilities, issues that could affect our ability to comply with the Sarbanes-Oxley Act or issues that could affect our ability to comply with other applicable laws.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes our purchases of our common shares for the ~~2016 third~~2017 first quarter:

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)
7/1/2016 - 7/31/2016 8,138
$ 70.88
—
$ 446,501
8/1/2016 - 8/31/2016 26,316
79.50
—
$ 446,501
9/1/2016 - 9/30/2016 6,119
81.69
—
$ 446,501
Total 40,573
$ 78.10
—
$ 446,501



	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)
1/1/2017 - 1/31/2017	13,410	$	87.39	—	$	446,501
2/1/2017 - 2/28/2017	28,758	93.52		—	$	446,501
3/1/2017 - 3/31/2017	8,866	94.59		—	$	446,501
Total	51,034	$	92.10	—	$	446,501

(1)

Represents 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 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 ~~September 30, 2016~~March 31, 2017 under ACGL’s share repurchase authorization, under which repurchases may be effected from time to time in open market or privately negotiated transactions through December 31, 2019.

ITEM 5. OTHER INFORMATION

In accordance with Section 10a(i)(2) of the Securities Exchange Act of 1934, as amended, we are responsible for disclosing non-audit services to be provided by our independent auditor, PricewaterhouseCoopers LLP, which are approved by the Audit Committee of our board of directors. During the ~~2016 third~~2017 first quarter, the Audit Committee approved engagements of PricewaterhouseCoopers LLP for permitted non-audit services, which consisted of tax consulting services, tax compliance services and other accounting consulting services.



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Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934

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.

Certain of our non-U.S. subsidiaries provide global marine policies that 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 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. Since these policies insure multiple voyages and fleets containing multiple ships, we are unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. We intend for our non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.



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ITEM 6. EXHIBITS



Exhibit No.		Description

~~2.1~~		~~Stock Purchase Agreement, dated as of August 15, 2016, between Arch Capital Group Ltd. and AIG International Group, Inc. (b)~~
~~4.1~~		~~Certificate of Designations of 5.25% Non-Cumulative Preferred Shares, Series E, of Arch Capital Group Ltd. (c)~~
~~4.2~~		~~Form of share certificate evidencing 5.25% Non-Cumulative Preferred Shares, Series E (c)~~
~~4.3~~		Deposit Agreement, dated September 29, 2016, between Arch Capital Group Ltd. and American Stock Transfer & Trust Company, LLC, as depositary, registrar and transfer agent and as dividend disbursing agent and redemption agent, and the holders from time to time of the depositary receipts (c)
~~4.4~~		~~Form of depositary receipt (c)~~
10.1		~~Form of Investor Rights Agreement between Arch Capital Group Ltd. and AIG International Group, Inc. (incorporated by reference~~First Amendment to ~~Exhibit B to the Stock Purchase Agreement filed as Exhibit 2.1) (b)~~
~~10.2~~		~~Bridge Credit Agreement, dated as of August 15, 2016, among Arch Capital Group Ltd., Credit Suisse AG, Cayman Islands Branch, as Administrative Agent, and the Lenders party thereto (b)~~
~~10.3~~		~~Second~~Third Amended and Restated Credit Agreement, dated as of October 26, 2016, by and among Arch Capital Group Ltd., certain of its subsidiaries as subsidiary borrowers, Bank of America, N.A., as Administrative Agent, Fronting Bank and L/C Administrator, and the lenders party thereto (d)
~~10.4~~		Purchase Agreement dated as of September 22, 2016 among the Company and Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC, as representatives of the several underwriters named therein (a)Incentive Compensation Plan
15		Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following financial information from Arch Capital Group Ltd.’s Quarterly Report for the quarter ended ~~September 30, 2016~~March 31, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015;~~2016; (ii) Consolidated Statements of Income for the three ~~and nine~~ month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iii) Consolidated Statements of Comprehensive Income for the three ~~and nine~~ month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the ~~nine~~three month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (v) Consolidated Statements of Cash Flows for the ~~nine~~three month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; and (vi) Notes to Consolidated Financial Statements.

~~(a) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on September 23, 2016, and incorporated by reference.~~

~~(b) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on August 15, 2016, and incorporated by reference.~~

~~(c) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on September 29, 2016, and incorporated by reference.~~

~~(d) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on October 26, 2016, and incorporated by reference.~~



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SIGNATURES

Pursuant to the requirements 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.



		ARCH CAPITAL GROUP LTD.
		(REGISTRANT)

		/s/ Constantine Iordanou
Date: ~~November 4, 2016~~May 5, 2017		Constantine Iordanou
		Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors

		/s/ Mark D. Lyons
Date: ~~November 4, 2016~~May 5, 2017		Mark D. Lyons
		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



Exhibit No.		Description

~~2.1~~		~~Stock Purchase Agreement, dated as of August 15, 2016, between Arch Capital Group Ltd. and AIG International Group, Inc. (b)~~
~~4.1~~		~~Certificate of Designations of 5.25% Non-Cumulative Preferred Shares, Series E, of Arch Capital Group Ltd. (c)~~
~~4.2~~		~~Form of share certificate evidencing 5.25% Non-Cumulative Preferred Shares, Series E (c)~~
~~4.3~~		Deposit Agreement, dated September 29, 2016, between Arch Capital Group Ltd. and American Stock Transfer & Trust Company, LLC, as depositary, registrar and transfer agent and as dividend disbursing agent and redemption agent, and the holders from time to time of the depositary receipts (c)
~~4.4~~		~~Form of depositary receipt (c)~~
10.1		~~Form of Investor Rights Agreement between Arch Capital Group Ltd. and AIG International Group, Inc. (incorporated by reference~~First Amendment to ~~Exhibit B to the Stock Purchase Agreement filed as Exhibit 2.1) (b)~~
~~10.2~~		~~Bridge Credit Agreement, dated as of August 15, 2016, among Arch Capital Group Ltd., Credit Suisse AG, Cayman Islands Branch, as Administrative Agent, and the Lenders party thereto (b)~~
~~10.3~~		~~Second~~Third Amended and Restated Credit Agreement, dated as of October 26, 2016, by and among Arch Capital Group Ltd., certain of its subsidiaries as subsidiary borrowers, Bank of America, N.A., as Administrative Agent, Fronting Bank and L/C Administrator, and the lenders party thereto (d)
~~10.4~~		Purchase Agreement dated as of September 22, 2016 among the Company and Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC, as representatives of the several underwriters named therein (a)Incentive Compensation Plan
15		Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following financial information from Arch Capital Group Ltd.’s Quarterly Report for the quarter ended ~~September 30, 2016~~March 31, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015;~~2016; (ii) Consolidated Statements of Income for the three ~~and nine~~ month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iii) Consolidated Statements of Comprehensive Income for the three ~~and nine~~ month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the ~~nine~~three month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; (v) Consolidated Statements of Cash Flows for the ~~nine~~three month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015;~~2016; and (vi) Notes to Consolidated Financial Statements.

~~(a) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on September 23, 2016, and incorporated by reference.~~

~~(b) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on August 15, 2016, and incorporated by reference.~~

~~(c) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on September 29, 2016, and incorporated by reference.~~

~~(d) Filed as an exhibit on our Report on Form 8-K, as filed with the SEC on October 26, 2016, and incorporated by reference.~~



	ACGL 2017 FIRST QUARTER FORM 10-Q	8465



	Three Months Ended
	September 30, 2015
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	752,438		$	329,327		$	74,657		$	1,158,451		$	131,165		$	1,189,192
Premiums ceded	(209,443		)	(92,182		)	(7,832		)	(311,486		)	(6,158		)	(217,220		)
Net premiums written	542,995			237,145			66,825			846,965			125,007			971,972
Change in unearned premiums	(20,451		)	23,286			(12,277		)	(9,442		)	(25,847		)	(35,289		)
Net premiums earned	522,544			260,431			54,548			837,523			99,160			936,683
Other underwriting income	519			2,783			3,565			6,867			756			7,623
Losses and loss adjustment expenses	(339,859		)	(115,780		)	(9,562		)	(465,201		)	(66,540		)	(531,741		)
Acquisition expenses, net	(77,076		)	(55,416		)	(10,428		)	(142,920		)	(28,646		)	(171,566		)
Other operating expenses	(84,620		)	(37,131		)	(21,048		)	(142,799		)	(3,421		)	(146,220		)
Underwriting income (loss)	$	21,508		$	54,887		$	17,075		93,470			1,309			94,779

Net investment income										67,251			18,982			86,233
Net realized gains (losses)										(53,480		)	(36,218		)	(89,698		)
Net impairment losses recognized in earnings										(5,868		)	—			(5,868		)
Equity in net income (loss) of investment funds accounted for using the equity method										(2,118		)	—			(2,118		)
Other income (loss)										(265		)	—			(265		)
Corporate expenses										(10,739		)	—			(10,739		)
Interest expense										(12,014		)	(1,286		)	(13,300		)
Net foreign exchange gains (losses)										16,056			(1,376		)	14,680
Income (loss) before income taxes										92,293			(18,589		)	73,704
Income tax expense										(9,704		)	—			(9,704		)
Net income (loss)										82,589			(18,589		)	64,000
Dividends attributable to redeemable noncontrolling interests										—			(4,588		)	(4,588		)
Amounts attributable to noncontrolling interests										—			20,621			20,621
Net income (loss) available to Arch										82,589			(2,556		)	80,033
Preferred dividends										(5,484		)	—			(5,484		)
Net income (loss) available to Arch common shareholders										$	77,105		$	(2,556	)	$	74,549

Underwriting Ratios
Loss ratio	65.0		%	44.5		%	17.5		%	55.5		%	67.1		%	56.8		%
Acquisition expense ratio	14.8		%	21.3		%	19.1		%	17.1		%	28.9		%	18.3		%
Other operating expense ratio	16.2		%	14.3		%	38.6		%	17.1		%	3.4		%	15.6		%
Combined ratio	96.0		%	80.1		%	75.2		%	89.7		%	99.4		%	90.7		%

Goodwill and intangible assets	$	29,834		$	2,149		$	71,637		$	103,620		$	—		$	103,620



	Arch Portfolio		Benchmark Return
2016 Third Quarter	0.88	%	0.83	%
2015 Third Quarter	(0.31	)%	(0.21	)%

Nine Months Ended September 30, 2016	4.03	%	4.43	%
Nine Months Ended September 30, 2015	0.76	%	(0.07	)%



Severity of gross unrealized losses:	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
September 30, 2016
0-10%	$	93,569	$	(2,364	)	4.3
10-20%	13,168		(2,011		)	3.6
20-30%	280		(84		)	0.2
Greater than 30%	458		(235		)	0.4
Total	$	107,475	$	(4,694	)	8.4

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



Issuance Year	Amortized Cost		Average Credit Quality	Estimated Fair Value
2004-2008	$	59,493	CC-	$	65,431
2009	444		AA	452
2010	1,063		NR	1,281
2014	1,642		NR	1,626
2015	3,168		D	3,160
2016	6,098		C-	6,125
Total RMBS	$	71,908	C+	$	78,075

2002-2008	27,012		A-	27,141
2009	531		A-	531
2010	8,276		AAA	8,492
2011	431		AAA	432
2012	34,898		AAA	35,385
2013	83,486		AA	85,987
2014	121,901		AA+	124,030
2015	111,950		AA+	113,347
2016	156,293		AA+	157,404
Total CMBS	$	544,778	AA+	$	552,749



	Non-Agency		Non-Agency
Additional Statistics:	RMBS		CMBS (1)
Weighted average loan age (months)	112		32
Weighted average life (months) (2)	41		80
Weighted average loan-to-value % (3)	57.5	%	54.1	%
Total delinquencies (4)	16.4	%	0.7	%
Current credit support % (5)	3.8	%	36.6	%



			Weighted Average
Sector	Amortized Cost		Credit Quality	Credit Support		Estimated Fair Value
Credit cards	$	650,579	AAA	19	%	$	657,109
Autos	256,996		AAA	27	%	258,244
Loans	140,373		A-	8	%	140,631
Equipment	105,975		AA-	2	%	105,786
Other (1)	77,851		A-	20	%	79,399
Total ABS (2)	$	1,231,774	AA+			$	1,241,169