Arch Capital (ACGL) 8-K Arch Capital Group LTD. Reports 2017 First Quarter Results

	Waterloo House, Ground Floor
	100 Pitts Bay Road
	Pembroke HM 08 Bermuda
	441-278-9250
	441-278-9255 fax
	Contact:
	Mark D. Lyons
	Executive Vice President and Chief Financial Officer

Financial Supplement

Financial Information

as of March 31, 2017

The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd.

This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital Group Ltd. with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q.  Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital Group Ltd.

Arch Capital Group Ltd. and Subsidiaries

Table of Contents

			Page
I.	Financial Highlights		3
II.	Consolidated Financial Statements
	a.	Consolidated Statements of Income	4
	b.	Consolidated Balance Sheets	5
	c.	Consolidated Statements of Changes in Shareholders’ Equity	6
	d.	Consolidated Statements of Cash Flows	7
III.	Segment Information
	a.	Overview	8
	b.	Consolidated Results	10
	c.	Insurance Segment Results	12
	d.	Reinsurance Segment Results	14
	e.	Mortgage Segment Results	16
	f.	Selected Information on Losses and Loss Adjustment Expenses	20
IV.	Investment Information
	a.	Investable Asset Summary and Investment Portfolio Metrics	21
	b.	Composition of Net Investment Income, Yield and Total Return	22
	c.	Composition of Fixed Maturities	23
	d.	Credit Quality Distribution and Maturity Profile	24
	e.	Analysis of Corporate Exposures	25
	f.	Structured Securities and Eurozone Investments	26
V.	Other
	a.	Comments on Regulation G	27
	b.	Operating Income Reconciliation and Annualized Operating Return on Average Common Equity	28
	c.	Operating Income and Effective Tax Rate Calculations	29
	d.	Capital Structure and Share Repurchase Activity	30

1

Arch Capital Group Ltd. and Subsidiaries

Basis of Presentation

Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2016 is derived from or agrees to audited financial information. During the 2017 first quarter, the Company changed its 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) for all periods presented. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

On December 31, 2016, the Company completed the acquisition of United Guaranty Corporation (“UGC”) pursuant to the Stock Purchase Agreement with American International Group, Inc. (“AIG”) entered into on August 15, 2016. As such, the acquisition of UGC is reflected in the Company’s consolidated balance sheets from December 31, 2016 on and in the Company’s consolidated statements of income for the 2017 first quarter on.

In March 2014, the Company invested $100.0 million to acquire 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”). In accordance with GAAP, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, 100% of the results of Watford Re are included in the Company’s consolidated financial statements. The portion of Watford Re’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford Re’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford Re.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect the Company’s 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 can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.

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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

2

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights

The following table presents financial highlights (1):

(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,
	2017			2016			Change
Underwriting results:
Gross premiums written	$	1,606,686		$	1,391,061		15.5	%
Net premiums written	1,132,574			977,101			15.9	%
Net premiums earned	995,020			836,062			19.0	%
Underwriting income (2)	214,367			116,635			83.8	%
Loss ratio	46.9		%	53.1		%	(6.2	)
Acquisition expense ratio	15.1		%	16.1		%	(1.0	)
Other operating expense ratio	16.8		%	17.3		%	(0.5	)
Combined ratio	78.8		%	86.5		%	(7.7	)
Net investment income	$	95,812		$	70,409		36.1	%
Per diluted share	$	0.69		$	0.57		21.1	%
Net income available to Arch common shareholders	$	241,909		$	149,314		62.0	%
Per diluted share	$	1.74		$	1.20		45.0	%
After-tax operating income available to Arch common shareholders (2)	$	197,965		$	145,742		35.8	%
Per diluted share	$	1.42		$	1.17		21.4	%
Comprehensive income available to Arch	$	351,991		$	272,929		29.0	%
Cash flow from operations	$	146,194		$	257,279		(43.2	)%
Diluted weighted average common shares and common share equivalents outstanding	139,047,672			124,496,496			11.7	%
Financial measures:
Change in book value per common share during period	4.5		%	4.0		%	0.5
Annualized return on average common equity	12.6		%	10.0		%	2.6
Annualized operating return on average common equity (2)	10.3		%	9.8		%	0.5
Total return on investments (3)
Including effects of foreign exchange	1.70		%	1.82		%	-12 bps
Excluding effects of foreign exchange	1.64		%	1.48		%	16 bps

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.

(3) Total return on investments includes net investment income, equity in net income (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 the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses.

3

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Revenues
Net premiums written	$	1,276,260		$	872,315		$	1,014,278		$	1,023,563		$	1,121,235
Change in unearned premiums	(159,243		)	96,540			(55,875		)	(17,578		)	(169,656		)
Net premiums earned	1,117,017			968,855			958,403			1,005,985			951,579
Net investment income	117,874			91,051			93,618			88,338			93,735
Net realized gains (losses)	34,153			(93,061		)	125,105			68,218			37,324
Net impairment losses recognized in earnings	(1,807		)	(13,593		)	(3,867		)	(5,343		)	(7,639		)
Other underwriting income	4,633			18,922			7,980			25,224			5,047
Equity in net income (loss) of investment funds accounted for using the equity method	48,088			16,421			16,662			8,737			6,655
Other income (loss)	(782		)	(368		)	(400		)	(7		)	(25		)
Total revenues	1,319,176			988,227			1,197,501			1,191,152			1,086,676
Expenses
Losses and loss adjustment expenses	(552,570		)	(553,875		)	(524,183		)	(584,592		)	(522,949		)
Acquisition expenses	(182,289		)	(165,843		)	(161,267		)	(172,677		)	(167,838		)
Other operating expenses	(174,719		)	(163,342		)	(153,286		)	(157,314		)	(150,148		)
Corporate expenses	(27,792		)	(36,678		)	(18,485		)	(17,200		)	(9,383		)
Amortization of intangible assets	(31,294		)	(4,850		)	(4,865		)	(4,880		)	(4,748		)
Interest expense	(28,676		)	(18,539		)	(15,943		)	(15,663		)	(16,107		)
Net foreign exchange gains (losses)	(19,404		)	38,176			(2,621		)	24,662			(23,566		)
Total expenses	(1,016,744		)	(904,951		)	(880,650		)	(927,664		)	(894,739		)
Income before income taxes	302,432			83,276			316,851			263,488			191,937
Income tax (expense) benefit	(28,397		)	12,298			(13,231		)	(14,131		)	(16,310		)
Net income	274,035			95,574			303,620			249,357			175,627
Net (income) loss attributable to noncontrolling interests	(20,908		)	(21,561		)	(50,748		)	(38,302		)	(20,829		)
Net income attributable to Arch	253,127			74,013			252,872			211,055			154,798
Preferred dividends	(11,218		)	(11,617		)	(5,484		)	(5,485		)	(5,484		)
Net income available to Arch common shareholders	$	241,909		$	62,396		$	247,388		$	205,570		$	149,314
Comprehensive income (loss) available to Arch	$	351,991		$	(160,280	)	$	208,790		$	273,260		$	272,929
Net income per common share and common share equivalent
Basic	$	1.80		$	0.51		$	2.05		$	1.70		$	1.24
Diluted	$	1.74		$	0.50		$	1.98		$	1.65		$	1.20
Weighted average common shares and common share equivalents outstanding
Basic	134,034,927			121,196,248			120,938,916			120,599,060			120,428,179
Diluted	139,047,672			125,427,259			124,931,653			124,365,596			124,496,496

4

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

(U.S. Dollars in thousands, except share data)	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Assets
Investments:
Fixed maturities available for sale, at fair value	$	13,745,932		$	13,426,577		$	11,026,929		$	11,050,464		$	10,645,257
Short-term investments available for sale, at fair value	803,619			612,005			1,184,408			853,531			623,844
Collateral received under securities lending, at fair value	538,361			762,565			466,055			338,326			594,929
Equity securities available for sale, at fair value	428,594			518,041			521,587			490,815			506,915
Other investments available for sale, at fair value	228,437			167,970			168,243			182,957			195,079
Investments accounted for using the fair value option	3,648,120			3,421,220			3,389,573			3,066,029			3,139,332
Investments accounted for using the equity method	861,607			811,273			797,542			685,766			628,832
Total investments	20,254,670			19,719,651			17,554,337			16,667,888			16,334,188
Cash	703,754			842,942			578,816			516,591			557,961
Accrued investment income	104,168			124,483			81,907			85,317			81,628
Securities pledged under securities lending, at fair value	525,569			744,980			453,757			330,773			580,766
Premiums receivable	1,254,048			1,072,435			1,182,708			1,260,607			1,209,548
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	2,133,148			2,114,138			2,076,248			2,034,970			1,962,863
Contractholder receivables	1,766,340			1,717,436			1,649,441			1,600,426			1,529,105
Ceded unearned premiums	941,923			859,567			541,238			540,954			500,412
Deferred acquisition costs	487,925			447,560			418,818			412,258			413,640
Receivable for securities sold	239,678			58,284			285,112			142,315			329,262
Goodwill and intangible assets	750,315			781,553			90,941			88,327			92,670
Other assets	930,688			889,080			691,569			693,152			910,987
Total assets	$	30,092,226		$	29,372,109		$	25,604,892		$	24,373,578		$	24,503,030
Liabilities
Reserve for losses and loss adjustment expenses	$	10,296,821		$	10,200,960		$	9,610,189		$	9,471,647		$	9,378,987
Unearned premiums	3,631,259			3,406,870			2,671,121			2,618,359			2,579,148
Reinsurance balances payable	321,285			300,407			271,688			295,987			276,426
Contractholder payables	1,766,340			1,717,436			1,649,441			1,600,426			1,529,105
Collateral held for insured obligations	327,161			301,406			277,463			261,228			249,440
Senior notes	1,732,410			1,732,258			791,437			791,392			791,349
Revolving credit agreement borrowings	734,961			756,650			398,100			397,830			457,431
Securities lending payable	538,353			762,554			466,047			338,318			594,922
Payable for securities purchased	389,649			76,183			474,041			382,834			494,813
Other liabilities	674,313			806,260			641,115			556,019			815,972
Total liabilities	20,412,552			20,060,984			17,250,642			16,714,040			17,167,593
Redeemable noncontrolling interests	205,644			205,553			205,459			205,366			205,274
Shareholders’ equity
Non-cumulative preferred shares	772,555			772,555			775,000			325,000			325,000
Convertible non-voting common equivalent preferred shares	1,101,304			1,101,304			—			—			—
Common shares	583			582			582			581			579
Additional paid-in capital	548,053			531,687			516,204			517,942			485,943
Retained earnings	8,238,296			7,996,701			7,934,304			7,686,916			7,481,346
Accumulated other comprehensive income (loss), net of deferred income tax	(15,677		)	(114,541		)	119,752			163,834			101,629
Common shares held in treasury, at cost	(2,039,270		)	(2,034,570		)	(2,031,859		)	(2,028,690		)	(2,019,249		)
Total shareholders’ equity available to Arch	8,605,844			8,253,718			7,313,983			6,665,583			6,375,248
Non-redeemable noncontrolling interests	868,186			851,854			834,808			788,589			754,915
Total shareholders’ equity	9,474,030			9,105,572			8,148,791			7,454,172			7,130,163
Total liabilities, noncontrolling interests and shareholders’ equity	$	30,092,226		$	29,372,109		$	25,604,892		$	24,373,578		$	24,503,030
Common shares and common share equivalents outstanding, net of treasury shares	135,790,306			135,550,337			122,675,197			122,572,260			122,093,596
Book value per common share (1)	$	57.69		$	55.19		$	53.30		$	51.73		$	49.55

(1)    Excludes the effects of stock options and restricted stock units outstanding.

5

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Non-cumulative preferred shares
Balance at beginning of period	$	772,555		$	775,000		$	325,000		$	325,000		$	325,000
Series E preferred shares issued	—			—			450,000			—			—
Series C preferred shares repurchased	—			(2,445		)	—			—			—
Balance at end of period	$	772,555		$	772,555		$	775,000		$	325,000		$	325,000
Convertible non-voting common equivalent preferred shares
Balance at beginning of period	1,101,304			—			—			—			—
Series D preferred shares issued	—			1,101,304			—			—			—
Balance at end of period	1,101,304			1,101,304			—			—			—
Common shares
Balance at beginning of period	582			582			581			579			577
Common shares issued, net	1			—			1			2			2
Balance at end of period	583			582			582			581			579
Additional paid-in capital
Balance at beginning of period	531,687			516,204			517,942			485,943			467,339
Issue costs on Series E preferred shares	—			—			(15,101		)	—			—
All other	16,366			15,483			13,363			31,999			18,604
Balance at end of period	548,053			531,687			516,204			517,942			485,943
Retained earnings
Balance at beginning of period	7,996,701			7,934,304			7,686,916			7,481,346			7,332,032
Cumulative effect of an accounting change (1)	(314		)	—			—			—			—
Balance at beginning of period, as adjusted	7,996,387			7,934,304			7,686,916			7,481,346			7,332,032
Net income	274,035			95,574			303,620			249,357			175,627
Amounts attributable to noncontrolling interests	(20,908		)	(21,560		)	(50,748		)	(38,302		)	(20,829		)
Preferred share dividends	(11,218		)	(11,617		)	(5,484		)	(5,485		)	(5,484		)
Balance at end of period	8,238,296			7,996,701			7,934,304			7,686,916			7,481,346
Accumulated other comprehensive income (loss)
Balance at beginning of period	(114,541		)	119,752			163,834			101,629			(16,502		)
Change in unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax	95,748			(219,989		)	(38,711		)	80,314			100,660
Change in foreign currency translation adjustments	3,116			(14,304		)	(5,371		)	(18,109		)	17,471
Balance at end of period	(15,677		)	(114,541		)	119,752			163,834			101,629
Common shares held in treasury, at cost
Balance at beginning of period	(2,034,570		)	(2,031,859		)	(2,028,690		)	(2,019,249		)	(1,941,904		)
Shares repurchased for treasury	(4,700		)	(2,711		)	(3,169		)	(9,441		)	(77,345		)
Balance at end of period	(2,039,270		)	(2,034,570		)	(2,031,859		)	(2,028,690		)	(2,019,249		)
Total shareholders’ equity available to Arch	8,605,844			8,253,718			7,313,983			6,665,583			6,375,248
Non-redeemable noncontrolling interests	868,186			851,854			834,808			788,589			754,915
Total shareholders’ equity	$	9,474,030		$	9,105,572		$	8,148,791		$	7,454,172		$	7,130,163

(1)    Balance at beginning of period for the March 31, 2017 column reflects a $0.3 million cumulative effect of an accounting change related to employee share-based payment transactions, net of tax.

6

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Operating Activities
Net income	$	274,035		$	95,574		$	303,620		$	249,357		$	175,627
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(40,855		)	83,605			(135,775		)	(83,303		)	(43,034		)
Net impairment losses included in earnings	1,807			13,593			3,867			5,343			7,639
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	(36,141		)	(2,513		)	(3,004		)	7,918			3,243
Amortization of intangible assets	31,294			4,850			4,865			4,880			4,748
Share-based compensation	15,657			10,270			10,542			21,504			14,265
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	53,027			94,967			91,078			74,944			111,255
Unearned premiums, net of ceded unearned premiums	159,243			(96,540		)	55,875			17,578			169,656
Premiums receivable	(176,350		)	127,296			79,905			(61,466		)	(217,348		)
Deferred acquisition costs	(41,728		)	2,309			(7,456		)	(3,400		)	(30,050		)
Reinsurance balances payable	20,114			(17,656		)	(24,514		)	21,783			51,929
Other items, net	(51,985		)	43,750			116,912			(36,457		)	74,613
Net cash provided by operating activities	208,118			359,505			495,915			218,681			322,543
Investing Activities
Purchases of fixed maturity investments	(10,476,918		)	(7,692,255		)	(10,298,824		)	(9,408,194		)	(8,133,537		)
Purchases of equity securities	(143,833		)	(287,935		)	(165,089		)	(84,415		)	(128,263		)
Purchases of other investments	(427,039		)	(380,632		)	(358,161		)	(345,415		)	(305,198		)
Proceeds from sales of fixed maturity investments	10,386,746			7,828,042			9,753,375			9,151,013			7,827,536
Proceeds from sales of equity securities	253,347			286,824			127,285			121,607			216,012
Proceeds from sales, redemptions and maturities of other investments	317,518			269,998			242,795			425,410			211,125
Proceeds from redemptions and maturities of fixed maturity investments	174,718			214,184			169,843			207,086			163,894
Net settlements of derivative instruments	(3,921		)	(40,464		)	(21,778		)	24,083			21,091
Net (purchases) sales of short-term investments	(397,851		)	480,752			(299,702		)	(238,866		)	(65,594		)
Change in cash collateral related to securities lending	180,946			(127,313		)	(9,220		)	24,403			(43,118		)
Acquisitions, net of cash	—			(1,971,809		)	(19,451		)	(1,460		)	—
Purchases of fixed assets	(5,194		)	(3,738		)	(3,281		)	(4,332		)	(3,952		)
Change in other assets	19,603			(42,089		)	(17,232		)	6,679			6,737
Net cash provided by (used for) investing activities	(121,878		)	(1,466,435		)	(899,440		)	(122,401		)	(233,267		)
Financing Activities
Proceeds from issuance of preferred shares, net	—			—			434,899			—			—
Purchases of common shares under share repurchase program	—			—			—			—			(75,256		)
Proceeds from common shares issued, net	(3,990		)	1,367			(2,298		)	(1,689		)	202
Proceeds from borrowings	—			1,340,741			—			46,000			—
Repayments of borrowings	(22,000		)	(40,000		)	—			(105,000		)	(74,171		)
Change in cash collateral related to securities lending	(180,946		)	127,313			9,220			(24,403		)	43,118
Dividends paid to redeemable noncontrolling interests	(4,497		)	(4,498		)	(4,497		)	(4,497		)	(4,497		)
Other	(5,018		)	(31,428		)	35,336			(31,338		)	29,115
Preferred dividends paid	(11,218		)	(11,617		)	(5,484		)	(5,485		)	(5,484		)
Net cash provided by (used for) financing activities	(227,669		)	1,381,878			467,176			(126,412		)	(86,973		)
Effects of exchange rate changes on foreign currency cash	2,241			(10,822		)	(1,426		)	(11,238		)	2,332
Increase (decrease) in cash	(139,188		)	264,126			62,225			(41,370		)	4,635
Cash beginning of period	842,942			578,816			516,591			557,961			553,326
Cash end of period	$	703,754		$	842,942		$	578,816		$	516,591		$	557,961
Income taxes paid	$	711		$	9,879		$	14,123		$	24,115		$	2,504
Interest paid	$	5,829		$	28,054		$	3,710		$	27,711		$	3,813
Non-cash consideration paid in convertible non-voting common equivalent preferred shares	$	—		$	1,101,304		$	—		$	—		$	—
Net cash provided by operating activities, excluding the ‘other’ segment	$	146,194		$	278,827		$	420,873		$	152,934		$	257,279

7

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

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’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 of ACGL, the President and Chief Operating Officer of ACGL 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 core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

The Company determined its reportable operating 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.

Insurance 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: 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.

• 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 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.

8

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

Reinsurance Segment

The reinsurance segment consists of the Company’s 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.

• 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.

Mortgage Segment

The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. On December 31, 2016, the Company completed the acquisition of United Guaranty Corporation (“UGC”). The acquisition of UGC 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. Arch Mortgage Insurance Company, United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.

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 the Company’s non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

The ‘other’ segment includes the results of Watford Holdings Ltd. and its subsidiary Watford Re Ltd., a multi-line Bermuda reinsurance company, which was launched in March 2014. Subsidiaries of the Company act as Watford Re’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford Re’s non-investment grade credit portfolios and the Company manages Watford Re’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, the Company consolidates the results of Watford Re in its consolidated financial statements, although it only owns 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. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.

9

Arch Capital Group Ltd. and Subsidiaries

Segment Information

(U.S. Dollars in thousands)	Three Months Ended
	March 31, 2017
	Insurance			Reinsurance			Mortgage			Sub-total (Core)			Other			Total
Gross premiums written (1)	$	782,281		$	475,782		$	348,623		$	1,606,686		$	154,120		$	1,657,990
Premiums ceded	(234,095		)	(166,092		)	(73,925		)	(474,112		)	(10,434		)	(381,730		)
Net premiums written	548,186			309,690			274,698			1,132,574			143,686			1,276,260
Change in unearned premiums	(42,540		)	(64,839		)	(30,175		)	(137,554		)	(21,689		)	(159,243		)
Net premiums earned	505,646			244,851			244,523			995,020			121,997			1,117,017
Other underwriting income	—			(306		)	4,123			3,817			816			4,633
Losses and loss adjustment expenses	(332,641		)	(105,454		)	(29,065		)	(467,160		)	(85,410		)	(552,570		)
Acquisition expenses	(74,868		)	(46,147		)	(28,766		)	(149,781		)	(32,508		)	(182,289		)
Other operating expenses	(88,126		)	(37,533		)	(41,870		)	(167,529		)	(7,190		)	(174,719		)
Underwriting income (loss)	$	10,011		$	55,411		$	148,945		214,367			(2,295		)	212,072
Net investment income										95,812			22,062			117,874
Net realized gains (losses)										28,512			5,641			34,153
Net impairment losses recognized in earnings										(1,807		)	—			(1,807		)
Equity in net income (loss) of investment funds accounted for using the equity method										48,088			—			48,088
Other income (loss)										(782		)	—			(782		)
Corporate expenses (2)										(12,208		)	—			(12,208		)
UGC transaction costs and other (2)										(15,584		)	—			(15,584		)
Amortization of intangible assets										(31,294		)	—			(31,294		)
Interest expense										(25,756		)	(2,920		)	(28,676		)
Net foreign exchange gains (losses)										(19,845		)	441			(19,404		)
Income before income taxes										279,503			22,929			302,432
Income tax expense										(28,397		)	—			(28,397		)
Net income										251,106			22,929			274,035
Dividends attributable to redeemable noncontrolling interests										—			(4,584		)	(4,584		)
Amounts attributable to nonredeemable noncontrolling interests										—			(16,324		)	(16,324		)
Net income available to Arch										251,106			2,021			253,127
Preferred dividends										(11,218		)	—			(11,218		)
Net income available to Arch common shareholders										$	239,888		$	2,021		$	241,909
Underwriting Ratios
Loss ratio	65.8		%	43.1		%	11.9		%	46.9		%	70.0		%	49.5		%
Acquisition expense ratio	14.8		%	18.8		%	11.8		%	15.1		%	26.6		%	16.3		%
Other operating expense ratio	17.4		%	15.3		%	17.1		%	16.8		%	5.9		%	15.6		%
Combined ratio	98.0		%	77.2		%	40.8		%	78.8		%	102.5		%	81.4		%
Net premiums written to gross premiums written	70.1		%	65.1		%	78.8		%	70.5		%	93.2		%	77.0		%
Total investable assets										$	18,833,609		$	1,902,622		$	20,736,231
Total assets										27,578,759			2,513,467			30,092,226
Total liabilities										19,095,154			1,317,398			20,412,552

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.’ See ‘Comments on Regulation G’ for a further discussion of such items.

10

Arch Capital Group Ltd. and Subsidiaries

Segment Information

(U.S. Dollars in thousands)	Three Months Ended
	March 31, 2016
	Insurance			Reinsurance			Mortgage			Sub-total (Core)			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	(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 before income taxes										169,098			22,839			191,937
Income tax expense										(16,310		)	—			(16,310		)
Net income										152,788			22,839			175,627
Dividends attributable to redeemable noncontrolling interests										—			(4,587		)	(4,587		)
Amounts attributable to nonredeemable noncontrolling interests										—			(16,242		)	(16,242		)
Net income available to Arch										152,788			2,010			154,798
Preferred dividends										(5,484		)	—			(5,484		)
Net income 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		%
Net premiums written to gross premiums written	68.8		%	66.6		%	95.7		%	70.2		%	97.0		%	78.0		%
Total investable assets										$	14,954,294		$	1,709,862		$	16,664,156
Total assets										22,179,648			2,323,382			24,503,030
Total liabilities										15,912,609			1,254,984			17,167,593

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.

11

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Gross premiums written	$	782,281		$	707,519		$	758,934		$	762,043		$	798,553
Premiums ceded	(234,095		)	(241,658		)	(217,446		)	(246,875		)	(248,789		)
Net premiums written	548,186			465,861			541,488			515,168			549,764
Change in unearned premiums	(42,540		)	48,226			(22,410		)	12,482			(36,675		)
Net premiums earned	505,646			514,087			519,078			527,650			513,089
Other underwriting income	—			—			—			—			—
Losses and loss adjustment expenses	(332,641		)	(348,226		)	(332,845		)	(354,633		)	(323,609		)
Acquisition expenses	(74,868		)	(75,244		)	(77,146		)	(77,312		)	(74,348		)
Other operating expenses	(88,126		)	(87,149		)	(86,613		)	(91,440		)	(85,058		)
Underwriting income	$	10,011		$	3,468		$	22,474		$	4,265		$	30,074
Underwriting Ratios
Loss ratio	65.8		%	67.7		%	64.1		%	67.2		%	63.1		%
Acquisition expense ratio	14.8		%	14.6		%	14.9		%	14.7		%	14.5		%
Other operating expense ratio	17.4		%	17.0		%	16.7		%	17.3		%	16.6		%
Combined ratio	98.0		%	99.3		%	95.7		%	99.2		%	94.2		%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of
reinsurance and reinstatement premiums	0.5		%	4.6		%	0.3		%	3.9		%	0.1		%
Net (favorable) adverse development in prior year loss
reserves, net of related adjustments	(0.3		)%	(1.5		)%	(2.3		)%	(0.8		)%	(0.8		)%
Combined ratio excluding catastrophic activity and prior year development (1)	97.8		%	96.2		%	97.7		%	96.1		%	94.9		%
Net premiums written to gross premiums written	70.1		%	65.8		%	71.3		%	67.6		%	68.8		%

(1) See ‘Comments on Regulation G’ for further discussion.

12

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. Dollars in thousands)	Three Months Ended
	March 31,				December 31,				September 30,				June 30,					March 31,
	2017				2016				2016				2016					2016
Net premiums written
Professional lines (1)	$	108,468	19.8	%	$	103,965	22.3	%	$	119,198	22.0	%	$	107,519		20.9	%	$	109,467	19.9	%
Construction and national accounts	99,977		18.2	%	74,158		15.9	%	65,105		12.0	%	85,260			16.5	%	104,474		19.0	%
Programs	99,957		18.2	%	73,953		15.9	%	91,165		16.8	%	75,420			14.6	%	89,784		16.3	%
Travel, accident and health	65,528		12.0	%	49,208		10.6	%	63,453		11.7	%	54,456			10.6	%	57,263		10.4	%
Excess and surplus casualty (2)	45,832		8.4	%	46,719		10.0	%	54,075		10.0	%	60,412			11.7	%	53,657		9.8	%
Property, energy, marine and aviation	40,104		7.3	%	33,115		7.1	%	42,092		7.8	%	50,194			9.7	%	49,975		9.1	%
Lenders products	24,705		4.5	%	26,979		5.8	%	28,633		5.3	%	25,254			4.9	%	24,784		4.5	%
Other (3)	63,615		11.6	%	57,764		12.4	%	77,767		14.4	%	56,653			11.0	%	60,360		11.0	%
Total	$	548,186	100.0	%	$	465,861	100.0	%	$	541,488	100.0	%	$	515,168		100.0	%	$	549,764	100.0	%
Client location
United States	$	456,579	83.3	%	$	385,026	82.6	%	$	446,403	82.4	%	$	436,958		84.8	%	$	450,028	81.9	%
Europe	56,053		10.2	%	35,588		7.6	%	38,432		7.1	%	34,318			6.7	%	65,085		11.8	%
Asia and Pacific	18,975		3.5	%	26,053		5.6	%	28,507		5.3	%	22,855		��	4.4	%	16,337		3.0	%
Other	16,579		3.0	%	19,194		4.1	%	28,146		5.2	%	21,037			4.1	%	18,314		3.3	%
Total	$	548,186	100.0	%	$	465,861	100.0	%	$	541,488	100.0	%	$	515,168		100.0	%	$	549,764	100.0	%
Underwriting location
United States	$	448,616	81.8	%	$	378,121	81.2	%	$	442,422	81.7	%	$	423,465		82.2	%	$	446,200	81.2	%
Europe	88,345		16.1	%	73,287		15.7	%	85,279		15.7	%	74,373			14.4	%	94,095		17.1	%
Other	11,225		2.0	%	14,453		3.1	%	13,787		2.5	%	17,330			3.4	%	9,469		1.7	%
Total	$	548,186	100.0	%	$	465,861	100.0	%	$	541,488	100.0	%	$	515,168		100.0	%	$	549,764	100.0	%
Net premiums earned
Professional lines (1)	$	108,638	21.5	%	$	107,277	20.9	%	$	110,614	21.3	%	$	108,556		20.6	%	$	104,944	20.5	%
Construction and national accounts	77,423		15.3	%	80,525		15.7	%	80,090		15.4	%	84,414			16.0	%	77,043		15.0	%
Programs	85,180		16.8	%	83,730		16.3	%	84,889		16.4	%	90,595			17.2	%	98,501		19.2	%
Travel, accident and health	58,481		11.6	%	54,706		10.6	%	57,097		11.0	%	59,821			11.3	%	47,545		9.3	%
Excess and surplus casualty (2)	51,007		10.1	%	52,239		10.2	%	54,687		10.5	%	57,155			10.8	%	54,965		10.7	%
Property, energy, marine and aviation	38,078		7.5	%	47,521		9.2	%	45,304		8.7	%	47,076			8.9	%	49,037		9.6	%
Lenders products	24,099		4.8	%	26,018		5.1	%	25,090		4.8	%	23,007			4.4	%	24,402		4.8	%
Other (3)	62,740		12.4	%	62,071		12.1	%	61,307		11.8	%	57,026			10.8	%	56,652		11.0	%
Total	$	505,646	100.0	%	$	514,087	100.0	%	$	519,078	100.0	%	$	527,650		100.0	%	$	513,089	100.0	%

(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.

13

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Gross premiums written	$	475,782		$	276,593		$	324,361		$	412,053		$	481,390
Premiums ceded	(166,092		)	(70,473		)	(89,551		)	(119,951		)	(160,566		)
Net premiums written	309,690			206,120			234,810			292,102			320,824
Change in unearned premiums	(64,839		)	45,721			17,117			(846		)	(59,616		)
Net premiums earned	244,851			251,841			251,927			291,256			261,208
Other underwriting income	(306		)	13,744			2,216			20,118			325
Losses and loss adjustment expenses	(105,454		)	(112,149		)	(105,924		)	(146,091		)	(111,598		)
Acquisition expenses	(46,147		)	(51,552		)	(50,192		)	(55,756		)	(54,758		)
Other operating expenses	(37,533		)	(34,055		)	(35,389		)	(36,914		)	(36,258		)
Underwriting income	$	55,411		$	67,829		$	62,638		$	72,613		$	58,919
Underwriting Ratios
Loss ratio	43.1		%	44.5		%	42.0		%	50.2		%	42.7		%
Acquisition expense ratio	18.8		%	20.5		%	19.9		%	19.1		%	21.0		%
Other operating expense ratio	15.3		%	13.5		%	14.0		%	12.7		%	13.9		%
Combined ratio	77.2		%	78.5		%	75.9		%	82.0		%	77.6		%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of
reinsurance and reinstatement premiums	4.0		%	4.1		%	3.5		%	5.4		%	1.4		%
Net (favorable) adverse development in prior year loss
reserves, net of related adjustments	(24.4		)%	(16.7		)%	(24.0		)%	(21.7		)%	(18.0		)%
Combined ratio excluding catastrophic activity and prior year development (1)	97.6		%	91.1		%	96.4		%	98.3		%	94.2		%
Net premiums written to gross premiums written	65.1		%	74.5		%	72.4		%	70.9		%	66.6		%

(1) See ‘Comments on Regulation G’ for further discussion.

14

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)	Three Months Ended
	March 31,					December 31,				September 30,				June 30,				March 31,
	2017					2016				2016				2016				2016
Net premiums written
Other specialty (1)	$	114,418		36.9	%	$	59,920	29.1	%	$	74,169	31.6	%	$	113,943	39.0	%	$	100,820		31.4	%
Casualty (2)	110,620			35.7	%	57,972		28.1	%	59,242		25.2	%	61,555		21.1	%	126,483			39.4	%
Property excluding property catastrophe (3)	75,387			24.3	%	53,261		25.8	%	70,733		30.1	%	69,831		23.9	%	73,723			23.0	%
Marine and aviation	9,541			3.1	%	13,352		6.5	%	5,435		2.3	%	1,463		0.5	%	17,540			5.5	%
Property catastrophe	(7,477		)	(2.4	)%	16,520		8.0	%	19,793		8.4	%	41,771		14.3	%	(2,295		)	(0.7	)%
Other (4)	7,201			2.3	%	5,095		2.5	%	5,438		2.3	%	3,539		1.2	%	4,553			1.4	%
Total	$	309,690		100.0	%	$	206,120	100.0	%	$	234,810	100.0	%	$	292,102	100.0	%	$	320,824		100.0	%
Pro rata	$	129,016		41.7	%	$	152,951	74.2	%	$	147,280	62.7	%	$	146,231	50.1	%	$	112,209		35.0	%
Excess of loss	180,674			58.3	%	53,169		25.8	%	87,530		37.3	%	145,871		49.9	%	208,615			65.0	%
Total	$	309,690		100.0	%	$	206,120	100.0	%	$	234,810	100.0	%	$	292,102	100.0	%	$	320,824		100.0	%
Client location
United States	$	113,259		36.6	%	$	75,801	36.8	%	$	112,007	47.7	%	$	126,449	43.3	%	$	134,506		41.9	%
Europe	142,952			46.2	%	57,445		27.9	%	57,207		24.4	%	90,688		31.0	%	131,828			41.1	%
Bermuda	13,109			4.2	%	24,481		11.9	%	14,416		6.1	%	14,685		5.0	%	20,765			6.5	%
Asia and Pacific	18,427			6.0	%	26,227		12.7	%	28,794		12.3	%	40,090		13.7	%	16,710			5.2	%
Other	21,943			7.1	%	22,166		10.8	%	22,386		9.5	%	20,190		6.9	%	17,015			5.3	%
Total	$	309,690		100.0	%	$	206,120	100.0	%	$	234,810	100.0	%	$	292,102	100.0	%	$	320,824		100.0	%
Underwriting location
Bermuda	$	42,183		13.6	%	$	59,921	29.1	%	$	60,651	25.8	%	$	108,638	37.2	%	$	48,415		15.1	%
United States	117,572			38.0	%	85,597		41.5	%	106,400		45.3	%	100,436		34.4	%	140,250			43.7	%
Europe	145,461			47.0	%	54,376		26.4	%	59,497		25.3	%	71,804		24.6	%	122,738			38.3	%
Other	4,474			1.4	%	6,226		3.0	%	8,262		3.5	%	11,224		3.8	%	9,421			2.9	%
Total	$	309,690		100.0	%	$	206,120	100.0	%	$	234,810	100.0	%	$	292,102	100.0	%	$	320,824		100.0	%
Net premiums earned
Other specialty (1)	$	69,965		28.6	%	$	69,566	27.6	%	$	76,686	30.4	%	$	109,493	37.6	%	$	74,249		28.4	%
Casualty (2)	72,968			29.8	%	74,536		29.6	%	69,414		27.6	%	80,157		27.5	%	76,053			29.1	%
Property excluding property catastrophe (3)	69,852			28.5	%	72,028		28.6	%	72,550		28.8	%	65,487		22.5	%	71,953			27.5	%
Marine and aviation	9,490			3.9	%	11,806		4.7	%	10,336		4.1	%	12,559		4.3	%	17,878			6.8	%
Property catastrophe	16,177			6.6	%	18,445		7.3	%	17,582		7.0	%	19,823		6.8	%	17,953			6.9	%
Other (4)	6,399			2.6	%	5,460		2.2	%	5,359		2.1	%	3,737		1.3	%	3,122			1.2	%
Total	$	244,851		100.0	%	$	251,841	100.0	%	$	251,927	100.0	%	$	291,256	100.0	%	$	261,208		100.0	%
Pro rata	$	133,092		54.4	%	$	135,711	53.9	%	$	132,649	52.7	%	$	153,933	52.9	%	$	139,693		53.5	%
Excess of loss	111,759			45.6	%	116,130		46.1	%	119,278		47.3	%	137,323		47.1	%	121,515			46.5	%
Total	$	244,851		100.0	%	$	251,841	100.0	%	$	251,927	100.0	%	$	291,256	100.0	%	$	261,208		100.0	%

(1)    Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.        (3)�� Includes facultative business.    

(2)      Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.                (4) Includes life, casualty clash and other.

15

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Gross premiums written	$	348,623		$	138,285		$	131,726		$	118,434		$	111,280
Premiums ceded	(73,925		)	(45,341		)	(51,182		)	(6,969		)	(4,767		)
Net premiums written	274,698			92,944			80,544			111,465			106,513
Change in unearned premiums	(30,175		)	(11,467		)	(3,582		)	(44,953		)	(44,748		)
Net premiums earned	244,523			81,477			76,962			66,512			61,765
Other underwriting income (1)	4,123			4,354			4,740			4,137			3,793
Losses and loss adjustment expenses	(29,065		)	(8,841		)	(11,107		)	(366		)	(8,629		)
Acquisition expenses	(28,766		)	(4,843		)	(5,190		)	(5,964		)	(5,793		)
Other operating expenses	(41,870		)	(26,082		)	(24,249		)	(22,847		)	(23,494		)
Underwriting income	$	148,945		$	46,065		$	41,156		$	41,472		$	27,642
Underwriting Ratios
Loss ratio	11.9		%	10.9		%	14.4		%	0.6		%	14.0		%
Acquisition expense ratio	11.8		%	5.9		%	6.7		%	12.8		%	9.4		%
Other operating expense ratio	17.1		%	32.0		%	31.5		%	36.1		%	38.0		%
Combined ratio	40.8		%	48.8		%	52.6		%	49.5		%	61.4		%
Net (favorable) adverse development in prior year loss
reserves, net of related adjustments	(9.6		)%	(6.0		)%	(3.2		)%	(16.6		)%	(4.4		)%
Combined ratio excluding prior year development (2)	50.4		%	54.8		%	55.8		%	66.1		%	65.8		%
Net premiums written to gross premiums written	78.8		%	67.2		%	61.1		%	94.1		%	95.7		%
Net premiums written by client location
United States	$	241,136		$	80,957		$	77,488		$	66,261		$	55,803
Other	33,562			11,987			3,056			45,204			50,710
Total	$	274,698		$	92,944		$	80,544		$	111,465		$	106,513
United States %	87.8		%	87.1		%	96.2		%	59.4		%	52.4		%
Other %	12.2		%	12.9		%	3.8		%	40.6		%	47.6		%
Net premiums written by underwriting location
United States	$	216,729		$	58,818		$	50,236		$	42,442		$	35,330
Other	57,969			34,126			30,308			69,023			71,183
Total	$	274,698		$	92,944		$	80,544		$	111,465		$	106,513
United States %	78.9		%	63.3		%	62.4		%	38.1		%	33.2		%
Other %	21.1		%	36.7		%	37.6		%	61.9		%	66.8		%

(1)     Represents income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.

(2)    See ‘Comments on Regulation G’ for further discussion.

16

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment

(U.S. Dollars in millions)	March 31, 2017					December 31, 2016					September 30, 2016					June 30, 2016
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance	$	237,769		73.1	%	$	234,518		74.3	%	$	40,258		34.7	%	$	33,367		30.7	%
Mortgage reinsurance	25,846			7.9	%	24,315			7.7	%	22,071			19.0	%	22,242			20.5	%
Other (2)	61,596			18.9	%	56,776			18.0	%	53,826			46.3	%	52,926			48.8	%
Total	$	325,211		100.0	%	$	315,609		100.0	%	$	116,155		100.0	%	$	108,535		100.0	%
Risk In Force (RIF) (3)
U.S. primary mortgage insurance	$	60,591		92.5	%	$	59,712		92.7	%	$	10,168		68.6	%	$	8,396		64.8	%
Mortgage reinsurance	2,494			3.8	%	2,489			3.9	%	2,557			17.2	%	2,567			19.8	%
Other (2)	2,409			3.7	%	2,242			3.5	%	2,104			14.2	%	1,993			15.4	%
Total	$	65,494		100.0	%	$	64,443		100.0	%	$	14,829		100.0	%	$	12,956		100.0	%
Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740	$	35,396		58.4	%	$	34,867		58.4	%	$	5,817		57.2	%	$	4,766		56.8	%
680-739	19,343			31.9	%	18,976			31.8	%	3,425			33.7	%	2,779			33.1	%
620-679	5,065			8.4	%	5,050			8.5	%	834			8.2	%	753			9.0	%
<620	787			1.3	%	819			1.4	%	92			0.9	%	98			1.2	%
Total	$	60,591		100.0	%	$	59,712		100.0	%	$	10,168		100.0	%	$	8,396		100.0	%
Weighted average FICO score	743					743					742					741
Total RIF by Loan-To-Value (LTV):
95.01% and above	$	5,808		9.6	%	$	5,781		9.7	%	$	1,221		12.0	%	$	1,135		13.5	%
90.01% to 95.00%	33,617			55.5	%	32,986			55.2	%	5,430			53.4	%	4,379			52.2	%
85.01% to 90.00%	18,346			30.3	%	18,140			30.4	%	2,982			29.3	%	2,438			29.0	%
85.00% and below	2,820			4.7	%	2,805			4.7	%	535			5.3	%	444			5.3	%
Total	$	60,591		100.0	%	$	59,712		100.0	%	$	10,168		100.0	%	$	8,396		100.0	%
Weighted average LTV	92.9		%			92.9		%			92.9		%			92.9		%
Total RIF by State:
Texas	$	4,995		8.2	%	$	4,961		8.3	%	$	583		5.7	%	$	469		5.6	%
California	3,333			5.5	%	3,222			5.4	%	865			8.5	%	727			8.7	%
Virginia	2,625			4.3	%	2,586			4.3	%	377			3.7	%	300			3.6	%
Florida	2,467			4.1	%	2,367			4.0	%	544			5.4	%	422			5.0	%
Washington	2,313			3.8	%	2,331			3.9	%	302			3.0	%	279			3.3	%
North Carolina	2,278			3.8	%	2,245			3.8	%	217			2.1	%	161			1.9	%
Georgia	2,153			3.6	%	2,111			3.5	%	301			3.0	%	247			2.9	%
Illinois	2,109			3.5	%	2,090			3.5	%	348			3.4	%	279			3.3	%
Maryland	2,107			3.5	%	2,080			3.5	%	299			2.9	%	241			2.9	%
Minnesota	2,003			3.3	%	1,986			3.3	%	388			3.8	%	351			4.2	%
Others	34,208			56.5	%	33,733			56.5	%	5,944			58.5	%	4,920			58.6	%
Total	$	60,591		100.0	%	$	59,712		100.0	%	$	10,168		100.0	%	$	8,396		100.0	%
Weighted average coverage (end of period RIF divided by IIF)	25.5		%			25.5		%			25.3		%			25.2		%
U.S. mortgage insurance total RIF, net of reinsurance (4)	$	43,606				$	42,183				$	8,918				$	7,198
Analysts’ persistency (5)	76.6		%			76.1		%			75.4		%			75.6		%
Risk-to-capital ratio -- Arch MI U.S. (6)	12.4:1					12.4:1					15.4:1					12.4:1
PMIER sufficiency ratio -- Arch MI U.S. (7)	122		%			116		%

(1)    The aggregate dollar amount of each insured mortgage loan’s current principal balance.         (4)    Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.

(2) Includes GSE credit risk-sharing transactions and international insurance business.        (5)    Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.

(3) The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied    (6)    Represents total current (non-delinquent) RIF, net of reinsurance, divided by total statutory capital. Ratio        

by the insurance coverage percentage specified in the policy for insurance policies issued and        calculated for combined Arch MI U.S. and key UGC subsidiaries only (estimate for March 31, 2017).

after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.        (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for March 31, 2017).

17

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment

(U.S. Dollars in millions, except policy/loan/claim count)	Three Months Ended
	March 31, 2017					December 31, 2016					September 30, 2016					June 30, 2016
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)	$	12,660				$	8,788				$	8,753				$	6,420
Total NIW by credit quality (FICO score):
>=740	$	7,184		56.7	%	$	5,181		59.0	%	$	5,187		59.3	%	$	3,950		61.5	%
680-739	4,615			36.5	%	3,124			35.5	%	3,074			35.1	%	2,162			33.7	%
620-679	861			6.8	%	483			5.5	%	492			5.6	%	307			4.8	%
<620	—			—	%	—			—	%	—			—	%	1			—	%
Total	$	12,660		100.0	%	$	8,788		100.0	%	$	8,753		100.0	%	$	6,420		100.0	%
Total NIW by LTV:
95.01% and above	$	972		7.7	%	$	543		6.2	%	$	507		5.8	%	$	551		8.6	%
90.01% to 95.00%	5,985			47.3	%	4,175			47.5	%	4,261			48.7	%	2,983			46.5	%
85.01% to 90.00%	4,061			32.1	%	2,815			32.0	%	2,883			32.9	%	2,078			32.4	%
85.01% and below	1,642			13.0	%	1,255			14.3	%	1,102			12.6	%	808			12.6	%
Total	$	12,660		100.0	%	$	8,788		100.0	%	$	8,753		100.0	%	$	6,420		100.0	%
Total NIW monthly vs. single:
Monthly	$	10,368		81.9	%	$	7,778		88.5	%	$	7,765		88.7	%	$	5,182		80.7	%
Single	2,292			18.1	%	1,010			11.5	%	988			11.3	%	1,238			19.3	%
Total	$	12,660		100.0	%	$	8,788		100.0	%	$	8,753		100.0	%	$	6,420		100.0	%
Total NIW purchase vs. refinance:
Purchase	$	10,720		84.7	%	$	6,964		79.2	%	$	7,264		83.0	%	$	5,309		82.7	%
Refinance	1,940			15.3	%	1,824			20.8	%	1,489			17.0	%	1,111			17.3	%
Total	$	12,660		100.0	%	$	8,788		100.0	%	$	8,753		100.0	%	$	6,420		100.0	%
Ending number of policies in force (PIF) (3)	1,164,929					1,153,630					199,661					172,666
Rollforward of insured loans in default:
Beginning delinquent number of loans	29,691					2,423					2,245					2,325
Plus: new notices	9,863					1,161					1,251					1,033
Less: cures	(11,707		)			(1,028		)			(922		)			(920		)
Less: paid claims	(1,613		)			(153		)			(151		)			(193		)
Plus: acquired delinquent loans (3)	—					27,288					—					—
Ending delinquent number of loans (3)	26,234					29,691					2,423					2,245
Ending percentage of loans in default (3)	2.25		%			2.57		%			1.21		%			1.30		%
Losses:
Number of claims paid	1,613					153					151					193
Total paid claims (in thousands)	$	70,784				$	6,080				$	5,513				$	7,744
Average per claim (in thousands)	$	43.9				$	39.7				$	36.5				$	40.1
Severity (2)	102.0		%			92.3		%			90.4		%			94.8		%
Average reserve per default (in thousands) (3)	$	20.4				$	20.5				$	25.2				$	27.8

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

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

(3)    Includes first lien primary and pool policies.

18

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Mortgage Segment

(U.S. Dollars in millions)	March 31, 2017
	Loss Reserves, Net (1)		Primary IIF				Primary RIF				Delinquency Rate
	% of Total		Total		% of Total		Total		% of Total
Supplemental disclosures for U.S. primary mortgage insurance:
Policy year:
2007 and prior	75.8	%	$	24,317	10.2	%	5,568		9.2	%	10.70	%
2008	11.9	%	6,503		2.7	%	1,603		2.6	%	7.11	%
2009	0.8	%	1,556		0.7	%	368		0.6	%	2.37	%
2010	0.6	%	1,641		0.7	%	440		0.7	%	1.71	%
2011	1.0	%	4,780		2.0	%	1,304		2.2	%	1.10	%
2012	1.7	%	16,367		6.9	%	4,464		7.4	%	0.62	%
2013	3.3	%	26,639		11.2	%	7,202		11.9	%	0.68	%
2014	2.1	%	27,507		11.6	%	7,286		12.0	%	0.66	%
2015	1.8	%	48,717		20.5	%	12,413		20.5	%	0.34	%
2016	1.0	%	67,162		28.2	%	16,803		27.7	%	0.13	%
2017	—	%	12,580		5.3	%	3,140		5.2	%	0.01	%
Total	100.0	%	$	237,769	100.0	%	$	60,591	100.0	%	2.25	%

(1) Total reserves for losses and loss adjustment expenses, net of recoverables, was $566.2 million at March 31, 2017.

(2) The aggregate dollar amount of each insured mortgage loan’s current principal balance.

(3) 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 risk-sharing or reinsurance transactions.

19

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Selected Information on Losses and Loss Adjustment Expenses

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses	$	464,942		$	431,071		$	407,352		$	484,033		$	391,543
Change in unpaid losses and loss adjustment expenses	2,218			38,145			42,524			17,057			52,293
Total losses and loss adjustment expenses	$	467,160		$	469,216		$	449,876		$	501,090		$	443,836
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance	$	(1,274	)	$	(7,523	)	$	(12,043	)	$	(4,133	)	$	(4,177	)
Reinsurance	(59,708		)	(41,965		)	(60,374		)	(63,187		)	(46,943		)
Mortgage	(23,561		)	(4,911		)	(2,498		)	(11,066		)	(2,735		)
Total	$	(84,543	)	$	(54,399	)	$	(74,915	)	$	(78,386	)	$	(53,855	)
Impact on losses and loss adjustment expenses:
Insurance	$	(2,140	)	$	(8,281	)	$	(13,716	)	$	(4,905	)	$	(6,150	)
Reinsurance	(57,248		)	(42,096		)	(59,481		)	(69,836		)	(47,364		)
Mortgage	(23,561		)	(4,911		)	(2,498		)	(11,066		)	(2,735		)
Total	$	(82,949	)	$	(55,288	)	$	(75,695	)	$	(85,807	)	$	(56,249	)
Impact on acquisition expenses:
Insurance	$	866		$	758		$	1,673		$	772		$	1,973
Reinsurance	(2,460		)	131			(893		)	6,649			421
Mortgage	—			—			—			—			—
Total	$	(1,594	)	$	889		$	780		$	7,421		$	2,394
Impact on combined ratio:
Insurance	(0.3		)%	(1.5		)%	(2.3		)%	(0.8		)%	(0.8		)%
Reinsurance	(24.4		)%	(16.7		)%	(24.0		)%	(21.7		)%	(18.0		)%
Mortgage	(9.6		)%	(6.0		)%	(3.2		)%	(16.6		)%	(4.4		)%
Total	(8.5		)%	(6.4		)%	(8.8		)%	(8.9		)%	(6.4		)%
Impact on loss ratio:
Insurance	(0.4		)%	(1.6		)%	(2.6		)%	(0.9		)%	(1.2		)%
Reinsurance	(23.4		)%	(16.7		)%	(23.6		)%	(24.0		)%	(18.1		)%
Mortgage	(9.6		)%	(6.0		)%	(3.2		)%	(16.6		)%	(4.4		)%
Total	(8.3		)%	(6.5		)%	(8.9		)%	(9.7		)%	(6.7		)%
Impact on acquisition expense ratio:
Insurance	0.1		%	0.1		%	0.3		%	0.1		%	0.4		%
Reinsurance	(1.0		)%	—		%	(0.4		)%	2.3		%	0.1		%
Mortgage	—		%	—		%	—		%	—		%	—		%
Total	(0.2		)%	0.1		%	0.1		%	0.8		%	0.3		%
Estimated net losses incurred from current accident year catastrophic events (2)
Insurance	$	2,494		$	23,725		$	1,774		$	20,592		$	428
Reinsurance	9,852			10,349			8,931			15,705			3,774
Total	$	12,346		$	34,074		$	10,705		$	36,297		$	4,202
Impact on combined ratio:
Insurance	0.5		%	4.6		%	0.3		%	3.9		%	0.1		%
Reinsurance	4.0		%	4.1		%	3.5		%	5.4		%	1.4		%
Total	1.2		%	4.0		%	1.3		%	4.1		%	0.5		%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) Equals estimated losses from catastrophic events occurring in the current accident year, net of reinsurance and reinstatement premiums. Amounts shown for the insurance segment are for named catastrophic events only. Amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.

20

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Investable Asset Summary and Investment Portfolio Metrics

The following table summarizes the Company’s investable assets and portfolio metrics (1):

(U.S. Dollars in thousands)	March 31,					December 31,					September 30,					June 30,					March 31,
	2017					2016					2016					2016					2016
Investable assets (1) (2):
Fixed maturities available for sale, at fair value	$	13,745,932		73.0	%	$	13,426,577		72.0	%	$	11,026,929		68.7	%	$	11,050,464		72.8	%	$	10,645,257		71.2	%
Fixed maturities, at fair value (3)	408,986			2.2	%	364,856			2.0	%	423,733			2.6	%	377,482			2.5	%	371,298			2.5	%
Fixed maturities pledged under securities lending agreements, at fair value	523,101			2.8	%	730,341			3.9	%	442,099			2.8	%	319,672			2.1	%	558,603			3.7	%
Total fixed maturities	14,678,019			77.9	%	14,521,774			77.9	%	11,892,761			74.1	%	11,747,618			77.4	%	11,575,158			77.4	%
Equity securities available for sale, at fair value	428,594			2.3	%	518,041			2.8	%	521,587			3.3	%	490,815			3.2	%	506,915			3.4	%
Equity securities, at fair value (3)	55,311			0.3	%	25,328			0.1	%	27,644			0.2	%	7,090			—	%	437			—	%
Equity securities pledged under securities lending agreements, at fair value	2,468			—	%	14,639			0.1	%	11,658			0.1	%	11,101			0.1	%	16,163			0.1	%
Total equity securities	486,373			2.6	%	558,008			3.0	%	560,889			3.5	%	509,006			3.4	%	523,515			3.5	%
Other investments available for sale, at fair value	228,437			1.2	%	167,970			0.9	%	168,243			1.0	%	182,957			1.2	%	195,079			1.3	%
Other investments, at fair value (3)	1,131,797			6.0	%	1,108,871			6.0	%	1,065,853			6.6	%	1,003,621			6.6	%	1,010,450			6.8	%
Total other investments	1,360,234			7.2	%	1,276,841			6.9	%	1,234,096			7.7	%	1,186,578			7.8	%	1,205,529			8.1	%
Investments accounted for using the equity method (4)	861,607			4.6	%	811,273			4.4	%	797,542			5.0	%	685,766			4.5	%	628,832			4.2	%
Short-term investments available for sale, at fair value	803,619			4.3	%	612,005			3.3	%	1,184,408			7.4	%	853,531			5.6	%	623,844			4.2	%
Short-term investments, at fair value (3)	75,559			0.4	%	64,542			0.3	%	—			—	%	—			—	%	—			—	%
Short-term investments pledged under securities lending agreements, at fair value	—			—	%	—			—	%	—			—	%	—			—	%	6,000			—	%
Total short-term investments	879,178			4.7	%	676,547			3.6	%	1,184,408			7.4	%	853,531			5.6	%	629,844			4.2	%
Cash	656,188			3.5	%	768,049			4.1	%	511,784			3.2	%	442,066			2.9	%	479,545			3.2	%
Securities transactions entered into but not settled at the balance sheet date	(87,990		)	(0.5	)%	23,697			0.1	%	(138,760		)	(0.9	)%	(246,257		)	(1.6	)%	(88,129		)	(0.6	)%
Total investable assets held by the Company	$	18,833,609		100.0	%	$	18,636,189		100.0	%	$	16,042,720		100.0	%	$	15,178,308		100.0	%	$	14,954,294		100.0	%
Average effective duration (in years)	3.36					3.64					3.31					3.85					3.56
Average S&P/Moody’s credit ratings (5)	AA/Aa2					AA-/Aa3					AA/Aa2					AA/Aa2					AA/Aa2
Embedded book yield (before investment expenses)	2.23		%			2.03		%			1.78		%			1.92		%			2.07		%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:

Investable assets in ‘other’ segment:
Cash	$	47,566		$	74,893		$	67,032		$	74,525		$	78,416
Investments accounted for using the fair value option	1,976,467			1,857,623			1,872,343			1,677,836			1,757,147
Securities sold but not yet purchased	(59,430		)	(33,157		)	(52,195		)	(54,668		)	(48,279		)
Securities transactions entered into but not settled at the balance sheet date	(61,981		)	(41,596		)	(50,169		)	5,738			(77,422		)
Total investable assets included in ‘other’ segment	$	1,902,622		$	1,857,763		$	1,837,011		$	1,703,431		$	1,709,862

(2)    This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.

(3)    Represents investments which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on the balance sheet.

(4) Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.

(5)    Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).

21

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Net Investment Income, Yield and Total Return

The following table summarizes the Company’s net investment income, yield and total return:

(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Composition of net investment income (1):
Fixed maturities	$	82,781		$	60,402		$	58,542		$	64,365		$	59,001
Term loan investments (2)	3,114			9,626			6,397			5,669			4,858
Equity securities (dividends)	2,966			2,450			3,633			3,984			3,756
Short-term investments	1,441			1,720			823			618			458
Other (3)	18,120			9,220			8,706			8,152			13,672
Gross investment income	108,422			83,418			78,101			82,788			81,745
Investment expenses	(12,610		)	(13,313		)	(11,819		)	(12,391		)	(11,336		)
Net investment income	$	95,812		$	70,105		$	66,282		$	70,397		$	70,409
Per share	$	0.69		$	0.56		$	0.53		$	0.57		$	0.57
Investment income yield, at amortized cost (1) (4):
Pre-tax	2.13		%	1.92		%	1.81		%	2.08		%	2.13		%
After-tax	1.90		%	1.80		%	1.70		%	1.91		%	1.91		%
Total return (1) (5):
Including effects of foreign exchange	1.70		%	(1.89		)%	0.88		%	1.27		%	1.82		%
Excluding effects of foreign exchange	1.64		%	(1.66		)%	0.91		%	1.63		%	1.48		%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) Included in “investments accounted for using the fair value option” on the Company’s balance sheet.

(3) Includes income on other investments, funds held balances, cash balances and other.

(4) Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.

(5) Includes net 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 or losses generated by the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses.

22

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Fixed Maturities

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):

(U.S. Dollars in thousands)	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gains (Losses)			Amortized Cost		Fair Value / Amortized Cost		Fair Value % of Total
At March 31, 2017
Corporates	$	4,902,600	$	31,033	$	(36,615	)	$	(5,582	)	$	4,908,182	99.9	%	33.4	%
U.S. government and government agencies	3,266,908		7,940		(11,152		)	(3,212		)	3,270,120		99.9	%	22.3	%
Municipal bonds	2,519,112		14,332		(17,411		)	(3,079		)	2,522,191		99.9	%	17.2	%
Non-U.S. government securities	1,335,296		26,017		(39,356		)	(13,339		)	1,348,635		99.0	%	9.1	%
Asset-backed securities	1,638,347		8,984		(4,910		)	4,074			1,634,273		100.2	%	11.2	%
Commercial mortgage-backed securities	590,521		3,485		(6,040		)	(2,555		)	593,076		99.6	%	4.0	%
Residential mortgage-backed securities	425,235		5,210		(2,712		)	2,498			422,737		100.6	%	2.9	%
Total	$	14,678,019	$	97,001	$	(118,196	)	$	(21,195	)	$	14,699,214	99.9	%	100.0	%
At December 31, 2016
Corporates	$	4,696,079	$	27,606	$	(46,905	)	$	(19,299	)	$	4,715,378	99.6	%	32.3	%
U.S. government and government agencies	2,804,811		9,319		(24,437		)	(15,118		)	2,819,929		99.5	%	19.3	%
Municipal bonds	3,713,434		8,554		(29,154		)	(20,600		)	3,734,034		99.4	%	25.6	%
Non-U.S. government securities	1,142,735		19,036		(56,872		)	(37,836		)	1,180,571		96.8	%	7.9	%
Asset-backed securities	1,123,987		6,897		(6,526		)	371			1,123,616		100.0	%	7.7	%
Commercial mortgage-backed securities	536,051		2,876		(6,508		)	(3,632		)	539,683		99.3	%	3.7	%
Residential mortgage-backed securities	504,677		4,794		(8,357		)	(3,563		)	508,240		99.3	%	3.5	%
Total	$	14,521,774	$	79,082	$	(178,759	)	$	(99,677	)	$	14,621,451	99.3	%	98.9	%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

23

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Credit Quality Distribution and Maturity Profile

The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):

(U.S. Dollars in thousands)	March 31,				December 31,				September 30,				June 30,				March 31,
	2017				2016				2016				2016				2016
Credit quality distribution of total fixed maturities (2) (3):
U.S. government and government agencies (4)	$	3,583,161	24.4	%	$	3,210,899	22.1	%	$	3,579,338	30.1	%	$	3,364,709	28.6	%	$	3,611,793	31.2	%
AAA	4,665,048		31.8	%	3,918,739		27.0	%	3,383,665		28.5	%	3,421,385		29.1	%	3,797,393		32.8	%
AA	2,700,952		18.4	%	3,148,226		21.7	%	2,137,615		18.0	%	2,255,666		19.2	%	1,524,692		13.2	%
A	2,108,293		14.4	%	2,338,834		16.1	%	1,581,646		13.3	%	1,541,075		13.1	%	1,512,085		13.1	%
BBB	860,615		5.9	%	1,203,942		8.3	%	470,613		4.0	%	525,084		4.5	%	484,968		4.2	%
BB	298,703		2.0	%	226,321		1.6	%	277,589		2.3	%	232,859		2.0	%	233,348		2.0	%
B	154,028		1.0	%	156,405		1.1	%	163,327		1.4	%	151,549		1.3	%	164,744		1.4	%
Lower than B	87,373		0.6	%	90,833		0.6	%	101,602		0.9	%	96,726		0.8	%	100,441		0.9	%
Not rated	219,846		1.5	%	227,574		1.6	%	197,366		1.7	%	158,565		1.3	%	145,694		1.3	%
Total fixed maturities, at fair value	$	14,678,019	100.0	%	$	14,521,774	100.0	%	$	11,892,761	100.0	%	$	11,747,618	100.0	%	$	11,575,158	100.0	%
Maturity profile of total fixed maturities (2):
Due in one year or less	$	665,855	4.5	%	$	582,729	4.0	%	$	308,548	2.6	%	$	272,242	2.3	%	$	295,627	2.6	%
Due after one year through five years	7,450,643		50.8	%	6,367,486		43.8	%	5,484,120		46.1	%	5,225,233		44.5	%	5,391,177		46.6	%
Due after five years through ten years	3,425,268		23.3	%	4,753,999		32.7	%	2,873,200		24.2	%	2,907,672		24.8	%	2,561,411		22.1	%
Due after 10 years	482,150		3.3	%	652,845		4.5	%	790,392		6.6	%	677,863		5.8	%	642,505		5.6	%
	12,023,916		81.9	%	12,357,059		85.1	%	9,456,260		79.5	%	9,083,010		77.3	%	8,890,720		76.8	%
Mortgage-backed securities	425,235		2.9	%	504,677		3.5	%	577,097		4.9	%	674,451		5.7	%	714,001		6.2	%
Commercial mortgage-backed securities	590,521		4.0	%	536,051		3.7	%	618,235		5.2	%	624,391		5.3	%	577,853		5.0	%
Asset-backed securities	1,638,347		11.2	%	1,123,987		7.7	%	1,241,169		10.4	%	1,365,766		11.6	%	1,392,584		12.0	%
Total fixed maturities, at fair value	$	14,678,019	100.0	%	$	14,521,774	100.0	%	$	11,892,761	100.0	%	$	11,747,618	100.0	%	$	11,575,158	100.0	%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.

(3)     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.

(4)     Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.

24

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Analysis of Corporate Exposures

The following table summarizes the Company’s corporate bonds by sector (1):

(U.S. Dollars in thousands)	March 31,				December 31,				September 30,				June 30,				March 31,
	2017				2016				2016				2016				2016
Sector:
Industrials	$	2,723,799	55.6	%	$	2,617,467	55.7	%	$	1,637,201	50.4	%	$	1,638,355	51.0	%	$	1,598,431	51.1	%
Financials	1,424,620		29.1	%	1,321,493		28.1	%	1,056,883		32.5	%	1,025,714		31.9	%	966,692		30.9	%
Utilities	337,051		6.9	%	366,440		7.8	%	178,199		5.5	%	225,403		7.0	%	207,371		6.6	%
Covered bonds	160,840		3.3	%	182,132		3.9	%	168,133		5.2	%	154,194		4.8	%	171,101		5.5	%
All other (2)	256,290		5.2	%	208,547		4.4	%	210,005		6.5	%	166,937		5.2	%	181,928		5.8	%
Total fixed maturities, at fair value	$	4,902,600	100.0	%	$	4,696,079	100.0	%	$	3,250,421	100.0	%	$	3,210,603	100.0	%	$	3,125,523	100.0	%
Credit quality distribution (3):
AAA	$	551,784	11.3	%	$	470,072	10.0	%	$	429,523	13.2	%	$	367,194	11.4	%	$	461,572	14.8	%
AA	912,162		18.6	%	819,071		17.4	%	788,465		24.3	%	837,863		26.1	%	704,982		22.6	%
A	1,898,080		38.7	%	1,842,796		39.2	%	1,193,288		36.7	%	1,134,860		35.3	%	1,138,261		36.4	%
BBB	988,633		20.2	%	1,054,202		22.4	%	348,405		10.7	%	420,279		13.1	%	377,861		12.1	%
BB	206,124		4.2	%	190,913		4.1	%	195,010		6.0	%	184,652		5.8	%	174,657		5.6	%
B	157,467		3.2	%	138,910		3.0	%	140,582		4.3	%	136,997		4.3	%	150,354		4.8	%
Lower than B	31,003		0.6	%	28,866		0.6	%	28,228		0.9	%	20,416		0.6	%	17,657		0.6	%
Not rated	157,347		3.2	%	151,249		3.2	%	126,920		3.9	%	108,342		3.4	%	100,179		3.2	%
Total fixed maturities, at fair value	$	4,902,600	100.0	%	$	4,696,079	100.0	%	$	3,250,421	100.0	%	$	3,210,603	100.0	%	$	3,125,523	100.0	%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2)    Includes sovereign securities, supranational securities and other.

(3)    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.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at March 31, 2017 (1):

(U.S. Dollars in thousands)	Fair Value		% of Asset Class		% of Investable Assets		Credit Quality (2)
Issuer:
Microsoft Corporation	$	148,440	3.0	%	0.8	%	AAA/Aaa
Apple Inc.	121,246		2.5	%	0.6	%	AA+/Aa1
JPMorgan Chase & Co.	109,874		2.2	%	0.6	%	A-/A3
The Bank of New York Mellon Corporation	103,531		2.1	%	0.5	%	A/A1
Wells Fargo & Company	87,047		1.8	%	0.5	%	A/A2
Citigroup Inc.	76,039		1.6	%	0.4	%	A-/Baa1
Daimler AG	71,214		1.5	%	0.4	%	A/A2
Bayerische Motoren Werke Aktiengesellschaft	71,278		1.5	%	0.4	%	A+/A1
MetLife, Inc.	65,844		1.3	%	0.3	%	AA-/Aa3
Honda Motor Co., Ltd.	58,897		1.2	%	0.3	%	A+/A1
Total	$	913,410	18.6	%	4.8	%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

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

25

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Structured Securities and Eurozone Investments

The following table provides the composition of the Company’s structured securities at March 31, 2017 (1):

(U.S. Dollars in thousands)	Agencies		AAA		AA		A		BBB		Non-Investment Grade		Total
Residential mortgage-backed securities	$	311,538	$	55,624	$	3,723	$	6,153	$	726	$	47,471	$	425,235
Commercial mortgage-backed securities	4,717		531,464		9,519		6,989		21,234		16,598		590,521
Asset-backed securities	—		1,322,358		3,436		131,570		72,627		108,356		1,638,347
Total	$	316,255	$	1,909,446	$	16,678	$	144,712	$	94,587	$	172,425	$	2,654,103

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

The fair value of the Company’s Eurozone investments are as follows at March 31, 2017 (1):

(U.S. Dollars in thousands)			Financial		Other		Bank		Equities
	Sovereign (3)		Corporates		Corporates		Loans (4)		and Other		Total
Country (2):
Netherlands	$	87,779	$	16,856	$	112,656	$	947	$	2,642	$	220,880
Germany	101,884		—		42,375		200		9,575		154,034
France	—		1,168		35,721		1,323		23,087		61,299
Luxembourg	1,088		23,310		8,218		3,552		—		36,168
Belgium	27,580		7,400		234		1		—		35,215
Austria	16,558		—		—		—		—		16,558
Ireland	—		6,301		4,333		2,078		2,295		15,007
Spain	—		—		1,088		2		11,698		12,788
Supranational (4)	7,417		—		—		—		—		7,417
Italy	—		—		—		1		6,514		6,515
Portugal	—		—		—		—		552		552
Greece	81		—		235		—		—		316
Total	$	242,387	$	55,035	$	204,860	$	8,104	$	56,363	$	566,749

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) The country allocations set forth in the table are based on various assumptions made by the Company 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, the Company does not believe that it has any other Eurozone investments at March 31, 2017.

(3) Sovereign includes securities issued and/or guaranteed by Eurozone governments.

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

26

Arch Capital Group Ltd. and Subsidiaries

Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the 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, net foreign exchange gains or losses and UGC transaction costs and other, net of 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 on the following page.

The Company believes 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, 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, the Company’s business performance. 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 an integral part of the Company’s 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 the Company’s 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 the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s 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 the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its 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. During the 2016 fourth quarter, UGC transaction costs and other included non-recurring expenses related to a change in the Company’s approach on the deferral of certain internal underwriting costs which are no longer being deferred. The Company believes that UGC transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes 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 from the calculation of after-tax operating income or loss available to Arch common shareholders.

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

In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford Re. As such, the Company consolidates the results of Watford Re in its consolidated financial statements, although it only owns 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, the Company does not guarantee or provide credit support for Watford Re. Because 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. 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. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.

The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s 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 the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s 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 ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 11.

The Company’s segment information includes the use of a combined ratio excluding catastrophic activity and prior year development for the insurance segment and reinsurance segment and a combined ratio excluding prior year development for the mortgage segment. These ratios are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown on the individual segment pages. The Company’s management utilizes the adjusted combined ratio excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the core underwriting performance of each of its 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. Management uses total return on investments as a key measure of the return generated to Arch common shareholders on the capital held in its business, and compares the return generated by the Company’s investment portfolio against benchmark returns which it measures portfolio returns against during the periods presented.

27

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation and Annualized Operating Return on Average Common Equity

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

(U.S. Dollars in thousands, except share data)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Net income available to Arch common shareholders	$	241,909		$	62,396		$	247,388		$	205,570		$	149,314
Net realized (gains) losses	(29,134		)	98,477			(99,159		)	(43,935		)	(32,464		)
Net impairment losses recognized in earnings	1,807			13,593			3,867			5,343			7,639
Equity in net (income) loss of investment funds accounted for using the equity method	(48,088		)	(16,421		)	(16,662		)	(8,737		)	(6,655		)
Net foreign exchange (gains) losses	19,796			(35,547		)	4,054			(22,703		)	22,209
UGC transaction costs and other	15,584			34,587			7,142			—			—
Income tax (benefit) expense (1)	(3,909		)	(15,557		)	2,970			5,036			5,699
After-tax operating income available to Arch common shareholders	$	197,965		$	141,528		$	149,600		$	140,574		$	145,742
Diluted per common share results:
Net income available to Arch common shareholders	$	1.74		$	0.50		$	1.98		$	1.65		$	1.20
Net realized (gains) losses	(0.21		)	0.78			(0.79		)	(0.35		)	(0.26		)
Net impairment losses recognized in earnings	0.01			0.11			0.03			0.04			0.06
Equity in net (income) loss of investment funds accounted for using the equity method	(0.34		)	(0.13		)	(0.13		)	(0.07		)	(0.05		)
Net foreign exchange (gains) losses	0.14			(0.28		)	0.03			(0.18		)	0.18
UGC transaction costs and other	0.11			0.27			0.06			—			—
Income tax (benefit) expense (1)	(0.03		)	(0.12		)	0.02			0.04			0.04
After-tax operating available to Arch common shareholders	$	1.42		$	1.13		$	1.20		$	1.13		$	1.17
Weighted average common shares and common share equivalents outstanding — diluted	139,047,672			125,427,259			124,931,653			124,365,596			124,496,496
Beginning common shareholders’ equity	$	7,481,163		$	6,538,983		$	6,340,583		$	6,050,248		$	5,841,542
Ending common shareholders’ equity	7,833,289			7,481,163			6,538,983			6,340,583			6,050,248
Average common shareholders’ equity (2)	$	7,657,226		$	6,471,392		$	6,439,783		$	6,195,416		$	5,945,895
Annualized return on average common equity (2)	12.6		%	3.9		%	15.4		%	13.3		%	10.0		%
Annualized operating return on average common equity (2)	10.3		%	8.7		%	9.3		%	9.1		%	9.8		%

(1) Income tax expense on net realized gains or losses, net impairment losses recognized in earnings, equity in net income (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.

(2) For the 2016 fourth quarter, average common shareholders’ equity and the related returns on average common equity reflect the weighted impact of the $1.10 billion of convertible non-voting common equivalent preferred shares, which were issued on December 31, 2016 as part of the UGC acquisition.

28

Arch Capital Group Ltd. and Subsidiaries

Operating Income and Effective Tax Rate Calculations

The following table provides a reconciliation of income before income taxes to after-tax operating income available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income available to Arch common shareholders:

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Arch Operating Income Components (1):
Income before income taxes	$	279,503		$	59,611		$	260,385		$	221,010		$	169,098
Net realized (gains) losses	(28,512		)	99,149			(95,946		)	(40,927		)	(31,862		)
Net impairment losses recognized in earnings	1,807			13,593			3,867			5,343			7,639
Equity in net (income) loss of investment funds accounted for using the equity method	(48,088		)	(16,421		)	(16,662		)	(8,737		)	(6,655		)
Net foreign exchange (gains) losses	19,845			(35,221		)	4,232			(22,461		)	22,041
UGC transaction costs and other	15,584			34,587			7,142			—			—
Pre-tax operating income	240,139			155,298			163,018			154,228			160,261
Arch share of ‘other’ segment operating income (2)	1,350			1,109			2,324			927			1,576
Pre-tax operating income available to Arch (b)	241,489			156,407			165,342			155,155			161,837
Income tax expense (a)	(32,306		)	(3,262		)	(10,258		)	(9,096		)	(10,611		)
After-tax operating income available to Arch	209,183			153,145			155,084			146,059			151,226
Preferred dividends	(11,218		)	(11,617		)	(5,484		)	(5,485		)	(5,484		)
After-tax operating income available to Arch common shareholders	$	197,965		$	141,528		$	149,600		$	140,574		$	145,742
Effective tax rate on pre-tax operating income available to Arch (a)/(b)	13.4		%	2.1		%	6.2		%	5.9		%	6.6		%

(1) Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income is as follows:

(U.S. Dollars in thousands)	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Balances in ‘other’ segment:
Underwriting income (loss)	$	(2,295	)	$	(3,266	)	$	1,379		$	(1,724	)	$	(944	)
Net investment income	22,062			20,946			27,336			17,941			23,326
Interest expense	(2,920		)	(3,058		)	(3,019		)	(3,231		)	(3,480		)
Preferred dividends	(4,584		)	(4,588		)	(4,588		)	(4,586		)	(4,587		)
Pre-tax operating income (loss) available to common shareholders	12,263			10,034			21,108			8,400			14,315
Arch ownership	11		%	11		%	11		%	11		%	11		%
Arch share of ‘Other’ segment operating income (loss) (3)	$	1,350		$	1,109		$	2,324		$	927		$	1,576

(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).

29

Arch Capital Group Ltd. and Subsidiaries

Capital Structure and Share Repurchase Activity

The following table provides an analysis of the Company’s capital structure (1):

(U.S. Dollars in thousands, except share data)	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Debt:
ACGL Senior notes, due May 1, 2034 ($300,000 principal, 7.35%)	$	296,979		$	296,957		$	296,936		$	296,915		$	296,895
Arch-U.S. Senior notes, due Nov. 1, 2043 ($500,000 principal, 5.144%) (2)	494,548			494,525			494,501			494,477			494,454
Arch Finance Senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)	495,778			495,689			—			—			—
Arch Finance Senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)	445,105			445,087			—			—			—
Revolving credit agreement borrowings, due October 26, 2021 (variable)	500,000			500,000			100,000			100,000			100,000
Total debt	$	2,232,410		$	2,232,258		$	891,437		$	891,392		$	891,349
Shareholders’ equity available to Arch:
Series C non-cumulative preferred shares (6.75%)	$	322,555		$	322,555		$	325,000		$	325,000		$	325,000
Series E non-cumulative preferred shares (5.25%)	450,000			450,000			450,000			—			—
Common shareholders’ equity (a)	7,833,289			7,481,163			6,538,983			6,340,583			6,050,248
Total shareholders’ equity available to Arch	$	8,605,844		$	8,253,718		$	7,313,983		$	6,665,583		$	6,375,248
Total capital available to Arch	$	10,838,254		$	10,485,976		$	8,205,420		$	7,556,975		$	7,266,597
Common shares outstanding, net of treasury shares (b)	135,790,306			135,550,337			122,675,197			122,572,260			122,093,596
Book value per common share (4) (a)/(b)	$	57.69		$	55.19		$	53.30		$	51.73		$	49.55
Leverage ratios:
Senior notes/total capital available to Arch	16.0		%	16.5		%	9.6		%	10.5		%	10.9		%
Revolving credit agreement borrowings/total capital available to Arch	4.6		%	4.8		%	1.2		%	1.3		%	1.4		%
Debt/total capital available to Arch	20.6		%	21.3		%	10.9		%	11.8		%	12.3		%
Preferred/total capital available to Arch	7.1		%	7.4		%	9.4		%	4.3		%	4.5		%
Debt and preferred/total capital available to Arch	27.7		%	28.7		%	20.3		%	16.1		%	16.7		%

(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford Re). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.

(2) Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.), a wholly owned subsidiary of Arch Capital Group Ltd. (“ACGL”), and fully and unconditionally guaranteed by ACGL.

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

(4) Excludes the effects of stock options and restricted stock units outstanding.

The following table provides an analysis of the Company’s share repurchase program:

(U.S. Dollars in thousands except share data)	Three Months Ended											Cumulative
	March 31,		December 31,		September 30,		June 30,		March 31,			March 31,
	2017		2016		2016		2016		2016			2017
Effect of share repurchases:
Aggregate cost of shares repurchased	$	—	$	—	$	—	$	—	$	75,256		$	3,682,661
Shares repurchased	—		—		—		—		1,140,137			125,223,844
Average price per share repurchased	$	—	$	—	$	—	$	—	$	66.01		$	29.41
Average book value per common share (1)	$	56.44	$	54.25	$	52.52	$	50.64	$	48.60
Average repurchase price-to-book multiple	—		—		—		—		1.36		x
Remaining share repurchase authorization (2)	$	446,501

(1)    Equals average of beginning and ending book value per common share for each period presented.

(2) Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 2019.

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