0000947484 us-gaap:OtherInvestmentsMember us-gaap:FairValueMeasurementsRecurringMember acgl:FairValueOptionMember 2019-09-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended September 30, 20172019
 
Or
  
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number:  001-16209


 archnewlogo11a20.jpgarchlogorgbsolida36.jpg
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)

BermudaNot applicable98-0374481
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
Waterloo House, Ground Floor 
100 Pitts Bay Road,PembrokeHM 08,Bermuda(441)278-9250
(Address of principal executive offices)(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol (s)Name of each exchange on which registered
Common shares, $0.0011 par value per shareACGLNASDAQ Stock Market
Depositary shares, each representing a 1/100th interest in a 5.25% Series E preferred share
ACGLPNASDAQ Stock Market
Depositary shares, each representing a 1/100th interest in a 5.45% Series F preferred share
ACGLONASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ☑No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ☑     Noo☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large acceleratedAccelerated Filerþ☑Accelerated Filer o☐ Non-accelerated Filer o☐Smaller reporting
company o☐Emerging growth company o☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐No þ☑

As of October 31, 2017,November 1, 2019, there were 130,874,024405,308,162 common shares, $0.0033$0.0011 par value per share, of the registrant outstanding.

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ARCH CAPITAL GROUP LTD.
 
INDEX TO FORM 10-Q
 
   Page No.
 PART I  
 
Financial Information
 
2
Item 1.
Consolidated Financial Statements
 
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
5049
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
7573
Item 4.
Controls and Procedures
 
7574
    
 PART II  
 
Other Information
 
7675
Item 1.
Legal Proceedings
75
Item 1A.
Risk Factors
75
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
75
Item 3.
Defaults Upon Senior Securities
 
76
Item 1A.4.
Risk FactorsMine Safety Disclosures
 
76
Item 2.5.
Unregistered Sales of Equity Securities and Use of ProceedsOther Information
76
Item 6.
Exhibits
 
77
Item 5.
Other Information
77
Item 6.
ExhibitsSignatures
 
78
Signatures
79


ARCH CAPITALACGL 2017 12019 THIRD QUARTER FORM 10-Q1
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PART I.  FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This releasereport or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this releasereport are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this releasereport and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:
our ability to successfully implement our business strategy during “soft” as well as “hard” markets;
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;
the integration of United Guaranty and any other businesses we have acquired or may acquire into our existing operations;
our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;
general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate;
competition, including increased competition, on the basis of pricing, capacity (including alternative formssources of capital), coverage terms, or other factors;
developments in the world’s financial and capital markets and our access to such markets;
our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;
the loss of key personnel;
accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through September 30, 2017;2019;
greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries;
severity and/or frequency of losses;
claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our results of operations;
the effect of climate change on our business;
acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;
the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;

ARCH CAPITAL 22019 THIRD QUARTER FORM 10-Q
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our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;

ACGL 2017 THIRD QUARTER FORM 10-Q2
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changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations;
the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies;
losses relating to aviation business and business produced by a certain managing underwriting agency for which we may be liable to the purchaser of our prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in our periodic reports filed with the SEC;
changes in accounting principles or policies or in our application of such accounting principles or policies;
changes in the political environment of certain countries in which we operate or underwrite business;
a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service providers, which could negatively impact our business and/or expose us to litigation;
statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers;customers, including the Tax Cuts and Jobs Act of 2017; and
the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.
 
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 




ARCH CAPITALACGL 2017 32019 THIRD QUARTER FORM 10-Q3
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
  Page No.
   
Report of Independent Registered Public Accounting Firm
 
5
   
Consolidated Balance Sheets
  
September 30, 20172019 (unaudited) and December 31, 20162018 
6
   
Consolidated Statements of Income
  
For the three and nine month periods ended September 30, 20172019 and 20162018 (unaudited) 
7
   
Consolidated Statements of Comprehensive Income
  
For the three and nine month periods ended September 30, 20172019 and 20162018 (unaudited) 
8
   
Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine month periods ended September 30, 2019 and 2018 (unaudited)
9
Consolidated Statements of Cash Flows
  
For the nine month periods ended September 30, 20172019 and 2016 (unaudited)
9
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2017 and 20162018 (unaudited) 
10
   
Notes to Consolidated Financial Statements (unaudited)  
Note 1 - GeneralBasis of Presentation and Recent Accounting Pronouncements
 
11
Note 2 - Recent Accounting Pronouncements
11
Note 3 - Variable Interest Entities and Noncontrolling InterestsShare Transactions
 
12
Note 43 - Earnings (Loss) Per Common Share
 
1513
Note 54 - Segment Information
 
1614
Note 65 - ReservesReserve for Losses and Loss Adjustment Expenses
 
2119
Note 76 - Investment Information
 
2422
Note 87 - Fair Value
 
3028
Note 8 - Derivative Instruments
34
Note 9 - Derivative InstrumentsCommitments and Contingencies
35
Note 10 - Leases
35
Note 11 - Variable Interest Entities and Noncontrolling Interests
 
36
Note 10 - Commitments and Contingencies
37
Note 11 - Share Transactions
37
Note 12 - Other Comprehensive Income (Loss)
 
39
Note 13 - Guarantor Financial Information
 
40
Note 14 - Income Taxes
 
48
Note 15 - Legal Proceedings
 
48
Note 16 - Transactions With Related PartiesSubsequent Events
 
48
Note 17 - Acquisition
48
Note 18 - Subsequent Events
49




ARCH CAPITALACGL 2017 42019 THIRD QUARTER FORM 10-Q4
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Report of Independent Registered Public Accounting Firm

To theBoard of Directors and Shareholders of Arch Capital Group Ltd.:

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet ofArch Capital Group Ltd. and its subsidiaries (the(the “Company”) as ofSeptember 30, 2017,2019, and the relatedconsolidatedstatements of income, and comprehensive income, and changes in shareholders’ equity for the three-month and nine-month periods endedSeptember 30, 20172019 and September 30, 20162018, and the consolidated statements of changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 20172019 and September 30, 2016. These2018,including the related notes (collectively referred to as the “interim financialstatements”).Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements arefor them to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.America.

We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)., the consolidatedbalance sheet of the Company as of December 31, 2018, and the related consolidatedstatements of income, comprehensive income, changes in shareholders’ equity, and cash flowsfor the year then ended (not presented herein), and in our report dated February 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

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

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

/s/ PricewaterhouseCoopers LLP


New York, NY
November 3, 20178, 2019


ARCH CAPITALACGL 2017 52019 THIRD QUARTER FORM 10-Q5
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 (Unaudited)  
 September 30,
2019		 December 31,
2018
Assets 
  
Investments: 
  
Fixed maturities available for sale, at fair value (amortized cost: $16,146,333 and $14,829,902)$16,470,523
 $14,699,010
Short-term investments available for sale, at fair value (amortized cost: $752,207 and $956,238)751,989
 955,880
Collateral received under securities lending, at fair value (amortized cost: $430,255 and $274,125)430,263
 274,133
Equity securities, at fair value550,485
 338,899
Investments accounted for using the fair value option3,838,243
 3,983,571
Investments accounted for using the equity method1,575,832
 1,493,791
Total investments23,617,335
 21,745,284
    
Cash880,099
 646,556
Accrued investment income116,196
 114,641
Securities pledged under securities lending, at fair value (amortized cost: $419,297 and $266,786)420,415
 268,395
Premiums receivable1,618,186
 1,299,150
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses3,168,195
 2,919,372
Contractholder receivables2,094,683
 2,079,111
Ceded unearned premiums1,168,258
 975,469
Deferred acquisition costs622,028
 569,574
Receivable for securities sold50,615
 36,246
Goodwill and intangible assets624,500
 634,920
Other assets1,192,093
 929,611
Total assets$35,572,603
 $32,218,329
    
Liabilities   
Reserve for losses and loss adjustment expenses$12,389,384
 $11,853,297
Unearned premiums4,243,372
 3,753,636
Reinsurance balances payable601,891
 393,107
Contractholder payables2,094,683
 2,079,111
Collateral held for insured obligations205,449
 236,630
Senior notes1,871,386
 1,733,528
Revolving credit agreement borrowings490,720
 455,682
Securities lending payable430,255
 274,125
Payable for securities purchased176,130
 90,034
Other liabilities1,007,524
 911,500
Total liabilities23,510,794
 21,780,650
    
Commitments and Contingencies


 


Redeemable noncontrolling interests48,789
 206,292
    
Shareholders' Equity   
Non-cumulative preferred shares780,000
 780,000
Common shares ($0.0011 par, shares issued: 574,173,205 and 570,737,283)638
 634
Additional paid-in capital1,864,468
 1,793,781
Retained earnings10,705,025
 9,426,299
Accumulated other comprehensive income (loss), net of deferred income tax211,714
 (178,720)
Common shares held in treasury, at cost (shares: 168,942,674 and 168,282,449)(2,403,749) (2,382,167)
Total shareholders' equity available to Arch11,158,096
 9,439,827
Non-redeemable noncontrolling interests854,924
 791,560
Total shareholders' equity12,013,020
 10,231,387
Total liabilities, noncontrolling interests and shareholders' equity$35,572,603
 $32,218,329

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
 (Unaudited)  
 September 30,
2017		 December 31,
2016
Assets 
  
Investments: 
  
Fixed maturities available for sale, at fair value (amortized cost: $13,722,581 and $13,522,671)$13,792,903
 $13,426,577
Short-term investments available for sale, at fair value (amortized cost: $1,645,873 and $611,878)1,646,036
 612,005
Collateral received under securities lending, at fair value (amortized cost: $543,243 and $762,554)543,252
 762,565
Equity securities available for sale, at fair value (cost: $401,674 and $475,085)477,143
 518,041
Other investments available for sale, at fair value (cost: $205,828 and $149,077)260,339
 167,970
Investments accounted for using the fair value option4,249,634
 3,421,220
Investments accounted for using the equity method962,574
 811,273
Total investments21,931,881
 19,719,651
    
Cash862,361
 842,942
Accrued investment income101,104
 124,483
Securities pledged under securities lending, at fair value (amortized cost: $529,700 and $746,409)528,212
 744,980
Premiums receivable1,269,678
 1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses2,506,015
 2,114,138
Contractholder receivables1,864,348
 1,717,436
Ceded unearned premiums947,135
 859,567
Deferred acquisition costs531,196
 447,560
Receivable for securities sold385,952
 58,284
Goodwill and intangible assets684,405
 781,553
Other assets1,012,510
 889,080
Total assets$32,624,797
 $29,372,109
    
Liabilities   
Reserve for losses and loss adjustment expenses$11,351,267
 $10,200,960
Unearned premiums3,751,550
 3,406,870
Reinsurance balances payable352,006
 300,407
Contractholder payables1,864,348
 1,717,436
Collateral held for insured obligations345,726
 301,406
Senior notes1,732,726
 1,732,258
Revolving credit agreement borrowings826,242
 756,650
Securities lending payable543,243
 762,554
Payable for securities purchased1,091,464
 76,183
Other liabilities788,354
 806,260
Total liabilities22,646,926
 20,060,984
    
Commitments and Contingencies

 

Redeemable noncontrolling interests205,829
 205,553
    
Shareholders' Equity   
Non-cumulative preferred shares772,555
 772,555
Convertible non-voting common equivalent preferred shares489,627
 1,101,304
Common shares ($0.0033 par, shares issued: 182,924,882 and 174,644,101)610
 582
Additional paid-in capital1,212,960
 531,687
Retained earnings8,359,354
 7,996,701
Accumulated other comprehensive income (loss), net of deferred income tax129,682
 (114,541)
Common shares held in treasury, at cost (shares: 52,058,509 and 51,856,584)(2,053,644) (2,034,570)
Total shareholders' equity available to Arch8,911,144
 8,253,718
Non-redeemable noncontrolling interests860,898
 851,854
Total shareholders' equity9,772,042
 9,105,572
Total liabilities, noncontrolling interests and shareholders' equity$32,624,797
 $29,372,109


See Notes to Consolidated Financial Statements


ARCH CAPITALACGL 201762019 THIRD QUARTER FORM 10-Q6
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
(Unaudited) (Unaudited)(Unaudited) (Unaudited)
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Revenues 
  
  
  
 
  
  
  
Net premiums written$1,325,403
 $1,014,278
 $3,850,358
 $3,159,076
$1,613,457
 $1,333,553
 $4,583,614
 $4,044,993
Change in unearned premiums(63,517) (55,875) (230,581) (243,109)(175,434) (42,675) (312,998) (182,453)
Net premiums earned1,261,886
 958,403
 3,619,777
 2,915,967
1,438,023
 1,290,878
 4,270,616
 3,862,540
Net investment income116,459
 93,618
 345,457
 275,691
161,488
 144,024
 473,475
 406,416
Net realized gains (losses)66,275
 125,105
 122,163
 230,647
62,518
 (51,705) 324,889
 (239,314)
              
Other-than-temporary impairment losses(1,878) (3,867) (5,415) (16,999)(1,163) (492) (2,521) (1,124)
Less investment impairments recognized in other comprehensive income, before taxes—
 —
 —
 150
—
 —
 —
 —
Net impairment losses recognized in earnings(1,878) (3,867) (5,415) (16,849)(1,163) (492) (2,521) (1,124)
              
Other underwriting income6,064
 7,980
 15,519
 38,251
3,326
 5,823
 18,104
 15,046
Equity in net income (loss) of investment funds accounted for using the equity method31,090
 16,662
 111,884
 32,054
Other income (loss)(342) (400) (3,118) (432)
Equity in net income of investment funds accounted for using the equity method17,130
 15,982
 96,533
 52,523
Other income1,338
 (726) 3,550
 2,461
Total revenues1,479,554
 1,197,501
 4,206,267
 3,475,329
1,682,660
 1,403,784
 5,184,646
 4,098,548
              
Expenses              
Losses and loss adjustment expenses1,046,141
 524,183
 2,288,571
 1,631,724
802,455
 699,420
 2,288,530
 2,062,433
Acquisition expenses193,854
 161,267
 566,579
 501,782
211,120
 201,602
 619,057
 595,816
Other operating expenses170,127
 153,286
 514,827
 460,748
196,512
 161,098
 596,589
 512,294
Corporate expenses17,098
 18,485
 69,766
 45,068
17,061
 14,335
 53,274
 52,159
Amortization of intangible assets31,824
 4,865
 93,942
 14,493
20,003
 26,315
 60,214
 79,523
Interest expense29,510
 15,943
 86,935
 47,713
31,328
 29,730
 89,673
 90,710
Net foreign exchange losses (gains)28,028
 2,621
 86,975
 1,525
Net foreign exchange (gains) losses(33,124) (10,838) (31,697) (44,823)
Total expenses1,516,582
 880,650
 3,707,595
 2,703,053
1,245,355
 1,121,662
 3,675,640
 3,348,112
              
Income (loss) before income taxes(37,028) 316,851
 498,672
 772,276
Income before income taxes437,305
 282,122
 1,509,006
 750,436
Income tax expense(8,189) (13,231) (70,755) (43,672)(38,116) (33,356) (128,474) (78,939)
Net income (loss)$(45,217) $303,620
 $427,917
 $728,604
Net income$399,189
 $248,766
 $1,380,532
 $671,497
Net (income) loss attributable to noncontrolling interests11,561
 (50,748) (23,279) (109,879)(6,736) (21,358) (70,597) (50,020)
Net income (loss) available to Arch(33,656) 252,872
 404,638
 618,725
Net income available to Arch392,453
 227,408
 1,309,935
 621,477
Preferred dividends(12,369) (5,484) (34,936) (16,453)(10,403) (10,402) (31,209) (31,242)
Loss on redemption of preferred shares(6,735) —
 (6,735) —
—
 —
 —
 (2,710)
Net income (loss) available to Arch common shareholders$(52,760) $247,388
 $362,967
 $602,272
Net income available to Arch common shareholders$382,050
 $217,006
 $1,278,726
 $587,525
              
Net income (loss) per common share and common share equivalent 
  
  
  
Net income per common share and common share equivalent 
  
  
  
Basic$(0.39) $2.05
 $2.70
 $4.99
$0.95
 $0.54
 $3.19
 $1.45
Diluted$(0.39) $1.98
 $2.61
 $4.84
$0.92
 $0.53
 $3.11
 $1.42
              
Weighted average common shares and common share equivalents outstanding     
  
     
  
Basic134,885,451
 120,938,916
 134,472,129
 120,656,420
402,564,121
 402,939,092
 401,419,153
 405,076,228
Diluted134,885,451
 124,931,653
 139,222,324
 124,528,174
413,180,201
 411,721,214
 410,807,402
 413,993,192








See Notes to Consolidated Financial Statements


ARCH CAPITALACGL 201772019 THIRD QUARTER FORM 10-Q7
Table of Contents


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
(Unaudited) (Unaudited)(Unaudited) (Unaudited)
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Comprehensive Income     
  
     
  
Net income (loss)$(45,217) $303,620
 $427,917
 $728,604
Net income$399,189
 $248,766
 $1,380,532
 $671,497
Other comprehensive income (loss), net of deferred income tax              
Unrealized appreciation (decline) in value of available-for-sale investments:              
Unrealized holding gains (losses) arising during period66,462
 16,281
 260,223
 251,722
59,290
 (53,308) 507,650
 (305,256)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax—
 —
 —
 (150)
Reclassification of net realized (gains) losses, net of income taxes, included in net income (loss)(23,912) (54,992) (46,180) (109,309)(38,743) 23,203
 (104,309) 122,307
Foreign currency translation adjustments8,280
 (5,312) 29,701
 (6,150)(16,424) 2,063
 (6,641) (9,250)
Comprehensive income5,613
 259,597
 671,661
 864,717
403,312
 220,724
 1,777,232
 479,298
Net (income) loss attributable to noncontrolling interests11,561
 (50,748) (23,279) (109,879)(6,736) (21,358) (70,597) (50,020)
Foreign currency translation adjustments attributable to noncontrolling interests411
 (59) 479
 141
Other comprehensive (income) loss attributable to noncontrolling interests764
 1,158
 (6,266) 2,908
Comprehensive income available to Arch$17,585
 $208,790
 $648,861
 $754,979
$397,340
 $200,524
 $1,700,369
 $432,186








See Notes to Consolidated Financial Statements


ARCH CAPITALACGL 201782019 THIRD QUARTER FORM 10-Q8
Table of Contents


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
(Unaudited)(Unaudited) (Unaudited)
Nine Months EndedThree Months Ended Nine Months Ended
September 30,September 30, September 30,
2017 20162019 2018 2019 2018
Non-cumulative preferred shares 
  
     
  
Balance at beginning of year$772,555
 $325,000
Preferred shares issued230,000
 450,000
Balance at beginning of period$780,000
 $780,000
 $780,000
 $872,555
Preferred shares redeemed(230,000) —
—
 —
 —
 (92,555)
Balance at end of period772,555
 775,000
780,000
 780,000
 780,000
 780,000
          
Convertible non-voting common equivalent preferred shares          
Balance at beginning of year1,101,304
 —
Balance at beginning of period—
 —
 —
 489,627
Preferred shares converted to common shares(611,677) —
—
 —
 —
 (489,627)
Balance at end of period489,627
 —
—
 —
 —
 —
          
Common shares          
Balance at beginning of year582
 577
Balance at beginning of period638
 633
 634
 611
Common shares issued, net28
 5
—
 —
 4
 22
Balance at end of period610
 582
638
 633
 638
 633
          
Additional paid-in capital 
  
     
  
Balance at beginning of year531,687
 467,339
Balance at beginning of period1,847,949
 1,760,606
 1,793,781
 1,230,617
Preferred shares converted to common shares611,653
 —
—
 —
 —
 489,608
Issue costs on preferred shares(7,946) (15,101)
Reversal of original issue costs on redeemed preferred shares6,735
 —
All other70,831
 63,966
Other changes16,519

14,893

70,687

55,274
Balance at end of period1,212,960
 516,204
1,864,468
 1,775,499
 1,864,468
 1,775,499
          
Retained earnings 
  
     
  
Balance at beginning of year7,996,701
 7,332,032
Balance at beginning of period10,322,975
 9,083,202
 9,426,299
 8,562,889
Cumulative effect of an accounting change(314) —
—
 —
 —
 149,794
Balance at beginning of year, as adjusted7,996,387
 7,332,032
Balance at beginning of period, as adjusted10,322,975
 9,083,202
 9,426,299
 8,712,683
Net income427,917
 728,604
399,189
 248,766
 1,380,532
 671,497
Net (income) loss attributable to noncontrolling interests(23,279) (109,879)(6,736) (21,358) (70,597) (50,020)
Preferred share dividends(34,936) (16,453)(10,403) (10,402) (31,209) (31,242)
Loss on redemption of preferred shares(6,735) —
—
 —
 —
 (2,710)
Balance at end of period8,359,354
 7,934,304
10,705,025
 9,300,208
 10,705,025
 9,300,208
          
Accumulated other comprehensive income (loss), net of deferred income tax          
Balance at beginning of year(114,541) (16,502)
Balance at beginning of period206,827
 (194,157) (178,720) 118,044
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:          
Balance at beginning of year(27,641) 50,085
Unrealized holding gains (losses) arising during period, net of reclassification adjustment214,043
 142,413
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax—
 (150)
Balance at beginning of period261,627
 (143,353) (114,178) 157,400
Cumulative effect of an accounting change—
 —
 —
 (149,794)
Balance at beginning of period, as adjusted261,627
 (143,353) (114,178) 7,606
Unrealized holding gains (losses) during period, net of reclassification adjustment20,547
 (30,105) 403,341
 (182,949)
Unrealized holding gains (losses) during period attributable to noncontrolling interests1,019
 1,238
 (5,970) 3,123
Balance at end of period186,402
 192,348
283,193
 (172,220) 283,193
 (172,220)
Foreign currency translation adjustments:   
Balance at beginning of year(86,900) (66,587)
Foreign currency translation adjustments, net of deferred income tax:       
Balance at beginning of period(54,800) (50,804) (64,542) (39,356)
Foreign currency translation adjustments29,701
 (6,150)(16,424) 2,063
 (6,641) (9,250)
Foreign currency translation adjustments attributable to noncontrolling interests479
 141
(255) (80) (296) (215)
Balance at end of period(56,720) (72,596)(71,479) (48,821) (71,479) (48,821)
Balance at end of period129,682
 119,752
211,714
 (221,041) 211,714
 (221,041)
          
Common shares held in treasury, at cost          
Balance at beginning of year(2,034,570) (1,941,904)
Balance at beginning of period(2,401,037) (2,266,529) (2,382,167) (2,077,741)
Shares repurchased for treasury(19,074) (89,955)(2,712) (13,622) (21,582) (202,410)
Balance at end of period(2,053,644) (2,031,859)(2,403,749) (2,280,151) (2,403,749) (2,280,151)
          
Total shareholders’ equity available to Arch8,911,144
 7,313,983
11,158,096
 9,355,148
 11,158,096
 9,355,148
Non-redeemable noncontrolling interests860,898
 834,808
854,924
 876,754
 854,924
 876,754
Total shareholders’ equity$9,772,042
 $8,148,791
$12,013,020
 $10,231,902
 $12,013,020
 $10,231,902


See Notes to Consolidated Financial Statements


ARCH CAPITALACGL 201792019 THIRD QUARTER FORM 10-Q9
Table of Contents


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 (Unaudited)
 Nine Months Ended
 September 30,
 2019 2018
Operating Activities 
  
Net income$1,380,532
 $671,497
Adjustments to reconcile net income to net cash provided by operating activities:   
Net realized (gains) losses(329,053) 224,757
Net impairment losses recognized in earnings2,521
 1,124
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss(38,912) 6,357
Amortization of intangible assets60,214
 79,523
Share-based compensation54,432
 45,806
Changes in:   
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable377,074
 68,245
Unearned premiums, net of ceded unearned premiums312,998
 182,453
Premiums receivable(328,765) (203,247)
Deferred acquisition costs(38,606) (36,074)
Reinsurance balances payable214,902
 83,696
Other items, net(124,198) (3,150)
Net cash provided by (used for) operating activities1,543,139
 1,120,987
Investing Activities 
  
Purchases of fixed maturity investments(24,010,623) (24,837,917)
Purchases of equity securities(524,051) (819,342)
Purchases of other investments(1,014,925) (1,543,332)
Proceeds from sales of fixed maturity investments22,707,854
 23,310,203
Proceeds from sales of equity securities371,130
 866,919
Proceeds from sales, redemptions and maturities of other investments827,517
 1,178,035
Proceeds from redemptions and maturities of fixed maturity investments394,719
 724,021
Net settlements of derivative instruments92,423
 765
Net sales of short-term investments129,078
 554,315
Change in cash collateral related to securities lending6,990
 137,073
Purchases of fixed assets(27,635) (19,050)
Other(202,953) 58,227
Net cash provided by (used for) investing activities(1,250,476) (390,083)
Financing Activities 
  
Redemption of preferred shares—
 (92,555)
Purchases of common shares under share repurchase program(2,871) (184,529)
Proceeds from common shares issued, net518
 (12,029)
Proceeds from borrowings200,083
 167,259
Repayments of borrowings(27,538) (427,000)
Change in cash collateral related to securities lending(6,990) (137,073)
Change in third party investment in redeemable noncontrolling interests(161,874) —
Dividends paid to redeemable noncontrolling interests(11,408) (13,491)
Other(5,207) (6,084)
Preferred dividends paid(31,209) (31,242)
Net cash provided by (used for) financing activities(46,496) (736,744)
    
Effects of exchange rate changes on foreign currency cash and restricted cash(8,335) (11,625)
    
Increase (decrease) in cash and restricted cash237,832
 (17,465)
Cash and restricted cash, beginning of year724,643
 727,284
Cash and restricted cash, end of period$962,475
 $709,819

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 (Unaudited)
 Nine Months Ended
 September 30,
 2017 2016
Operating Activities 
  
Net income$427,917
 $728,604
Adjustments to reconcile net income to net cash provided by operating activities:   
Net realized (gains) losses(141,944) (262,112)
Net impairment losses recognized in earnings5,415
 16,849
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss(63,784) 8,157
Amortization of intangible assets93,942
 14,493
Share-based compensation58,308
 46,311
Changes in:   
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable602,652
 277,277
Unearned premiums, net of ceded unearned premiums230,581
 243,109
Premiums receivable(167,143) (198,909)
Deferred acquisition costs(73,631) (40,906)
Reinsurance balances payable37,528
 49,198
Other items, net71,293
 155,068
Net Cash Provided By Operating Activities1,081,134
 1,037,139
Investing Activities 
  
Purchases of fixed maturity investments(28,079,129) (27,840,555)
Purchases of equity securities(667,135) (377,767)
Purchases of other investments(1,406,528) (1,008,774)
Proceeds from sales of fixed maturity investments27,629,474
 26,731,924
Proceeds from sales of equity securities751,873
 464,904
Proceeds from sales, redemptions and maturities of other investments938,581
 879,330
Proceeds from redemptions and maturities of fixed maturity investments747,621
 540,823
Net settlements of derivative instruments(20,952) 23,396
Net (purchases) sales of short-term investments(964,653) (604,162)
Change in cash collateral related to securities lending148,692
 (27,935)
Acquisitions, net of cash(27,709) (20,911)
Purchases of fixed assets(16,862) (11,565)
Other86,145
 (3,816)
Net Cash Provided By (Used For) Investing Activities(880,582) (1,255,108)
Financing Activities 
  
Proceeds from issuance of preferred shares, net222,054
 434,899
Redemption of preferred shares(230,000) —
Purchases of common shares under share repurchase program—
 (75,256)
Proceeds from common shares issued, net(7,484) (3,785)
Proceeds from borrowings238,915
 46,000
Repayments of borrowings(172,000) (179,171)
Change in cash collateral related to securities lending(148,692) 27,935
Dividends paid to redeemable noncontrolling interests(13,491) (13,491)
Other(49,280) 33,113
Preferred dividends paid(34,936) (16,453)
Net Cash Provided By (Used For) Financing Activities(194,914) 253,791
    
Effects of exchange rate changes on foreign currency cash13,781
 (10,332)
    
Increase (decrease) in cash19,419
 25,490
Cash beginning of year842,942
 553,326
Cash end of period$862,361
 $578,816
    
Income taxes paid$47,907
 $40,742
Interest paid$64,613
 $35,234



See Notes to Consolidated Financial Statements


ARCH CAPITALACGL 2017102019 THIRD QUARTER FORM 10-Q10
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1.    GeneralBasis of Presentation and Recent Accounting Pronouncements
General
Arch Capital Group Ltd. (“ACGL”Arch Capital”) is a Bermuda public limited liability company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means ACGLArch Capital and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries.subsidiaries (“Watford”). Watford is a multi-line Bermuda reinsurance company. Watford’s own management and board of directors are responsible for its results and profitability. See Note 3.note 11.
On December 31, 2016, the Company completed the acquisition of United Guaranty Corporation, a North Carolina corporation (“UGC”) pursuant to a stock purchase agreement with American International Group, Inc. (“AIG”). The acquisition of UGC (“UGC acquisition”) expanded the scale of Arch’s existing mortgage insurance businesses by combining UGC’s position as the market leader in the U.S. private mortgage insurance industry with Arch’s financial strength and history of innovation, further diversifyingJanuary 1, 2019, the Company’s U.K. insurance operations entered into a transaction with The Ardonagh Group to acquire renewal rights for a U.K. commercial lines book of business, profileconsisting of commercial property, casualty, motor, professional liability, personal accident and customer base.travel business.
Basis of Presentation
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 20162018 (“20162018 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation, including the presentation of ‘amortization of intangible assets’ on its consolidated statements of income to split out such item
(previously reflected in acquisition expenses and/or other operating expenses).presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2.    Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock CompensationASU 2016-02, “Leases (Topic 718) - Improvements842)”, which provides a new comprehensive model for lease accounting. Topic 842 requires a lessee to Employee Share-Based Payment Accounting,” effectiverecognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The Company adopted the modified retrospective approach of this standard, that resulted in the recognition of a right-of-use asset of  $147.9 million as part of other assets and a lease liability of $163.6 million as part of other liabilities in the consolidated balance sheet as of January 1, 2017. This2019. The Company de-recognized the liability for deferred rent that was required under the previous guidance.
In addition, the Company adopted ASU was issued2018-11, “Leases: Targeted Improvements (Topic 842),” which provides an additional (optional) transition method to adopt the new lease standard. The Company adopted the alternative transition method and elected to utilize a cumulative-effect adjustment to the opening balance of the retained earnings for the year of adoption. As such, the Company’s reporting for the comparative periods prior to the adoption continue to be presented in the 2016 first quarterfinancial statements in accordance with previous lease accounting guidance. The Company also adopted the practical expedients as a package which allows the Company to improvenot reassess (1) whether any expired or existing contracts are or contain leases (2) the lease classification for any expired or existing leases (3) initial direct costs for any existing leases and simplify(4) to account for the accounting for employee share-based payment transactions. This ASU provides simplifications with respectlease and non lease components as a single lease component. In addition to income tax consequences, classificationelecting the practical expedients as a package, the Company elected to include hindsight to determine the lease term of awards as either equity or liabilities,existing leases, and classification on the statement of cash flows for these types of transactions. With respect to the forfeituremade an accounting policy election to not apply the Company has electedrecognition requirements to account for forfeitures as they occur, which did not result in a materialshort-term leases (lease term of less than twelve months). The cumulative effect adjustment. With respectadjustment to the change in presentation in the statementopening balance of cash flows related to excess tax benefits, the Company has applied the guidance prospectively and prior periods have not been adjusted.
Recently Issued Accounting Standards Not Yet Adopted
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” was issued in the 2014 second quarter and updated through various ASUs in 2016. This ASU (and as updated in 2016) creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts or financial instruments.The ASU also requires enhanced disclosures about revenue. The ASU is effective in the 2018 first quarter and the Company intends on adopting the ASU using the modified retrospective method, whereby the cumulative effect of adoption will be recognized as an adjustment to retained earnings at the date of initial application.was 0. The adoption of this ASU willthe updated guidance did not impact the Company's insurance premium revenues or revenues from its investment portfolio, which represent a substantial portion of consolidated revenues, but may have an impact on the Company's other revenues. Based on the Company’s evaluation of the impacted revenue streams, the ASU is not expected to have a material effect on the Company’s consolidated financial statementsresults of operations or liquidity.
The Company adopted ASU 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting,” which was issued in June 2018 to simplify the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, most of the cumulative effect adjustmentguidance on such payments to retained earnings atnonemployees would be aligned with the date of initial applicationrequirements for share-based payments granted to employees. The ASU is not expected to be material.effective for reporting periods beginning after December 15,


ARCH CAPITALACGL 2017 112019 THIRD QUARTER FORM 10-Q11
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition2018. This guidance and Measurement of Financial Assetsand Financial Liabilities,” was issued in the 2016 first quarter to enhance the reporting model for financial instruments and to provide improved financial information to readers of the financial statements. Among other provisions focused on improving the recognition and measurement of financial instruments, the ASU requires that equity investments be measured at fair value on the balance sheet with changes in fair value reported in the income statement and that an exit price notion be used when measuring the fair value of financial instruments for disclosure purposes. The ASU is effective in the 2018 first quarter and, aside from limited situations, cannot be early adopted. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The adoption of this ASU isprovision did not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but will have a material impact on the Company's results of operations as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income.

ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash " was issued in the 2016 fourth quarter. The ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. As a result, transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. The ASU is effective, with retrospective adoption, for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The adoption of this ASU is not expected to have a material effect on the Company’sCompany's financial position, results of operations financial position, comprehensive income or net cash providedflows.

The Company adopted ASU 2018-02 “Income Statement-Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from operating activities.

ASU 2017-08, “Receivables - Nonrefundable Fees andAccumulated Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,Comprehensive Income,” which was issued in February 2018 to allow the reclassification of the stranded tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and Jobs Act of 2017 first quarter.(“Tax Cuts Act”). Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to AOCI. The ASU amendsamount of the amortization period for certain purchased callable debt securities heldreclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at a premium by shortening the amortization period fordate of the premiumenactment of the Tax Cuts Act related to the earliest call date.items in AOCI. The ASU will beupdated guidance is effective for the Company on January 1, 2019reporting periods beginning after December 15, 2018 and is required to be applied using a modified retrospective approach through a cumulative-effect adjustmentretrospectively to retained earnings aseach period in which the effect of the Tax Cuts Act related to items remaining in AOCI are recognized or at the beginning of the first reporting period in which the guidance is effective. of adoption. The Company is currently assessing the impact the implementationadoption of this ASU will have on its consolidated financial statements. The adoption of this
ASU isdid not expected to have a material effect on the Company’s results of operations, financial position or cash flows.liquidity.


The Company adopted ASU 2017-09, “Compensation2017-08 “Receivables - Stock Compensation (Topic 718) - Scope of Modification AccountingNonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities,” which was issued in March, 2017. This ASU shortens the 2017 second quarter. The ASU provides updated guidance amortization period for certain callable debt securities held at a premium and requires the premium to clarify when to account for a changebe amortized to the terms or conditions of a share-based payment award as a modification. Underearliest call date. However, the new guidance modificationdoes not require an accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes aschange for securities held at a result of the change in terms or conditions.discount whose discount continues to be amortized to maturity. The ASUstandard is effective prospectively for all companiesfinancial statements issued for annualfiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2017,2018, with early adoption permitted. The adoption of the guidance requires a modified retrospective approach with a cumulative-effect adjustment to retained earnings. The adoption of this ASU isdid not expected to have a material effect on the Company’s results of operations, financial position or cash flows.

3.Variable Interest Entities and Noncontrolling Interests
A variable interest entity (“VIE”) refers to an entity that has characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have characteristics of a controlling financial interest. The primary beneficiary of a VIE is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. If a company is determined to be the primary beneficiary, it is required to consolidate the VIE in its financial statements.
Watford Holdings Ltd.
In March 2014, the Company invested $100.0 million and acquired approximately 11% of Watford Holdings Ltd.’s common equity and a warrant to purchase additional common equity. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford Re”). Watford Re is considered a VIE and the Company concluded that it is the primary beneficiary of Watford Re. As such, the results of Watford Re are included in the Company’s consolidated financial statements.
The
Recently Issued Accounting Standards Not Yet Adopted
For information regarding additional accounting standards that the Company doeshas not guarantee or provide credit support for Watford Re, andyet adopted, see note 3(q), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s financial exposure to Watford Re is limited to its2018 Form 10-K.
2.    Share Transactions
Share Repurchases
The board of directors of Arch Capital has authorized the investment in Watford Re’sArch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased 386.3 million common shares for an aggregate purchase price of $3.97 billion. For the nine months ended September 30, 2019, Arch Capital repurchased 0.1 million shares under the share repurchase program with an aggregate purchase price of $2.9 million. Arch Capital repurchased 6.9 million shares under the share repurchase program with an aggregate purchase price of $184.5 million during the nine months ended September 30, 2018. At September 30, 2019, $160.9 million of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. (see note 16).
Conversion of Convertible Non-Voting Common Equivalent Preferred Shares
In March 2018, Arch Capital completed an underwritten public secondary offering of 17.0 million common shares (split adjusted) by American International Group, Inc. (“AIG”) following transfer of 0.6 million Series D convertible non-voting common equivalent preferred shares (“Series D Preferred Shares”). Proceeds from the sale of common shares pursuant to the public offering were received by AIG. At September 30, 2019, no Series D Preferred Shares were outstanding.
Series C Preferred Shares
On January 2, 2018, Arch Capital redeemed all outstanding 6.75% Series C non-cumulative preferred shares. The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and counterparty credit risk (mitigated by collateral) arisingunpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares were removed from reinsurance transactions.additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford Re are reported:
 September 30, December 31,
 2017 2016
Assets   
Investments accounted for using the fair value option$2,457,365
 $1,857,623
Cash57,151
 74,893
Accrued investment income13,718
 17,017
Premiums receivable209,985
 189,911
Reinsurance recoverable on unpaid and paid losses and LAE37,575
 24,420
Ceded unearned premiums23,538
 12,145
Deferred acquisition costs87,692
 86,379
Receivable for securities sold74,051
 1,326
Goodwill and intangible assets7,650
 7,650
Other assets132,796
 111,386
Total assets of consolidated VIE$3,101,521
 $2,382,750
    
Liabilities   
Reserves for losses and loss adjustment expenses$735,132
 $510,809
Unearned premiums344,060
 293,480
Reinsurance balances payable22,487
 12,289
Revolving credit agreement borrowings426,242
 256,650
Payable for securities purchased211,065
 42,922
Other liabilities174,472
 88,976
Total liabilities of consolidated VIE$1,913,458
 $1,205,126
    
Redeemable noncontrolling interests$220,529
 $220,253
For the nine months ended September 30, 2017, Watford Re generated $221.9 million of cash provided by operating activities, $394.4 million of cash used for investing activities and $152.5 million of cash provided by financing activities, compared to $207.0 million of cash provided by operating activities, $124.0 million of cash used for investing activities and $119.6 million of cash used for financing activities for the nine months ended September 30, 2016.
Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford Re’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford Re’s common shares was approximately 89% at September 30, 2017. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable noncontrolling interests:
 September 30,
 2017 2016
Three Months Ended   
Balance, beginning of period$877,456
 $788,589
Amounts attributable to noncontrolling interests(16,147) 46,160
Foreign currency translation adjustments attributable to noncontrolling interests(411) 59
Balance, end of period$860,898
 $834,808
    
Nine Months Ended   
Balance, beginning of year$851,854
 $738,831
Amounts attributable to noncontrolling interests9,523
 96,118
Foreign currency translation adjustments attributable to noncontrolling interests(479) (141)
Balance, end of period$860,898
 $834,808
Redeemable noncontrolling interests
The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests relate to the 9,065,200 cumulative redeemable preference shares (“Watford Preference Shares”) issued in March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
The following table sets forth activity in the redeemable non-controlling interests:
 September 30,
 2017 2016
Three Months Ended   
Balance, beginning of period$205,736
 $205,366
Accretion of preference share issuance costs93
 93
Balance, end of period$205,829
 $205,459
    
Nine Months Ended   
Balance, beginning of year$205,553
 $205,182
Accretion of preference share issuance costs276
 277
Balance, end of period$205,829
 $205,459

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

The portion of Watford Re’s income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
 September 30,
 2017 2016
Three Months Ended   
Amounts attributable to non-redeemable noncontrolling interests$16,147
 $(46,160)
Dividends attributable to redeemable noncontrolling interests(4,586) (4,588)
Net (income) loss attributable to noncontrolling interests$11,561
 $(50,748)
    
Nine Months Ended   
Amounts attributable to non-redeemable noncontrolling interests$(9,523) $(96,118)
Dividends attributable to redeemable noncontrolling interests(13,756) (13,761)
Net (income) loss attributable to noncontrolling interests$(23,279) $(109,879)
Bellemeade Re I and II
Upon closing of the UGC acquisition, the Company acquired the rights and obligations related to aggregate excess of loss reinsurance agreements with Bellemeade Re I Ltd. (“Bellemeade I”), entered into in July 2015, and with Bellemeade Re II Ltd. (“Bellemeade II”), entered into in May 2016 (the “Bellemeade Agreements”). Bellemeade I and Bellemeade II are special purpose reinsurance companies domiciled in Bermuda, each of which provided for up to approximately $300 million of aggregate excess of loss reinsurance coverage at inception for new delinquencies on portfolios of in-force policies issued.
As a result of the evaluation of the Bellemeade Agreements, the Company concluded that both Bellemeade I and Bellemeade II are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to the economic performance of Bellemeade I and Bellemeade II, the Company does not consolidate Bellemeade I and Bellemeade II in its consolidated financial statements.
The following table presents total assets of Bellemeade I and Bellemeade II as well as the Company’s maximum exposure to loss associated with these VIEs:
   Maximum Exposure to Loss
 Total VIE Assets On-Balance Sheet Off-Balance Sheet Total
Bellemeade I$112,090
 $533
 $1,009
 $1,542
Bellemeade II191,387
 (53) 746
 693
Total$303,477
 $480
 $1,755
 $2,235
See note 18, “Subsequent Event.”
Irving Partners Limited Partnership
Upon closing of the UGC acquisition, the Company acquired a limited partnership interest in Irving Partners Limited Partnership (“Irving Partners”), which owns and operates an office building in Greensboro, North Carolina in which the Company is the main tenant. The Company concluded that Irving Partners is a VIE but that it is not the primary beneficiary. During the 2017 third quarter, the Company’s ownership in Irving Partners was sold to a third party for approximately $14.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.3.    Earnings (Loss) Per Common Share
Due to the net loss recorded in the 2017 third quarter, diluted weighted average common shares and common share equivalents outstanding for the 2017 third quarter do not include the effect of 4.7 million otherwise dilutive securities since the inclusion of such securities is anti-dilutive to per share results. Since the Company reported net income for the other periods presented, the computation of diluted average shares outstanding includes dilutive securities for such periods.
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
Three Months Ended
Nine Months EndedThree Months Ended
Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Numerator:              
Net income (loss)$(45,217) $303,620
 $427,917
 $728,604
Net income$399,189
 $248,766
 $1,380,532
 $671,497
Amounts attributable to noncontrolling interests11,561
 (50,748) (23,279) (109,879)(6,736) (21,358) (70,597) (50,020)
Net income (loss) available to Arch(33,656) 252,872
 404,638
 618,725
Net income available to Arch392,453
 227,408
 1,309,935
 621,477
Preferred dividends(12,369) (5,484) (34,936) (16,453)(10,403) (10,402) (31,209) (31,242)
Loss on redemption of preferred shares(6,735) —
 (6,735) —
—
 —
 —
 (2,710)
Net income (loss) available to Arch common shareholders$(52,760) $247,388
 $362,967
 $602,272
Net income available to Arch common shareholders$382,050
 $217,006
 $1,278,726
 $587,525
              
Denominator:              
Weighted average common shares outstanding129,211,251
 120,938,916
 124,526,611
 120,656,420
402,564,121
 402,939,092
 401,419,153
 400,649,105
Series D preferred shares (1)5,674,200
 —
 9,945,518
 —
—
 —
 —
 4,427,123
Weighted average common shares and common share equivalents outstanding — basic134,885,451
 120,938,916
 134,472,129
 120,656,420
402,564,121
 402,939,092
 401,419,153
 405,076,228
Effect of dilutive common share equivalents:              
Nonvested restricted shares—
 1,313,025
 1,459,879
 1,295,825
1,895,972
 1,619,286
 1,637,015
 1,568,044
Stock options (2)—
 2,679,712
 3,290,316
 2,575,929
8,720,108
 7,162,836
 7,751,234
 7,348,920
Weighted average common shares and common share equivalents outstanding — diluted (3)134,885,451
 124,931,653
 139,222,324
 124,528,174
413,180,201
 411,721,214
 410,807,402
 413,993,192
              
Earnings (loss) per common share:       
Earnings per common share:       
Basic$(0.39) $2.05
 $2.70
 $4.99
$0.95
 $0.54
 $3.19
 $1.45
Diluted$(0.39) $1.98
 $2.61
 $4.84
$0.92
 $0.53
 $3.11
 $1.42
(1)
Such shares are convertible non-voting common equivalent preferred shares issued in connection with the UGC acquisition. See note 2.
(2)Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 20172019 third quarter and 20162018 third quarter, the number of stock options excluded were nil37,394 and 334,203,4,396,352, respectively. For the nine months ended September 30, 20172019 and 2016,2018 period, the number of stock options excluded were 838,8682,198,115 and 842,105,5,481,584, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


5.4.    Segment Information
The Company classifies its businesses into three3 underwriting segments — insurance, reinsurance and mortgage — and two2 other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the ChairmanPresident and Chief Executive Officer the President and Chief Operating Officer,of Arch Capital, and the Chief Financial Officer of ACGL.Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company and United Guaranty Mortgage Indemnity Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, UGC transaction costs and other, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.
The ‘other’ segment includes the results of Watford Re (see Note 3)note 11). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
 Three Months Ended
 September 30, 2019
 Insurance Reinsurance Mortgage Sub-Total Other Total
            
Gross premiums written (1)$1,005,874
 $662,572
 $375,092
 $2,043,292
 $249,960
 $2,181,121
Premiums ceded(302,034) (226,096) (57,703) (585,587) (94,208) (567,664)
Net premiums written703,840
 436,476
 317,389
 1,457,705
 155,752
 1,613,457
Change in unearned premiums(98,504) (72,621) 25,611
 (145,514) (29,920) (175,434)
Net premiums earned605,336
 363,855
 343,000
 1,312,191
 125,832
 1,438,023
Other underwriting income (loss)—
 (1,208) 3,955
 2,747
 579
 3,326
Losses and loss adjustment expenses(422,782) (270,379) (13,080) (706,241) (96,214) (802,455)
Acquisition expenses(91,259) (62,393) (34,396) (188,048) (23,072) (211,120)
Other operating expenses(115,408) (32,533) (37,003) (184,944) (11,568) (196,512)
Underwriting income (loss)$(24,113) $(2,658) $262,476
 235,705
 (4,443) 231,262
            
Net investment income      126,874
 34,614
 161,488
Net realized gains (losses)      81,177
 (18,659) 62,518
Net impairment losses recognized in earnings      (1,163) —
 (1,163)
Equity in net income (loss) of investment funds accounted for using the equity method      17,130
 —
 17,130
Other income (loss)      1,338
 —
 1,338
Corporate expenses (2)      (15,066) —
 (15,066)
Transaction costs and other (2)      (1,995) —
 (1,995)
Amortization of intangible assets      (20,003) —
 (20,003)
Interest expense      (23,237) (8,091) (31,328)
Net foreign exchange gains (losses)      29,794
 3,330
 33,124
Income before income taxes      430,554
 6,751
 437,305
Income tax expense      (38,116) —
 (38,116)
Net income      392,438
 6,751
 399,189
Dividends attributable to redeemable noncontrolling interests      —
 (6,600) (6,600)
Amounts attributable to nonredeemable noncontrolling interests      —
 (136) (136)
Net income available to Arch      392,438
 15
 392,453
Preferred dividends      (10,403) —
 (10,403)
Net income available to Arch common shareholders      $382,035
 $15
 $382,050
            
Underwriting Ratios 
  
  
    
  
Loss ratio69.8% 74.3% 3.8% 53.8% 76.5% 55.8%
Acquisition expense ratio15.1% 17.1% 10.0% 14.3% 18.3% 14.7%
Other operating expense ratio19.1% 8.9% 10.8% 14.1% 9.2% 13.7%
Combined ratio104.0% 100.3% 24.6% 82.2% 104.0% 84.2%
            
Goodwill and intangible assets$158,990
 $—
 $457,860
 $616,850
 $7,650
 $624,500
 Three Months Ended
 September 30, 2017
 Insurance Reinsurance Mortgage Sub-Total Other Total
            
Gross premiums written (1)$787,447
 $422,083
 $347,951
 $1,557,179
 $166,198
 $1,648,246
Premiums ceded(222,516) (105,389) (57,900) (385,503) (12,471) (322,843)
Net premiums written564,931
 316,694
 290,051
 1,171,676
 153,727
 1,325,403
Change in unearned premiums(29,766) 6,879
 (15,533) (38,420) (25,097) (63,517)
Net premiums earned535,165
 323,573
 274,518
 1,133,256
 128,630
 1,261,886
Other underwriting income (loss)—
 1,728
 3,599
 5,327
 737
 6,064
Losses and loss adjustment expenses(568,795) (318,609) (35,156) (922,560) (123,581) (1,046,141)
Acquisition expenses(82,638) (57,340) (21,803) (161,781) (32,073) (193,854)
Other operating expenses(90,875) (36,214) (34,770) (161,859) (8,268) (170,127)
Underwriting income (loss)$(207,143) $(86,862) $186,388
 (107,617) (34,555) (142,172)
            
Net investment income      94,127
 22,332
 116,459
Net realized gains (losses)      64,104
 2,171
 66,275
Net impairment losses recognized in earnings      (1,878) —
 (1,878)
Equity in net income (loss) of investment funds accounted for using the equity method      31,090
 —
 31,090
Other income (loss)      (342) —
 (342)
Corporate expenses (2)      (14,108) —
 (14,108)
UGC transaction costs and other (2)      (2,990) —
 (2,990)
Amortization of intangible assets      (31,824) —
 (31,824)
Interest expense      (26,264) (3,246) (29,510)
Net foreign exchange gains (losses)      (27,785) (243) (28,028)
Income (loss) before income taxes      (23,487) (13,541) (37,028)
Income tax (expense) benefit      (8,168) (21) (8,189)
Net income (loss)      (31,655) (13,562) (45,217)
Dividends attributable to redeemable noncontrolling interests      —
 (4,586) (4,586)
Amounts attributable to nonredeemable noncontrolling interests      —
 16,147
 16,147
Net income (loss) available to Arch      (31,655) (2,001) (33,656)
Preferred dividends      (12,369) —
 (12,369)
Loss on redemption of preferred shares      (6,735) —
 (6,735)
Net income (loss) available to Arch common shareholders      $(50,759) $(2,001) $(52,760)
            
Underwriting Ratios 
  
  
    
  
Loss ratio106.3% 98.5% 12.8% 81.4% 96.1% 82.9%
Acquisition expense ratio15.4% 17.7% 7.9% 14.3% 24.9% 15.4%
Other operating expense ratio17.0% 11.2% 12.7% 14.3% 6.4% 13.5%
Combined ratio138.7% 127.4% 33.4% 110.0% 127.4% 111.8%
            
Goodwill and intangible assets$23,445
 $417
 $652,893
 $676,755
 $7,650
 $684,405

(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction‘transaction costs and other.’




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Three Months EndedThree Months Ended
September 30, 2016September 30, 2018
Insurance Reinsurance Mortgage Sub-Total Other TotalInsurance Reinsurance Mortgage Sub-Total Other Total
                      
Gross premiums written (1)$758,934
 $324,361
 $131,726
 $1,214,765
 $163,736
 $1,278,765
$836,820
 $435,396
 $350,559
 $1,622,532
 $185,033
 $1,731,328
Premiums ceded(217,446) (89,551) (51,182) (357,923) (6,300) (264,487)(259,968) (123,705) (57,226) (440,656) (33,356) (397,775)
Net premiums written541,488
 234,810
 80,544
 856,842
 157,436
 1,014,278
576,852
 311,691
 293,333
 1,181,876
 151,677
 1,333,553
Change in unearned premiums(22,410) 17,117
 (3,582) (8,875) (47,000) (55,875)(15,794) (18,418) 7,591
 (26,621) (16,054) (42,675)
Net premiums earned519,078
 251,927
 76,962
 847,967
 110,436
 958,403
561,058
 293,273
 300,924
 1,155,255
 135,623
 1,290,878
Other underwriting income (loss)—
 2,216
 4,740
 6,956
 1,024
 7,980
—
 1,387
 3,733
 5,120
 703
 5,823
Losses and loss adjustment expenses(332,845) (105,924) (11,107) (449,876) (74,307) (524,183)(409,435) (183,413) (9,615) (602,463) (96,957) (699,420)
Acquisition expenses(77,146) (50,192) (5,190) (132,528) (28,739) (161,267)(88,255) (50,367) (33,361) (171,983) (29,619) (201,602)
Other operating expenses(86,613) (35,389) (24,249) (146,251) (7,035) (153,286)(90,081) (29,936) (31,122) (151,139) (9,959) (161,098)
Underwriting income (loss)$22,474
 $62,638
 $41,156
 126,268
 1,379
 127,647
$(26,713) $30,944
 $230,559
 234,790
 (209) 234,581
                      
Net investment income      66,282
 27,336
 93,618
      114,328
 29,696
 144,024
Net realized gains (losses)      95,946
 29,159
 125,105
      (47,010) (4,695) (51,705)
Net impairment losses recognized in earnings      (3,867) —
 (3,867)      (492) —
 (492)
Equity in net income (loss) of investment funds accounted for using the equity method      16,662
 —
 16,662
      15,982
 —
 15,982
Other income (loss)      (400) —
 (400)      (726) —
 (726)
Corporate expenses (2)      (11,343) —
 (11,343)      (13,244) —
 (13,244)
UGC transaction costs and other (2)      (7,142) —
 (7,142)
Transaction costs and other (2)      (1,091) —
 (1,091)
Amortization of intangible assets      (4,865) —
 (4,865)      (26,315) —
 (26,315)
Interest expense      (12,924) (3,019) (15,943)      (24,666) (5,064) (29,730)
Net foreign exchange gains (losses)      (4,232) 1,611
 (2,621)      7,130
 3,708
 10,838
Income (loss) before income taxes      260,385
 56,466
 316,851
Income tax (expense) benefit      (13,232) 1
 (13,231)
Net income (loss)      247,153
 56,467
 303,620
Income before income taxes      258,686
 23,436
 282,122
Income tax expense      (33,356) —
 (33,356)
Net income      225,330
 23,436
 248,766
Dividends attributable to redeemable noncontrolling interests      —
 (4,588) (4,588)      —
 (4,599) (4,599)
Amounts attributable to nonredeemable noncontrolling interests      —
 (46,160) (46,160)      —
 (16,759) (16,759)
Net income (loss) available to Arch      247,153
 5,719
 252,872
Net income available to Arch      225,330
 2,078
 227,408
Preferred dividends      (5,484) —
 (5,484)      (10,402) —
 (10,402)
Net income (loss) available to Arch common shareholders      $241,669
 $5,719
 $247,388
Net income available to Arch common shareholders      $214,928
 $2,078
 $217,006
                      
Underwriting Ratios 
  
  
    
  
 
  
  
    
  
Loss ratio64.1% 42.0% 14.4% 53.1% 67.3% 54.7%73.0% 62.5% 3.2% 52.1% 71.5% 54.2%
Acquisition expense ratio14.9% 19.9% 6.7% 15.6% 26.0% 16.8%15.7% 17.2% 11.1% 14.9% 21.8% 15.6%
Other operating expense ratio16.7% 14.0% 31.5% 17.2% 6.4% 16.0%16.1% 10.2% 10.3% 13.1% 7.3% 12.5%
Combined ratio95.7% 75.9% 52.6% 85.9% 99.7% 87.5%104.8% 89.9% 24.6% 80.1% 100.6% 82.3%
                      
Goodwill and intangible assets$26,367
 $1,228
 $55,696
 $83,291
 $7,650
 $90,941
$20,141
 $—
 $538,871
 $559,012
 $7,650
 $566,662


(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction‘transaction costs and other.’







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


Nine Months EndedNine Months Ended
September 30, 2017September 30, 2019
Insurance Reinsurance Mortgage Sub-Total Other TotalInsurance Reinsurance Mortgage Sub-Total Other Total
                      
Gross premiums written (1)$2,313,630
 $1,351,051
 $1,032,800
 $4,697,007
 $473,131
 $4,915,895
$2,867,753
 $1,890,974
 $1,095,607
 $5,853,574
 $598,627
 $6,196,809
Premiums ceded(704,057) (386,743) (194,139) (1,284,465) (35,315) (1,065,537)(914,751) (627,120) (149,358) (1,690,469) (178,118) (1,613,195)
Net premiums written1,609,573
 964,308
 838,661
 3,412,542
 437,816
 3,850,358
1,953,002
 1,263,854
 946,249
 4,163,105
 420,509
 4,583,614
Change in unearned premiums(51,188) (81,182) (61,776) (194,146) (36,435) (230,581)(201,719) (186,450) 72,436
 (315,733) 2,735
 (312,998)
Net premiums earned1,558,385
 883,126
 776,885
 3,218,396
 401,381
 3,619,777
1,751,283
 1,077,404
 1,018,685
 3,847,372
 423,244
 4,270,616
Other underwriting income (loss)—
 1,143
 11,999
 13,142
 2,377
 15,519
—
 4,393
 11,867
 16,260
 1,844
 18,104
Losses and loss adjustment expenses(1,252,375) (631,669) (84,915) (1,968,959) (319,612) (2,288,571)(1,168,677) (751,147) (50,226) (1,970,050) (318,480) (2,288,530)
Acquisition expenses(236,378) (154,638) (76,235) (467,251) (99,328) (566,579)(265,177) (173,504) (98,722) (537,403) (81,654) (619,057)
Other operating expenses(271,268) (110,458) (108,790) (490,516) (24,311) (514,827)(338,327) (102,197) (116,697) (557,221) (39,368) (596,589)
Underwriting income (loss)$(201,636) $(12,496) $518,944
 304,812
 (39,493) 265,319
$(20,898) $54,949
 $764,907
 798,958
 (14,414) 784,544
                      
Net investment income      282,459
 62,998
 345,457
      371,161
 102,314
 473,475
Net realized gains (losses)      110,662
 11,501
 122,163
      318,722
 6,167
 324,889
Net impairment losses recognized in earnings      (5,415) —
 (5,415)      (2,521) —
 (2,521)
Equity in net income (loss) of investment funds accounted for using the equity method      111,884
 —
 111,884
      96,533
 —
 96,533
Other income (loss)      (3,118) —
 (3,118)      3,550
 —
 3,550
Corporate expenses (2)      (48,517) —
 (48,517)      (47,911) —
 (47,911)
UGC transaction costs and other (2)      (21,249) —
 (21,249)
Transaction costs and other (2)      (5,363) —
 (5,363)
Amortization of intangible assets      (93,942) —
 (93,942)      (60,214) —
 (60,214)
Interest expense      (77,932) (9,003) (86,935)      (70,094) (19,579) (89,673)
Net foreign exchange gains (losses)      (85,451) (1,524) (86,975)      28,779
 2,918
 31,697
Income (loss) before income taxes      474,193
 24,479
 498,672
Income tax (expense) benefit      (70,734) (21) (70,755)
Net income (loss)      403,459
 24,458
 427,917
Income before income taxes      1,431,600
 77,406
 1,509,006
Income tax expense      (128,454) (20) (128,474)
Net income      1,303,146
 77,386
 1,380,532
Dividends attributable to redeemable noncontrolling interests      —
 (13,756) (13,756) ��    —
 (15,778) (15,778)
Amounts attributable to nonredeemable noncontrolling interests      —
 (9,523) (9,523)      —
 (54,819) (54,819)
Net income (loss) available to Arch      403,459
 1,179
 404,638
Net income available to Arch      1,303,146
 6,789
 1,309,935
Preferred dividends      (34,936) —
 (34,936)      (31,209) —
 (31,209)
Loss on redemption of preferred shares      (6,735) —
 (6,735)
Net income (loss) available to Arch common shareholders      $361,788
 $1,179
 $362,967
Net income available to Arch common shareholders      $1,271,937
 $6,789
 $1,278,726
                      
Underwriting Ratios            
  
  
    
  
Loss ratio80.4% 71.5% 10.9% 61.2% 79.6% 63.2%66.7% 69.7% 4.9% 51.2% 75.2% 53.6%
Acquisition expense ratio15.2% 17.5% 9.8% 14.5% 24.7% 15.7%15.1% 16.1% 9.7% 14.0% 19.3% 14.5%
Other operating expense ratio17.4% 12.5% 14.0% 15.2% 6.1% 14.2%19.3% 9.5% 11.5% 14.5% 9.3% 14.0%
Combined ratio113.0% 101.5% 34.7% 90.9% 110.4% 93.1%101.1% 95.3% 26.1% 79.7% 103.8% 82.1%
(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction‘transaction costs and other.’




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


Nine Months EndedNine Months Ended
September 30, 2016September 30, 2018
Insurance Reinsurance Mortgage Sub-Total Other TotalInsurance Reinsurance Mortgage Sub-Total Other Total
                      
Gross premiums written (1)$2,319,530
 $1,217,804
 $361,440
 $3,898,025
 $421,627
 $4,046,667
$2,429,570
 $1,503,206
 $1,002,727
 $4,935,339
 $574,078
 $5,266,086
Premiums ceded(713,110) (370,068) (62,918) (1,145,347) (15,229) (887,591)(752,413) (455,682) (154,230) (1,362,161) (102,263) (1,221,093)
Net premiums written1,606,420
 847,736
 298,522
 2,752,678
 406,398
 3,159,076
1,677,157
 1,047,524
 848,497
 3,573,178
 471,815
 4,044,993
Change in unearned premiums(46,603) (43,345) (93,283) (183,231) (59,878) (243,109)(30,913) (134,761) 23,147
 (142,527) (39,926) (182,453)
Net premiums earned1,559,817
 804,391
 205,239
 2,569,447
 346,520
 2,915,967
1,646,244
 912,763
 871,644
 3,430,651
 431,889
 3,862,540
Other underwriting income (loss)—
 22,659
 12,670
 35,329
 2,922
 38,251
—
 2,490
 10,464
 12,954
 2,092
 15,046
Losses and loss adjustment expenses(1,011,087) (363,613) (20,102) (1,394,802) (236,922) (1,631,724)(1,120,630) (555,044) (74,672) (1,750,346) (312,087) (2,062,433)
Acquisition expenses(228,806) (160,706) (16,947) (406,459) (95,323) (501,782)(264,094) (148,828) (87,665) (500,587) (95,229) (595,816)
Other operating expenses(263,111) (108,561) (70,590) (442,262) (18,486) (460,748)(274,735) (101,185) (108,622) (484,542) (27,752) (512,294)
Underwriting income (loss)$56,813
 $194,170
 $110,270
 361,253
 (1,289) 359,964
$(13,215) $110,196
 $611,149
 708,130
 (1,087) 707,043
                      
Net investment income      207,088
 68,603
 275,691
      322,332
 84,084
 406,416
Net realized gains (losses)      168,735
 61,912
 230,647
      (218,414) (20,900) (239,314)
Net impairment losses recognized in earnings      (16,849) —
 (16,849)      (1,124) —
 (1,124)
Equity in net income (loss) of investment funds accounted for using the equity method      32,054
 —
 32,054
      52,523
 —
 52,523
Other income (loss)      (432) —
 (432)      2,461
 —
 2,461
Corporate expenses (2)      (37,926) —
 (37,926)      (43,330) —
 (43,330)
UGC transaction costs and other (2)      (7,142) —
 (7,142)
Transaction costs and other (2)      (8,829) —
 (8,829)
Amortization of intangible assets      (14,493) —
 (14,493)      (79,523) —
 (79,523)
Interest expense      (37,983) (9,730) (47,713)      (76,631) (14,079) (90,710)
Net foreign exchange gains (losses)      (3,812) 2,287
 (1,525)      38,302
 6,521
 44,823
Income (loss) before income taxes      650,493
 121,783
 772,276
Income tax (expense) benefit      (43,673) 1
 (43,672)
Net income (loss)      606,820
 121,784
 728,604
Income before income taxes      695,897
 54,539
 750,436
Income tax expense      (78,912) (27) (78,939)
Net income      616,985
 54,512
 671,497
Dividends attributable to redeemable noncontrolling interests      —
 (13,761) (13,761)      —
 (13,769) (13,769)
Amounts attributable to nonredeemable noncontrolling interests      —
 (96,118) (96,118)      —
 (36,251) (36,251)
Net income (loss) available to Arch      606,820
 11,905
 618,725
Net income available to Arch      616,985
 4,492
 621,477
Preferred dividends      (16,453) —
 (16,453)      (31,242) —
 (31,242)
Net income (loss) available to Arch common shareholders      $590,367
 $11,905
 $602,272
Loss on redemption of preferred shares      (2,710) —
 (2,710)
Net income available to Arch common shareholders      $583,033
 $4,492
 $587,525
                      
Underwriting Ratios            
  
  
    
  
Loss ratio64.8% 45.2% 9.8% 54.3% 68.4% 56.0%68.1% 60.8% 8.6% 51.0% 72.3% 53.4%
Acquisition expense ratio14.7% 20.0% 8.3% 15.8% 27.5% 17.2%16.0% 16.3% 10.1% 14.6% 22.0% 15.4%
Other operating expense ratio16.9% 13.5% 34.4% 17.2% 5.3% 15.8%16.7% 11.1% 12.5% 14.1% 6.4% 13.3%
Combined ratio96.4% 78.7% 52.5% 87.3% 101.2% 89.0%100.8% 88.2% 31.2% 79.7% 100.7% 82.1%


(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction‘transaction costs and other.’






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


6.5.    Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2019 2018 2019 2018
Reserve for losses and loss adjustment expenses at beginning of period$12,230,316
 $11,424,337
 $11,853,297
 $11,383,792
Unpaid losses and loss adjustment expenses recoverable3,024,797
 2,651,749
 2,814,291
 2,464,910
Net reserve for losses and loss adjustment expenses at beginning of period9,205,519
 8,772,588
 9,039,006
 8,918,882
        
Net incurred losses and loss adjustment expenses relating to losses occurring in:       
Current year855,352
 779,043
 2,419,044
 2,257,670
Prior years(52,897) (79,623) (130,514) (195,237)
Total net incurred losses and loss adjustment expenses802,455
 699,420
 2,288,530
 2,062,433
        
Retroactive reinsurance transactions (1)—
 —
 (225,500) (420,404)
        
Net foreign exchange (gains) losses(73,200) (33,783) (74,981) (110,061)
        
Net paid losses and loss adjustment expenses relating to losses occurring in:       
Current year(175,611) (149,999) (301,099) (245,021)
Prior years(399,948) (396,695) (1,366,741) (1,314,298)
Total net paid losses and loss adjustment expenses(575,559) (546,694) (1,667,840) (1,559,319)
        
Net reserve for losses and loss adjustment expenses at end of period9,359,215
 8,891,531
 9,359,215
 8,891,531
Unpaid losses and loss adjustment expenses recoverable3,030,169
 2,662,790
 3,030,169
 2,662,790
Reserve for losses and loss adjustment expenses at end of period$12,389,384
 $11,554,321
 $12,389,384
 $11,554,321

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Reserve for losses and loss adjustment expenses at beginning of period$10,520,511
 $9,471,647
 $10,200,960
 $9,125,250
Unpaid losses and loss adjustment expenses recoverable and deferred charges2,116,210
 2,003,768
 2,083,575
 1,828,837
Net reserve for losses and loss adjustment expenses at beginning of period8,404,301
 7,467,879
 8,117,385
 7,296,413
        
Net incurred losses and loss adjustment expenses relating to losses occurring in:       
Current year1,092,175
 598,940
 2,487,212
 1,848,299
Prior years(45,232) (74,757) (197,839) (216,575)
Discount and accretion on retroactive reinsurance(802) —
 (802) —
Total net incurred losses and loss adjustment expenses1,046,141
 524,183
 2,288,571
 1,631,724
        
Net foreign exchange losses (gains)61,919
 1,463
 168,493
 (13,270)
        
Net paid losses and loss adjustment expenses relating to losses occurring in:       
Current year(167,450) (128,432) (282,952) (285,468)
Prior years(457,183) (304,673) (1,403,769) (1,068,979)
Total net paid losses and loss adjustment expenses(624,633) (433,105) (1,686,721) (1,354,447)
        
Net reserve for losses and loss adjustment expenses at end of period8,887,728
 7,560,420
 8,887,728
 7,560,420
Unpaid losses and loss adjustment expenses recoverable and deferred charges2,463,539
 2,049,769
 2,463,539
 2,049,769
Reserve for losses and loss adjustment expenses at end of period$11,351,267
 $9,610,189
 $11,351,267
 $9,610,189

(1)During the 2019 first quarter and 2018 second quarter, a subsidiary of the Company entered into two separate retroactive reinsurance transactions with third party reinsurers to reinsure run-off liabilities associated with certain U.S. insurance exposures.
2017 Third Quarter Catastrophe Losses

The Company’s 2017 third quarter results reflect estimated net losses from current accident year catastrophic events of $347.8 million, net of reinsurance and reinstatement premiums, which consisted of $133.4 million from the reinsurance segment and $214.5 million from the insurance segment. Such amounts were primarily related to Hurricanes Harvey, Irma and Maria, along with the Mexican earthquakes and other more minor global events. In addition, estimated net losses from current accident year catastrophic events for the 2017 third quarter in the ‘other’ segment were $19.8 million.
Development on Prior Year Loss Reserves


20172019 Third Quarter


During the 20172019 third quarter, the Company recorded net favorable development on prior year loss reserves of $45.2$52.9 million, which consisted of $36.5$4.4 million of favorable development from the insurance segment, $15.3 million from the reinsurance segment, $3.0 million from the insurance segment, $21.5$33.0 million from the mortgage segment and adverse development of $15.8$0.2 million from the ‘other’ segment.
The insurance segment’s net favorable development of $4.4 million, or 0.7 loss ratio points, for the 2019 third quarter consisted of $24.8 million of net favorable development in short-tailed lines and $20.4 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines primarily resulted from lenders products and property (including special risk other than marine) reserves across all accident years (i.e., the year in which a loss occurred). Net adverse development in medium-tailed and long-tailed lines included $6.3 million of adverse development in executive assurance reserves, primarily from the 2016 to 2018 accident years, $4.9 million of adverse development on casualty reserves, primarily related to contract
binding business across most accident years, $4.2 million of adverse development on program business, primarily from the 2018 accident year, and $3.8 million in healthcare reserves, primarily from the 2016 to 2018 accident years.
The reinsurance segment’s net favorable development of $15.3 million, or 4.2 loss ratio points, for the 2019 third quarter consisted of $35.2 million of net favorable development from short-tailed and medium-tailed lines and net adverse development of $19.9 million from long-tailed lines. Net favorable development in short-tailed and medium lines reflected $26.5 million of favorable development from property catastrophe and property other than property catastrophe reserves, primarily related to 2017 and 2018 catastrophic events, and favorable development on marine and aviation and other reserves across most underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period). Adverse development in long-tailed lines reflected an increase in reserves from casualty from various underwriting years.
The mortgage segment’s net favorable development was $33.0 million, or 9.6 loss ratio points, for the 2019 third quarter. The 2019 third quarter development was primarily driven by

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continued favorable claim rates on first lien business and subrogation recoveries on second lien business.
2018 Third Quarter
During the 2018 third quarter, the Company recorded net favorable development on prior year loss reserves of $79.6 million, which consisted of $5.9 million from the insurance segment, $34.3 million from the reinsurance segment, $38.6 million from the mortgage segment and $0.7 million from the ‘other’ segment.
The insurance segment’s net favorable development of $5.9 million, or 1.1 loss ratio points, for the 2018 third quarter consisted of $14.3 million of net favorable development in short-tailed lines and $8.4 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2017 accident year (i.e., the year in which a loss occurred) while net adverse development in medium-tailed and long-tailed lines primarily resulted from $16.4 million of adverse development on contract binding business, primarily from the 2015 to 2017 accident years. Such amounts were partially offset by $8.0 million of net favorable development in other medium-tailed and short-tailed lines, including professional liability and surety business, across most accident years.
The reinsurance segment’s net favorable development of $36.5$34.3 million, or 11.311.7 loss ratio points, for the 20172018 third quarter consisted of $16.9$26.5 million from short-tailed lines and $19.6$7.8 million from long-tailed and medium-tailed lines. Favorable development in
short-tailed lines included $11.8$15.9 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years (i.e.(i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period.period, and $10.3 million from other specialty reserves, primarily from the 2016 underwriting year. Favorable development in long-tailed and medium-tailed lines reflected reductions in casualty reserves of $13.4$7.9 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2009 underwriting years, andyear.
The mortgage segment’s net favorable development in marinewas $38.6 million, or 12.8 loss ratio points, for the 2018 third quarter. The 2018 third quarter development was primarily driven by lower than expected claim rates on first lien business and subrogation recoveries on second lien business.
Nine Months Ended September 30, 2019
During the nine months ended September 30, 2019, the Company recorded net favorable development on prior year
loss reserves of $4.3$130.5 million, across most underwriting years.which consisted of $11.4 million from the insurance segment, $26.3 million from the reinsurance segment, $92.5 million from the mortgage segment and $0.3 million from the ‘other’ segment.
The insurance segment’s net favorable development of $3.0$11.4 million, or 0.60.7 loss ratio points, for the 2017 third quarter2019 period consisted of $1.8$42.6 million of net favorable development in short-tailed lines, partially offset by $31.2 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines primarily resulted from lenders products and property (including special risk other than marine) reserves across all accident years, partially offset by net adverse development in travel business, primarily from the 2018 accident year. Net adverse development in medium-tailed and long-tailed lines reflected $27.4 million of adverse development in program business, primarily from the 2018 accident year, and $12.8 million of adverse development on casualty business, primarily from contract binding business across most accident years. Such amounts were partially offset by $9.0 million of net favorable development in other medium-tailed and long-tailed lines, including professional liability, marine and surety business, across most accident years.
The reinsurance segment’s net favorable development of $26.3 million, or 2.4 loss ratio points, for the 2019 period consisted of $37.1 million of net favorable development from short-tailed and medium-tailed lines, offset by $10.8 million of net adverse development from long-tailed lines. Net favorable development in short-tailed lines reflected $22.6 million from other specialty lines and $9.5 million from property catastrophe reserves. Favorable development in medium-tailed lines reflected reductions in marine and aviation reserves of $10.4 million across most underwriting years.
The mortgage segment’s net favorable development was $92.5 million, or 9.1 loss ratio points, for the 2019 period. The 2019 development was primarily driven by continued lower than expected claim rates on first lien business and subrogation recoveries on second lien business.
Nine Months Ended September 30, 2018

During the nine months ended September 30, 2018, the Company recorded net favorable development on prior year loss reserves of $195.2 million, which consisted of $14.1 million from the insurance segment, $103.9 million from the reinsurance segment, $74.9 million from the mortgage segment and $2.3 million from the ‘other’ segment.
The insurance segment’s net favorable development of $14.1 million, or 0.9 loss ratio points, for the 2018 period consisted of $37.0 million of net favorable development in short-tailed lines and $1.2$16.4 million of net favorable development in long-tailed andlines, partially offset by $39.3 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2011 to 2016 accident years (i.e., the year in which a loss occurred). Net favorable development in medium-tailed lines reflected $11.9 million from professional liability reserves across most accident years and in surety reserves with $4.2 million of favorable development. Such amounts were partially offset by $12.9 million of adverse development on a small number of programs in the 2014 to 2016 accident years.


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The mortgage segment’sproperty (including special risk other than marine) reserves from the 2010 and 2017 accident years. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves of $8.0 million, primarily from the 2008 accident year, and in healthcare reserves of $8.1 million, primarily from the 2003 accident year. Net adverse development in medium-tailed lines reflected $23.4 million of adverse development in program business, primarily driven by a few inactive programs that were non-renewed in prior periods and $42.1 million of adverse development on contract binding business, primarily from the 2014 to 2017 accident years. Such amounts were partially offset by $26.2 million of net favorable development was $21.5 million, or 7.8 points, for the 2017 third quarter. The 2017 third quarter development was primarily driven by continued lower than expected claim emergencein other medium-tailed lines, including professional liability and surety business, across most origination years and also reflected $6.1 million related to second lien and other portfolios, primarily due to subrogation recoveries.accident years.
2016 Third Quarter
During the 2016 third quarter, the Company recorded net favorable development on prior year loss reserves of $74.8 million, which consisted of $59.5 million from the reinsurance segment, $13.7 million from the insurance segment, $2.5 million from the mortgage segment and adverse development of $0.9 million from the ‘other’ segment.
The reinsurance segment’s net favorable development of $59.5$103.9 million, or 23.611.4 loss ratio points, for the 2016 third quarter2018 period consisted of $27.7$77.6 million from short-tailed lines and $31.8$26.3 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $23.2$56.4 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years, reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period.period, and $10.7 million from other specialty reserves, across most underwriting years. Favorable development in long-tailed and medium-tailed lines reflected reductions in casualty reserves of $29.3$16.0 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2010 underwriting years, and 2012 to 2013 underwriting years.
The insurance segment’s net favorable development of $13.7 million, or 2.6 points, for the 2016 third quarter consisted of $18.2 million of net favorable development in long-tailed lines, partially offset by $2.4 million of net adverse development in short-tailed lines and $2.0 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2015 accident years, and net reductions in casualty reserves from the 2007 and 2008 accident years. Net adverse development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2015 accident year, primarily due to a small number of attritional losses. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $6.2 million stemming in part from terminated programs, partially offset by favorable development of $4.2 million in other medium-tailed lines, primarily in professional liability and surety.
The mortgage segment’s net favorable development was $2.5 million, or 3.2 points, for the 2016 third quarter. The 2016 third quarter development was primarily driven by lower than expected claim rates across most origination years.
Nine Months Ended September 30, 2017
During the nine months ended September 30, 2017, the Company recorded net favorable development on prior year loss reserves of $197.8 million, which consisted of $133.3 million from the reinsurance segment, $7.2 million from the insurance segment, $74.9 million from the mortgage segment and adverse development of $17.5 million from the ‘other’ segment.
The reinsurance segment’s net favorable development of $133.3 million, or 15.1 points, for the 2017 period consisted of $85.8 million from short-tailed lines and $47.5 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $62.7 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years, reflecting lower levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed and medium-tailed lines reflected reductions in casualty reserves of $28.0 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2013 underwriting years, and favorable development in marine reserves of $16.6$10.8 million across most underwriting years.
The insurance segment’s net favorable development of $7.2 million, or 0.5 points, for the 2017 period consisted of $9.0 million of net favorable development in short-tailed lines and $7.4 million of net favorable development in long-tailed lines, partially offset by $9.2 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines primarily resulted from property (including special risk other than marine) reserves from the 2011 to 2016 accident years. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2014 accident years and reductions in healthcare reserves across various accident years, partially offset by $17.2 million of adverse development on construction reserves across various accident years. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $39.3 million stemming in part from development on a small number of programs in the 2013 to 2015 accident years, partially offset by net favorable development of $30.1 million in other medium-tailed lines, primarily in professional liability and surety.
The mortgage segment’s net favorable development was $74.9 million, or 9.68.6 loss ratio points, for the 20172018 period. The 2018 development was primarily driven by continued lower than expected claim emergence across most origination yearsrates on first lien business and also reflected $19.2 million related tosubrogation recoveries on second lien and other portfolios, primarily due to subrogation recoveries.business.



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Nine Months Ended September 30, 2016
During the nine months ended September 30, 2016, the Company recorded net favorable development on prior year loss reserves of $216.6 million, which consisted of $176.7 million from the reinsurance segment, $24.8 million from the insurance segment, $16.3 million from the mortgage segment and adverse development of $1.2 million from the ‘other’ segment.
The reinsurance segment’s net favorable development of $176.7 million, or 22.0 points, for the 2016 period consisted of $113.1 million from short-tailed lines and $63.6 million from long-tailed and medium-tailed lines. Favorable development in short-tailed lines included $92.6 million from property catastrophe and property other than property catastrophe reserves, across most underwriting years. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during the period. Favorable development in long-tailed lines reflected reductions in casualty reserves of $66.4 million based on varying levels of reported and paid claims activity, primarily from the 2002 to 2013 underwriting years. Such amounts were partially offset by net adverse development on marine reserves, primarily from the 2002 and 2015 underwriting years, partially offset by favorable development from most other underwriting years.
The insurance segment’s net favorable development of $24.8 million, or 1.6 points, for the 2016 period consisted of $36.2 million of net favorable development in long-tailed lines and $7.7 million of net favorable development in short-tailed lines, partially offset by $19.1 million of net adverse development in medium-tailed lines. Net favorable development in long-tailed lines reflected net reductions in executive assurance reserves from the 2008 to 2009 accident years and 2011 to 2013 accident years, and net reductions in casualty reserves across most accident years, partially offset by a large energy casualty claim from the 2015 accident year. Net favorable development in short-tailed lines primarily resulted from reductions in property (including special risk other than marine) reserves from the 2009 to 2014 accident years, primarily due to varying levels of reported claims activity. Net adverse development in medium-tailed lines primarily resulted from an increase in programs of $28.6 million stemming in part from terminated programs, partially offset by favorable development of $9.5 million in other medium-tailed lines, primarily in professional liability and surety.
The mortgage segment’s net favorable development was $16.3 million, or 7.9 points, for the 2016 period. The development was primarily driven by lower than expected claim rates across most origination years.

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7.6.    Investment Information


At September 30, 2017,2019, total investable assets of $22.00$24.30 billion included $19.70$21.57 billion managedheld by the Company and $2.30$2.73 billion attributable to Watford Re.Watford.
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s investmentssecurities classified as available for sale:
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cost or
Amortized
Cost
 
OTTI
Unrealized
Losses (2)
Estimated
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cost or
Amortized
Cost
 
OTTI
Unrealized
Losses (2)
September 30, 2017         
September 30, 2019         
Fixed maturities (1):                  
Corporate bonds$4,275,437
 $49,576
 $(22,303) $4,248,164
 $(73)$6,269,993
 $198,742
 $(18,420) $6,089,671
 $—
Mortgage backed securities323,900
 5,078
 (2,540) 321,362
 (2,146)544,033
 11,185
 (918) 533,766
 (6)
Municipal bonds2,353,234
 31,202
 (7,614) 2,329,646
 —
653,346
 27,095
 (379) 626,630
 —
Commercial mortgage backed securities584,730
 3,114
 (4,377) 585,993
 —
754,306
 27,523
 (158) 726,941
 —
U.S. government and government agencies3,761,612
 3,303
 (20,246) 3,778,555
 —
5,127,290
 67,957
 (6,671) 5,066,004
 —
Non-U.S. government securities1,473,819
 49,570
 (21,647) 1,445,896
 —
1,873,856
 48,212
 (52,767) 1,878,411
 —
Asset backed securities1,544,919
 9,053
 (4,748) 1,540,614
 (22)1,657,494
 29,838
 (5,931) 1,633,587
 —
Total14,317,651
 150,896
 (83,475) 14,250,230
 (2,241)16,880,318
 410,552
 (85,244) 16,555,010
 (6)
Equity securities480,607
 84,755
 (7,873) 403,725
 —
Other investments260,339
 54,512
 (1) 205,828
 —
Short-term investments1,646,036
 667
 (504) 1,645,873
 —
751,989
 227
 (445) 752,207
 —
Total$16,704,633
 $290,830
 $(91,853) $16,505,656
 $(2,241)$17,632,307
 $410,779
 $(85,689) $17,307,217
 $(6)
                  
December 31, 2016         
December 31, 2018         
Fixed maturities (1):                  
Corporate bonds$4,392,373
 $27,606
 $(46,905) $4,411,672
 $(2,285)$5,537,548
 $14,476
 $(105,428) $5,628,500
 $(69)
Mortgage backed securities490,093
 4,794
 (8,357) 493,656
 (3,323)541,193
 3,991
 (3,216) 540,418
 (6)
Municipal bonds3,713,434
 8,554
 (29,154) 3,734,034
 (201)1,013,395
 5,380
 (11,891) 1,019,906
 —
Commercial mortgage backed securities536,051
 2,876
 (6,508) 539,683
 —
729,442
 2,650
 (10,751) 737,543
 —
U.S. government and government agencies2,804,540
 9,319
 (24,437) 2,819,658
 —
3,758,698
 27,189
 (8,474) 3,739,983
 —
Non-U.S. government securities1,096,440
 19,036
 (56,872) 1,134,276
 —
1,771,338
 14,477
 (50,948) 1,807,809
 —
Asset backed securities1,123,987
 6,897
 (6,526) 1,123,616
 (22)1,600,896
 8,060
 (14,798) 1,607,634
 —
Total14,156,918
 79,082
 (178,759) 14,256,595
 (5,831)14,952,510
 76,223
 (205,506) 15,081,793
 (75)
Equity securities532,680
 62,627
 (17,517) 487,570
 —
Other investments167,970
 21,358
 (2,465) 149,077
 —
Short-term investments612,005
 272
 (145) 611,878
 —
955,880
 36
 (394) 956,238
 —
Total$15,469,573
 $163,339
 $(198,886) $15,505,120
 $(5,831)$15,908,390
 $76,259
 $(205,900) $16,038,031
 $(75)
(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the securitiesfixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
(2)Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At September 30, 2017,2019 the net unrealized gainloss related to securities for which a non-credit OTTI was recognized in AOCI was $0.9$0.01 million, compared to a net unrealized gainloss of $2.8$0.04 million at December 31, 2016.2018.



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The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
Estimated
Fair
Value		 
Gross
Unrealized
Losses
 Estimated
Fair
Value		 
Gross
Unrealized
Losses
 Estimated
Fair
Value		 
Gross
Unrealized
Losses
Estimated
Fair
Value		 
Gross
Unrealized
Losses
 Estimated
Fair
Value		 
Gross
Unrealized
Losses
 Estimated
Fair
Value		 
Gross
Unrealized
Losses
September 30, 2017           
September 30, 2019           
Fixed maturities (1):                      
Corporate bonds$1,173,096
 $(18,315) $191,382
 $(3,988) $1,364,478
 $(22,303)$538,471
 $(11,128) $113,987
 $(7,292) $652,458
 $(18,420)
Mortgage backed securities146,352
 (2,477) 1,511
 (63) 147,863
 (2,540)97,288
 (905) 200
 (13) 97,488
 (918)
Municipal bonds745,410
 (5,958) 110,752
 (1,656) 856,162
 (7,614)43,627
 (379) —
 —
 43,627
 (379)
Commercial mortgage backed securities282,901
 (3,579) 17,570
 (798) 300,471
 (4,377)47,219
 (151) 1,872
 (7) 49,091
 (158)
U.S. government and government agencies3,083,239
 (19,736) 25,894
 (510) 3,109,133
 (20,246)1,592,232
 (6,531) 47,416
 (140) 1,639,648
 (6,671)
Non-U.S. government securities1,149,528
 (20,741) 37,655
 (906) 1,187,183
 (21,647)1,214,128
 (51,742) 47,576
 (1,025) 1,261,704
 (52,767)
Asset backed securities587,561
 (4,404) 22,051
 (344) 609,612
 (4,748)375,936
 (4,600) 48,743
 (1,331) 424,679
 (5,931)
Total7,168,087
 (75,210) 406,815
 (8,265) 7,574,902
 (83,475)3,908,901
 (75,436) 259,794
 (9,808) 4,168,695
 (85,244)
Equity securities170,937
 (7,873) —
 —
 170,937
 (7,873)
Other investments725
 (1) —
 —
 725
 (1)
Short-term investments110,444
 (504) —
 —
 110,444
 (504)43,007
 (445) —
 —
 43,007
 (445)
Total$7,450,193
 $(83,588) $406,815
 $(8,265) $7,857,008
 $(91,853)$3,951,908
 $(75,881) $259,794
 $(9,808) $4,211,702
 $(85,689)
                      
December 31, 2016           
December 31, 2018           
Fixed maturities (1):                      
Corporate bonds$1,700,813
 $(43,011) $46,902
 $(3,894) $1,747,715
 $(46,905)$2,983,195
 $(68,910) $1,234,865
 $(36,518) $4,218,060
 $(105,428)
Mortgage backed securities402,699
 (8,134) 6,105
 (223) 408,804
 (8,357)84,296
 (695) 109,009
 (2,521) 193,305
 (3,216)
Municipal bonds1,513,308
 (28,504) 29,636
 (650) 1,542,944
 (29,154)233,081
 (2,074) 408,155
 (9,817) 641,236
 (11,891)
Commercial mortgage backed securities231,374
 (6,331) 5,635
 (177) 237,009
 (6,508)223,341
 (2,831) 193,956
 (7,920) 417,297
 (10,751)
U.S. government and government agencies1,888,018
 (24,437) —
 —
 1,888,018
 (24,437)635,049
 (1,354) 391,102
 (7,120) 1,026,151
 (8,474)
Non-U.S. government securities807,598
 (56,872) —
 —
 807,598
 (56,872)1,028,340
 (35,524) 389,671
 (15,424) 1,418,011
 (50,948)
Asset backed securities627,557
 (5,465) 65,723
 (1,061) 693,280
 (6,526)533,592
 (8,832) 368,095
 (5,966) 901,687
 (14,798)
Total7,171,367
 (172,754) 154,001
 (6,005) 7,325,368
 (178,759)5,720,894
 (120,220) 3,094,853
 (85,286) 8,815,747
 (205,506)
Equity securities269,381
 (17,517) —
 —
 269,381
 (17,517)
Other investments39,299
 (2,465) —
 —
 39,299
 (2,465)
Short-term investments29,146
 (145) —
 —
 29,146
 (145)122,878
 (394) —
 —
 122,878
 (394)
Total$7,509,193
 $(192,881) $154,001
 $(6,005) $7,663,194
 $(198,886)$5,843,772
 $(120,614) $3,094,853
 $(85,286) $8,938,625
 $(205,900)
(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”

At September 30, 2019, on a lot level basis, approximately 1,980 security lots out of a total of approximately 9,260 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $3.0 million. At December 31, 2018, on a lot level basis, approximately 5,870 security lots out of a total of approximately 8,450 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $2.6 million.

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

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
  September 30, 2019 December 31, 2018
Maturity 
Estimated
Fair
Value
 
Amortized
Cost
 Estimated
Fair
Value		 
Amortized
Cost
Due in one year or less $545,056
 $538,903
 $276,682
 $279,135
Due after one year through five years 10,096,867
 9,971,896
 8,666,297
 8,738,944
Due after five years through 10 years 3,075,318
 2,952,478
 2,919,232
 2,951,582
Due after 10 years 207,244
 197,439
 218,768
 226,537
  13,924,485
 13,660,716
 12,080,979
 12,196,198
Mortgage backed securities 544,033
 533,766
 541,193
 540,418
Commercial mortgage backed securities 754,306
 726,941
 729,442
 737,543
Asset backed securities 1,657,494
 1,633,587
 1,600,896
 1,607,634
Total (1) $16,880,318
 $16,555,010
 $14,952,510
 $15,081,793

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

See “—Securities Lending Agreements.”
At September 30, 2017, on a lot level basis, approximately 2,870 security lots out of a total of approximately 7,410 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $1.6 million. At December 31, 2016, on a lot level basis, approximately 3,540 security lots out of a total of approximately 7,240 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $4.6 million.

ACGL 2017 THIRD QUARTER FORM 10-Q25
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
  September 30, 2017 December 31, 2016
Maturity 
Estimated
Fair
Value
 
Amortized
Cost
 Estimated
Fair
Value		 
Amortized
Cost
Due in one year or less $537,043
 $534,513
 $560,830
 $557,675
Due after one year through five years 7,547,002
 7,508,674
 6,158,148
 6,211,099
Due after five years through 10 years 3,495,424
 3,480,251
 4,676,847
 4,710,017
Due after 10 years 284,633
 278,823
 610,962
 620,849
  11,864,102
 11,802,261
 12,006,787
 12,099,640
Mortgage backed securities 323,900
 321,362
 490,093
 493,656
Commercial mortgage backed securities 584,730
 585,993
 536,051
 539,683
Asset backed securities 1,544,919
 1,540,614
 1,123,987
 1,123,616
Total (1) $14,317,651
 $14,250,230
 $14,156,918
 $14,256,595
(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.”
 
Securities Lending Agreements
The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan from the Company.
The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short term investments. At September 30, 2017,2019, the fair value of the cash collateral received on securities lending was $63.8$12.0 million and the fair value of security collateral received was $479.5$418.2 million. At December 31, 2016,2018, the fair value of the cash collateral received on securities lending was $212.5$19.0 million, and the fair value of security collateral received was $550.1$255.1 million. Cash collateral is reinvested in short-term investments.
The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories as follows:
  Remaining Contractual Maturity of the Agreements
  Overnight and Continuous Less than 30 Days 30-90 Days 90 Days or More Total
September 30, 2019          
U.S. government and government agencies $257,979
 $—
 $156,541
 $—
 $414,520
Corporate bonds 4,820
 —
 —
 —
 4,820
Equity securities 10,915
 —
 —
 —
 10,915
Total $273,714
 $—
 $156,541
 $—
 $430,255
Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 8 $—
Amounts related to securities lending not included in offsetting disclosure in note 8 $430,255
           
December 31, 2018          
U.S. government and government agencies $219,276
 $—
 $32,583
 $—
 $251,859
Corporate bonds 7,129
 —
 —
 —
 7,129
Equity securities 15,137
 —
 —
 —
 15,137
Total $241,542
 $—
 $32,583
 $—
 $274,125
Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 8
 $—
Amounts related to securities lending not included in offsetting disclosure in note 8
 $274,125

  Remaining Contractual Maturity of the Agreements
  Overnight and Continuous Less than 30 Days 30-90 Days 90 Days or More Total
September 30, 2017          
U.S. government and government agencies $424,838
 $8,186
 $74,930
 $—
 $507,954
Corporate bonds 31,305
 —
 —
 —
 31,305
Equity securities 3,984
 —
 —
 —
 3,984
Total $460,127
 $8,186
 $74,930
 $—
 $543,243
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9 $—
Amounts related to securities lending not included in offsetting disclosure in Note 9 $543,243
           
December 31, 2016          
U.S. government and government agencies $556,015
 $31,244
 $126,093
 $5,140
 $718,492
Corporate bonds 29,078
 —
 —
 —
 29,078
Equity securities 14,984
 —
 —
 —
 14,984
Total $600,077
 $31,244
 $126,093
 $5,140
 $762,554
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 9 $—
Amounts related to securities lending not included in offsetting disclosure in Note 9 $762,554


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


Equity Securities, at Fair Value
At September 30, 2019, the Company held $550.5 million of equity securities, at fair value, compared to $338.9 million at December 31, 2018. Such holdings include publicly traded common stocks in the natural resources, energy, consumer staples and other sectors and exchange-traded funds.
Other Investments
The following table summarizes the Company’s other investments including availablewhich are included in investments accounted for sale andusing the fair value option, components:by strategy:
 September 30,
2019		 December 31,
2018
Term loan investments (par value: $1,434,328 and $1,369,216)$1,330,886
 $1,282,287
Lending624,699
 524,112
Credit related funds165,444
 202,123
Energy113,791
 117,509
Investment grade fixed income83,649
 101,902
Infrastructure49,602
 45,371
Private equity54,609
 24,383
Real estate17,440
 14,252
Total$2,440,120
 $2,311,939

 September 30,
2017		 December 31,
2016
Available for sale:   
Asian and emerging markets$123,225
 $84,778
Investment grade fixed income53,325
 33,923
Credit related funds20,752
 7,469
Other63,037
 41,800
Total available for sale260,339
 167,970
Fair value option:   
Term loan investments (par value: $1,378,797 and $1,208,537)1,387,663
 1,190,799
Mezzanine debt funds172,000
 127,943
Credit related funds194,200
 218,298
Investment grade fixed income95,151
 75,468
Asian and emerging markets300,552
 178,568
Other (1)147,639
 129,717
Total fair value option2,297,205
 1,920,793
Total$2,557,544
 $2,088,763
Investments Accounted For Using the Equity Method
(1)Includes fund investments with strategies in mortgage servicing rights, transportation, infrastructure and other.

The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
 September 30,
2019		 December 31,
2018
Credit related funds$428,353
 $429,402
Equities284,465
 375,273
Real estate265,502
 232,647
Lending200,112
 125,041
Private equity141,343
 114,019
Infrastructure149,005
 113,748
Energy107,052
 103,661
Total$1,575,832
 $1,493,791

Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general
partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Fair Value Option
The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:
 September 30,
2019		 December 31,
2018
Fixed maturities$908,802
 $1,245,562
Other investments2,440,120
 2,311,939
Short-term investments390,980
 322,177
Equity securities98,341
 103,893
Investments accounted for using the fair value option$3,838,243
 $3,983,571
 September 30,
2017		 December 31,
2016
Fixed maturities$1,508,204
 $1,099,116
Other investments2,297,205
 1,920,793
Short-term investments349,540
 373,669
Equity securities94,685
 27,642
Investments accounted for using the fair value option$4,249,634
 $3,421,220

Limited partnership interestsPartnership Interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Investments accounted for using the equity method (1)$962,574
 $800,970
1,575,832
 1,493,791
Investments accounted for using the fair value option (2)109,157
 90,804
189,186
 162,398
Total$1,071,731
 $891,774
$1,765,018
 $1,656,189
(1)Aggregate unfunded commitments were $850.4 million$1.44 billion at September 30, 2017,2019, compared to $776.6 million$1.22 billion at December 31, 2016.2018.
(2)Aggregate unfunded commitments were $162.3$51.1 million at September 30, 2017,2019, compared to $16.7$117.5 million at December 31, 2016.2018.


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


Net Investment Income
The components of net investment income were derived from the following sources:
September 30,September 30,
2017 20162019 2018
Three Months Ended      
Fixed maturities$96,144
 $71,366
$126,889
 $120,516
Term loans24,236
 21,903
Equity securities2,887
 3,311
3,992
 3,165
Short-term investments2,957
 1,703
3,834
 4,547
Other (1)37,957
 37,466
22,704
 17,195
Gross investment income139,945
 113,846
181,655
 167,326
Investment expenses(23,486) (20,228)(20,167) (23,302)
Net investment income$116,459
 $93,618
$161,488
 $144,024
      
Nine Months Ended      
Fixed maturities$284,807
 $223,033
$381,706
 $343,513
Term loans73,582
 62,430
Equity securities9,184
 10,409
11,348
 10,510
Short-term investments6,732
 3,015
11,872
 13,799
Other (1)111,613
 98,089
62,423
 52,210
Gross investment income412,336
 334,546
540,931
 482,462
Investment expenses(66,879) (58,855)(67,456) (76,046)
Net investment income$345,457
 $275,691
$473,475
 $406,416
(1)Includes income distributions from investment funds term loan investments and other items.
 
Net Realized Gains (Losses)
Net realized gains (losses) were as follows, excluding other than-temporarynet impairment provision.losses recognized in earnings:
 September 30,
 2019 2018
Three Months Ended   
Available for sale securities: 
  
Gross gains on investment sales$73,685
 $10,990
Gross losses on investment sales(30,561) (34,879)
Change in fair value of assets and liabilities accounted for using the fair value option:   
Fixed maturities(3,895) (6,604)
Other investments(21,778) (7,950)
Equity securities(1,231) 2,752
Short-term investments(1,941) (471)
Equity securities, at fair value:   
Net realized gains (losses) on sales during the period5,217
 (2,012)
Net unrealized gains (losses) on equity securities still held at reporting date(1,206) 10,798
Derivative instruments (1)42,893
 (17,556)
Other (2)1,335
 (6,773)
Net realized gains (losses)$62,518
 $(51,705)
    
Nine Months Ended   
Available for sale securities:   
Gross gains on investment sales$192,140
 $44,732
Gross losses on investment sales(77,498) (175,141)
Change in fair value of assets and liabilities accounted for using the fair value option:   
Fixed maturities38,682
 (47,082)
Other investments(37,363) (14,578)
Equity securities9,449
 10,650
Short-term investments(2,613) (758)
Equity securities, at fair value:   
Net realized gains (losses) on sales during the period9,503
 (13,298)
Net unrealized gains (losses) on equity securities still held at reporting date58,562
 (4,063)
Derivative instruments (1)142,730
 (23,665)
Other (2)(8,703) (16,111)
Net realized gains (losses)$324,889
 $(239,314)
 September 30,
 2017 2016
Three Months Ended   
Available for sale securities: 
  
Gross gains on investment sales$66,565
 $84,451
Gross losses on investment sales(39,015) (22,985)
Change in fair value of assets and liabilities accounted for using the fair value option:   
Fixed maturities4,035
 43,935
Other investments24,264
 46,428
Equity securities10,230
 (52)
Short-term investments(3,320) 1,150
Derivative instruments (1)4,298
 (16,964)
Other (2)(782) (10,858)
Net realized gains (losses)$66,275
 $125,105
    
Nine Months Ended   
Available for sale securities:   
Gross gains on investment sales$212,470
 $266,965
Gross losses on investment sales(152,996) (129,409)
Change in fair value of assets and liabilities accounted for using the fair value option:   
Fixed maturities34,232
 62,234
Other investments42,149
 38,016
Equity securities16,604
 385
Short-term investments12
 107
Derivative instruments (1)(9,653) 24,102
Other (2)(20,655) (31,753)
Net realized gains (losses)$122,163
 $230,647

(1)
See Note 9note 8 for information on the Company’s derivative instruments.
(2)Includes the re-measurement of contingent consideration liability amounts.


Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
The Company recorded $31.1$17.1 million of equity in net income related to investment funds accounted for using the equity method in the 20172019 third quarter, compared to $16.7$16.0 million for the 20162018 third quarter, and $111.9$96.5 million for the nine months ended September 30, 2017,2019, compared to $32.1$52.5 million for the 20162018 period. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss

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

of the funds (which include changes in the market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other-Than-Temporary ImpairmentsNet Impairment Losses Recognized in Earnings
The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance.
The following table details the net impairment losses recognized in earnings by asset class:
September 30,September 30,
2017 20162019 2018
Three Months Ended      
Fixed maturities: 
  
 
  
Mortgage backed securities$(50) $(233)$(284) $(73)
Corporate bonds(82) —
(666) (270)
Non-U.S. government securities(178) (545)—
 (149)
U.S. government and government agencies(426) —
Municipal bonds(202) —
Total(938) (778)
Equity securities(940) (557)
Other investments—
 (2,532)
Asset backed securities(213) —
Net impairment losses recognized in earnings$(1,878) $(3,867)$(1,163) $(492)
      
Nine Months Ended      
Fixed maturities:      
Mortgage backed securities$(1,461) $(788)$(839) $(196)
Corporate bonds(1,484) (5,655)(1,256) (631)
Non-U.S. government securities(376) (777)—
 (149)
Asset backed securities—
 (2,506)(426) (148)
U.S. government and government agencies(426) —
Municipal bonds(375) —
Total(4,122) (9,726)
Equity securities(1,126) (3,594)
Other investments(167) (3,529)
Net impairment losses recognized in earnings$(5,415) $(16,849)$(2,521) $(1,124)
Net impairment losses recognized in earnings in the 2017 third quarter2019 periods were primarily related to equities and on fixed maturities with foreign currency fluctuations. For the nine months ended September 30, 2017, net impairment losses recognized in earnings reflected the Company’s decision to liquidate a portfolio of mortgage backed securities in April 2017. The Company recorded impairment lossesfluctuations and other impairments on securities in such portfolio that were in an unrealized loss position at March 31, 2017.corporate bonds and other securities.
The Company believes that the $2.2 millionminimal amount of OTTI included in accumulated other comprehensive income at September 30, 20172019 on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At September 30, 2017,2019, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.
 
The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:
 September 30,
 2019 2018
Three Months Ended   
Balance at start of period$346
 $698
Credit loss impairments recognized on securities not previously impaired—
 —
Credit loss impairments recognized on securities previously impaired—
 —
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
Reductions for securities sold during the period—
 (47)
Balance at end of period$346
 $651
    
Nine Months Ended   
Balance at start of year$637
 $767
Credit loss impairments recognized on securities not previously impaired—
 —
Credit loss impairments recognized on securities previously impaired—
 —
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
Reductions for securities sold during the period(291) (116)
Balance at end of period$346
 $651
 September 30,
 2017 2016
Three Months Ended   
Balance at start of period$4,437
 $14,847
Credit loss impairments recognized on securities not previously impaired—
 38
Credit loss impairments recognized on securities previously impaired15
 60
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
Reductions for securities sold during the period(689) (1,166)
Balance at end of period$3,763
 $13,779
    
Nine Months Ended   
Balance at start of year$13,138
 $26,875
Credit loss impairments recognized on securities not previously impaired31
 1,388
Credit loss impairments recognized on securities previously impaired210
 582
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security—
 —
Reductions for securities sold during the period(9,616) (15,066)
Balance at end of period$3,763
 $13,779

Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsuranceunderwriting operations. The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 10 for further details.note 16, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2018 Form 10-K. The following table details the value of the Company’s restricted assets:
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Assets used for collateral or guarantees: 
  
 
  
Affiliated transactions$4,264,131
 $3,871,971
$4,629,369
 $4,623,483
Third party agreements1,689,104
 1,513,079
2,605,587
 2,181,682
Deposits with U.S. regulatory authorities618,136
 472,890
788,295
 689,114
Deposits with non-U.S. regulatory authorities56,753
 44,399
71,800
 59,624
Total restricted assets$6,628,124
 $5,902,339
$8,095,051
 $7,553,903



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


8.In addition, Watford maintains a secured credit facility to provide borrowing capacity for investment purposes and a total return swap agreement and maintains assets pledged as collateral for such purposes. The Company does not guarantee or provide credit support for Watford, and the Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions. As of September 30, 2019 and December 31, 2018, Watford held $1.06 billion and $1.30 billion, respectively, in pledged assets to collateralize the credit facility mentioned above.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
 September 30,
2019		 December 31,
2018
Cash$880,099
 $646,556
Restricted cash (included in ‘other assets’)$82,376
 $78,087
Cash and restricted cash$962,475
 $724,643


7.    Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
Level 1:
Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2:Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
for substantially the full term of the financial instrument
Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g.(e.g.,
comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at September 30, 2017.2019.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $21.14$22.21 billion of financial assets and liabilities measured at fair value at September 30, 2017, 2019,

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approximately $242.9$187.9 million, or 1.2%0.9%, were priced using non-binding broker-dealer quotes. Of the $19.10$20.41 billion of financial assets and liabilities measured at fair value at December 31, 2016,2018, approximately $234.0$217.9 million, or 1.2%1.1%, were priced using non-binding broker-dealer quotes.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

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The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
•U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
•Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process. During the nine months ended September 30, 2019, the Company transferred $25.8 million of corporate bonds from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.
•Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•Municipal bonds — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
•Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
•Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option

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Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
During the 2017 third quarter,nine months ended September 30, 2019, the Company transferred $17.6$5.5 million of fixed maturitiesasset-backed securities from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy.

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Table A small number of Contentssecurities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3. During nine months ended September 30 2019, the Company transferred $107.4 million of equity securities from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other investments
The Company determined that exchange-traded investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not
been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities. During the 2017 third quarter,nine months ended September 30, 2019, the Company transferred $4.8$31.6 million of other investments from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market
inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.
Contingent consideration liabilities
Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to the acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies and other acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.


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The following table presents the Company’s financial assets and liabilities measured at fair value by level at September 30, 2017:2019:
  Estimated Fair Value Measurements Using:  Estimated Fair Value Measurements Using:
Estimated
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Estimated
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets measured at fair value (1): 
  
  
  
 
  
  
  
Available for sale securities: 
  
  
  
 
  
  
  
Fixed maturities: 
  
  
  
 
  
  
  
Corporate bonds$4,275,437
 $—
 $4,263,446
 $11,991
$6,269,993
 $—
 $6,261,248
 $8,745
Mortgage backed securities323,900
 —
 323,496
 404
544,033
 —
 543,761
 272
Municipal bonds2,353,234
 —
 2,353,234
 —
653,346
 —
 653,346
 —
Commercial mortgage backed securities584,730
 —
 584,185
 545
754,306
 —
 754,306
 —
U.S. government and government agencies3,761,612
 3,687,126
 74,486
 —
5,127,290
 5,005,512
 121,778
 —
Non-U.S. government securities1,473,819
 —
 1,473,819
 —
1,873,856
 —
 1,873,856
 —
Asset backed securities1,544,919
 —
 1,539,919
 5,000
1,657,494
 —
 1,652,045
 5,449
Total14,317,651
 3,687,126
 10,612,585
 17,940
16,880,318
 5,005,512
 11,860,340
 14,466
              
Equity securities480,607
 473,908
 6,699
 —
       
Short-term investments1,646,036
 1,600,885
 45,151
 —
751,989
 720,518
 31,471
 —
              
Other investments84,671
 83,254
 1,417
 —
Other investments measured at net asset value (2)175,668
      
Total other investments260,339
 83,254
 1,417
 —
Equity securities, at fair value561,105
 514,380
 11,402
 35,323
              
Derivative instruments (4)33,141
 —
 33,141
 —
51,647
 —
 51,647
 —
              
Fair value option:              
Corporate bonds823,181
 —
 811,710
 11,471
619,779
 —
 597,000
 22,779
Non-U.S. government bonds97,614
 —
 97,614
 —
61,755
 —
 61,755
 —
Mortgage backed securities21,218
 —
 21,218
 —
15,512
 —
 15,512
 —
Municipal bonds2,740
 —
 2,740
 —
1,140
 —
 1,140
 —
Commercial mortgage backed securities12,539
 —
 12,539
 —
Asset backed securities63,437
 —
 63,437
 —
208,620
 —
 208,620
 —
U.S. government and government agencies487,475
 487,475
 —
 —
1,996
 1,886
 110
 —
Short-term investments349,540
 343,620
 5,920
 —
390,980
 376,033
 14,947
 —
Equity securities94,685
 59,332
 35,353
 —
98,340
 41,333
 735
 56,272
Other investments1,298,198
 120,212
 1,146,840
 31,146
1,411,420
 41,316
 1,284,661
 85,443
Other investments measured at net asset value (2)999,007
      1,028,700
      
Total4,249,634
 1,010,639
 2,197,371
 42,617
3,838,242
 460,568
 2,184,480
 164,494
              
Total assets measured at fair value$20,987,408
 $6,855,812
 $12,896,364
 $60,557
$22,083,301
 $6,700,978
 $14,139,340
 $214,283
              
Liabilities measured at fair value: 
  
  
  
 
  
  
  
Contingent consideration liabilities$(59,248) $—
 $—
 $(59,248)$(7,344) $—
 $—
 $(7,344)
Securities sold but not yet purchased (3)(72,682) —
 (72,682) —
(65,736) —
 (65,736) —
Derivative instruments (4)(23,037) —
 (23,037) —
(53,740) —
 (53,740) —
Total liabilities measured at fair value$(154,967) $—
 $(95,719) $(59,248)$(126,820) $—
 $(119,476) $(7,344)


(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 7, “Investment Information—note 6, “—Securities Lending Agreements.”
(2)In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(3)Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
(4)
See Note 9, “Derivative Instruments.”note 8.


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The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2016:2018:
  Estimated Fair Value Measurements Using:  Estimated Fair Value Measurements Using:
Estimated
Fair
Value		 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Estimated
Fair
Value		 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets measured at fair value (1): 
  
  
  
 
  
  
  
Available for sale securities: 
  
  
  
 
  
  
  
Fixed maturities: 
  
  
  
 
  
  
  
Corporate bonds$4,392,373
 $—
 $4,374,029
 $18,344
$5,537,548
 $—
 $5,529,407
 $8,141
Mortgage backed securities490,093
 —
 490,093
 —
541,193
 —
 540,884
 309
Municipal bonds3,713,434
 —
 3,713,434
 —
1,013,395
 —
 1,013,395
 —
Commercial mortgage backed securities536,051
 —
 536,051
 —
729,442
 —
 729,438
 4
U.S. government and government agencies2,804,540
 2,691,575
 112,965
 —
3,758,698
 3,657,181
 101,517
 —
Non-U.S. government securities1,096,440
 —
 1,096,440
 —
1,771,338
 —
 1,771,338
 —
Asset backed securities1,123,987
 —
 1,112,698
 11,289
1,600,896
 —
 1,600,896
 —
Total14,156,918
 2,691,575
 11,435,710
 29,633
14,952,510
 3,657,181
 11,286,875
 8,454
              
Equity securities532,680
 529,695
 2,985
 —
353,794
 321,927
 31,867
 —
              
Short-term investments612,005
 608,862
 3,143
 —
955,880
 875,881
 79,999
 —
              
Other investments112,313
 112,313
 —
 —
Other investments measured at net asset value (2)55,657
      
Total other investments167,970
 112,313
 —
 —
       
Derivative instruments (4)28,410
 —
 28,410
 —
73,893
 —
 73,893
 —
              
Fair value option:              
Corporate bonds790,935
 —
 790,935
 —
852,585
 —
 846,827
 5,758
Non-U.S. government bonds61,747
 —
 61,747
 —
79,066
 —
 79,066
 —
Mortgage backed securities18,624
 —
 18,624
 —
16,731
 —
 16,731
 —
Municipal bonds7,144
 —
 7,144
 —
Asset backed securities30,324
 —
 30,324
 —
178,790
 —
 178,790
 —
U.S. government and government agencies197,486
 197,486
 —
 —
111,246
 111,138
 108
 —
Short-term investments373,669
 309,127
 64,542
 —
322,177
 278,579
 43,598
 —
Equity securities27,642
 25,328
 2,314
 —
103,893
 48,827
 55,066
 —
Other investments1,226,242
 80,706
 1,120,536
 25,000
1,254,220
 39,107
 1,152,408
 62,705
Other investments measured at net asset value (2)694,551
      1,057,719
      
Total3,421,220
 612,647
 2,089,022
 25,000
3,983,571
 477,651
 2,379,738
 68,463
              
Total assets measured at fair value$18,919,203
 $4,555,092
 $13,559,270
 $54,633
$20,319,648
 $5,332,640
 $13,852,372
 $76,917
              
Liabilities measured at fair value: 
  
  
  
 
  
  
  
Contingent consideration liabilities$(122,350) $—
 $—
 $(122,350)$(66,665) $—
 $—
 $(66,665)
Securities sold but not yet purchased (3)(33,157) —
 (33,157) —
(7,790) —
 (7,790) —
Derivative instruments (4)(26,049) —
 (26,049) —
(20,664) —
 (20,664) —
Total liabilities measured at fair value$(181,556) $—
 $(59,206) $(122,350)$(95,119) $—
 $(28,454) $(66,665)


(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 7, “Investment Information—note 6, “—Securities Lending Agreements.”
(2)In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(3)Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
(4)
See Note 9, “Derivative Instruments.”note 8.




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The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:
 AssetsLiabilities
sAvailable For Sale Fair Value Option Fair Value  
 Structured Securities (1) Corporate
Bonds		 Corporate
Bonds		 
Other
Investments
 
Equity
Securities
 
Equity
Securities
 Contingent Consideration Liabilities
Three Months Ended September 30, 2019   
        
  
Balance at beginning of period$290
 $7,642
 $26,103
 $95,273
 $56,145
 $51,212
 $(7,825)
Total gains or (losses) (realized/unrealized)          

  
Included in earnings (2)—
 —
 (1,227) (411) 127
 (26) (79)
Included in other comprehensive income—
 (301) —
 —
 —
 —
 —
Purchases, issuances, sales and settlements          

  
Purchases—
 —
 —
 3,713
 —
 12,119
 —
Issuances—
 —
 —
 —
 —
 —
 —
Sales—
 —
 (2,097) (80) —
 (27,982) —
Settlements(18) (456) —
 —
 —
 —
 560
Transfers in and/or out of Level 35,449
 1,860
 —
 (13,052) —
 —
 —
Balance at end of period$5,721
 $8,745
 $22,779
 $85,443
 $56,272
 $35,323
 $(7,344)
              
Three Months Ended September 30, 2018   
        
  
Balance at beginning of period$376
 $8,773
 $11,335
 $58,214
 $—
 $—
 $(63,930)
Total gains or (losses) (realized/unrealized)          

  
Included in earnings (2)—
 (1) (503) (1,459) —
 —
 (1,711)
Included in other comprehensive income2
 (32) —
 —
 —
 —
 —
Purchases, issuances, sales and settlements          

  
Purchases—
 —
 —
 6,250
 —
 —
 —
Issuances—
 —
 —
 —
 —
 —
 —
Sales—
 —
 —
 (74) —
 —
 —
Settlements(33) (456) (1,226) —
 —
 —
 —
Transfers in and/or out of Level 3—
 —
 —
 —
 —
 —
 —
Balance at end of period$345
 $8,284
 $9,606
 $62,931
 $—
 $—
 $(65,641)
              
Nine Months Ended September 30, 2019   
        
  
Balance at beginning of year$313
 $8,141
 $5,758
 $62,705
 $—
 $—
 $(66,665)
Total gains or (losses) (realized/unrealized)          

  
Included in earnings (2)1,757
 —
 (1,566) (11,727) 127
 (26) (1,410)
Included in other comprehensive income5
 (317) —
 —
 —
 —
 —
Purchases, issuances, sales and settlements          

  
Purchases—
 429
 —
 3,713
 —
 12,119
 —
Issuances—
 —
 —
 —
 —
 —
 (548)
Sales(1,757) —
 (5,332) (228) —
 (27,982) —
Settlements(46) (1,368) —
 (600) —
 —
 61,279
Transfers in and/or out of Level 35,449
 1,860
 23,919
 31,580
 56,145
 51,212
 —
Balance at end of period$5,721
 $8,745
 $22,779
 $85,443
 $56,272
 $35,323
 $(7,344)
              
Nine Months Ended September 30, 2018   
        
  
Balance at beginning of year$5,927
 $9,460
 $12,217
 $59,167
 $—
 $—
 $(60,996)
Total gains or (losses) (realized/unrealized)          

  
Included in earnings (2)4
 (1) (1,115) (1,838) —
 —
 (4,645)
Included in other comprehensive income(6) (200) —
 —
 —
 —
 —
Purchases, issuances, sales and settlements          

  
Purchases—
 393
 —
 6,250
 —
 —
 —
Issuances—
 —
 —
 —
 —
 —
 —
Sales(5,003) —
 —
 (148) —
 —
 —
Settlements(577) (1,368) (1,496) (500) —
 —
 —
Transfers in and/or out of Level 3—
 —
 —
 —
 —
 —
 —
Balance at end of period$345
 $8,284
 $9,606
 $62,931
 $—
 $—
 $(65,641)
 Assets Liabilities
sAvailable For Sale Fair Value Option    
 Structured Securities (1) Corporate
Bonds		 Corporate
Bonds		 
Other
Investments
 Total Contingent Consideration Liabilities
Three Months Ended September 30, 2017   
    
    
Balance at beginning of period$—
 $11,570
 $—
 $25,000
 $36,570
 $(57,246)
Total gains or (losses) (realized/unrealized)           
Included in earnings (2)—
 —
 —
 —
 —
 (2,002)
Included in other comprehensive income—
 289
 —
 —
 289
 —
Purchases, issuances, sales and settlements           
Purchases—
 —
 —
 1,348
 1,348
 —
Issuances—
 —
 —
 —
 —
 —
Sales—
 —
 —
 —
 —
 —
Settlements—
 —
 —
 —
 —
 —
Transfers in and/or out of Level 35,949
 132
 11,471
 4,798
 22,350
 —
Balance at end of period$5,949
 $11,991
 $11,471
 $31,146
 $60,557
 $(59,248)
            
Three Months Ended September 30, 2016   
    
  
  
Balance at beginning of period$49,211
 $17,305
 $—
 $—
 $66,516
 $(111,670)
Total gains or (losses) (realized/unrealized)           
Included in earnings (2)—
 1,667
 —
 —
 1,667
 (4,795)
Included in other comprehensive income—
 —
 —
 —
 —
 88
Purchases, issuances, sales and settlements           
Purchases—
 —
 —
 —
 —
 —
Issuances—
 —
 —
 —
 —
 —
Sales—
 —
 —
 —
 —
 —
Settlements(22,435) —
 —
 —
 (22,435) —
Transfers in and/or out of Level 3—
 —
 —
 —
 —
 —
Balance at end of period$26,776
 $18,972
 $—
 $—
 $45,748
 $(116,377)
            
Nine Months Ended September 30, 2017   
    
    
Balance at beginning of year$11,289
 $18,344
 $—
 $25,000
 $54,633
 $(122,350)
Total gains or (losses) (realized/unrealized)           
Included in earnings (2)3,779
 893
 —
 —
 4,672
 (9,089)
Included in other comprehensive income—
 289
 —
 —
 289
 —
Purchases, issuances, sales and settlements           
Purchases—
 4,935
 —
 1,348
 6,283
 —
Issuances—
 —
 —
 —
 —
 —
Sales(13,640) (12,602) —
 —
 (26,242) —
Settlements(1,428) —
 —
 —
 (1,428) 72,191
Transfers in and/or out of Level 35,949
 132
 11,471
 4,798
 22,350
 —
Balance at end of period$5,949
 $11,991
 $11,471
 $31,146
 $60,557
 $(59,248)
            
Nine Months Ended September 30, 2016   
    
  
  
Balance at beginning of year$57,500
 $16,368
 $—
 $—
 $73,868
 $(96,048)
Total gains or (losses) (realized/unrealized)           
Included in earnings (2)(2,500) 1,828
 —
 —
 (672) (20,916)
Included in other comprehensive income—
 —
 —
 —
 —
 51
Purchases, issuances, sales and settlements           
Purchases—
 776
 —
 —
 776
 —
Issuances—
 —
 —
 —
 —
 —
Sales—
 —
 —
 —
 —
 —
Settlements(28,224) —
 —
 —
 (28,224) 536
Transfers in and/or out of Level 3—
 —
 —
 —
 —
 —
Balance at end of period$26,776
 $18,972
 $—
 $—
 $45,748
 $(116,377)


(1)Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(2)For the 2017 periods, gainsGains or losses were included in net realized gains (losses). For the 2016 periods, losses on structured securities were included in net impairment losses recognized in earnings gains or losses while gains or losses on corporate bonds and contingent consideration liabilities were included in net realized gains (losses).



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


Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at September 30, 2017,2019, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At September 30, 2017,2019, the Company’s senior notes of ACGL were carried at their cost, net of debt issuance costs, of $297.0 million$1.87 billion and had a fair value of $406.0 million, while$2.35 billion. At December 31, 2018, the Company’s senior notes of Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) were carried at their cost, net of debt issuance costs, of $494.6 million$1.73 billion and had a fair value of $566.2 million. The senior notes of Arch Capital Finance LLC due in 2026 were carried at their cost, net of debt issuance costs, of $496.0 million and had a fair value of $519.8 million, while the senior notes due in 2046 were carried at their cost, net of debt issuance costs, of $445.1 million and had a fair value of $503.5 million.$1.88 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.
9.8.    Derivative Instruments
The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements. 
In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.
 
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
Estimated Fair Value  Estimated Fair Value  
Asset Derivatives Liability Derivatives 
Notional
Value (1)
Asset Derivatives Liability Derivatives 
Notional
Value (1)
September 30, 2017     
September 30, 2019     
Futures contracts (2)$5,351
 $(6,722) $1,524,985
$15,148
 $(20,515) $3,987,260
Foreign currency forward contracts (2)19,376
 (5,348) 805,201
5,316
 (8,616) 965,348
TBAs (3)18,331
 —
 18,143
54,961
 —
 53,229
Other (2)8,414
 (10,967) 2,032,922
31,183
 (24,609) 3,983,466
Total$51,472
 $(23,037)  $106,608
 $(53,740)  
          
December 31, 2016     
December 31, 2018     
Futures contracts (2)$360
 $(9,398) $1,655,530
$51,800
 $(2,115) $3,153,518
Foreign currency forward contracts (2)9,354
 (12,941) 1,186,386
8,147
 (7,796) 1,008,907
TBAs (3)—
 —
 —
8,292
 —
 8,132
Other (2)20,287
 (3,710) 1,014,863
13,946
 (10,753) 2,213,981
Total$30,001
 $(26,049)  $82,185
 $(20,664)  
(1)Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
(2)The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
(3)The fair value of TBAs are included in ‘fixed maturities available for sale, at fair value.’
The Company did not hold any derivatives which were designated as hedging instruments at September 30, 20172019 or December 31, 2016.2018.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure. The remaining derivatives included in the table above were not subject to a master netting agreement.
At September 30, 2017,2019, asset derivatives and liability derivatives of $49.4$105.5 million and $22.5$52.7 million, respectively, were subject to a master netting agreement, compared to $28.4$80.4 million and $26.0$18.9 million, respectively, at December 31, 2016.2018. The remaining derivatives included in the preceding table were not subject to a master netting agreement.
All realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in net realized


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


Realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:
Derivatives not designated as September 30,
hedging instruments: 2019 2018
     
Three Months Ended    
Net realized gains (losses):    
Futures contracts $46,194
 $(15,399)
Foreign currency forward contracts 2,044
 (5,458)
TBAs 269
 (3)
Other (5,614) 3,304
Total $42,893
 $(17,556)
     
Nine Months Ended    
Net realized gains (losses):    
Futures contracts $140,503
 $(10,609)
Foreign currency forward contracts (17,030) (13,074)
TBAs 507
 (100)
Other 18,750
 118
Total $142,730
 $(23,665)
Derivatives not designated as September 30,
hedging instruments: 2017 2016
     
Three Months Ended    
Net realized gains (losses):    
Futures contracts $4,899
 $(15,368)
Foreign currency forward contracts (228) 4,583
TBAs 122
 (23)
Other (495) (6,156)
Total $4,298
 $(16,964)
     
Nine Months Ended    
Net realized gains (losses):    
Futures contracts $7,309
 $45,954
Foreign currency forward contracts (12,266) (13,951)
TBAs 143
 311
Other (4,839) (8,212)
Total $(9,653) $24,102


10.9.    Commitments and Contingencies
Letter of Credit and Revolving Credit Facilities
ACGL repaid $100.0 million of borrowings under its unsecured revolving loan and letter of credit facility in the 2017 third quarter, offset by an increase in borrowings in the Company’s ‘other’ segment.
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $1.58$1.90 billion at September 30, 2017,2019, compared to $1.29$1.77 billion at December 31, 2016.2018.
Interest Paid

11.    Share Transactions
Share Repurchases
The board of directors of ACGL has authorizedInterest paid on the investment in ACGL’s common shares through a share repurchase program. Since the inception of the share repurchase program, ACGL has repurchased approximately 125.2Company’s senior notes and other borrowings were $68.6 million common shares for an aggregate purchase price of $3.68 billion. For the nine months ended September 30, 2017, the Company did not repurchase any shares under the share repurchase program, compared to 1.1 million common shares repurchased for the nine months ended September 30, 20162019, consistent with $67.6 million for the 2018 period.
Letter of Credit and Revolving Credit Facilities
In September 2019, Watford entered into an aggregate purchase priceunsecured letter of $75.3credit agreement. Watford has access to a $100 million (no repurchasesletter of credit facility expiring on September 20, 2020. The Company does not guarantee or provide credit support for Watford, and the Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the 2016 third quarter). At September 30, 2017, $446.5 million of sharereinsurance transactions.
 
repurchases were available under
10.    Leases
In the program, which may be effected from time to time in open marketordinary course of business, the Company renews and enters into new leases for office property and equipment. At the lease inception date, the Company determines whether a contract contains a lease and its classification as a finance or privately negotiated transactions through December 31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
Conversion of Convertible Non-Voting Common Equivalent Preferred Shares
On June 8, 2017, ACGL and AIG entered into Amendment No. 1 (the “Amendment”) to the Investor Rights Agreement (the “Investor Rights Agreement”) dated as of December 31, 2016 to amend the restrictions on transfers of the 1,276,282 shares of ACGL’s convertible non-voting common-equivalent preference shares owned by AIG (the “Convertible Preferred Shares”). The Convertible Preferred Shares were issued to AIG as part of the consideration in UGC acquisition. Pursuant to the certificate of designations for the Convertible Preferred Shares and in accordance with the terms and conditions set forth therein, each Convertible Preferred Share is convertible into ten common shares of ACGL.
Pursuant to the Amendment, ACGL permitted AIG to transfer: (i) 638,141 Convertible Preferred Shares from and after June 8, 2017, and up to an additional 95,721 of the Convertible Preferred Shares to the extent that the several underwriters exercise the option to purchase additional securities expected to be granted pursuant to an underwritten secondary offering of ACGL common shares issuable upon conversion of the Convertible Preferred Shares by AIG and (ii) any andoperating lease. Primarily all of the Convertible Preferred Shares from and after January 15, 2018, subject to certain exceptions, and in each case subject to the terms and conditions of the Investor Rights Agreement. All otherCompany’s leases are classified as operating leases. The Company’s operating leases have remaining lease terms of the Investor Rights Agreement remain in effect.
In June 2017, ACGL completed an underwritten public secondary offering of 7,088,620 common shares by AIG following transfer of 708,862 Convertible Preferred Shares. Proceeds from the sale of common shares pursuantup to the public offering were received by AIG. At September 30, 2017, 567,420 Convertible Preferred Shares were outstanding.
Series F Preferred Shares
In August 2017, ACGL completed a $230 million underwritten public offering of 9.2 million depositary shares (the “Depositary Shares”), each11 years, some of which represents a 1/1,000th interestinclude options to extend the lease term. The Company considers these options when determining the lease term and measuring its lease liability and right-of-use asset. In addition, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Short-term operating leases with an initial term of twelve months or less were excluded on the Company's consolidated balance sheet and represent an inconsequential amount of operating lease expense.
As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in a sharedetermining the present value of its 5.45% Non-Cumulative Preferred Shares, Series F, have a $0.01 par value and $25,000 liquidation preference per share (equivalent to $25 liquidation preference per Depositary Share) (the “Series F Preferred Shares”). Each Depositary Share, evidenced by a depositary receipt, entitleslease payments.
Additional information regarding the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series F Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).Company’s operating leases is as follows:
  September 30,
  2019
   
Three Months Ended  
Operating lease costs $7,751
Cash payments included in the measurement of lease liabilities reported in operating cash flows $8,031
Right-of-use assets obtained in exchange for new lease liabilities $2,897
Right-of-use assets (1) $131,424
Operating lease liability (1) $147,326
Weighted average discount rate 3.9%
Weighted average remaining lease term 6.3 years
   
Nine Months Ended  
Operating lease costs

 $22,611
Cash payments included in the measurement of lease liabilities reported in operating cash flows $22,616
Right-of-use assets obtained in exchange for new lease liabilities $7,009
Right-of-use assets (1) $131,424
Operating lease liability (1) $147,326
Weighted average discount rate 3.9%
Weighted average remaining lease term 6.3 years
(1)The right-of-use assets are included in ‘other assets’ while the operating lease liability is included in ‘other liabilities.’



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


Holders of Series F Preferred Shares will be entitled to receive dividend payments only when, as and if declared by our board of directors or a duly authorized committeeThe following table presents the contractual maturities of the board. Any such dividends will be payable from,Company's operating lease liabilities at September 30, 2019:
Years Ending December 31,  
2019 (remainder) $1,693
2020 31,541
2021 30,392
2022 27,096
2023 22,290
2024 and thereafter 55,080
Total undiscounted lease liability $168,092
Less: present value adjustment (20,767)
Operating lease liability $147,325


At December 31, 2018, the future minimum rental commitments, exclusive of escalation clauses and including,maintenance costs and net of rental income, for all of the Company’s operating leases was as follows:
2019$31,088
202030,491
202129,351
202226,068
202321,408
2024 and thereafter54,745
Total$193,151

11.Variable Interest Entities and Noncontrolling Interests
Watford
In March 2014, the Company invested $100.0 million and acquired 2,500,000 common shares, approximately 11% of Watford’s outstanding common equity, and a warrant to purchase up to 975,503 additional common shares. The warrants expire on March 31, 2020. The exercise price of the warrants is determined on the date of original issueexercise based on a noncumulative basis, quarterlycertain targeted returns for existing common shareholders. Watford’s common shares are listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”.
On July 2, 2019, Watford completed an offering of $175.0 million in aggregate principal amount of its 6.5% senior notes, due July 2, 2029 (“Watford Senior Notes”). Interest on the Watford Senior Notes will be paid semi-annually in arrears on the last day of March, June, Septembereach January 2 and December of each year, at an annual rate of 5.45%. Dividends on the Series F Preferred Shares are not cumulative.July 2, commencing January 2, 2020. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series F Preferred Shares.
Except in specified circumstances relating to certain tax or corporate events, the Series F Preferred Shares are not redeemable prior to August 17, 2022 (the fifth anniversary of the issue date). On and after that date, the Series F Preferred Shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series F Preferred Shares (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Depositary Shares will be redeemed if and to the extent the related Series F Preferred Shares are redeemed by the Company. Neither the Depositary Shares nor the Series F Preferred Shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series F Preferred Shares are not convertible into any other securities. The Series F Preferred Shares will not have voting rights, except under limited circumstances.
The$172.4 million net proceeds from the offering of $222.1 million and other available funds were used to redeem a portion of Watford’s outstanding preference shares (“Watford Preference Shares”). The Company purchased $35.0 million in partaggregate principal amount of the Watford Senior Notes.
Watford is considered a VIE and the Company concluded that it is the primary beneficiary of Watford. As such, the results of Watford are included in the Company’s consolidated financial statements.
The Company does not guarantee or provide credit support for Watford, and the Company’s financial exposure to Watford is limited to its outstanding 6.75% Series C Non-Cumulative Preferred Shares. Theinvestment in Watford’s senior notes, common and preferred shares were redeemed at a redemption price equaland counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.
The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford are reported:
 September 30, December 31,
 2019 2018
Assets   
Investments accounted for using the fair value option$2,048,295
 $2,312,003
Fixed maturities available for sale, at fair value678,094
 393,351
Equity securities, at fair value43,488
 32,206
Cash80,390
 63,529
Accrued investment income18,277
 19,461
Premiums receivable302,265
 227,301
Reinsurance recoverable on unpaid and paid losses and LAE144,437
 86,445
Ceded unearned premiums129,909
 61,587
Deferred acquisition costs67,241
 80,858
Receivable for securities sold25,283
 24,507
Goodwill and intangible assets7,650
 7,650
Other assets66,165
 63,959
Total assets of consolidated VIE$3,611,494
 $3,372,857
    
Liabilities   
Reserve for losses and loss adjustment expenses$1,164,945
 $1,032,760
Unearned premiums454,148
 390,114
Reinsurance balances payable79,264
 21,034
Revolving credit agreement borrowings490,720
 455,682
Senior notes172,350
 —
Payable for securities purchased40,586
 60,142
Other liabilities (1)196,431
 302,524
Total liabilities of consolidated VIE$2,598,444
 $2,262,256
    
Redeemable noncontrolling interests$52,281
 $220,992

(1)Includes certain borrowings related to investing activities.
For the nine months ended September 30, 2019, Watford generated $177.2 million of cash provided by operating activities, $181.2 million of cash used for investing activities and $22.2 million of cash provided by financing activities, compared to $25 per share, plus all declared$174.3 million of cash provided by operating activities, $208.3 million of cash used for investing activities and unpaid dividends to (but excluding)$24.2 million of cash used for financing activities for the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.nine months ended September 30, 2018.


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


Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford’s common shares was approximately 89% at September 30, 2019. The portion of Watford’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable noncontrolling interests:
 September 30,
 2019 2018
Three Months Ended   
Balance, beginning of period$855,347
 $861,153
Additional paid in capital attributable to noncontrolling interests205
 —
Amounts attributable to noncontrolling interests136
 16,759
Other comprehensive income (loss) attributable to noncontrolling interests(764) (1,158)
Balance, end of period$854,924
 $876,754
    
Nine Months Ended   
Balance, beginning of year$791,560
 $843,411
Additional paid in capital attributable to noncontrolling interests2,279
 —
Amounts attributable to noncontrolling interests54,819
 36,251
Other comprehensive income (loss) attributable to noncontrolling interests6,266
 (2,908)
Balance, end of period$854,924
 $876,754

Redeemable noncontrolling interests
The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests relate to the Watford Preference Shares issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per share. The Watford Preference Shares were issued at a discounted amount of $24.50 per share. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
On August 1, 2019, Watford redeemed 6,919,998 of its 9,065,200 issued and outstanding Watford Preference Shares. The Watford Preference Shares were redeemed at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends, with accumulation of any undeclared dividends on or after June 30, 2019. In addition, the Company received $11.5 million pursuant to the redemption of Watford Preference Shares.
The following table sets forth activity in the redeemable non-controlling interests:
 September 30,
 2019 2018
Three Months Ended   
Balance, beginning of period$206,475
 $206,105
Redemption of noncontrolling interests(157,709) —
Accretion of preference share issuance costs23
 94
Balance, end of period$48,789
 $206,199
    
Nine Months Ended   
Balance, beginning of year$206,292
 $205,922
Redemption of noncontrolling interests(157,709) —
Accretion of preference share issuance costs206
 277
Balance, end of period$48,789
 $206,199

The portion of Watford’s income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
 September 30,
 2019 2018
Three Months Ended   
Amounts attributable to non-redeemable noncontrolling interests$(136) $(16,759)
Dividends attributable to redeemable noncontrolling interests(6,600) (4,599)
Net (income) loss attributable to noncontrolling interests$(6,736) $(21,358)
    
Nine Months Ended   
Amounts attributable to non-redeemable noncontrolling interests$(54,819) $(36,251)
Dividends attributable to redeemable noncontrolling interests(15,778) (13,769)
Net (income) loss attributable to noncontrolling interests$(70,597) $(50,020)


ARCH CAPITAL 372019 THIRD QUARTER FORM 10-Q
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Bellemeade Re
The Company has entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements.
The following table presents the total assets of the Bellemeade entities, as well as the Company’s maximum exposure to loss associated with these VIEs, calculated as the maximum historical observable spread between the one month LIBOR, the basis for the contractual payments to bond holders, and short term invested trust asset yields.
   Maximum Exposure to Loss
Bellemeade Entities (Issue Date)Total VIE Assets On-Balance Sheet (Asset) Liability Off-Balance Sheet Total
Sep 30, 2019       
Bellemeade 2015-1 Ltd. (Jul-15)$6,046
 $—
 $2
 $2
Bellemeade 2017-1 Ltd. (Oct-17)249,737
 (345) 3,526
 3,181
Bellemeade 2018-1 Ltd. (Apr-18)362,603
 (1,351) 7,035
 5,684
Bellemeade 2018-2 Ltd. (Aug-18)507,534
 (829) 3,395
 2,566
Bellemeade 2018-3 Ltd. (Oct-18)488,430
 (916) 4,600
 3,684
Bellemeade 2019-1 Ltd. (Mar-19)293,595
 (210) 4,533
 4,323
Bellemeade 2019-2 Ltd. (Apr-19)621,022
 (367) 15,161
 14,794
Bellemeade 2019-3 Ltd. (July-19)

700,920
 (468) 11,888
 11,420
Total$3,229,887
 $(4,486) $50,140
 $45,654
Dec 31, 2018       
Bellemeade 2015-1 Ltd. (Jul-15)$43,246
 $112
 $498
 $610
Bellemeade 2017-1 Ltd. (Oct-17)304,373
 165
 1,312
 1,477
Bellemeade 2018-1 Ltd. (Apr-18)374,460
 132
 3,539
 3,671
Bellemeade 2018-2 Ltd. (Aug-18)653,278
 874
 4,005
 4,879
Bellemeade 2018-3 Ltd. (Oct-18)506,110
 469
 1,836
 2,305
Total$1,881,467
 $1,752
 $11,190
 $12,942

See note 16.

ARCH CAPITAL 382019 THIRD QUARTER FORM 10-Q
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12.    Other Comprehensive Income (Loss)

The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
    Amounts Reclassified from AOCI
  Consolidated Statement of Income Three Months Ended Nine Months Ended
Details About Line Item That Includes September 30, September 30,
AOCI Components Reclassification 2019 2018 2019 2018
           
Unrealized appreciation on available-for-sale investments        
  Net realized gains (losses) $43,124
 $(23,888) $114,642
 $(130,409)
  Other-than-temporary impairment losses (1,163) (492) (2,521) (1,124)
  Total before tax 41,961
 (24,380) 112,121
 (131,533)
  Income tax (expense) benefit (3,218) 1,177
 (7,812) 9,226
  Net of tax $38,743
 $(23,203) $104,309
 $(122,307)
    Amounts Reclassified from AOCI
  Consolidated Statement of Income Three Months Ended Nine Months Ended
Details About Line Item That Includes September 30, September 30,
AOCI Components Reclassification 2017 2016 2017 2016
           
Unrealized appreciation on available-for-sale investments        
  Net realized gains (losses) $27,550
 $61,464
 $59,474
 $137,555
  Other-than-temporary impairment losses (1,878) (3,867) (5,415) (16,999)
  Total before tax 25,672
 57,597
 54,059
 120,556
  Income tax (expense) benefit (1,760) (2,605) (7,879) (11,247)
  Net of tax $23,912
 $54,992
 $46,180
 $109,309

 Before Tax Amount Tax Expense (Benefit) Net of Tax Amount
Three Months Ended September 30, 2019     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$70,449
 $11,159
 $59,290
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income41,961
 3,218
 38,743
Foreign currency translation adjustments(16,507) (83) (16,424)
Other comprehensive income (loss)$11,981
 $7,858
 $4,123
      
Three Months Ended September 30, 2018     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$(57,812) $(4,504) $(53,308)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income(24,380) (1,177) (23,203)
Foreign currency translation adjustments2,167
 104
 2,063
Other comprehensive income (loss)$(31,265) $(3,223) $(28,042)
      
Nine Months Ended September 30, 2019     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$573,513
 $65,863
 $507,650
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income112,121
 7,812
 104,309
Foreign currency translation adjustments(6,454) 187
 (6,641)
Other comprehensive income (loss)$454,938
 $58,238
 $396,700
      
Nine Months Ended September 30, 2018     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$(335,789) $(30,533) $(305,256)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income(131,533) (9,226) (122,307)
Foreign currency translation adjustments(9,102) 148
 (9,250)
Other comprehensive income (loss)$(213,358) $(21,159) $(192,199)

 Before Tax Amount Tax Expense (Benefit) Net of Tax Amount
Three Months Ended September 30, 2017     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$69,330
 $2,868
 $66,462
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income25,672
 1,760
 23,912
Foreign currency translation adjustments8,590
 310
 8,280
Other comprehensive income (loss)$52,248
 $1,418
 $50,830
      
Three Months Ended September 30, 2016     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$11,692
 $(4,589) $16,281
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income57,597
 2,605
 54,992
Foreign currency translation adjustments(5,407) (95) (5,312)
Other comprehensive income (loss)$(51,312) $(7,289) $(44,023)
      
Nine Months Ended September 30, 2017     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$288,813
 $28,590
 $260,223
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)—
 —
 —
Less reclassification of net realized gains (losses) included in net income54,059
 7,879
 46,180
Foreign currency translation adjustments30,264
 563
 29,701
Other comprehensive income (loss)$265,018
 $21,274
 $243,744
      
Nine Months Ended September 30, 2016     
Unrealized appreciation (decline) in value of investments:     
Unrealized holding gains (losses) arising during period$281,770
 $30,048
 $251,722
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)(150) —
 (150)
Less reclassification of net realized gains (losses) included in net income120,556
 11,247
 109,309
Foreign currency translation adjustments(5,733) 417
 (6,150)
Other comprehensive income (loss)$155,331
 $19,218
 $136,113




ARCH CAPITALACGL 2017 392019 THIRD QUARTER FORM 10-Q39
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


13.     Guarantor Financial Information
The following tables present condensed financial information for ACGL, Arch Capital, Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a 100% owned subsidiary of ACGL,Arch Capital, and ACGL’sArch Capital’s other subsidiaries.
The senior notes of Arch-U.S. due November 1, 2043 are fully and unconditionally guaranteed by Arch Capital.

September 30, 2017
September 30, 2019
Condensed Consolidating Balance SheetCondensed Consolidating Balance SheetACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL ConsolidatedCondensed Consolidating Balance SheetArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
AssetsAssets         Assets         
Total investmentsTotal investments$402
 $69,671
 $21,876,508
 $(14,700) $21,931,881
Total investments$41
 $918,720
 $22,737,556
 $(38,982) $23,617,335
CashCash4,868
 88,818
 768,675
 —
 862,361
Cash12,696
 72,727
 794,676
 —
 880,099
Investments in subsidiariesInvestments in subsidiaries9,214,178
 4,028,493
 —
 (13,242,671) —
Investments in subsidiaries11,454,186
 4,189,656
 —
 (15,643,842) —
Due from subsidiaries and affiliatesDue from subsidiaries and affiliates81
 117
 1,923,941
 (1,924,139) —
Due from subsidiaries and affiliates106
 2
 1,899,559
 (1,899,667) —
Premiums receivablePremiums receivable—
 —
 1,863,203
 (593,525) 1,269,678
Premiums receivable—
 —
 2,446,539
 (828,353) 1,618,186
Reinsurance recoverable on unpaid and paid losses and loss adjustment expensesReinsurance recoverable on unpaid and paid losses and loss adjustment expenses—
 —
 7,023,836
 (4,517,821) 2,506,015
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses—
 —
 8,490,131
 (5,321,936) 3,168,195
Contractholder receivablesContractholder receivables—
 —
 1,864,348
 —
 1,864,348
Contractholder receivables—
 —
 2,094,683
 —
 2,094,683
Ceded unearned premiumsCeded unearned premiums—
 —
 2,240,129
 (1,292,994) 947,135
Ceded unearned premiums—
 —
 2,149,492
 (981,234) 1,168,258
Deferred acquisition costsDeferred acquisition costs—
 —
 677,567
 (146,371) 531,196
Deferred acquisition costs—
 —
 674,559
 (52,531) 622,028
Goodwill and intangible assetsGoodwill and intangible assets—
 —
 684,405
 —
 684,405
Goodwill and intangible assets—
 —
 624,500
 —
 624,500
Other assetsOther assets13,357
 59,734
 2,146,993
 (192,306) 2,027,778
Other assets21,336
 25,586
 1,875,817
 (143,420) 1,779,319
Total assets$9,232,886
 $4,246,833
 $41,069,605
 $(21,924,527) $32,624,797
Total assets$11,488,365
 $5,206,691
 $43,787,512
 $(24,909,965) $35,572,603
                    
LiabilitiesLiabilities         Liabilities         
Reserve for losses and loss adjustment expensesReserve for losses and loss adjustment expenses$—
 $—
 $15,836,263
 $(4,484,996) $11,351,267
Reserve for losses and loss adjustment expenses$—
 $—
 $17,486,844
 $(5,097,460) $12,389,384
Unearned premiumsUnearned premiums—
 —
 5,044,544
 (1,292,994) 3,751,550
Unearned premiums—
 —
 5,224,606
 (981,234) 4,243,372
Reinsurance balances payableReinsurance balances payable—
 —
 945,530
 (593,524) 352,006
Reinsurance balances payable—
 —
 1,430,244
 (828,353) 601,891
Contractholder payablesContractholder payables—
 —
��1,864,348
 —
 1,864,348
Contractholder payables—
 —
 2,094,683
 —
 2,094,683
Collateral held for insured obligationsCollateral held for insured obligations—
 —
 345,726
 
 345,726
Collateral held for insured obligations—
 —
 205,449
 

 205,449
Senior notesSenior notes297,030
 494,596
 941,100
 —
 1,732,726
Senior notes297,228
 494,803
 1,114,355
 (35,000) 1,871,386
Revolving credit agreement borrowingsRevolving credit agreement borrowings—
 —
 826,242
 —
 826,242
Revolving credit agreement borrowings—
 —
 490,720
 —
 490,720
Due to subsidiaries and affiliatesDue to subsidiaries and affiliates41
 542,103
 1,381,996
 (1,924,140) —
Due to subsidiaries and affiliates8
 542,103
 1,357,556
 (1,899,667) —
Other liabilitiesOther liabilities24,671
 100,278
 2,669,614
 (371,502) 2,423,061
Other liabilities33,033
 55,585
 1,946,208
 (420,917) 1,613,909
Total liabilities321,742
 1,136,977
 29,855,363
 (8,667,156) 22,646,926
Total liabilities330,269
 1,092,491
 31,350,665
 (9,262,631) 23,510,794
                    
Redeemable noncontrolling interestsRedeemable noncontrolling interests—
 —
 220,529
 (14,700) 205,829
Redeemable noncontrolling interests—
 —
 52,281
 (3,492) 48,789
                    
Shareholders’ EquityShareholders’ Equity         Shareholders’ Equity         
Total shareholders’ equity available to ArchTotal shareholders’ equity available to Arch8,911,144
 3,109,856
 10,132,815
 (13,242,671) 8,911,144
Total shareholders’ equity available to Arch11,158,096
 4,114,200
 11,529,642
 (15,643,842) 11,158,096
Non-redeemable noncontrolling interestsNon-redeemable noncontrolling interests—
 —
 860,898
 —
 860,898
Non-redeemable noncontrolling interests—
 —
 854,924
 —
 854,924
Total shareholders’ equity8,911,144
 3,109,856
 10,993,713
 (13,242,671) 9,772,042
Total shareholders’ equity11,158,096
 4,114,200
 12,384,566
 (15,643,842) 12,013,020
                   
Total liabilities, noncontrolling interests and shareholders’ equity$9,232,886
 $4,246,833
 $41,069,605
 $(21,924,527) $32,624,797
Total liabilities, noncontrolling interests and shareholders’ equity$11,488,365
 $5,206,691
 $43,787,512
 $(24,909,965) $35,572,603













ARCH CAPITALACGL 2017 402019 THIRD QUARTER FORM 10-Q40
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




 December 31, 2016 December 31, 2018
Condensed Consolidating Balance SheetCondensed Consolidating Balance SheetACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL ConsolidatedCondensed Consolidating Balance SheetArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
AssetsAssets         Assets         
Total investmentsTotal investments$2,612
 $41,672
 $19,690,067
 $(14,700) $19,719,651
Total investments$104
 $452,674
 $21,307,206
 $(14,700) $21,745,284
CashCash1,687
 71,955
 769,300
 —
 842,942
Cash6,125
 5,940
 634,491
 —
 646,556
Investments in subsidiariesInvestments in subsidiaries8,660,586
 3,716,681
 —
 (12,377,267) —
Investments in subsidiaries9,735,256
 3,999,243
 —
 (13,734,499) —
Due from subsidiaries and affiliatesDue from subsidiaries and affiliates14,297
 51,298
 1,866,681
 (1,932,276) —
Due from subsidiaries and affiliates9
 2
 1,802,686
 (1,802,697) —
Premiums receivablePremiums receivable—
 —
 1,579,865
 (507,430) 1,072,435
Premiums receivable—
 —
 1,834,389
 (535,239) 1,299,150
Reinsurance recoverable on unpaid and paid losses and loss adjustment expensesReinsurance recoverable on unpaid and paid losses and loss adjustment expenses—
 —
 6,114,518
 (4,000,380) 2,114,138
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses—
 —
 8,618,660
 (5,699,288) 2,919,372
Contractholder receivablesContractholder receivables—
 —
 1,717,436
 —
 1,717,436
Contractholder receivables—
 —
 2,079,111
 —
 2,079,111
Ceded unearned premiumsCeded unearned premiums—
 —
 1,985,311
 (1,125,744) 859,567
Ceded unearned premiums—
 —
 1,730,262
 (754,793) 975,469
Deferred acquisition costsDeferred acquisition costs—
 —
 577,461
 (129,901) 447,560
Deferred acquisition costs—
 —
 618,535
 (48,961) 569,574
Goodwill and intangible assetsGoodwill and intangible assets—
 —
 781,553
 —
 781,553
Goodwill and intangible assets—
 —
 634,920
 —
 634,920
Other assetsOther assets15,725
 49,244
 1,901,786
 (149,928) 1,816,827
Other assets12,588
 80,949
 1,466,438
 (211,082) 1,348,893
Total assets$8,694,907
 $3,930,850
 $36,983,978
 $(20,237,626) $29,372,109
Total assets$9,754,082
 $4,538,808
 $40,726,698
 $(22,801,259) $32,218,329
                    
LiabilitiesLiabilities         Liabilities         
Reserve for losses and loss adjustment expensesReserve for losses and loss adjustment expenses$—
 $—
 $14,164,191
 $(3,963,231) $10,200,960
Reserve for losses and loss adjustment expenses$—
 $—
 $17,345,142
 $(5,491,845) $11,853,297
Unearned premiumsUnearned premiums—
 —
 4,532,614
 (1,125,744) 3,406,870
Unearned premiums—
 —
 4,508,429
 (754,793) 3,753,636
Reinsurance balances payableReinsurance balances payable—
 —
 807,837
 (507,430) 300,407
Reinsurance balances payable—
 —
 928,346
 (535,239) 393,107
Contractholder payablesContractholder payables—
 —
 1,717,436
 —
 1,717,436
Contractholder payables—
 —
 2,079,111
 —
 2,079,111
Collateral held for insured obligationsCollateral held for insured obligations—
 —
 301,406
 —
 301,406
Collateral held for insured obligations—
 —
 236,630
 —
 236,630
Deposit accounting liabilities—
 —
 22,150
 —
 22,150
Senior notesSenior notes296,957
 494,525
 940,776
 —
 1,732,258
Senior notes297,150
 494,723
 941,655
 —
 1,733,528
Revolving credit agreement borrowingsRevolving credit agreement borrowings100,000
 —
 656,650
 —
 756,650
Revolving credit agreement borrowings—
 —
 455,682
 —
 455,682
Due to subsidiaries and affiliatesDue to subsidiaries and affiliates26,270
 535,584
 1,370,422
 (1,932,276) —
Due to subsidiaries and affiliates—
 536,805
 1,265,892
 (1,802,697) —
Other liabilitiesOther liabilities17,962
 54,823
 1,867,040
 (316,978) 1,622,847
Other liabilities17,105
 26,270
 1,699,768
 (467,484) 1,275,659
Total liabilities441,189
 1,084,932
 26,380,522
 (7,845,659) 20,060,984
Total liabilities314,255
 1,057,798
 29,460,655
 (9,052,058) 21,780,650
                    
Redeemable noncontrolling interestsRedeemable noncontrolling interests—
 —
 220,253
 (14,700) 205,553
Redeemable noncontrolling interests—
 —
 220,992
 (14,700) 206,292
                    
Shareholders’ EquityShareholders’ Equity         Shareholders’ Equity         
Total shareholders’ equity available to ArchTotal shareholders’ equity available to Arch8,253,718
 2,845,918
 9,531,349
 (12,377,267) 8,253,718
Total shareholders’ equity available to Arch9,439,827
 3,481,010
 10,253,491
 (13,734,501) 9,439,827
Non-redeemable noncontrolling interestsNon-redeemable noncontrolling interests—
 —
 851,854
 —
 851,854
Non-redeemable noncontrolling interests—
 —
 791,560
 —
 791,560
Total shareholders’ equity8,253,718
 2,845,918
 10,383,203
 (12,377,267) 9,105,572
Total shareholders’ equity9,439,827
 3,481,010
 11,045,051
 (13,734,501) 10,231,387
                   
Total liabilities, noncontrolling interests and shareholders’ equity$8,694,907
 $3,930,850
 $36,983,978
 $(20,237,626) $29,372,109
Total liabilities, noncontrolling interests and shareholders’ equity$9,754,082
 $4,538,808
 $40,726,698
 $(22,801,259) $32,218,329




ARCH CAPITALACGL 2017 412019 THIRD QUARTER FORM 10-Q41
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




 Three Months Ended September 30, 2017 Three Months Ended September 30, 2019
Condensed Consolidating Statement of Income and Comprehensive IncomeCondensed Consolidating Statement of Income and Comprehensive IncomeACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL ConsolidatedCondensed Consolidating Statement of Income and Comprehensive IncomeArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
RevenuesRevenues         Revenues         
Net premiums earnedNet premiums earned$—
 $—
 $1,261,886
 $—
 $1,261,886
Net premiums earned$—
 $—
 $1,438,023
 $—
 $1,438,023
Net investment incomeNet investment income117
 151
 138,784
 (22,593) 116,459
Net investment income81
 2,899
 181,621
 (23,113) 161,488
Net realized gains (losses)Net realized gains (losses)—
 —
 66,275
 —
 66,275
Net realized gains (losses)—
 1,880
 66,683
 (6,045) 62,518
Net impairment losses recognized in earningsNet impairment losses recognized in earnings—
 —
 (1,878) —
 (1,878)Net impairment losses recognized in earnings—
 —
 (1,163) —
 (1,163)
Other underwriting incomeOther underwriting income—
 —
 6,064
 —
 6,064
Other underwriting income—
 —
 3,326
 —
 3,326
Equity in net income (loss) of investment funds accounted for using the equity methodEquity in net income (loss) of investment funds accounted for using the equity method—
 —
 31,090
 —
 31,090
Equity in net income (loss) of investment funds accounted for using the equity method—
 600
 16,530
 —
 17,130
Other income (loss)Other income (loss)(102) —
 (240) —
 (342)Other income (loss)(153) —
 1,491
 —
 1,338
Total revenues15
 151
 1,501,981
 (22,593) 1,479,554
Total revenues(72) 5,379
 1,706,511
 (29,158) 1,682,660
                    
ExpensesExpenses         Expenses         
Losses and loss adjustment expensesLosses and loss adjustment expenses—
 —
 1,046,141
 —
 1,046,141
Losses and loss adjustment expenses—
 —
 802,455
 —
 802,455
Acquisition expensesAcquisition expenses—
 —
 193,854
 —
 193,854
Acquisition expenses—
 —
 211,120
 —
 211,120
Other operating expensesOther operating expenses—
 —
 170,127
 —
 170,127
Other operating expenses—
 —
 196,512
 —
 196,512
Corporate expensesCorporate expenses14,576
 410
 2,112
 —
 17,098
Corporate expenses15,066
 1,631
 364
 —
 17,061
Amortization of intangible assetsAmortization of intangible assets—
 —
 31,824
 —
 31,824
Amortization of intangible assets—
 —
 20,003
 —
 20,003
Interest expenseInterest expense5,934
 12,037
 33,811
 (22,272) 29,510
Interest expense5,539
 12,019
 36,712
 (22,942) 31,328
Net foreign exchange (gains) lossesNet foreign exchange (gains) losses—
 —
 20,510
 7,518
 28,028
Net foreign exchange (gains) losses1
 —
 (25,405) (7,720) (33,124)
Total expenses20,510
 12,447
 1,498,379
 (14,754) 1,516,582
Total expenses20,606
 13,650
 1,241,761
 (30,662) 1,245,355
                    
Income (loss) before income taxesIncome (loss) before income taxes(20,495) (12,296) 3,602
 (7,839) (37,028)Income (loss) before income taxes(20,678) (8,271) 464,750
 1,504
 437,305
Income tax (expense) benefitIncome tax (expense) benefit—
 4,432
 (12,621) —
 (8,189)Income tax (expense) benefit—
 1,647
 (39,763) —
 (38,116)
Income (loss) before equity in net income of subsidiariesIncome (loss) before equity in net income of subsidiaries(20,495) (7,864) (9,019) (7,839) (45,217)Income (loss) before equity in net income of subsidiaries(20,678) (6,624) 424,987
 1,504
 399,189
Equity in net income (loss) of subsidiaries(13,161) 50,057
 —
 (36,896) —
Net income (loss)(33,656) 42,193
 (9,019) (44,735) (45,217)
Equity in net income of subsidiariesEquity in net income of subsidiaries413,131
 124,814
 —
 (537,945) —
Net incomeNet income392,453
 118,190
 424,987
 (536,441) 399,189
Net (income) loss attributable to noncontrolling interestsNet (income) loss attributable to noncontrolling interests—
 —
 11,238
 323
 11,561
Net (income) loss attributable to noncontrolling interests—
 —
 (6,906) 170
 (6,736)
Net income (loss) available to Arch(33,656) 42,193
 2,219
 (44,412) (33,656)
Net income available to ArchNet income available to Arch392,453
 118,190
 418,081
 (536,271) 392,453
Preferred dividendsPreferred dividends(12,369) —
 —
 —
 (12,369)Preferred dividends(10,403) —
 —
 —
 (10,403)
Loss on redemption of preferred shares(6,735) —
 —
 —
 (6,735)
Net income (loss) available to Arch common shareholders$(52,760) $42,193
 $2,219
 $(44,412) $(52,760)
Net income available to Arch common shareholdersNet income available to Arch common shareholders$382,050
 $118,190
 $418,081
 $(536,271) $382,050
                    
Comprehensive income (loss) available to Arch$17,585
 $47,676
 $45,936
 $(93,612) $17,585
Comprehensive income available to ArchComprehensive income available to Arch$397,340
 $138,832
 $427,238
 $(566,070) $397,340




ARCH CAPITALACGL 2017 422019 THIRD QUARTER FORM 10-Q42
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




 Three Months Ended September 30, 2016 Three Months Ended September 30, 2018
Condensed Consolidating Statement of Income and Comprehensive IncomeCondensed Consolidating Statement of Income and Comprehensive IncomeACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL ConsolidatedCondensed Consolidating Statement of Income and Comprehensive IncomeArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
RevenuesRevenues         Revenues         
Net premiums earnedNet premiums earned$—
 $—
 $958,403
 $—
 $958,403
Net premiums earned$—
 $—
 $1,290,878
 $—
 $1,290,878
Net investment incomeNet investment income6
 803
 99,654
 (6,845) 93,618
Net investment income2
 1,202
 165,289
 (22,469) 144,024
Net realized gains (losses)Net realized gains (losses)—
 —
 125,105
 —
 125,105
Net realized gains (losses)—
 (64) (51,641) —
 (51,705)
Net impairment losses recognized in earningsNet impairment losses recognized in earnings—
 —
 (3,867) —
 (3,867)Net impairment losses recognized in earnings—
 —
 (492) —
 (492)
Other underwriting incomeOther underwriting income—
 —
 7,980
 —
 7,980
Other underwriting income—
 —
 5,823
 —
 5,823
Equity in net income (loss) of investment funds accounted for using the equity methodEquity in net income (loss) of investment funds accounted for using the equity method—
 —
 16,662
 —
 16,662
Equity in net income (loss) of investment funds accounted for using the equity method—
 —
 15,982
 —
 15,982
Other income (loss)Other income (loss)71
 —
 (471) —
 (400)Other income (loss)(195) —
 (531) —
 (726)
Total revenues77
 803
 1,203,466
 (6,845) 1,197,501
Total revenues(193) 1,138
 1,425,308
 (22,469) 1,403,784
                    
ExpensesExpenses         Expenses         
Losses and loss adjustment expensesLosses and loss adjustment expenses—
 —
 524,183
 —
 524,183
Losses and loss adjustment expenses—
 —
 699,420
 —
 699,420
Acquisition expensesAcquisition expenses—
 —
 161,267
 —
 161,267
Acquisition expenses—
 —
 201,602
 —
 201,602
Other operating expensesOther operating expenses—
 —
 153,286
 —
 153,286
Other operating expenses—
 —
 161,098
 —
 161,098
Corporate expensesCorporate expenses18,488
 608
 (611) —
 18,485
Corporate expenses15,170
 446
 (1,281) —
 14,335
Amortization of intangible assetsAmortization of intangible assets—
 —
 4,865
 —
 4,865
Amortization of intangible assets—
 —
 26,315
 —
 26,315
Interest expenseInterest expense5,948
 6,627
 9,890
 (6,522) 15,943
Interest expense5,536
 12,075
 34,276
 (22,157) 29,730
Net foreign exchange (gains) lossesNet foreign exchange (gains) losses—
 —
 2,723
 (102) 2,621
Net foreign exchange (gains) losses—
 —
 (10,426) (412) (10,838)
Total expenses24,436
 7,235
 855,603
 (6,624) 880,650
Total expenses20,706
 12,521
 1,111,004
 (22,569) 1,121,662
                    
Income (loss) before income taxesIncome (loss) before income taxes(24,359) (6,432) 347,863
 (221) 316,851
Income (loss) before income taxes(20,899) (11,383) 314,304
 100
 282,122
Income tax (expense) benefitIncome tax (expense) benefit—
 2,116
 (15,347) —
 (13,231)Income tax (expense) benefit—
 2,276
 (35,632) —
 (33,356)
Income (loss) before equity in net income of subsidiariesIncome (loss) before equity in net income of subsidiaries(24,359) (4,316) 332,516
 (221) 303,620
Income (loss) before equity in net income of subsidiaries(20,899) (9,107) 278,672
 100
 248,766
Equity in net income of subsidiariesEquity in net income of subsidiaries277,231
 21,945
 —
 (299,176) —
Equity in net income of subsidiaries248,307
 92,906
 —
 (341,213) —
Net income252,872
 17,629
 332,516
 (299,397) 303,620
Net income (loss)Net income (loss)227,408
 83,799
 278,672
 (341,113) 248,766
Net (income) loss attributable to noncontrolling interestsNet (income) loss attributable to noncontrolling interests—
 —
 (51,071) 323
 (50,748)Net (income) loss attributable to noncontrolling interests—
 —
 (21,669) 311
 (21,358)
Net income available to Arch252,872
 17,629
 281,445
 (299,074) 252,872
Net income (loss) available to ArchNet income (loss) available to Arch227,408
 83,799
 257,003
 (340,802) 227,408
Preferred dividendsPreferred dividends(5,484) —
 —
 —
 (5,484)Preferred dividends(10,402) —
 —
 —
 (10,402)
Net income available to Arch common shareholders$247,388
 $17,629
 $281,445
 $(299,074) $247,388
Net income (loss) available to Arch common shareholdersNet income (loss) available to Arch common shareholders$217,006
 $83,799
 $257,003
 $(340,802) $217,006
                    
Comprehensive income (loss) available to Arch$208,790
 $2,019
 $237,555
 $(239,574) $208,790
Comprehensive income available to ArchComprehensive income available to Arch$200,524
 $77,389
 $230,565
 $(307,954) $200,524




ARCH CAPITALACGL 2017 432019 THIRD QUARTER FORM 10-Q43
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2019
Condensed Consolidating Statement of Income and Comprehensive IncomeCondensed Consolidating Statement of Income and Comprehensive IncomeACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL ConsolidatedCondensed Consolidating Statement of Income and Comprehensive IncomeArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
RevenuesRevenues         Revenues��        
Net premiums earnedNet premiums earned$—
 $—
 $3,619,777
 $—
 $3,619,777
Net premiums earned$—
 $—
 $4,270,616
 $—
 $4,270,616
Net investment incomeNet investment income123
 1,151
 410,392
 (66,209) 345,457
Net investment income165
 9,425
 532,031
 (68,146) 473,475
Net realized gains (losses)Net realized gains (losses)—
 —
 122,163
 —
 122,163
Net realized gains (losses)—
 16,223
 320,356
 (11,690) 324,889
Net impairment losses recognized in earningsNet impairment losses recognized in earnings—
 —
 (5,415) —
 (5,415)Net impairment losses recognized in earnings—
 —
 (2,521) —
 (2,521)
Other underwriting incomeOther underwriting income—
 —
 15,519
 —
 15,519
Other underwriting income—
 —
 18,104
 —
 18,104
Equity in net income of investment funds accounted for using the equity method—
 —
 111,884
 —
 111,884
Equity in net income (loss) of investment funds accounted for using the equity methodEquity in net income (loss) of investment funds accounted for using the equity method—
 536
 95,997
 —
 96,533
Other income (loss)Other income (loss)(368) —
 (2,750) —
 (3,118)Other income (loss)(634) —
 4,184
 —
 3,550
Total revenues(245) 1,151
 4,271,570
 (66,209) 4,206,267
Total revenues(469) 26,184
 5,238,767
 (79,836) 5,184,646
                    
ExpensesExpenses         Expenses         
Losses and loss adjustment expensesLosses and loss adjustment expenses—
 —
 2,288,571
 —
 2,288,571
Losses and loss adjustment expenses—
 —
 2,288,530
 —
 2,288,530
Acquisition expensesAcquisition expenses—
 —
 566,579
 —
 566,579
Acquisition expenses—
 —
 619,057
 —
 619,057
Other operating expensesOther operating expenses—
 —
 514,827
 —
 514,827
Other operating expenses—
 —
 596,589
 —
 596,589
Corporate expensesCorporate expenses53,639
 3,727
 12,400
 —
 69,766
Corporate expenses46,666
 5,912
 696
 —
 53,274
Amortization of intangible assetsAmortization of intangible assets—
 —
 93,942
 —
 93,942
Amortization of intangible assets—
 —
 60,214
 —
 60,214
Interest expenseInterest expense18,024
 35,956
 98,197
 (65,242) 86,935
Interest expense16,615
 35,966
 104,430
 (67,338) 89,673
Net foreign exchange losses (gains)—
 —
 65,701
 21,274
 86,975
Net foreign exchange (gains) lossesNet foreign exchange (gains) losses3
 —
 (26,715) (4,985) (31,697)
Total expenses71,663
 39,683
 3,640,217
 (43,968) 3,707,595
Total expenses63,284
 41,878
 3,642,801
 (72,323) 3,675,640
                    
Income (loss) before income taxesIncome (loss) before income taxes(71,908) (38,532) 631,353
 (22,241) 498,672
Income (loss) before income taxes(63,753) (15,694) 1,595,966
 (7,513) 1,509,006
Income tax (expense) benefitIncome tax (expense) benefit—
 13,374
 (84,129) —
 (70,755)Income tax (expense) benefit—
 3,491
 (131,965) —
 (128,474)
Income (loss) before equity in net income of subsidiariesIncome (loss) before equity in net income of subsidiaries(71,908) (25,158) 547,224
 (22,241) 427,917
Income (loss) before equity in net income of subsidiaries(63,753) (12,203) 1,464,001
 (7,513) 1,380,532
Equity in net income of subsidiariesEquity in net income of subsidiaries476,546
 213,586
 —
 (690,132) —
Equity in net income of subsidiaries1,373,688
 410,115
 —
 (1,783,803) —
Net incomeNet income404,638
 188,428
 547,224
 (712,373) 427,917
Net income1,309,935
 397,912
 1,464,001
 (1,791,316) 1,380,532
Amounts attributable to noncontrolling interests—
 —
 (24,247) 968
 (23,279)
Net (income) loss attributable to noncontrolling interestsNet (income) loss attributable to noncontrolling interests—
 —
 (71,405) 808
 (70,597)
Net income available to ArchNet income available to Arch404,638
 188,428
 522,977
 (711,405) 404,638
Net income available to Arch1,309,935
 397,912
 1,392,596
 (1,790,508) 1,309,935
Preferred dividendsPreferred dividends(34,936) —
 —
 —
 (34,936)Preferred dividends(31,209) —
 —
 —
 (31,209)
Loss on redemption of preferred shares(6,735) —
 —
 —
 (6,735)
Net income available to Arch common shareholdersNet income available to Arch common shareholders$362,967
 $188,428
 $522,977
 $(711,405) $362,967
Net income available to Arch common shareholders$1,278,726
 $397,912
 $1,392,596
 $(1,790,508) $1,278,726
                    
Comprehensive income (loss) available to Arch$648,861
 $240,759
 $745,856
 $(986,615) $648,861
Comprehensive income available to ArchComprehensive income available to Arch$1,700,369
 $608,108
 $1,779,463
 $(2,387,571) $1,700,369




ARCH CAPITALACGL 2017 442019 THIRD QUARTER FORM 10-Q44
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




  Nine Months Ended September 30, 2018
Condensed Consolidating Statement of Income and Comprehensive IncomeArch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
Revenues         
Net premiums earned$—
 $—
 $3,862,540
 $—
 $3,862,540
Net investment income37
 2,020
 471,588
 (67,229) 406,416
Net realized gains (losses)29
 (71) (239,272) —
 (239,314)
Net impairment losses recognized in earnings—
 —
 (1,124) —
 (1,124)
Other underwriting income—
 —
 15,046
 —
 15,046
Equity in net income (loss) of investment funds accounted for using the equity method—
 —
 52,523
 —
 52,523
Other income (loss)2,066
 —
 395
 —
 2,461
 Total revenues2,132
 1,949
 4,161,696
 (67,229) 4,098,548
           
Expenses         
Losses and loss adjustment expenses—
 —
 2,062,433
 —
 2,062,433
Acquisition expenses—
 —
 595,816
 —
 595,816
Other operating expenses—
 —
 512,294
 —
 512,294
Corporate expenses47,981
 1,205
 2,973
 —
 52,159
Amortization of intangible assets—
 —
 79,523
 —
 79,523
Interest expense16,609
 36,014
 104,359
 (66,272) 90,710
Net foreign exchange (gains) losses29
 —
 (37,347) (7,505) (44,823)
 Total expenses64,619
 37,219
 3,320,051
 (73,777) 3,348,112
           
Income (loss) before income taxes(62,487) (35,270) 841,645
 6,548
 750,436
Income tax (expense) benefit—
 7,704
 (86,643) —
 (78,939)
Income (loss) before equity in net income of subsidiaries(62,487) (27,566) 755,002
 6,548
 671,497
Equity in net income of subsidiaries683,964
 266,053
 —
 (950,017) —
Net income621,477
 238,487
 755,002
 (943,469) 671,497
Net (income) loss attributable to noncontrolling interests—
 —
 (50,976) 956
 (50,020)
Net income available to Arch621,477
 238,487
 704,026
 (942,513) 621,477
Preferred dividends(31,242) —
 —
 —
 (31,242)
Loss on redemption of preferred shares(2,710) —
 —
 —
 (2,710)
Net income available to Arch common shareholders$587,525
 $238,487
 $704,026
 $(942,513) $587,525
           
Comprehensive income available to Arch$432,186
 $153,992
 $522,448
 $(676,440) $432,186

  Nine Months Ended September 30, 2016
Condensed Consolidating Statement of Income and Comprehensive IncomeACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Revenues         
Net premiums earned$—
 $—
 $2,915,967
 $—
 $2,915,967
Net investment income7
 2,351
 294,012
 (20,679) 275,691
Net realized gains (losses)—
 —
 230,647
 —
 230,647
Net impairment losses recognized in earnings—
 —
 (16,849) —
 (16,849)
Other underwriting income—
 —
 54,749
 (16,498) 38,251
Equity in net income of investment funds accounted for using the equity method—
 —
 32,054
 —
 32,054
Other income (loss)270
 —
 (702) —
 (432)
 Total revenues277
 2,351
 3,509,878
 (37,177) 3,475,329
           
Expenses         
Losses and loss adjustment expenses—
 —
 1,631,724
 —
 1,631,724
Acquisition expenses—
 —
 501,782
 —
 501,782
Other operating expenses—
 —
 460,748
 —
 460,748
Corporate expenses45,284
 1,549
 (1,765) —
 45,068
Amortization of intangible assets—
 —
 14,493
 —
 14,493
Interest expense17,811
 19,946
 46,169
 (36,213) 47,713
Net foreign exchange losses (gains)—
 —
 5,093
 (3,568) 1,525
 Total expenses63,095
 21,495
 2,658,244
 (39,781) 2,703,053
           
Income (loss) before income taxes(62,818) (19,144) 851,634
 2,604
 772,276
Income tax (expense) benefit—
 6,446
 (50,118) —
 (43,672)
Income (loss) before equity in net income of subsidiaries(62,818) (12,698) 801,516
 2,604
 728,604
Equity in net income of subsidiaries681,543
 64,684
 —
 (746,227) —
Net income618,725
 51,986
 801,516
 (743,623) 728,604
Amounts attributable to noncontrolling interests—
 —
 (110,844) 965
 (109,879)
Net income available to Arch618,725
 51,986
 690,672
 (742,658) 618,725
Preferred dividends(16,453) —
 —
 —
 (16,453)
Net income available to Arch common shareholders$602,272
 $51,986
 $690,672
 $(742,658) $602,272
           
Comprehensive income (loss) available to Arch$754,979
 $89,204
 $830,348
 $(919,552) $754,979






ARCH CAPITALACGL 2017 452019 THIRD QUARTER FORM 10-Q45
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2019
Condensed Consolidating Statement
of Cash Flows
Condensed Consolidating Statement
of Cash Flows
ACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Condensed Consolidating Statement
of Cash Flows
Arch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
Operating ActivitiesOperating Activities         Operating Activities         
Net Cash Provided By (Used For) Operating Activities$130,715
 $70,761
 $1,464,701
 $(585,043) $1,081,134
Net Cash Provided By (Used For) Operating Activities$42,221
 $525,712
 $1,554,406
 $(579,200) $1,543,139
Investing ActivitiesInvesting Activities         Investing Activities         
Purchases of fixed maturity investmentsPurchases of fixed maturity investments—
 —
 (28,079,129) —
 (28,079,129)Purchases of fixed maturity investments—
 (868,773) (23,313,996) 172,146
 (24,010,623)
Purchases of equity securitiesPurchases of equity securities—
 —
 (667,135) —
 (667,135)Purchases of equity securities—
 (74,502) (520,292) 70,743
 (524,051)
Purchases of other investmentsPurchases of other investments—
 —
 (1,406,528) —
 (1,406,528)Purchases of other investments—
 (28,557) (986,368) —
 (1,014,925)
Proceeds from the sales of fixed maturity investmentsProceeds from the sales of fixed maturity investments—
 —
 27,629,474
 —
 27,629,474
Proceeds from the sales of fixed maturity investments—
 482,804
 22,373,404
 (148,354) 22,707,854
Proceeds from the sales of equity securitiesProceeds from the sales of equity securities—
 —
 751,873
 —
 751,873
Proceeds from the sales of equity securities—
 7,441
 434,432
 (70,743) 371,130
Proceeds from the sales, redemptions and maturities of other investmentsProceeds from the sales, redemptions and maturities of other investments—
 —
 938,581
 —
 938,581
Proceeds from the sales, redemptions and maturities of other investments—
 1,057
 826,460
 —
 827,517
Proceeds from redemptions and maturities of fixed maturity investmentsProceeds from redemptions and maturities of fixed maturity investments—
 —
 747,621
 —
 747,621
Proceeds from redemptions and maturities of fixed maturity investments—
 —
 394,719
 —
 394,719
Net settlements of derivative instrumentsNet settlements of derivative instruments—
 —
 (20,952) —
 (20,952)Net settlements of derivative instruments—
 —
 92,423
 —
 92,423
Net (purchases) sales of short-term investmentsNet (purchases) sales of short-term investments2,209
 (27,998) (938,864) —
 (964,653)Net (purchases) sales of short-term investments63
 31,605
 97,410
 —
 129,078
Change in cash collateral related to securities lendingChange in cash collateral related to securities lending—
 —
 148,692
 —
 148,692
Change in cash collateral related to securities lending—
 —
 6,990
 —
 6,990
Contributions to subsidiariesContributions to subsidiaries20,641
 (72,900) (353,588) 405,847
 —
Contributions to subsidiaries(2,121) —
 (70,125) 72,246
 —
Issuance of intercompany loansIssuance of intercompany loans—
 —
 (47,000) 47,000
 —
Issuance of intercompany loans—
 —
 (53,828) 53,828
 —
Repayment of intercompany loans—
 47,000
 —
 (47,000) —
Acquisitions, net of cash—
 —
 (27,709) —
 (27,709)
Purchases of fixed assetsPurchases of fixed assets(18) —
 (16,844) —
 (16,862)Purchases of fixed assets(32) —
 (27,603) —
 (27,635)
OtherOther—
 —
 106,786
 (20,641) 86,145
Other—
 (10,000) (192,953) —
 (202,953)
Net Cash Provided By (Used For) Investing Activities22,832
 (53,898) (1,234,722) 385,206
 (880,582)Net Cash Provided By (Used For) Investing Activities(2,090) (458,925) (939,327) 149,866
 (1,250,476)
Financing ActivitiesFinancing Activities         Financing Activities         
Proceeds from issuance of preferred shares, net222,054
 —
 —
 —
 222,054
Redemption of preferred shares(230,000) —
 —
 —
 (230,000)
Purchases of common shares under share repurchase programPurchases of common shares under share repurchase program(2,871) —
 —
 —
 (2,871)
Proceeds from common shares issued, netProceeds from common shares issued, net(7,484) —
 405,847
 (405,847) (7,484)Proceeds from common shares issued, net518
 —
 72,246
 (72,246) 518
Proceeds from intercompany borrowingsProceeds from intercompany borrowings—
 —
 47,000
 (47,000) —
Proceeds from intercompany borrowings—
 —
 53,828
 (53,828) —
Proceeds from borrowingsProceeds from borrowings—
 —
 238,915
 —
 238,915
Proceeds from borrowings—
 —
 235,083
 (35,000) 200,083
Repayments of intercompany borrowingsRepayments of intercompany borrowings—
 —
 (47,000) 47,000
 —
Repayments of intercompany borrowings—
 —
 —
 —
 —
Repayments of borrowingsRepayments of borrowings(100,000) —
 (72,000) —
 (172,000)Repayments of borrowings—
 —
 (27,538) —
 (27,538)
Change in cash collateral related to securities lendingChange in cash collateral related to securities lending—
 —
 (148,692) —
 (148,692)Change in cash collateral related to securities lending—
 —
 (6,990) —
 (6,990)
Change in third party investment in redeemable noncontrolling interestsChange in third party investment in redeemable noncontrolling interests—
 —
 (173,082) 11,208
 (161,874)
Dividends paid to redeemable noncontrolling interestsDividends paid to redeemable noncontrolling interests—
 —
 (14,447) 956
 (13,491)Dividends paid to redeemable noncontrolling interests—
 —
 (12,217) 809
 (11,408)
Dividends paid to parent (1)Dividends paid to parent (1)—
 —
 (584,087) 584,087
 —
Dividends paid to parent (1)—
 —
 (578,391) 578,391
 —
OtherOther—
 —
 (69,921) 20,641
 (49,280)Other—
 —
 (5,207) —
 (5,207)
Preferred dividends paidPreferred dividends paid(34,936) —
 —
 —
 (34,936)Preferred dividends paid(31,209) —
 —
 —
 (31,209)
Net Cash Provided By (Used For) Financing Activities(150,366) —
 (244,385) 199,837
 (194,914)Net Cash Provided By (Used For) Financing Activities(33,562) —
 (442,268) 429,334
 (46,496)
Effects of exchange rates changes on foreign currency cash—
 —
 13,781
 —
 13,781
Increase (decrease) in cash3,181
 16,863
 (625) —
 19,419
Cash beginning of year1,687
 71,955
 769,300
 —
 842,942
Cash end of period$4,868
 $88,818
 $768,675
 $—
 $862,361
Effects of exchange rates changes on foreign currency cash and restricted cashEffects of exchange rates changes on foreign currency cash and restricted cash—
 —
 (8,335) —
 (8,335)
Increase (decrease) in cash and restricted cashIncrease (decrease) in cash and restricted cash6,569
 66,787
 164,476
 —
 237,832
Cash and restricted cash, beginning of yearCash and restricted cash, beginning of year6,159
 5,940
 712,544
 —
 724,643
Cash and restricted cash, end of periodCash and restricted cash, end of period$12,728
 $72,727
 $877,020
 $—
 $962,475


(1)     Dividends received by parent are included in net cash provided by (used for) operating activities.




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




 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2018
Condensed Consolidating Statement
of Cash Flows
Condensed Consolidating Statement
of Cash Flows
ACGL (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other ACGL Subsidiaries Consolidating Adjustments and Eliminations ACGL Consolidated
Condensed Consolidating Statement
of Cash Flows
Arch Capital (Parent Guarantor) Arch-U.S. (Subsidiary Issuer) Other Arch Capital Subsidiaries Consolidating Adjustments and Eliminations Arch Capital Consolidated
Operating ActivitiesOperating Activities         Operating Activities         
Net Cash Provided By (Used For) Operating Activities$94,250
 $14,448
 $1,096,443
 $(168,002) $1,037,139
Net Cash Provided By (Used For) Operating Activities$222,097
 $176,851
 $1,622,248
 $(900,209) $1,120,987
Investing ActivitiesInvesting Activities         Investing Activities         
Purchases of fixed maturity investmentsPurchases of fixed maturity investments—
 —
 (27,840,555) —
 (27,840,555)Purchases of fixed maturity investments—
 (214,449) (25,229,184) 605,716
 (24,837,917)
Purchases of equity securitiesPurchases of equity securities—
 —
 (377,767) —
 (377,767)Purchases of equity securities—
 —
 (819,342) —
 (819,342)
Purchases of other investmentsPurchases of other investments—
 —
 (1,008,774) —
 (1,008,774)Purchases of other investments—
 —
 (1,543,332) —
 (1,543,332)
Proceeds from the sales of fixed maturity investmentsProceeds from the sales of fixed maturity investments—
 —
 26,731,924
 —
 26,731,924
Proceeds from the sales of fixed maturity investments—
 111,533
 23,804,386
 (605,716) 23,310,203
Proceeds from the sales of equity securitiesProceeds from the sales of equity securities—
 —
 464,904
 —
 464,904
Proceeds from the sales of equity securities—
 —
 866,919
 —
 866,919
Proceeds from the sales, redemptions and maturities of other investmentsProceeds from the sales, redemptions and maturities of other investments—
 —
 879,330
 —
 879,330
Proceeds from the sales, redemptions and maturities of other investments—
 —
 1,178,035
 —
 1,178,035
Proceeds from redemptions and maturities of fixed maturity investmentsProceeds from redemptions and maturities of fixed maturity investments—
 41,500
 499,323
 —
 540,823
Proceeds from redemptions and maturities of fixed maturity investments—
 —
 724,021
 —
 724,021
Net settlements of derivative instrumentsNet settlements of derivative instruments—
 —
 23,396
 —
 23,396
Net settlements of derivative instruments—
 —
 765
 —
 765
Net (purchases) sales of short-term investmentsNet (purchases) sales of short-term investments(436,830) (53,779) (113,553) —
 (604,162)Net (purchases) sales of short-term investments96,397
 (49,031) 506,949
 —
 554,315
Change in cash collateral related to securities lendingChange in cash collateral related to securities lending—
 —
 (27,935) —
 (27,935)Change in cash collateral related to securities lending—
 —
 137,073
 —
 137,073
Contributions to subsidiariesContributions to subsidiaries(3,585) —
 (9,247) 12,832
 —
Contributions to subsidiaries—
 (2,500) (29,646) 32,146
 —
Acquisitions, net of cash—
 —
 (20,911) —
 (20,911)
Purchases of fixed assetsPurchases of fixed assets(8) —
 (11,557) —
 (11,565)Purchases of fixed assets(71) —
 (18,979) —
 (19,050)
OtherOther2,000
 —
 (5,816) —
 (3,816)Other(4) —
 58,231
 —
 58,227
Net Cash Provided By (Used For) Investing Activities(438,423) (12,279) (817,238) 12,832
 (1,255,108)Net Cash Provided By (Used For) Investing Activities96,322
 (154,447) (364,104) 32,146
 (390,083)
Financing ActivitiesFinancing Activities         Financing Activities         
Proceeds from issuance of preferred shares, net434,899
 —
 —
 —
 434,899
Redemption of preferred sharesRedemption of preferred shares(92,555) —
 —
 —
 (92,555)
Purchases of common shares under share repurchase programPurchases of common shares under share repurchase program(75,256) —
 —
 —
 (75,256)Purchases of common shares under share repurchase program(184,529) —
 —
 —
 (184,529)
Proceeds from common shares issued, netProceeds from common shares issued, net(3,785) —
 12,832
 (12,832) (3,785)Proceeds from common shares issued, net(12,029) —
 32,146
 (32,146) (12,029)
Proceeds from borrowingsProceeds from borrowings—
 —
 46,000
 —
 46,000
Proceeds from borrowings—
 —
 167,259
 —
 167,259
Repayments of borrowingsRepayments of borrowings—
 —
 (179,171) —
 (179,171)Repayments of borrowings—
 —
 (427,000) —
 (427,000)
Change in cash collateral related to securities lendingChange in cash collateral related to securities lending—
 —
 27,935
 —
 27,935
Change in cash collateral related to securities lending—
 —
 (137,073) —
 (137,073)
Dividends paid to redeemable noncontrolling interestsDividends paid to redeemable noncontrolling interests—
 —
 (14,448) 957
 (13,491)Dividends paid to redeemable noncontrolling interests—
 —
 (14,447) 956
 (13,491)
Dividends paid to parent (1)Dividends paid to parent (1)—
 —
 (167,045) 167,045
 —
Dividends paid to parent (1)—
 —
 (899,253) 899,253
 —
OtherOther—
 200
 32,913
 —
 33,113
Other—
 —
 (6,084) —
 (6,084)
Preferred dividends paidPreferred dividends paid(16,453) —
 —
 —
 (16,453)Preferred dividends paid(31,242) —
 —
 —
 (31,242)
Net Cash Provided By (Used For) Financing Activities339,405
 200
 (240,984) 155,170
 253,791
Net Cash Provided By (Used For) Financing Activities(320,355) —
 (1,284,452) 868,063
 (736,744)
Effects of exchange rates changes on foreign currency cash—
 —
 (10,332) —
 (10,332)
Increase (decrease) in cash(4,768) 2,369
 27,889
 —
 25,490
Cash beginning of year6,809
 17,023
 529,494
 —
 553,326
Cash end of period$2,041
 $19,392
 $557,383
 $—
 $578,816
Effects of exchange rates changes on foreign currency cash and restricted cashEffects of exchange rates changes on foreign currency cash and restricted cash—
 —
 (11,625) —
 (11,625)
Increase (decrease) in cash and restricted cashIncrease (decrease) in cash and restricted cash(1,936) 22,404
 (37,933) —
 (17,465)
Cash and restricted cash, beginning of yearCash and restricted cash, beginning of year10,048
 30,380
 686,856
 —
 727,284
Cash and restricted cash, end of periodCash and restricted cash, end of period$8,112
 $52,784
 $648,923
 $—
 $709,819


(1)     Dividends received by parent are included in net cash provided by (used for) operating activities.






ARCH CAPITALACGL 2017 472019 THIRD QUARTER FORM 10-Q47
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


14.    Income Taxes
The Company’s income tax provision on income before income taxes resulted in an expense of 14.2%8.5% for the nine months ended September 30, 2017,2019, compared to an expense of 5.7%10.5% for the 20162018 period. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. For interim reporting purposes, the Company has calculated its annual effective tax rate for the full year of 20172019 by treating any excess tax benefits in the U.S. that arise from the accounting for stock based compensation as a discrete item. As such, this amount is not included when projecting the Company’s full year annual effective tax rate but rather is accounted for at the U.S. Federal statutory rate of 35%21% after applying the projected full year annual effective tax rate to actual nine-monthnine months results before the discrete item. The impact of the discrete item resulted in a benefit of 1.5%0.4% for the nine months ended September 30, 2017.2019.
The Company had a net deferred tax assetliability of $248.3$55.9 million at September 30, 2017,2019, compared to $221.2a net deferred tax asset of $22.5 million at December 31, 2016.2018. The change is primarily a result of the appreciation of the Company’s fixed maturities from December 31, 2018 to September 30, 2019. In addition, the Company paid $47.9$47.1 million and $40.7recovered $34.0 million of income taxes for the nine months ended September 30, 20172019 and 2016,2018, respectively.
15.    Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of September 30, 2017,2019, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
16.    Transactions with Related Parties
Kewsong Lee, a director of ACGL, is a Managing Director and Deputy Chief Investment Officer for Corporate Private Equity of Carlyle Group LP (“Carlyle”). As part of its investment philosophy, the Company invests a portion of its investment portfolio in alternative investment funds. As of September 30, 2017, the total value of the Company’s investments in funds or other investments managed by Carlyle was approximately $248.5 million, and the Company had aggregate unfunded commitments to funds managed by Carlyle of $471.6 million. The Company may make additional commitments to funds managed by Carlyle from time to time. During the nine months ended September 30, 2017 and 2016, the Company made aggregate capital contributions to funds managed by Carlyle of $86.0 million and $50.1 million, respectively, and received aggregate cash distributions from funds managed by Carlyle of $48.7 million and $17.9 million, respectively. Effective November 2, 2017, Mr. Lee resigned from ACGL’s Board of Directors because of the expansion of his duties at Carlyle following his recent promotion to co-CEO effective January 1, 2018.
17.    Acquisition
On July 1, 2017, the Company completed its previously announced acquisition of AIG United Guaranty Insurance (Asia) Limited (renamed “Arch MI Asia Limited”) following the payment of $40.0 million to AIG. Arch MI Asia Limited compliments the Company’s existing private mortgage insurance businesses, which have operations in the United States, Europe and Australia.
The purchase price was allocated to the acquired assets and liabilities of Arch MI Asia Limited based on estimated fair values on the acquisition date. The Company recognized other intangible assets of $2.3 million and goodwill of $0.8 million. The goodwill balance is primarily attributed to Arch MI Asia Limited’s assembled workforce and access to the mortgage insurance market. None of the goodwill recognized is expected to be deductible for income tax purposes.

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

18.    Subsequent Events

OnBellemeade Re 2019-4 Ltd.
In October 25, 2017,2019, the Company’s first-lien U.S. mortgage insurance subsidiaries entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re 2017-12019-4 Ltd. (“Bellemeade III”2019-4”), a special purpose reinsurance company domiciled in Bermuda. The Bellemeade III2019-4 agreement provides for up to $368.1$577.3 million of aggregate excess of loss reinsurance coverage at inception in excess of $162.4 million of aggregate losses for new delinquencies on a portfolio of in-force policies issued between January 1, 2017 and June 30, 2017. Forin the coverage period, Bellemeade III will cover $368.1 million in excessfirst half of $165.7 million of aggregate losses.2019. The coverage
amount decreases over a ten-year period as the underlying covered mortgages amortize.
Bellemeade III2019-4 financed the coverage through the issuance of mortgage insurance-linked notes in an aggregate amount of approximately $368.1$577.3 million to unrelated investors (the “Notes”). The maturity date of the Notes is October 25, 2027.2029. The Notes will be redeemed prior to maturity upon the occurrence of a mandatory termination event or if the ceding insurers trigger a termination of the reinsurance agreement following the occurrence of an optional termination event. All of the proceeds paid to Bellemeade III2019-4 from the sale of the Notes were deposited into a reinsurance trust for the sole benefit of the ceding insurers as security for Bellemeade III’s2019-4’s obligations. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds.
Catastrophic Events
In the 2019 fourth quarter, Typhoon Hagibis, the ongoing wildfires in California and other catastrophic events may have an impact on the Company’s financial results. It is too early to reasonably estimate losses for these events given the significant uncertainties and the early stage of the damage assessment process, among other factors.
Share Repurchases
At September 30, 2019, approximately $160.9 million of share repurchases were available under Arch Capital’s share repurchase program. From October 2017, a series of wildfires burned across several California counties. With the information available,1 through October 31, 2019, the Company has establisheddid not repurchase any common shares. On November 8, 2019, the board of directors of ACGL increased the aggregate purchase amount authorized under the share repurchase program to $1.0 billion. Repurchases under this authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021. The timing and amount of the repurchase transactions under this authorization will depend on a preliminary rangevariety of pre-tax losses of $30 million to $55 million for these wildfires, net of reinsurancefactors, including market conditions and reinstatement premiums. At this time, there are significant uncertainties surrounding the numbers of claimscorporate and scope of damage for these wildfires. The Company’s preliminary estimate for the wildfires is based on currently available information derived from modeling techniques, industry assessments of exposure, preliminary claims information obtained from the Company’s clients and brokers to date and a review of in-force contracts. Actual losses from these wildfires may vary materially from the estimates due to the inherent uncertainties in making such determinations.regulatory considerations.




ARCH CAPITALACGL 2017 482019 THIRD QUARTER FORM 10-Q49
Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 20162018 (“20162018 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 20162018 Form 10-K. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
Arch Capital Group Ltd. (“ACGL”Arch Capital” and, together with its subsidiaries, “Arch”, “we” or “us”) is a Bermuda public limited liability company with approximately $11.04$12.89 billion in capital at September 30, 20172019 and, through operations in Bermuda, the United States, Europe, Canada, Australia and Australia,Hong Kong, writes insurance, reinsurance and mortgage insurance on a worldwide basis.
CURRENT OUTLOOK
The broad property casualty insurance market environment continues to be competitive in our business, consistent with our view in prior quarters, reflecting slight deterioration in rates across certain sectors. As in prior quarters, this has led to flat or lower writings in certain property casualty lines in the 2017 third quarter. However, with the continued low interest rate environment, additional price increases are needed in many lines in order for us to achieve our return requirements. Recent catastrophic loss activity, including Hurricanes Harvey, Irma and Maria and the California wildfires, may result in improvements in rates and provide opportunities for growth. Our underwriting teams continue to execute a disciplined strategy by emphasizing small and medium-sized accounts over large accounts and by utilizing reinsurance purchases to reduce volatility on large account, high capacity business.
Our mortgage segment continues to experience favorable market conditions. The mortgage segment includes our U.S. primary mortgage insurance operations, international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. On December 31, 2016, we completed the acquisition of United Guaranty Corporation, a North Carolina corporation (“UGC”) from American International Group, Inc. (“AIG”). The acquisition of UGC expanded our U.S. primary mortgage insurance operations 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. On July 1, 2017, we completed our previously announced
acquisition of AIG United Guaranty Insurance (Asia) Limited from AIG (renamed “Arch MI Asia Limited”).
We insure mortgages for homes in areas that have been impacted by catastrophic events, such as Hurricanes Harvey and Irma and the California wildfires. We anticipate that we will experience an increase in delinquency notices on insured loans impacted by such events, principally in the 2017 fourth quarter. Generally, mortgage insurance losses occur only when a credit event occurs and, following a physical damage event, when the home is restored to pre-storm condition. Our ultimate claims exposure will depend on the number of delinquency notices received and the ultimate claim rate related to such notices. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and flood insurance carried on a related property, and a borrower's access to aid from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas. The 2017 third quarter results do not include a reserve for claims associated with future notices not yet reported as, in accordance with GAAP, no reserves are recorded until we are notified of the delinquencies. Management anticipates that subsequent quarters may experience some loss activity from the impacted areas, but does not expect this to be material.
Our objective is to achieve an average operating return on average equity of 15% or greater over the insurance cycle, which we believe to be an attractive return to our common shareholders given the risks we assume. We continue to look for opportunities to find acceptable books of business to underwrite without sacrificing underwriting discipline and continue to write a portion of our overall book in catastrophe-exposed business which has the potential to increase the volatility of our operating results.
Changing economic conditions could haveAcross all lines in our insurance business, renewal rates experienced a material impact on the frequency and severity of claims and, therefore, could negatively impact our underwriting returns. In addition, volatilitymodest increase as net premiums grew in the financial markets could2019 third quarter. Reinsurance pricing tends to follow that of the primary insurance industry although catastrophe and large attritional losses, such as the Japanese typhoons this year, in the reinsurance market can disproportionately affect results and create opportunities. We believe that property facultative and marine businesses are examples of improving markets.

Our underwriting teams continue to significantly affect our investment returns, reported resultsexecute a disciplined strategy by emphasizing small and shareholders’ equity. We consider the potential impact of economic trendsmedium-sized accounts over large accounts, shrinking premiums in the estimation process for establishing unpaid lossesmore commoditized lines such as general liability and by utilizing reinsurance purchases to reduce volatility on large account, high capacity business. The spread between rate changes and loss adjustment expensestrend continues to be a key variable in assessing expected returns and in determining our investment strategies. In addition, weakness of the U.S., European countries and other key economies, projected budget deficits for the U.S., European countries and other governments and the consequences associated with potential downgrades of securities of the U.S., European countries and other governments by credit rating agencies is inherently unpredictable and could have a material adverse effect on financial markets and economic conditions in the U.S. and

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throughout the world. In turn, this could have a material adverse effect on our business, financial condition and results of operations and, in particular, this could have a material adverse effect on the value and liquidity of securities in our investment portfolio.
NATURAL CATASTROPHE RISK
We monitor our natural catastrophe risk globally for all perils and regions, in each case, where we believe there is significant exposure. Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. Currently, we seek to limit our 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders’ equity available to Arch. We reserve the right to change this threshold at any time.
Based on in-force exposure estimated as of October 1, 2017, our modeled peak zone catastrophe exposure was a windstorm affecting the Northeastern U.S., with a net probable maximum pre-tax loss of $493 million, followed by windstorms affecting the Gulf of Mexico and Florida Tri-County regions with net probable maximum pre-tax losses of $442 million and $383 million, respectively. Our exposures to other perils, such as U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of October 1, 2017, our modeled peak zone earthquake exposure (Los Angeles earthquake) represented approximately 60% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Japan earthquake) was substantially less than both our peak zone windstorm and earthquake exposures.
Net probable maximum pre-tax loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. Loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our loss estimates include clash estimates from other zones. The loss estimates shown above do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer a net loss greater than 25% of total shareholders’ equity availabledifficult to Arch from one or more catastrophic events due to several factors, including the inherent uncertaintiesquantify precisely, particularly in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders’ equity exposed to a single catastrophic event. Actual losses may also increase if ourspecialty lines.
 
reinsurers failOur mortgage segment continues to meet their obligationsexperience generally favorable market conditions. Although pricing remains competitive in the U.S., borrower credit quality and the general economy remain strong. Our results continue to usreflect our success in making high quality credit underwriting risk decisions and building customer relationships.
Arch remains committed to providing solutions across many offerings as the marketplace evolves, including the mortgage credit risk transfer programs initiated by government sponsored enterprises, or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risks Relating“GSEs,” in 2018. Such programs have continued to Our Industry”generate business. In addition, we completed Bellemeade risk transfers in March, April, July and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Natural and Man-Made Catastrophic Events” inOctober 2019, increasing our 2016 Form 10-K.protection for mortgage tail risk.
FINANCIAL MEASURES
Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for ACGL’sArch Capital’s common shareholders:
Book Value per Common Share
Book value per common share represents total common shareholders’ equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per common share as a key measure of the value generated for our common shareholders each period and believes that book value per common share is the key driver of ACGL’sArch Capital’s share price over time. Book value per common share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per common share depending on the purchase price.
Book value per common share was $59.61$25.61 at September 30, 2017,2019, compared to $59.60$24.64 at June 30, 20172019 and $53.30$21.15 at September 30, 2016.2018. The 11.8% 3.9% increase for the 2019 third quarter reflected strong underwriting results and the impact of a decrease in interest rates on our fixed income securities while the 21.1% increase over the trailing twelve months reflected strong investment and underwriting results albeit impacted by the 2017 third quarter catastrophic event activity.and investment returns.
Operating Return on Average Common Equity
Operating return on average common equity (“Operating ROAE”) represents annualized after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a non-GAAP financial

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measure as defined in Regulation G, represents net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other, loss on repurchaseredemption of preferred shares and income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders. See “Comment on Non-GAAP Financial Measures.”
Our Operating ROAE was (5.3)%10.3% for the 20172019 third quarter, compared to 9.3%11.4% for the 20162018 third quarter, and 4.4%12.0% for the nine months ended September 30, 2017,2019, compared to 9.4%11.4% for

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the 20162018 period. The 20172019 and 2018 returns reflect the high level of catastrophic loss activity in the 2017 third quarter, partially offset by strongreflected favorable mortgage insurance underwriting performance, strong investment returns and favorable investment returns.a low level of catastrophic activity.
Total Return on Investments
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. The following table summarizes our total return compared to the benchmark return against which we measured our portfolio during the periods. See “Comment on Non-GAAP Financial Measures.”
 
Arch
Portfolio
 
Benchmark
Return
2017 Third Quarter1.60% 1.24%
2016 Third Quarter0.88% 0.83%
    
Nine Months Ended September 30, 20175.05% 4.33%
Nine Months Ended September 30, 20164.03% 4.43%
 
Arch
Portfolio
 
Benchmark
Return
Pre-tax total return (before investment expenses):   
2019 Third Quarter1.00 % 0.70 %
2018 Third Quarter0.31 % 0.36 %
    
Nine Months Ended September 30, 20196.20 % 5.79 %
Nine Months Ended September 30, 2018(0.19)% (0.46)%
Excluding the effects of foreign exchange, total return was 1.26% for the 2017 third quarter and 4.24% for the nine months ended September 30, 2017, reflecting strong returns on equity and alternative strategies. Total return for the 2017 third quarter2019 periods reflected the weakeningimpact of a decline in interest rates, which increased the U.S. Dollar against the Euro, British Pound Sterling and other major currenciestotal return on non-U.S. Dollar denominated investments.
The benchmark return index included weightings to the following indices, which are primarily from The Bank of America Merrill Lynch (“BoAML”):
%
BoAML 1-10 Year U.S. Corporate & All Yankees, A - AAA Rated Index20.00%
BoAML 1-10 Year U.S. Municipal Securities Index17.00
BoAML 1-5 Year U.S. Treasury Index13.00
BoAML 3-5 Year Fixed Rate Asset Backed Securities Index7.00
BoAML 5-10 Year U.S. Treasury Index5.00
Barclays CMBS Inv. Grade, AAA Rated Index5.00
MSCI All Country World Gross Total Return Index5.00
BoAML German Government Index4.50
BoAML U.S. Mortgage Backed Securities Index4.00
BoAML 1-5 Year U.K. Gilt Index3.00
Hedge Fund Research HFRX Fixed Income Credit Index2.50
Hedge Fund Research HFRX Equal Weighted Strategies2.50
BoAML U.S. High Yield Constrained Index2.50
BoAML 1-5 Year Australian Governments Index2.50
S&P Leveraged Loan Index2.50
BoAML 0-3 Month U.S. Treasury Bill Index2.00
BoAML 1-5 Year Canada Government Index1.50
BoAML 20+ Year Canada Government Index0.50
Total100.00%
our investment grade fixed income portfolio, aided by favorable returns on equities.
The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do
not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. At September 30, 2017,2019, the benchmark return index had an average credit quality of “Aa2”“Aa3” by Moody’s Investors Service (“Moody’s”), and an estimated duration of 3.552.97 years.

The benchmark return index included weightings to the following indices:
 ACGL 2017 THIRD QUARTER FORM 10-Q%
ICE BoAML 1-10 Year AAA - A U.S. Corporate Index5221.00%
ICE BoAML 1-5 Year U.S. Treasury Index15.00
ICE BoAML 3-5 Year Fixed Rate Asset Backed Securities Index7.00
ICE BoAML 1-10 Year U.S. Municipal Securities Index5.00
Bloomberg Barclays CMBS Invest Grade Aaa Total Return Index5.00
MSCI ACWI Net Total Return USD Index5.00
Hedge Fund Research HFRX Fixed Income Credit Index5.00
Hedge Fund Research HFRX Equal Weighted Strategies5.00
ICE BoAML 1-10 Year BBB U.S. Corporate Index4.00
ICE BoAML German Government 1-10 Year Index4.00
ICE BoAML U.S. Mortgage Backed Securities Index4.00
ICE BoAML 0-3 Month U.S. Treasury Bill Index4.00
ICE BoAML 1-5 Year U.K. Gilt Index3.50
ICE BoAML 5-10 Year U.S. Treasury Index3.00
ICE BoAML 1-5 Year Australian Governments Index3.00
ICE BoAML U.S. High Yield Constrained Index2.50
S&P Leveraged Loan Total Return Index2.50
ICE BoAML 1-5 Year Canada Government Index1.00
ICE BoAML 20+ Year Canada Government Index0.50
Total100.00%
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COMMENT ON NON-GAAP FINANCIAL MEASURES
Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other, loss on redemption of preferred shares and income taxes, and the use of annualized operating return on average common equity. The presentation

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of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included under “Results of Operations” below. 
We believe that net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other and loss on repurchaseredemption of preferred shares in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our
proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way we account for our other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. UGC transactionTransaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to the UGC acquisition. The Company believesacquisitions. We believe that UGC transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’sour business performance. The loss on redemption of preferred shares related to the redemption of our Series C preferred shares in September 2017January 2018 and had no impact on shareholders' equity or cash flows. Due to these reasons, we exclude net realized gains
or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other and loss on redemption of preferred shares from the calculation of after-tax operating income available to Arch common shareholders. 
We believe that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the ‘other’ segment. Such measures represent the pre-tax profitability of our underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in our corporate (non-underwriting) segment. While these measures are presented in Note 5,note 4, “Segment Information,” of the notes accompanying our consolidated financial statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The

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reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a subtotal before the contribution from the ‘other’ segment, in accordance with Regulation G, is shown in Note 5,note 4, “Segment Information” of the notes accompanying to our consolidated financial statements.


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

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

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


Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis of the underwriting performance of each of our underwriting segments.
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the
periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders on the capital held in the business, and compares the return generated by our investment portfolio against benchmark returns which we measured our portfolio against during the periods.
RESULTS OF OPERATIONS
The following table summarizes our consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders. Each line item reflects the impact of our approximate 11% ownership of Watford Re’sWatford’s common equity.
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Net income (loss) available to Arch common shareholders$(52,760) $247,388
 $362,967
 $602,272
Net income available to Arch common shareholders$382,050
 $217,006
 $1,278,726
 $587,525
Net realized (gains) losses(64,344) (99,159) (111,930) (175,558)(79,122) 47,528
 (319,403) 220,718
Net impairment losses recognized in earnings1,878
 3,867
 5,415
 16,849
1,163
 492
 2,521
 1,124
Equity in net (income) loss of investment funds accounted for using the equity method(31,090) (16,662) (111,884) (32,054)(17,130) (15,982) (96,533) (52,523)
Net foreign exchange (gains) losses27,811
 4,054
 85,619
 3,560
(30,160) (7,539) (29,100) (39,021)
UGC transaction costs and other2,990
 7,142
 21,249
 7,142
Transaction costs and other1,995
 1,091
 5,363
 8,829
Loss on redemption of preferred shares6,735
 —
 6,735
 —
—
 —
 —
 2,710
Income tax expense (benefit) (1)1,647
 2,970
 1,580
 13,705
2,156
 (316) 12,708
 (9,343)
After-tax operating income (loss) available to Arch common shareholders$(107,133) $149,600
 $259,751
 $435,916
After-tax operating income available to Arch common shareholders$260,952
 $242,280
 $854,282
 $720,019
              
Beginning common shareholders’ equity$8,126,332
 $6,340,583
 $7,481,163
 $5,841,542
$9,977,352
 $8,383,755
 $8,659,827
 $8,324,047
Ending common shareholders’ equity8,138,589
 6,538,983
 8,138,589
 6,538,983
10,378,096
 8,575,148
 10,378,096
 8,575,148
Average common shareholders’ equity$8,132,461
 $6,439,783
 $7,809,876
 $6,190,263
$10,177,724
 $8,479,452
 $9,518,962
 $8,449,598
              
Annualized return on average common equity %(2.6) 15.4
 6.2
 13.0
15.0
 10.2
 17.9
 9.3
Annualized operating return on average
common equity %
(5.3) 9.3
 4.4
 9.4
10.3
 11.4
 12.0
 11.4
(1)Income tax expense (benefit) on net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, UGC transaction costs and other and loss on redemption of preferred shares reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.


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Segment Information
We classify our businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — corporate (non-underwriting) and ‘other.’ Our insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to our chief operating decision makers, the ChairmanPresident and Chief Executive Officer the President and Chief Operating Officer,of Arch Capital and the Chief Financial Officer of ACGL.Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
We determined our reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
Insurance Segment
The following tables set forth our insurance segment’s underwriting results:
Three Months Ended September 30,Three Months Ended September 30,
2017 2016 % Change2019 2018 % Change
Gross premiums written$787,447
 $758,934
 3.8
$1,005,874
 $836,820
 20.2
Premiums ceded(222,516) (217,446)  (302,034) (259,968)  
Net premiums written564,931
 541,488
 4.3
703,840
 576,852
 22.0
Change in unearned premiums(29,766) (22,410)  (98,504) (15,794)  
Net premiums earned535,165
 519,078
 3.1
605,336
 561,058
 7.9
Losses and loss adjustment expenses(568,795) (332,845)  
(422,782) (409,435)  
Acquisition expenses(82,638) (77,146)  
(91,259) (88,255)  
Other operating expenses(90,875) (86,613)  
(115,408) (90,081)  
Underwriting income (loss)$(207,143) $22,474
 (1,021.7)$(24,113) $(26,713)  n/m
          
Underwriting Ratios 
  
 % Point
Change		 
  
 % Point
Change
Loss ratio106.3% 64.1% 42.2
69.8% 73.0% (3.2)
Acquisition expense ratio15.4% 14.9% 0.5
15.1% 15.7% (0.6)
Other operating expense ratio17.0% 16.7% 0.3
19.1% 16.1% 3.0
Combined ratio138.7% 95.7% 43.0
104.0% 104.8% (0.8)
 
Nine Months Ended September 30,Nine Months Ended September 30,
2017 2016 % Change2019 2018 % Change
Gross premiums written$2,313,630
 $2,319,530
 (0.3)$2,867,753
 $2,429,570
 18.0
Premiums ceded(704,057) (713,110)  (914,751) (752,413)  
Net premiums written1,609,573
 1,606,420
 0.2
1,953,002
 1,677,157
 16.4
Change in unearned premiums(51,188) (46,603)  (201,719) (30,913)  
Net premiums earned1,558,385
 1,559,817
 (0.1)1,751,283
 1,646,244
 6.4
Losses and loss adjustment expenses(1,252,375) (1,011,087)  (1,168,677) (1,120,630)  
Acquisition expenses(236,378) (228,806)  (265,177) (264,094)  
Other operating expenses(271,268) (263,111)  (338,327) (274,735)  
Underwriting income (loss)$(201,636) $56,813
 (454.9)$(20,898) $(13,215)  n/m
          
Underwriting Ratios    % Point
Change		 
  
 % Point
Change
Loss ratio80.4% 64.8% 15.6
66.7% 68.1% (1.4)
Acquisition expense ratio15.2% 14.7% 0.5
15.1% 16.0% (0.9)
Other operating expense ratio17.4% 16.9% 0.5
19.3% 16.7% 2.6
Combined ratio113.0% 96.4% 16.6
101.1% 100.8% 0.3
The insurance segment consists of our insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:
•Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
•Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
•Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
•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


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managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
•Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
•Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
•Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.
Premiums Written.
The following table setstables set forth our insurance segment’s net premiums written by major line of business:
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Professional lines$120,509
 21.3
 $119,198
 22.0
Professional Lines$137,569
 19.5
 $113,100
 19.6
Programs109,805
 19.4
 91,165
 16.8
120,039
 17.1
 103,928
 18.0
Property, energy, marine and aviation97,966
 13.9
 60,909
 10.6
Construction and national accounts66,053
 11.7
 65,105
 12.0
98,522
 14.0
 71,888
 12.5
Travel, accident and health71,386
 12.6
 63,453
 11.7
75,192
 10.7
 79,450
 13.8
Excess and surplus casualty43,853
 7.8
 54,075
 10.0
62,843
 8.9
 44,829
 7.8
Property, energy, marine and aviation48,396
 8.6
 42,092
 7.8
Lenders products25,732
 4.6
 28,633
 5.3
31,005
 4.4
 25,995
 4.5
Other79,197
 14.0
 77,767
 14.4
80,704
 11.5
 76,753
 13.3
Total$564,931
 100.0
 $541,488
 100.0
$703,840
 100.0
 $576,852
 100.0
20172019 Third Quarter versus 20162018 Third Quarter. Gross premiums written by the insurance segment in the 20172019 third quarter were 3.8%20.2% higher than in the 20162018 third quarter, while net premiums written were 4.3% higher than in22.0% higher. Approximately thirty percent of the 2016 third quarter. The increasegrowth in net premiums written reflectedresulted from our acquisition of renewal rights of a U.K. commercial lines book of business on January 1, 2019. The remainder was due to growth in program business, due to the continued effectsexisting accounts and rate increases across most lines of two newer programs, and in travel business. Such amounts were partially offset by a decrease in excess and surplus casualty business which reflected a lower level of project-related premiums, primarily due to the fact that the 2016 period included a
 
significant amount of premium from one large construction project, along with a targeted reduction in certain exposures.
 Nine Months Ended September 30,
 2019 2018
 Amount % Amount %
Professional Lines$388,482
 19.9
 $341,187
 20.3
Programs329,882
 16.9
 300,662
 17.9
Property, energy, marine and aviation272,271
 13.9
 175,157
 10.4
Construction and national accounts254,765
 13.0
 236,700
 14.1
Travel, accident and health239,833
 12.3
 223,196
 13.3
Excess and surplus casualty166,474
 8.5
 126,793
 7.6
Lenders products75,793
 3.9
 70,269
 4.2
Other225,502
 11.5
 203,193
 12.1
Total$1,953,002
 100.0
 $1,677,157
 100.0
 Nine Months Ended September 30,
 2017 2016
 Amount % Amount %
Professional lines$339,761
 21.1
 $336,184
 20.9
Programs303,190
 18.8
 256,369
 16.0
Construction and national accounts239,504
 14.9
 254,839
 15.9
Travel, accident and health189,604
 11.8
 175,172
 10.9
Excess and surplus casualty134,907
 8.4
 168,144
 10.5
Property, energy, marine and aviation134,531
 8.4
 142,261
 8.9
Lenders products71,896
 4.5
 78,671
 4.9
Other196,180
 12.2
 194,780
 12.1
Total$1,609,573
 100.0
 $1,606,420
 100.0
Nine Months Ended September 30, 20172019 versus 20162018 period. Gross premiums written by the insurance segment for the nine months ended September 30, 20172019 were 0.3% lower18.0% higher than in the 20162018 period, while net premiums written were 0.2%16.4% higher than in the 20162018 period. The changeGrowth in net premiums written largely reflectedprimarily resulted from our response to weaker market conditions,acquisition of renewal rights of a U.K. commercial lines book of business on January 1, 2019, with reductions in excess and surplus casualty, construction and property lines, partially offset bythe remainder reflecting growth in programsexisting accounts and travel, accident and health. The lower levelrate increases across most lines of excess and surplus casualty reflected a targeted reduction in certain exposures, increased use of reinsurance and other factors while the decrease in construction premiums reflected non-renewals as well as lower audit and project premiums. The reduction in property lines reflected continued weak market conditions. Growth in program business primarily reflected the continued impact of two newer programs while the increase in travel, accident and health reflected continued expansion in existing travel accounts.business.


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Net Premiums Earned.
The following tables set forth our insurance segment’s net premiums earned by major line of business:
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Professional lines$113,146
 21.1
 $110,614
 21.3
Professional Lines$135,343
 22.4
 $115,271
 20.5
Programs94,353
 17.6
 84,889
 16.4
104,432
 17.3
 96,509
 17.2
Property, energy, marine and aviation80,246
 13.3
 53,857
 9.6
Construction and national accounts77,779
 14.5
 80,090
 15.4
81,472
 13.5
 80,381
 14.3
Travel, accident and health66,136
 12.4
 57,097
 11.0
81,952
 13.5
 81,405
 14.5
Excess and surplus casualty47,852
 8.9
 54,687
 10.5
53,991
 8.9
 43,401
 7.7
Property, energy, marine and aviation46,906
 8.8
 45,304
 8.7
Lenders products(1)23,499
 4.4
 25,090
 4.8
(5,724) (0.9) 24,254
 4.3
Other65,494
 12.2
 61,307
 11.8
73,624
 12.2
 65,980
 11.8
Total$535,165
 100.0
 $519,078
 100.0
$605,336
 100.0
 $561,058
 100.0
(1)Reflects a change in earning patterns on certain business in the 2019 third quarter.

 Nine Months Ended September 30,
 2017 2016
 Amount % Amount %
Professional lines$330,159
 21.2
 $324,114
 20.8
Programs267,115
 17.1
 273,985
 17.6
Construction and national accounts236,050
 15.1
 241,547
 15.5
Travel, accident and health188,053
 12.1
 164,463
 10.5
Excess and surplus casualty147,709
 9.5
 166,807
 10.7
Property, energy, marine and aviation126,407
 8.1
 141,417
 9.1
Lenders products72,160
 4.6
 72,499
 4.6
Other190,732
 12.2
 174,985
 11.2
Total$1,558,385
 100.0
 $1,559,817
 100.0
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 Nine Months Ended September 30,
 2019 2018
 Amount % Amount %
Professional Lines$365,801
 20.9
 $343,515
 20.9
Programs304,605
 17.4
 288,853
 17.5
Property, energy, marine and aviation208,879
 11.9
 153,300
 9.3
Construction and national accounts234,198
 13.4
 239,377
 14.5
Travel, accident and health237,163
 13.5
 222,994
 13.5
Excess and surplus casualty144,218
 8.2
 129,994
 7.9
Lenders products (1)41,078
 2.3
 70,231
 4.3
Other215,341
 12.3
 197,980
 12.0
Total$1,751,283
 100.0
 $1,646,244
 100.0
(1)Reflects a change in earning patterns on certain business in the 2019 third quarter.
Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Net premiums earned in the 2019 third quarter were 7.9% higher than in the 2018 third quarter. For the nine months ended September 30, 2019, net premiums earned were 6.4% higher than in the 2018 period. Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned in the 2017 third quarter were 3.1% higher than in the 2016 third quarter, and 0.1% lower for the nine months ended September 30, 2017 than in the 2016 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment’s loss ratio:
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Current year106.9 % 66.7 % 80.9 % 66.4 %
Prior period reserve development(0.6)% (2.6)% (0.5)% (1.6)%
Loss ratio106.3 % 64.1 % 80.4 % 64.8 %
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2019 2018 2019 2018
Current year70.5 % 74.1 % 67.4 % 69.0 %
Prior period reserve development(0.7)% (1.1)% (0.7)% (0.9)%
Loss ratio69.8 % 73.0 % 66.7 % 68.1 %
Current Year Loss Ratio.
The insurance segment’s current year loss ratio in the 20172019 third quarter was 40.23.6 points higherlower than in the 20162018 third quarter and reflected 40.14.3 points of current year catastrophic activity, primarily related to Hurricanes Harvey, Irma and Maria,Hurricane Dorian, compared to 0.35.8 points in the 20162018 third quarter.quarter primarily related to Hurricane Florence. The insurance segment’s current year loss ratio for the nine months ended September 30, 20172019 was 14.51.6 points higherlower than in the 20162018 period and reflected 14.51.6 points of current year catastrophic activity, compared to 1.52.5 points in the 20162018 period. The current yearbalance of the change in the 2019 loss ratios for the 2017 periods reflectedresulted, in part, from changes in the mix of business and loss cost trends.the level of large attritional losses.
Prior Period Reserve Development.
The insurance segment’s net favorable development was $3.0$4.4 million, or 0.60.7 points, for the 20172019 third quarter, compared to $13.7$5.9 million, or 2.61.1 points, for the 20162018 third quarter, and $7.2$11.4 million, or 0.50.7 points, for the nine months ended September 30, 2017,2019, compared to $24.8$14.1 million, or 1.60.9 points, for the 20162018 period. The 2019 third quarter loss ratio reflected a lower level of large attritional losses than in the 2018 third quarter. See note 6,5, “Reserve for Losses and Loss Adjustment Expenses,” of the notes accompanying to our consolidated financial statements for information about the insurance segment’s prior year reserve development.
Underwriting Expenses.
20172019 Third Quarter versus 20162018 Third Quarter:Quarter. The insurance segment’s underwriting expense ratio was 32.4%34.2% in the 20172019 third quarter, compared to 31.6%31.8% in the 20162018 third quarter. The comparison of the underwriting expense ratios reflects changesOperating expenses increased in the level of reinsurance ceded on a quota share basis and changes2019 third quarter due to our 2019 acquisitions, which increased the operating expense ratio. The resulting increase in the mix of business.expense ratio was partially offset by the growth in net premiums earned.
Nine Months Ended September 30, 20172019 versus 2016 period:2018 period. The insurance segment’s underwriting expense ratio was 32.6%34.4% for the nine months ended September 30, 2017,2019, compared to 31.6%32.7% for the 20162018 period. The comparison ofOperating expenses increased for the underwriting expense ratios reflects changes in the level of reinsurance ceded on a quota share basis and changes in the mix of business.
nine months ended September 30, 2019 due to our 2019 acquisitions.

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Reinsurance Segment
The following tables set forth our reinsurance segment’s underwriting results:
 Three Months Ended September 30,
 2019 2018 % Change
Gross premiums written$662,572
 $435,396
 52.2
Premiums ceded(226,096) (123,705)  
Net premiums written436,476
 311,691
 40.0
Change in unearned premiums(72,621) (18,418)  
Net premiums earned363,855
 293,273
 24.1
Other underwriting income(1,208) 1,387
  
Losses and loss adjustment expenses(270,379) (183,413)  
Acquisition expenses(62,393) (50,367)  
Other operating expenses(32,533) (29,936)  
Underwriting income$(2,658) $30,944
 (108.6)
      
Underwriting Ratios    % Point
Change
Loss ratio74.3% 62.5% 11.8
Acquisition expense ratio17.1% 17.2% (0.1)
Other operating expense ratio8.9% 10.2% (1.3)
Combined ratio100.3% 89.9% 10.4
 Three Months Ended September 30,
 2017 2016 % Change
Gross premiums written$422,083
 $324,361
 30.1
Premiums ceded(105,389) (89,551)  
Net premiums written316,694
 234,810
 34.9
Change in unearned premiums6,879
 17,117
  
Net premiums earned323,573
 251,927
 28.4
Other underwriting income1,728
 2,216
  
Losses and loss adjustment expenses(318,609) (105,924)  
Acquisition expenses(57,340) (50,192)  
Other operating expenses(36,214) (35,389)  
Underwriting income (loss)$(86,862) $62,638
 (238.7)
      
Underwriting Ratios    % Point
Change
Loss ratio98.5% 42.0% 56.5
Acquisition expense ratio17.7% 19.9% (2.2)
Other operating expense ratio11.2% 14.0% (2.8)
Combined ratio127.4% 75.9% 51.5

 Nine Months Ended September 30,
 2017 2016 % Change
Gross premiums written$1,351,051
 $1,217,804
 10.9
Premiums ceded(386,743) (370,068)  
Net premiums written964,308
 847,736
 13.8
Change in unearned premiums(81,182) (43,345)  
Net premiums earned883,126
 804,391
 9.8
Other underwriting income1,143
 22,659
  
Losses and loss adjustment expenses(631,669) (363,613)  
Acquisition expenses(154,638) (160,706)  
Other operating expenses(110,458) (108,561)  
Underwriting income (loss)$(12,496) $194,170
 (106.4)
      
Underwriting Ratios    % Point
Change
Loss ratio71.5% 45.2% 26.3
Acquisition expense ratio17.5% 20.0% (2.5)
Other operating expense ratio12.5% 13.5% (1.0)
Combined ratio101.5% 78.7% 22.8
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 Nine Months Ended September 30,
 2019 2018 % Change
Gross premiums written$1,890,974
 $1,503,206
 25.8
Premiums ceded(627,120) (455,682)  
Net premiums written1,263,854
 1,047,524
 20.7
Change in unearned premiums(186,450) (134,761)  
Net premiums earned1,077,404
 912,763
 18.0
Other underwriting income4,393
 2,490
  
Losses and loss adjustment expenses(751,147) (555,044)  
Acquisition expenses(173,504) (148,828)  
Other operating expenses(102,197) (101,185)  
Underwriting income (loss)$54,949
 $110,196
 (50.1)
      
Underwriting Ratios    % Point
Change
Loss ratio69.7% 60.8% 8.9
Acquisition expense ratio16.1% 16.3% (0.2)
Other operating expense ratio9.5% 11.1% (1.6)
Combined ratio95.3% 88.2% 7.1
The reinsurance segment consists of our reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:
•Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
•Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
•Other specialty: provides coverage to ceding company clients for proportional motor and other lines, including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
•Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence or aggregation of losses from 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 treaty basis and on a facultative basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
•Other. 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.

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Premiums Written.
The following table setstables set forth our reinsurance segment’s net premiums written by major line of business:
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Casualty$178,802
 41.0
 $98,788
 31.7
Other specialty$101,400
 32.0
 $74,169
 31.6
94,072
 21.6
 105,535
 33.9
Casualty113,446
 35.8
 59,242
 25.2
Property excluding property catastrophe63,943
 20.2
 70,733
 30.1
118,671
 27.2
 83,222
 26.7
Property catastrophe28,123
 8.9
 19,793
 8.4
23,597
 5.4
 9,053
 2.9
Marine and aviation2,037
 0.6
 5,435
 2.3
10,181
 2.3
 6,011
 1.9
Other7,745
 2.4
 5,438
 2.3
11,153
 2.6
 9,082
 2.9
Total$316,694
 100.0
 $234,810
 100.0
$436,476
 100.0
 $311,691
 100.0
       
Pro rata$206,948
 65.3
 $147,280
 62.7
Excess of loss109,746
 34.7
 87,530
 37.3
Total$316,694
 100.0
 $234,810
 100.0
20172019 Third Quarter versus 20162018 Third Quarter. Gross premiums written by the reinsurance segment in the 20172019 third quarter were 30.1%52.2% higher than in the 20162018 third quarter, while net premiums written were 34.9% higher than40.0% higher. The growth in the 2016 third quarter. Gross and net premiums written for the 2017 third quarter reflected an increase of $45.4 million in casualty business related to a retroactive reinsurance contract which was substantially earned in the period and resulted in a corresponding increase to losses and loss adjustment expenses. In addition, reinstatement premiums related to Hurricanes Harvey, Irma and Maria contributed $25.0 million to gross premiums written primarily reflected new business opportunities in casualty and $15.8 million to net premiums writtenproperty lines, partially offset by a decline in the 2017 third quarter.other specialty business, driven by reductions in motor and agriculture business. The increasegrowth in net premiums written inis less than the 2017 third quarter also reflected growth in other specialtygross premiums written because a high proportion of the property business primarily in international motor quota share contracts.is subject to retrocessions.
Nine Months Ended September 30,Nine Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Casualty$425,311
 33.7
 $297,077
 28.4
Other specialty$371,146
 38.5
 $288,932
 34.1
363,723
 28.8
 399,608
 38.1
Casualty287,120
 29.8
 247,280
 29.2
Property excluding property catastrophe208,445
 21.6
 214,287
 25.3
317,461
 25.1
 246,268
 23.5
Property catastrophe57,773
 6.0
 59,269
 7.0
73,574
 5.8
 51,730
 4.9
Marine and aviation20,510
 2.1
 24,438
 2.9
41,758
 3.3
 26,084
 2.5
Other19,314
 2.0
 13,530
 1.6
42,027
 3.3
 26,757
 2.6
Total$964,308
 100.0
 $847,736
 100.0
$1,263,854
 100.0
 $1,047,524
 100.0
       
Pro rata$536,857
 55.7
 $405,720
 47.9
Excess of loss427,451
 44.3
 442,016
 52.1
Total$964,308
 100.0
 $847,736
 100.0
Nine Months Ended September 30, 20172019 versus 20162018 period. Gross premiums written by the reinsurance segment for the nine months ended September 30, 20172019 were 10.9%25.8% higher than in the 20162018 period, while net premiums written were 13.8%20.7% higher than in the 20162018 period. Gross andThe growth in net premiums written foris less than the
nine months ended September 30, 2017 reflected the casualty retroactive reinsurance contract from the 2017 third quarter noted above and reinstatement premiums from Hurricanes Harvey, Irma and Maria. Gross and net growth in gross premiums written in both periods also reflected an increase in other specialtybecause a high

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proportion of the property business relatedis subject to certain other retroactive reinsurance contracts written in the second quarter of each period. In addition to the retroactive reinsurance contracts noted above, theretrocessions. The increase in net premiums written infor the nine months ended September 30, 20172019 reflected growth from select new business opportunities across most lines of business, partially offset by a decline in other specialty business, primarily in international motor quota share contracts.business.
Net Premiums Earned.
The following tables set forth our reinsurance segment’s net premiums earned by major line of business:
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Casualty$116,242
 31.9
 $77,496
 26.4
Other specialty$96,090
 29.7
 $76,686
 30.4
112,349
 30.9
 108,311
 36.9
Casualty117,255
 36.2
 69,414
 27.6
Property excluding property catastrophe65,049
 20.1
 72,550
 28.8
90,358
 24.8
 71,358
 24.3
Property catastrophe30,039
 9.3
 17,582
 7.0
22,617
 6.2
 18,190
 6.2
Marine and aviation6,801
 2.1
 10,336
 4.1
11,798
 3.2
 8,672
 3.0
Other8,339
 2.6
 5,359
 2.1
10,491
 2.9
 9,246
 3.2
Total$323,573
 100.0
 $251,927
 100.0
$363,855
 100.0
 $293,273
 100.0
       
Pro rata$188,874
 58.4
 $132,649
 52.7
Excess of loss134,699
 41.6
 119,278
 47.3
Total$323,573
 100.0
 $251,927
 100.0
Nine Months Ended September 30,Nine Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Casualty$311,030
 28.9
 $231,877
 25.4
Other specialty$307,620
 34.8
 $260,428
 32.4
370,443
 34.4
 361,676
 39.6
Casualty270,126
 30.6
 225,624
 28.0
Property excluding property catastrophe197,785
 22.4
 209,990
 26.1
259,629
 24.1
 210,961
 23.1
Property catastrophe61,975
 7.0
 55,358
 6.9
59,886
 5.6
 52,293
 5.7
Marine and aviation26,277
 3.0
 40,773
 5.1
35,355
 3.3
 28,150
 3.1
Other19,343
 2.2
 12,218
 1.5
41,061
 3.8
 27,806
 3.0
Total$883,126
 100.0
 $804,391
 100.0
$1,077,404
 100.0
 $912,763
 100.0
       
Pro rata$503,954
 57.1
 $426,275
 53.0
Excess of loss379,172
 42.9
 378,116
 47.0
Total$883,126
 100.0
 $804,391
 100.0
Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. For the 20172019 third quarter, net premiums earned were 28.4%24.1% higher than in the 20162018 third quarter, and reflect the retroactive reinsurance contract and reinstatement premium impacts discussed above as well as in net premiums written over the previous five quarters. Net premiums earned forquarter. For the nine months ended September 30, 20172019, net premiums earned were 9.8%18.0% higher than in the 20162018 period.

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Other Underwriting Income (Loss).
Other underwriting income (loss) for the 20172019 third quarter was a loss of $1.2 million, compared to an income of $1.4 million for the 2018 third quarter, and nine months ended September 30, 2017 was $1.7 million, compared to $2.2 million for the 2016 third quarter, and $1.1an income of $4.4 million for the nine months ended September 30, 2017,2019, compared to $22.7$2.5 million of income for the 20162018 period. The 2016 year-to-date period included $19.1 million related to a contract which was commuted during the 2016 second quarter. This contract had been reflected as a deposit accounting liability (i.e., a contract that, in accordance with GAAP, does not pass risk transfer) prior to the commutation.
Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance segment’s loss ratio:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Current year109.8 % 65.6 % 86.6 % 67.2 %78.5 % 74.2 % 72.1 % 72.2 %
Prior period reserve development(11.3)% (23.6)% (15.1)% (22.0)%(4.2)% (11.7)% (2.4)% (11.4)%
Loss ratio98.5 % 42.0 % 71.5 % 45.2 %74.3 % 62.5 % 69.7 % 60.8 %
Current Year Loss Ratio.
The reinsurance segment’s current year loss ratio in the 20172019 third quarter was 44.24.3 points higher than in the 20162018 third quarter and reflected 46.312.2 points of current year catastrophic activity, primarily related to Hurricanes Harvey, IrmaHurricane Dorian and Maria,Typhoon Faxai compared to 4.19.5 points in the 20162018 third quarter. Thequarter, primarily related to Hurricane Florence and Typhoon Jebi.The reinsurance segment’s current year loss ratio for the nine months ended September 30, 20172019 was 19.40.1 points higherlower than in the 20162018 period and reflected 20.05.3 points of current year catastrophic activity, compared to 3.94.0 points in the 20162018 period. The balance of the change in the 2017 current year2019 loss ratios resulted, in part, from the effects of market conditions and changes in the mix of business.business and the level of attritional losses.
Prior Period Reserve Development.
The reinsurance segment’s net favorable development was $36.5$15.3 million, or 11.34.2 points, for the 20172019 third quarter, compared to $59.5$34.3 million, or 23.611.7 points, for the 20162018 third quarter, and $133.3$26.3 million, or 15.12.4 points, for the nine months ended September 30, 2017,2019, compared to $176.7$103.9 million, or 22.011.4 points, for the 20162018 period. See note 6,5, “Reserve for Losses and Loss Adjustment Expenses,” of the notes accompanying to our consolidated financial statements for information about the reinsurance segment’s prior year reserve development.
Underwriting Expenses.
20172019 Third Quarter versus 20162018 Third Quarter:Quarter. The underwriting expense ratio for the reinsurance segment was 28.9%26.0% in the 20172019 third quarter, compared to 33.9%27.4% in the 2016
third quarter. The retroactive reinsurance contract noted above improved the reported 20172018 third quarter, underwriting expense ratio by 4.1 points. The comparison of the underwriting expense ratios also reflected changesreflecting growth in the mix and type of business and a higher level of net premiums earned and changes in the 2017 third quarter.mix of business.
Nine Months Ended September 30, 20172019 versus 2016 period:2018 period. The underwriting expense ratio for the reinsurance segment was 30.0%25.6% for the nine months ended September 30, 2017,2019, compared to 33.5%27.4% for the 20162018 period. The comparison of the underwriting expense ratios primarily reflected changes in the mix and type of business.
Mortgage Segment
The following tables set forth ourOur mortgage segment’s underwriting results. On December 31, 2016, we completed the acquisition of UGC. As such, the 2017 results reflect the combination of Archoperations include U.S. and UGC while the 2016 periods do not reflect UGC activity.
 Three Months Ended September 30,
 2017 2016 % Change
Gross premiums written$347,951
 $131,726
 164.1
Premiums ceded(57,900) (51,182)  
Net premiums written290,051
 80,544
 260.1
Change in unearned premiums(15,533) (3,582)  
Net premiums earned274,518
 76,962
 256.7
Other underwriting income3,599
 4,740
  
Losses and loss adjustment expenses(35,156) (11,107)  
Acquisition expenses(21,803) (5,190)  
Other operating expenses(34,770) (24,249)  
Underwriting income$186,388
 $41,156
 352.9
      
Underwriting Ratios 
  
 % Point
Change
Loss ratio12.8% 14.4% (1.6)
Acquisition expense ratio7.9% 6.7% 1.2
Other operating expense ratio12.7% 31.5% (18.8)
Combined ratio33.4% 52.6% (19.2)
international mortgage insurance and reinsurance operations as well as


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 Nine Months Ended September 30,
 2017 2016 % Change
Gross premiums written$1,032,800
 $361,440
 185.7
Premiums ceded(194,139) (62,918)  
Net premiums written838,661
 298,522
 180.9
Change in unearned premiums(61,776) (93,283)  
Net premiums earned776,885
 205,239
 278.5
Other underwriting income11,999
 12,670
  
Losses and loss adjustment expenses(84,915) (20,102)  
Acquisition expenses(76,235) (16,947)  
Other operating expenses(108,790) (70,590)  
Underwriting income$518,944
 $110,270
 370.6
      
Underwriting Ratios    % Point
Change
Loss ratio10.9% 9.8% 1.1
Acquisition expense ratio9.8% 8.3% 1.5
Other operating expense ratio14.0% 34.4% (20.4)
Combined ratio34.7% 52.5% (17.8)
Theparticipation in GSE credit risk-sharing transactions. Our mortgage segmentgroup includes the results of our U.S. primarydirect mortgage insurance operations, includingin the U.S. primarily through Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined(together, “Arch MI U.S.”), which are approved as eligiblemortgage reinsurance by Arch Reinsurance Ltd. (“Arch Re Bermuda”) to mortgage insurers by Federal National Mortgage Association (“Fannie Mae”)on both a proportional and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.non-proportional basis globally; direct mortgage insurance in Europe through Arch MI U.S. and Arch Mortgage Insurance (EU) Designated Activity Company are leading providers of mortgage insurance products(“Arch MI Europe”) and services to the U.S.in Hong Kong through Arch MI Asia Limited (“Arch MI Asia”); and European markets, respectively. The mortgage segment also includesparticipation in various GSE credit risk-sharing transactions andproducts primarily through Arch Re Bermuda.
The following tables set forth our mortgage reinsurance for the U.S. and Australian markets.segment’s underwriting results.
 Three Months Ended September 30,
 2019 2018 % Change
Gross premiums written$375,092
 $350,559
 7.0
Premiums ceded(57,703) (57,226)  
Net premiums written317,389
 293,333
 8.2
Change in unearned premiums25,611
 7,591
  
Net premiums earned343,000
 300,924
 14.0
Other underwriting income3,955
 3,733
  
Losses and loss adjustment expenses(13,080) (9,615)  
Acquisition expenses(34,396) (33,361)  
Other operating expenses(37,003) (31,122)  
Underwriting income$262,476
 $230,559
 13.8
      
Underwriting Ratios 
  
 % Point
Change
Loss ratio3.8% 3.2% 0.6
Acquisition expense ratio10.0% 11.1% (1.1)
Other operating expense ratio10.8% 10.3% 0.5
Combined ratio24.6% 24.6% —
 Nine Months Ended September 30,
 2019 2018 % Change
Gross premiums written$1,095,607
 $1,002,727
 9.3
Premiums ceded(149,358) (154,230)  
Net premiums written946,249
 848,497
 11.5
Change in unearned premiums72,436
 23,147
  
Net premiums earned1,018,685
 871,644
 16.9
Other underwriting income11,867
 10,464
  
Losses and loss adjustment expenses(50,226) (74,672)  
Acquisition expenses(98,722) (87,665)  
Other operating expenses(116,697) (108,622)  
Underwriting income$764,907
 $611,149
 25.2
      
Underwriting Ratios 
  
 % Point
Change
Loss ratio4.9% 8.6% (3.7)
Acquisition expense ratio9.7% 10.1% (0.4)
Other operating expense ratio11.5% 12.5% (1.0)
Combined ratio26.1% 31.2% (5.1)
 
Premiums Written.
The following tables set forth our mortgage segment’s net premiums written by client location and underwriting location (i.e., where the business is underwritten):
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Client location:       
United States$262,028
 90.3
 $77,488
 96.2
Other28,023
 9.7
 3,056
 3.8
Total$290,051
 100.0
 $80,544
 100.0
       
Underwriting location:              
United States$235,447
 81.2
 $50,236
 62.4
$260,202
 82.0
 $240,959
 82.1
Other54,604
 18.8
 30,308
 37.6
57,187
 18.0
 52,374
 17.9
Total$290,051
 100.0
 $80,544
 100.0
$317,389
 100.0
 $293,333
 100.0
 Nine Months Ended September 30,
 2017 2016
 Amount % Amount %
Client location:       
United States756,620
 90.2
 199,552
 66.8
Other82,041
 9.8
 98,970
 33.2
Total$838,661
 100.0
 $298,522
 100.0
        
Underwriting location:       
United States$679,442
 81.0
 $128,008
 42.9
Other159,219
 19.0
 170,514
 57.1
Total$838,661
 100.0
 $298,522
 100.0
20172019 Third Quarter versus 20162018 Third Quarter. Gross premiums written by the mortgage segment in the 20172019 third quarter were 164.1%7.0% higher than in the 20162018 third quarter, while net premiums written were 8.2% higher. The growth in net premiums written primarily reflecting thereflected an increase in monthly premium business due to growth in insurance in force due toin the acquisition of UGC. Premiums ceded for the 2017 third quarter were primarily related to the 50% quota share reinsurance agreement to AIG, covering 2014 to 2016 policy years of UGC business on a run-off basis, while the 2016 third quarter reflected the retrocession of $45.4 million of Australian mortgage reinsurance business.U.S.
 Nine Months Ended September 30,
 2019 2018
 Amount % Amount %
Underwriting location:       
United States$774,356
 81.8
 $691,851
 81.5
Other171,893
 18.2
 156,646
 18.5
Total$946,249
 100.0
 $848,497
 100.0
Nine Months Ended September 30, 20172019 versus 20162018 period. Gross premiums written by the mortgage segment for the nine months ended September 30, 2019 were 185.7%9.3% higher than in the 20162018 period, while net premiums written were 11.5% higher. The growth in net premiums written primarily reflecting thereflected an increase in monthly premium business due to growth in insurance in force in the U.S. In addition, net premiums written for the nine months ended September 30, 2019 included $17.1 million due to the acquisitionnovation of UGC.a quota share reinsurance arrangement on international business.
The persistency rate, which represents the percentage of mortgage insurance in force at the beginning of a 12-month period that remains in force at the end of such period, of the Arch MI U.S. portfolio of mortgage loans was 80.2%78.6% at September 30, 2017,2019, compared to 78.1%81.5% at June 30, 2017. The higher persistency rate at September 30, 2017 reflects changes in level of mortgage refinance activity and mortgage interest rates.December 31, 2018.

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Arch MI U.S. generated $17.7$25.3 billion of new insurance written (“NIW”) in the 20172019 third quarter, compared to $8.8$21.4 billion in the 20162018 third quarter. NIW represents the original principal balance of all loans that received coverage during the period. OurMonthly premium policies contributed 92.3% of NIW in the 2019 third quarter, compared to 92.6% for the 20172018 third quarter reflected the combinationquarter.

ARCH CAPITAL 582019 THIRD QUARTER FORM 10-Q
Table of Arch and UGC, a higher percentage of monthly premium business and an increase in purchase market activity.Contents

The following tables provide details on the NIW generated by Arch MI U.S.:
(U.S. Dollars in millions)Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Total new insurance written (NIW) (1)$17,683
   $8,753
  $25,313
   $21,425
  
              
Credit quality (FICO):              
>=740$10,063
 56.9
 $5,187
 59.3
$15,204
 60.1
 $12,013
 56.1
680-7396,357
 35.9
 3,074
 35.1
8,725
 34.5
 7,728
 36.1
620-6791,263
 7.1
 492
 5.6
1,384
 5.5
 1,684
 7.9
Total$17,683
 100.0
 $8,753
 100.0
$25,313
 100.0
 $21,425
 100.0
              
Loan-to-value (LTV):              
95.01% and above$1,757
 9.9
 $507
 5.8
$3,182
 12.6
 $3,231
 15.1
90.01% to 95.00%8,406
 47.5
 4,261
 48.7
10,409
 41.1
 9,689
 45.2
85.01% to 90.00%5,668
 32.1
 2,883
 32.9
7,762
 30.7
 6,264
 29.2
85.01% and below1,852
 10.5
 1,102
 12.6
3,960
 15.6
 2,241
 10.5
Total$17,683
 100.0
 $8,753
 100.0
$25,313
 100.0
 $21,425
 100.0
              
Monthly vs. single:              
Monthly$15,392
 87.0
 $7,765
 88.7
$23,358
 92.3
 $19,842
 92.6
Single2,291
 13.0
 988
 11.3
1,955
 7.7
 1,583
 7.4
Total$17,683
 100.0
 $8,753
 100.0
$25,313
 100.0
 $21,425
 100.0
              
Purchase vs. refinance:              
Purchase$16,460
 93.1
 $7,264
 83.0
$19,068
 75.3
 $20,397
 95.2
Refinance1,223
 6.9
 1,489
 17.0
6,245
 24.7
 1,028
 4.8
Total$17,683
 100.0
 $8,753
 100.0
$25,313
 100.0
 $21,425
 100.0
(1)Represents the original principal balance of all loans that received coverage during the period.


(U.S. Dollars in millions)Nine Months Ended September 30,Nine Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Total new insurance written (NIW) (1)$47,646
   $18,079
  $53,681
   $52,742
  
              
Credit quality (FICO):              
>=740$27,061
 56.8
 $10,945
 60.5
$31,416
 58.5
 $29,933
 56.8
680-73917,246
 36.2
 6,195
 34.3
18,905
 35.2
 18,952
 35.9
620-6793,339
 7.0
 938
 5.2
3,360
 6.3
 3,857
 7.3
<620—
 —
 1
 —
Total$47,646
 100.0
 $18,079
 100.0
$53,681
 100.0
 $52,742
 100.0
              
Loan-to-value (LTV):              
95.01% and above$4,429
 9.3
 $1,233
 6.8
$7,520
 14.0
 $7,328
 13.9
90.01% to 95.00%22,763
 47.8
 8,477
 46.9
22,881
 42.6
 24,030
 45.6
85.01% to 90.00%15,191
 31.9
 5,982
 33.1
15,937
 29.7
 15,817
 30.0
85.01% and below5,263
 11.0
 2,387
 13.2
7,343
 13.7
 5,567
 10.6
Total$47,646
 100.0
 $18,079
 100.0
$53,681
 100.0
 $52,742
 100.0
              
Monthly vs. single:              
Monthly$40,592
 85.2
 $15,136
 83.7
$49,556
 92.3
 $49,046
 93.0
Single7,054
 14.8
 2,943
 16.3
4,125
 7.7
 3,696
 7.0
Total$47,646
 100.0
 $18,079
 100.0
$53,681
 100.0
 $52,742
 100.0
              
Purchase vs. refinance:              
Purchase$43,243
 90.8
 $14,628
 80.9
$44,349
 82.6
 $49,556
 94.0
Refinance4,403
 9.2
 3,451
 19.1
9,332
 17.4
 3,186
 6.0
Total$47,646
 100.0
 $18,079
 100.0
$53,681
 100.0
 $52,742
 100.0
(1)Represents the original principal balance of all loans that received coverage during the period.
Net Premiums Earned.
The following tables set forth our mortgage segment’s net premiums earned by client location and underwriting location:
Three Months Ended September 30,Three Months Ended September 30,
2017 20162019 2018
Amount % Amount %Amount % Amount %
Client Location:       
United States$262,324
 95.6
 $64,616
 84.0
Other12,194
 4.4
 12,346
 16.0
Total$274,518
 100.0
 $76,962
 100.0
       
Underwriting location:              
United States$233,862
 85.2
 $40,498
 52.6
$287,064
 83.7
 $256,231
 85.1
Other40,656
 14.8
 36,464
 47.4
55,936
 16.3
 44,693
 14.9
Total$274,518
 100.0
 $76,962
 100.0
$343,000
 100.0
 $300,924
 100.0
 Nine Months Ended September 30,
 2017 2016
 Amount % Amount %
Client Location:       
United States$745,011
 95.9
 $182,794
 89.1
Other31,874
 4.1
 22,445
 10.9
Total$776,885
 100.0
 $205,239
 100.0
        
Underwriting location:       
United States$661,645
 85.2
 $107,142
 52.2
Other115,240
 14.8
 98,097
 47.8
Total$776,885
 100.0
 $205,239
 100.0

 Nine Months Ended September 30,
 2019 2018
 Amount % Amount %
Underwriting location:       
United States$843,599
 82.8
 $742,269
 85.2
Other175,086
 17.2
 129,375
 14.8
Total$1,018,685
 100.0
 $871,644
 100.0
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Net premiums earned for the 2017 periods2019 third quarter were 14.0% higher than in the 2016 periods,2018 third quarter. For the nine months ended September 30, 2019, net premiums earned were 16.9% higher than in the 2018 period. The increases were primarily due to the UGC acquisition and growth in U.S. insurance in force for Arch MI U.S.force.
Other Underwriting Income.
Other underwriting income, which is primarily related to older GSE credit risk-sharing transactions receiving derivative accounting treatment, was $3.6$4.0 million for the 20172019 third quarter, compared to $4.7$3.7 million for the 20162018 third quarter,quarter. and $12.0$11.9 million for the nine months ended September 30, 2017,2019, compared to $12.7$10.5 million for the 20162018 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment’s loss ratio:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Current year20.6 % 17.6 % 20.5 % 17.7 %13.4 % 16.0 % 14.0 % 17.2 %
Prior period reserve development(7.8)% (3.2)% (9.6)% (7.9)%(9.6)% (12.8)% (9.1)% (8.6)%
Loss ratio12.8 % 14.4 % 10.9 % 9.8 %3.8 % 3.2 % 4.9 % 8.6 %
Current Year Loss Ratio.
The mortgage segment’s current year loss ratio was 3.02.6 points higherlower in the 20172019 third quarter than in the 20162018 third quarter and 2.8quarter. The mortgage segment’s current year loss ratio was 3.2 points higherlower for the nine months ended September 30, 20172019 than infor the 20162018 period. The lower current year loss ratioratios for the 2017 third quarter reflects2019

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periods reflect the UGC acquisition and growth in insurance in force along with changes in the mix of business.current favorable macroeconomic environment.
Prior Period Reserve Development.
The mortgage segment’s net favorable development was $21.5$33.0 million, or 7.89.6 points, for the 20172019 third quarter, compared to $2.5$38.6 million, or 3.212.8 points, for the 20162018 third quarter, and $74.9$92.5 million, or 9.69.1 points, for the nine months ended September 30, 2017,2019, compared to $16.3$74.9 million, or 7.98.6 points, for the 20162018 period. See note 6,5, “Reserve for Losses and Loss Adjustment Expenses,” of the notes accompanying to our consolidated financial statements for information about the mortgage segment’s prior year reserve development.
Underwriting Expenses.
20172019 Third Quarter versus 20162018 Third Quarter. The underwriting expense ratio for the mortgage segment was 20.6%20.8% in the 20172019 third quarter, compared to 38.2%21.4% in the 20162018 third quarter. The improvementlower ratio in the 2019 third quarter primarily resulted from athe higher level of net premiums earned reflecting the UGC acquisition as Arch MI U.S. has increased its scale of operations.earned.
Nine Months Ended September 30, 20172019 versus 20162018 period. The underwriting expense ratio for the mortgage segment was
23.8% 21.2% for the nine months ended September 30, 2017,2019, compared to 42.7%22.6% for the 20162018 period. The improvementlower ratio in the 2019 period primarily resulted from athe higher level of net premiums earned reflecting the UGC acquisition as Arch MI U.S. has increased its scale of operations.earned.
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, items related to our non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.
Net Investment Income.
The components of net investment income were derived from the following sources:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Fixed maturities$84,602
 $58,542
 $251,039
 $181,908
$109,955
 $103,252
 $331,941
 $294,658
Equity securities3,210
 3,633
 10,152
 11,373
3,581
 3,426
 9,321
 10,408
Short-term investments2,514
 823
 5,624
 1,899
3,432
 4,417
 11,178
 12,591
Other (1)18,238
 15,103
 57,770
 47,454
24,170
 18,030
 67,229
 56,501
Gross investment income108,564
 78,101
 324,585
 242,634
141,138
 129,125
 419,669
 374,158
Investment expenses (2)(14,437) (11,819) (42,126) (35,546)(14,262) (14,797) (48,506) (51,826)
Net investment income$94,127
 $66,282
 $282,459
 207,088
$126,876
 $114,328
 $371,163
 322,332
(1)Amounts include dividends and interestother distributions on investment funds, term loan investments, funds held balances, cash balances and other items.
(2)Investment expenses were approximately 0.32%0.31% of average invested assets for the 20172019 third quarter, compared to 0.31%0.29% for the 20162018 third quarter, and 0.30%0.33% for the nine months ended September 30, 2017,2019, compared to 0.32%0.36% for the 20162018 period.
NetThe higher level of net investment income for the 20172019 periods primarily reflected growth in average investable assets, the reinvestment of fixed income onsecurities at slightly higher available yields and the acquired UGC portfolio and higher returns on fund investments than in the 2016 periods.shift from municipal bonds to corporates. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 2.00%2.58% for the 20172019 third quarter, comparedcompare to 1.81%2.45% for the 20162018 third quarter, and 2.04%2.62% for the nine months ended September 30, 2017,2019, compared to 1.95%2.31% for the 20162018 period.
Corporate Expenses.
Corporate expenses were $15.1 million for the 2019 third quarter, compared to $13.2 million for the 2018 third quarter, and $47.9 million for the nine months ended September 30, 2019, compared to $43.3 million for the 2018 period. The increase in corporate expenses in the 2019 periods primarily reflected higher compensation costs.
Transaction Costs and Other.
Transaction costs and other were $2.0 million for the 2019 third quarter, compared to $1.1 million for the 2018 third quarter, and $5.4 million for the nine months ended September 30, 2019, compared to $8.8 million for the 2018 period. Amounts in the 2019 period primarily related to recent acquisition activity. Amounts for 2018 periods were primarily attributable to the write off of intangible assets related to insurance licenses for a subsidiary of UGC which was merged into another subsidiary.


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Corporate Expenses.
Corporate expenses were $14.1 million for the 2017 third quarter, compared to $11.3 million for the 2016 third quarter, and $48.5 million for the nine months ended September 30, 2017, compared to $37.9 million for the 2016 period. The higher level of corporate expenses in the 2017 periods was primarily due to higher incentive compensation costs.
UGC Transaction Costs and Other.
UGC transaction costs and other were $3.0 million for the 2017 third quarter and $21.2 million for the nine months ended September 30, 2017. UGC transaction costs and other include advisory, financing, legal and other transaction costs related to the UGC acquisition. Amounts for the 2017 third quarter primarily related to severance and related costs, while the total for the nine months ended September 30, 2017 reflected $13.2 million of severance and related costs, with the remainder primarily due to incentive compensation paid in conjunction with the UGC acquisition.
Amortization of Intangible Assets.
Amortization of intangible assets for the 20172019 third quarter was $31.8$20.0 million, compared to $4.9$26.3 million for the 20162018 third quarter, and $93.9$60.2 million for the nine months ended September 30, 2017,2019, compared to $14.5$79.5 million for the 20162018 period. During the 2017 first quarter, we reclassified our income statement presentation of amortization of intangible assetsSuch expenses primarily related to reflect such item separately (previously reflected in acquisition and/or other operating expenses). The higher level of expense for the 2017 periods reflects the amortization of intangible assets included in the UGC acquisition, including intangible assetswhile the 2019 periods also included amortization related to acquired insurance contractsthe previously announced acquisitions of (i) renewal rights of a U.K. commercial lines book of business on January 1, 2019; and distribution relationships.(ii) McNeil & Co. on December 6, 2018. See the consolidated financial statements contained in our 2018 Form 10-K for disclosures on our amortization pattern.
Interest Expense.
Interest expense was $26.3$23.2 million for the 20172019 third quarter, compared to $12.9the $24.7 million for the 20162018 third quarter, and $77.9$70.1 million for the nine months ended September 30, 2017,2019, compared to $38.0$76.6 million for the 20162018 period. The increaselower level in the 20172019 periods primarily reflectsreflected the impactpaydown of the issuance of the Company’s 2026 and 2046 senior notes in December 2016 and the higher level of borrowings outstanding under our revolving credit agreement. The proceeds from the debt offering and additional borrowings under the revolving credit agreement were used to closeborrowings in the UGC acquisition on December 31, 2016.second half of 2018.
Loss on Redemption of Preferred Shares.
In September 2017,January 2018, we redeemed $230 million ofall remaining 6.75% Series C preferred shares and, in accordance with GAAP, recorded a loss of $6.7$2.7 million to remove original issuance costs related to the redeemed shares from additional paid-in capital. Such adjustment had no impact on total shareholders’ equity or cash flows.
Net Realized Gains or Losses.
We recorded net realized gains of $64.1$81.2 million for the 20172019 third quarter, compared to net realized gainslosses of $95.9$47.0 million for the 20162018 third quarter, and net realized gains of $110.7$318.7 million for the nine months ended September 30, 2017,2019, compared to net realized gainslosses of $168.7$218.4 million for the 20162018 period. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations. Net realized gains or losses also includesinclude realized and unrealized contract gains and losses on our derivative instruments, changes in the fair value of assets and liabilities accounted for using the fair value option and in the fair value of equities, along with re-measurement of contingent consideration liability amounts. See note 6, “Investment Information—Net Realized Gains (Losses),” to our consolidated financial statements for additional information.
Net Impairment Losses Recognized in Earnings.
We recorded $1.9$1.2 million of impairment losses for the 20172019 third quarter, compared to $3.9$0.5 million for the 20162018 third quarter, and $5.4$2.5 million for the nine months ended September 30, 2017,2019, compared to $16.8$1.1 million for the 20162018 period. See note 7,6, “Investment Information—Other-Than-Temporary Impairments,” of the notes accompanying to our consolidated financial statements for additional information.
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method.
We recorded $31.1$17.1 million of equity in net income related to investment funds accounted for using the equity method in the 20172019 third quarter, compared to $16.7$16.0 million of income for the 20162018 third quarter, and $111.9$96.5 million of income for the nine months ended September 30, 2017,2019, compared to $32.1$52.5 million of income for the 20162018 period. Investment funds accounted for using the equity method totaled $962.6 million$1.58 billion at September 30, 2017,2019, compared to $811.3 million$1.49 billion at December 31, 2016.2018. See note 6, “Investment Information—Investments Accounted For Using the Equity Method,” to our consolidated financial statements for additional information.
Net Foreign Exchange Gains or Losses.
Net foreign exchange lossesgains for the 20172019 third quarter were $27.8$29.8 million, compared to net foreign exchange lossesgains for the 20162018 third quarter of $4.2 million, and net$7.1 million. Net foreign exchange losses of $85.5 milliongains for the nine months ended September 30, 2017,2019 were $28.8 million, compared to net foreign exchange losses of $3.8 milliongains for the 2016 period.2018 period of $38.3 million. Amounts in suchboth periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.

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Income Tax Expense.
Our income tax provision on income (loss) before income taxes resulted in an expense of 34.8%8.9% for the 2017 third quarter, compared to an expense of 5.1% for the 20162019 third quarter and an expense of 14.9%9.0% for the nine months ended September 30, 2017,2019, compared to 6.7%12.9% for the 2016 period.2018 third quarter and 11.3% for the nine months ended September 30, 2018 . The effective tax rates for the 20172019 third quarter and nine months ended September 30, 20172019 included a discrete income tax benefit of $1.3 million and $7.7$5.6 million, respectively, arising from the change in accounting for stockrelated to share based compensation. Our effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.
Other Segment
The ‘other’ segment includes the results of Watford Re.Watford. Pursuant to generally accepted accounting principles, Watford Re is considered a variable interest entity and we concluded that we are the primary beneficiary of Watford Re.Watford. As such, we consolidate

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the results of Watford Re in our consolidated financial statements, although we only own approximately 11% of Watford Re’sWatford’s common equity. See note 3,11, “Variable Interest Entities and Noncontrolling Interests”Interests,” and note 5,4, “Segment Information,” of the notes accompanying to our consolidated financial statements for additional information on Watford Re.Watford.
CRITICAL ACCOUNTING POLICIES,
ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20162018 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including note 2, “Recent1, “Basis of Presentation and Recent Accounting Pronouncements.”
FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Investable Assets
At September 30, 2017,2019, total investable assets of $22.00 billion included $19.70 billion held by Arch and $2.30were $21.57 billion, excluding the $2.73 billion included in the ‘other’ segment (i.e., attributable to Watford Re)Watford).
 
Investable Assets Held by Arch
The following table summarizes the fair value of the investable assets held by Arch:
Investable assets (1):
Estimated
Fair Value
 
% of
Total
Estimated
Fair Value
 
% of
Total
September 30, 2017   
September 30, 2019   
Fixed maturities (2)$14,731,262
 74.8
$16,586,794
 76.9
Short-term investments(2)1,723,081
 8.7
785,358
 3.6
Cash805,210
 4.1
799,709
 3.7
Equity securities (2)546,027
 2.8
559,054
 2.6
Other investments (2)1,496,531
 7.6
1,369,554
 6.4
Investments accounted for using the equity method962,574
 4.9
1,575,832
 7.3
Securities transactions entered into but not settled at the balance sheet date(568,498) (2.9)(110,213) (0.5)
Total investable assets held by Arch$19,696,187
 100.0
$21,566,088
 100.0
      
December 31, 2016   
Average effective duration (in years)3.64
  
Average S&P/Moody’s credit ratings (3)AA/Aa2
  
Embedded book yield (4)2.70%  
   
December 31, 2018   
Fixed maturities (2)$14,521,774
 77.9
$14,881,902
 76.1
Short-term investments676,547
 3.6
Short-term investments (2)995,926
 5.1
Cash768,049
 4.1
583,027
 3.0
Equity securities (2)558,008
 3.0
368,843
 1.9
Other investments (2)1,276,841
 6.9
1,261,525
 6.4
Investments accounted for using the equity method811,273
 4.4
1,493,791
 7.6
Securities transactions entered into but not settled at the balance sheet date23,697
 0.1
(18,153) (0.1)
Total investable assets held by Arch$18,636,189
 100.0
$19,566,861
 100.0
   
Average effective duration (in years)3.38
  
Average S&P/Moody’s credit ratings (3)AA/Aa2
  
Embedded book yield (4)2.89%  
(1)In securities lending transactions, we receive collateral in excess of the fair value of the securities pledged. For purposes of this table, we have excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value.
(2)Includes investments carried as available for sale, at fair value and at fair value under the fair value option.
(3)Average credit ratings on our investment portfolio on securities with ratings by Standard & Poor’s Rating Services (“S&P”) and Moody’s Investors Service (“Moody’s”).
(4)Before investment expenses.
At September 30, 2017, our fixed income portfolio, which includes fixed maturity securities and short-term investments, had average credit quality ratings from Standard & Poor’s Rating Services (“S&P”)/Moody’s of “AA/Aa2” and an average yield to maturity (embedded book yield), before investment expenses, of 2.20%. At December 31, 2016, our fixed income portfolio had average credit quality ratings from S&P/Moody’s of “AA-/Aa3” and an average yield to maturity of 2.03%. Our investment portfolio had an average effective duration of 3.14 years at September 30, 2017, compared to 3.64 years at December 31, 2016. At September 30, 2017,2019, approximately $13.59$15.40 billion, or 69%71.4%, of total investable assets held by Arch were internally managed, compared to $13.90$14.08 billion, or 75%72.0%, at December 31, 2016.2018.


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The following table summarizes our fixed maturities and fixed maturities pledged under securities lending agreements (“Fixed Maturities”) by type:
Estimated
Fair Value
 
% of
Total
Estimated
Fair Value
 
% of
Total
September 30, 2017 
  
September 30, 2019 
  
Corporate bonds$4,588,758
 31.1
$6,494,654
 39.2
Mortgage backed securities337,478
 2.3
528,227
 3.2
Municipal bonds2,353,234
 16.0
652,296
 3.9
Commercial mortgage backed securities584,730
 4.0
754,306
 4.5
U.S. government and government agencies3,761,612
 25.5
4,830,839
 29.1
Non-U.S. government securities1,554,956
 10.6
1,800,032
 10.9
Asset backed securities1,550,494
 10.5
1,526,440
 9.2
Total$14,731,262
 100.0
$16,586,794
 100.0
      
December 31, 2016 
  
December 31, 2018 
  
Corporate bonds$4,696,079
 32.3
$5,735,526
 38.5
Mortgage backed securities504,677
 3.5
535,763
 3.6
Municipal bonds3,713,434
 25.6
1,012,308
 6.8
Commercial mortgage backed securities536,051
 3.7
729,442
 4.9
U.S. government and government agencies2,804,811
 19.3
3,601,269
 24.2
Non-U.S. government securities1,142,735
 7.9
1,713,891
 11.5
Asset backed securities1,123,987
 7.7
1,553,703
 10.4
Total$14,521,774
 100.0
$14,881,902
 100.0
The following table provides the credit quality distribution of our Fixed Maturities. For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.
Estimated Fair Value 
% of
Total
Estimated Fair Value 
% of
Total
September 30, 2017   
September 30, 2019   
U.S. government and gov’t agencies (1)$4,040,392
 27.4
$5,403,271
 32.6
AAA4,048,800
 27.5
3,240,708
 19.5
AA2,406,692
 16.3
1,879,728
 11.3
A2,285,336
 15.5
3,648,581
 22.0
BBB1,110,089
 7.5
1,576,052
 9.5
BB291,798
 2.0
362,117
 2.2
B231,880
 1.6
210,824
 1.3
Lower than B90,947
 0.6
61,205
 0.4
Not rated225,328
 1.5
204,308
 1.2
Total$14,731,262
 100.0
$16,586,794
 100.0
      
December 31, 2016   
December 31, 2018   
U.S. government and gov’t agencies (1)$3,210,899
 22.1
$4,194,676
 28.2
AAA3,918,739
 27.0
3,551,039
 23.9
AA3,148,226
 21.7
2,129,336
 14.3
A2,338,834
 16.1
3,069,656
 20.6
BBB1,203,942
 8.3
1,251,205
 8.4
BB226,321
 1.6
275,201
 1.8
B156,405
 1.1
183,614
 1.2
Lower than B90,833
 0.6
61,271
 0.4
Not rated227,574
 1.6
165,904
 1.1
Total$14,521,774
 100.0
$14,881,902
 100.0
(1)Includes U.S. government-sponsored agency residential mortgage-backed securities and agency commercial mortgage-backed securities.
 
The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all Fixed Maturities which were in an unrealized loss position:
Severity of gross unrealized losses:Estimated Fair Value 
Gross
Unrealized
Losses
 
% of
Total Gross
Unrealized
Losses
Estimated Fair Value 
Gross
Unrealized
Losses
 
% of
Total Gross
Unrealized
Losses
September 30, 2017     
September 30, 2019     
0-10%$7,499,372
 $(71,889) 86.1
$4,084,228
 $(70,410) 82.6
10-20%73,042
 (10,600) 12.7
79,286
 (12,714) 14.9
20-30%2,164
 (687) 0.8
3,701
 (1,121) 1.3
Greater than 30%324
 (299) 0.4
1,480
 (999) 1.2
Total$7,574,902
 $(83,475) 100.0
$4,168,695
 $(85,244) 100.0
          
December 31, 2016     
December 31, 2018     
0-10%$7,078,582
 $(127,909) 71.6
$8,722,837
 $(190,170) 92.5
10-20%155,403
 (24,219) 13.5
87,188
 (13,012) 6.3
20-30%89,887
 (25,929) 14.5
3,359
 (1,058) 0.5
Greater than 30%1,496
 (702) 0.4
2,363
 (1,266) 0.6
Total$7,325,368
 $(178,759) 100.0
$8,815,747
 $(205,506) 100.0
The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at September 30, 2017,2019, excluding guaranteed amounts and covered bonds:
 Estimated Fair Value 
Credit
Rating (1)
Apple Inc.$144,561
 AA+/Aa1
Microsoft Corporation131,597
 AAA/Aaa
JPMorgan Chase & Co.116,451
 A-/A3
The Bank of New York Mellon Corporation89,245
 A/A1
Citigroup Inc.87,285
 A-/A3
Wells Fargo & Company82,560
 A/A2
New York Life Insurance Company74,684
 AA+/Aaa
Massmutual Global Funding II C72,581
 AA+/Aa2
MetLife, Inc.71,893
 AA-/Aa3
American Express Company69,096
 A-/A2
Total$939,953
  
 Estimated Fair Value 
Credit
Rating (1)
Bank of America Corporation$241,428
 A-/A2
Apple Inc.213,331
 AA+/Aa1
JPMorgan Chase & Co.209,254
 A-/A2
Wells Fargo & Company201,534
 A-/A1
Citigroup Inc.184,850
 A/A1
Morgan Stanley141,891
 BBB+/A3
Nestlé S.A.113,597
 AA-/Aa2
BP p.l.c.110,616
 A-/A1
The Goldman Sachs Group, Inc.109,147
 BBB+/A3
Deere & Company105,217
 A/A2
Total$1,630,865
  
(1)Average credit ratings as assigned by S&P and Moody’s, respectively.


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The following table provides information on our structured securities, which includes residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”):
Agencies Investment Grade Below Investment Grade TotalAgencies Investment Grade Below Investment Grade Total
Sep. 30, 2017       
Sep 30, 2019       
RMBS$274,710
 $19,940
 $42,828
 $337,478
$478,427
 $15,437
 $34,363
 $528,227
CMBS4,071
 509,080
 71,579
 584,730
94,004
 636,384
 23,918
 754,306
ABS—
 1,458,114
 92,380
 1,550,494
—
 1,458,377
 68,063
 1,526,440
Total$278,781
 $1,987,134
 $206,787
 $2,472,702
$572,431
 $2,110,198
 $126,344
 $2,808,973
              
December 31, 2016       
Dec 31, 2018       
RMBS$393,188
 $60,600
 $50,889
 $504,677
$488,862
 $15,410
 $31,491
 $535,763
CMBS12,900
 513,266
 9,885
 536,051
104,547
 602,865
 22,030
 729,442
ABS—
 1,077,614
 46,373
 1,123,987
—
 1,485,150
 68,553
 1,553,703
Total$406,088
 $1,651,480
 $107,147
 $2,164,715
$593,409
 $2,103,425
 $122,074
 $2,818,908
At September 30, 2017,2019, our structured securities included $40.5$38.3 million par value in sub-prime securities with a fair value of $34.5$30.6 million and average credit quality ratings from S&P/Moody’s of “CCC/Caa3.“CCC-/Caa3,” At December 31, 2016, our fixed income portfolio included $25.3compared to $38.2 million par value in sub-prime securities with a fair value of $23.3$31.7 million and average credit quality ratings from S&P/Moody’s of “CCC/Caa3.”“CCC-/Caa3” at December 31, 2018.
At September 30, 2017,2019, our equityinvestment portfolio included $546.0$559.1 million of equity securities, compared to $558.0$368.8 million at December 31, 2016.2018. Our equity portfolio includes publicly traded common stocks in the natural resources, energy, consumer staples and other sectors.sectors and exchange-traded funds.
The following table provides information on the severity of the unrealized loss position as a percentage of cost for all equity securities classified as available for sale which were in an unrealized loss position:
Severity of gross unrealized losses:Estimated Fair Value 
Gross
Unrealized
Losses
 
% of
Total Gross
Unrealized
Losses
September 30, 2017     
0-10%$155,016
 $(3,670) 46.6
10-20%11,219
 (1,804) 22.9
20-30%2,632
 (848) 10.8
Greater than 30%2,070
 (1,551) 19.7
Total$170,937
 $(7,873) 100.0
      
December 31, 2016     
0-10%$214,364
 $(8,776) 50.1
10-20%52,034
 (7,100) 40.5
20-30%1,983
 (607) 3.5
Greater than 30%1,000
 (1,034) 5.9
Total$269,381
 $(17,517) 100.0
The following table provides information on the fair value of our Eurozone investments at September 30, 2017:
Country (1)
Sovereign
(2)
 Corporate Bonds 
Other
(3)
 Total
Netherlands$100,463
 $96,733
 $7,154
 $204,350
Germany103,751
 27,931
 43,928
 175,610
Belgium47,890
 7,522
 —
 55,412
Luxembourg—
 16,605
 18,624
 35,229
France1,011
 7,017
 23,885
 31,914
Austria16,120
 —
 —
 16,120
Spain—
 1,696
 10,192
 11,889
Ireland—
 6,698
 2,670
 9,369
Italy—
 1,685
 6,942
 8,626
Finland—
 —
 4,306
 4,306
Portugal—
 —
 549
 549
Greece—
 —
 402
 402
Total$269,236
 $165,887
 $118,653
 $553,777
(1)The country allocations set forth in the table are based on various assumptions made by us in assessing the country in which the underlying credit risk resides, including a review of the jurisdiction of organization, business operations and other factors. Based on such analysis, we do not believe that we have any other Eurozone investments at September 30, 2017.
(2)Includes securities issued and/or guaranteed by Eurozone governments.
(3)Includes bank loans, equities and other.
The following table summarizes our other investments:investments which are included in investments accounted for using the fair value option, by strategy:
 September 30,
2017		 December 31,
2016
Available for sale:   
Asian and emerging markets$123,225
 $84,778
Investment grade fixed income53,325
 33,923
Credit related funds20,752
 7,469
Other63,037
 41,800
Total available for sale260,339
 167,970
Fair value option:   
Term loan investments376,721
 378,877
Mezzanine debt funds172,000
 127,943
Credit related funds194,200
 218,298
Investment grade fixed income95,151
 75,468
Asian and emerging markets250,481
 178,568
Other (1)147,639
 129,717
Total fair value option1,236,192
 1,108,871
Total$1,496,531
 $1,276,841
 September 30,
2019		 December 31,
2018
Lending$624,699
 $524,112
Term loan investments289,902
 281,486
Energy113,791
 117,509
Credit related funds165,444
 152,510
Investment grade fixed income83,649
 101,902
Infrastructure49,602
 45,371
Private equity25,027
 24,383
Real estate17,440
 14,252
Total$1,369,554
 $1,261,525
(1)Includes fund investments with strategies in mortgage servicing rights, transportation and infrastructure assets and other.
For details on our investments accounted for using the equity method, see note 6, “Investment Information—Investments Accounted For Using the Equity Method,” to our consolidated financial statements.
Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration
risk that would be allowed under our investment guidelines if implemented in other ways. See note 8, “Derivative Instruments,” to our consolidated financial statements for additional disclosures related to derivatives.
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. See note 7, “Fair Value,” to our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value, segregated by level in the fair value hierarchy.
Investable Assets in the ‘Other’ Segment
Investable assets in the ‘other’ segment are managed by Watford Re.Watford. The board of directors of Watford Re establishes theirits investment policies and guidelines. Watford Re’sWatford’s investments are accounted for using the fair value option with changes in the carrying value of such investments recorded in net realized gains or losses.
The following table summarizes investable assets in the ‘other’ segment:
 September 30,
2019		 December 31,
2018
Investments accounted for using the fair value option:   
Other investments$1,070,566
 $1,050,414
Fixed maturities563,214
 922,819
Short-term investments357,611
 282,131
Equity securities56,905
 56,638
Total2,048,296
 2,312,002
Fixed maturities available for sale, at fair value639,112
 393,351
Equity securities, at fair value43,487
 32,206
Cash80,390
 63,529
Securities sold but not yet purchased(65,736) (7,790)
Securities transactions entered into but not settled at the balance sheet date(15,302) (35,635)
Total investable assets included in ‘other’ segment$2,730,247
 $2,757,663


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The following table summarizes investable assets in the ‘other’ segment:Reinsurance
 September 30,
2017		 December 31,
2016
Investments accounted for using the fair value option:   
Other investments$1,061,013
 $811,922
Fixed maturities1,094,593
 734,260
Short-term investments272,495
 309,127
Equity securities29,265
 2,314
Total2,457,366
 1,857,623
Cash57,151
 74,893
Securities sold but not yet purchased(72,682) (33,157)
Securities transactions entered into but not settled at the balance sheet date(137,014) (41,596)
Total investable assets included in ‘other’ segment$2,304,821
 $1,857,763
Premiums Receivable and Reinsurance Recoverables
At September 30, 2017, 81.2% of premiums receivable of $1.27 billion represented amounts not yet due, while amounts in excess of 90 days overdue were 4.1% of the total. At December 31, 2016, 81.0% of premiums receivable of $1.07 billion represented amounts not yet due, while amounts in excess of 90 days overdue were 5.2% of the total. Our reserves for doubtful accounts were approximately $24.0 million at September 30, 2017, compared to $21.0 million at December 31, 2016.
At September 30, 2017 and December 31, 2016, approximately 72.5% and 75.7% of reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) of $2.51 billion and $2.11 billion, respectively, were due from carriers which had an A.M. Best rating of “A-” or better while 27.5% and 24.3%, respectively, were from companies not rated. For items not rated, over 90% of such amount was collateralized through reinsurance trusts or letters of credit at September 30, 2017 and December 31, 2016. The largest reinsurance recoverables from any one carrier was approximately 2.2% and 2.4%, respectively, of total shareholders’ equity available to Arch at September 30, 2017 and December 31, 2016.
Approximately 4.1% of the $43.3 million of paid losses and loss adjustment expenses recoverable at September 30, 2017 were more than 90 days overdue, compared to 6.7% of the $30.6 million of paid losses and loss adjustment expenses recoverable at December 31, 2016. No collection issues were indicated on the amount in excess of 90 days overdue at September 30, 2017.
The effects of reinsurance on written and earned premiums and losses and loss adjustment expenses (“LAE”) with unaffiliated reinsurers were as follows:
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2017 2016 2017 20162019 2018 2019 2018
Premiums written:              
Direct$1,147,793
 $841,119
 $3,338,106
 $2,539,073
$1,438,943
 $1,242,276
 $4,176,274
 $3,601,410
Assumed500,453
 437,646
 1,577,789
 1,507,594
742,178
 489,052
 2,020,535
 1,664,676
Ceded(322,843) (264,487) (1,065,537) (887,591)(567,664) (397,775) (1,613,195) (1,221,093)
Net$1,325,403
 $1,014,278
 $3,850,358
 $3,159,076
$1,613,457
 $1,333,553
 $4,583,614
 $4,044,993
              
Premiums earned:              
Direct$1,121,168
 $807,656
 $3,216,268
 $2,382,784
$1,375,384
 $1,223,445
 $3,977,005
 $3,545,493
Assumed501,587
 413,960
 1,431,746
 1,308,349
593,129
 466,361
 1,701,307
 1,446,815
Ceded(360,869) (263,213) (1,028,237) (775,166)(530,490) (398,928) (1,407,696) (1,129,768)
Net$1,261,886
 $958,403
 $3,619,777
 $2,915,967
$1,438,023
 $1,290,878
 $4,270,616
 $3,862,540
              
Losses and LAE:              
Direct$917,721
 $490,420
 $1,968,900
 $1,471,472
$741,871
 $718,921
 $2,063,168
 $1,807,860
Assumed621,717
 172,490
 1,112,255
 630,271
366,904
 198,248
 1,093,541
 759,527
Ceded(493,297) (138,727) (792,584) (470,019)(306,320) (217,749) (868,179) (504,954)
Net$1,046,141
 $524,183
 $2,288,571
 $1,631,724
$802,455
 $699,420
 $2,288,530
 $2,062,433
ReservesReinsurance Recoverables
The following table summarizes our reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) at September 30, 2019 and December 31, 2018:
 September 30,
2019		 December 31,
2018
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses$3,168,195
 $2,919,372
% due from carriers with A.M. Best rating of “A-” or better58.6% 63.0%
% due from unrated fully collateralized reinsurers (1)15.5% 12.9%
% due from all other carriers with no A.M. Best rating (2)25.9% 24.1%
Largest balance due from any one carrier as % of total shareholders’ equity1.7% 2.7%
(1)Such amount is fully collateralized through reinsurance trusts.
(2)Over 90% of such amount is collateralized through reinsurance trusts or letters of credit.
Growth in items not rated in 2019 is primarily due to recoverables from a third party reinsurer related to a retroactive reinsurance transaction to reinsure liabilities associated with certain U.S. insurance exposures. Such amounts are fully collateralized. See note 5, “Reserve for Losses and Loss
Adjustment Expenses,” to our consolidated financial statements for additional information.
Bellemeade Re
We have entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). For the respective coverage periods, we will retain the first layer of the respective aggregate losses and the special purpose reinsurance companies will provide second layer coverage up to the outstanding coverage amount. We will then retain losses in excess of the outstanding coverage limit. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize.
The following table summarizes the respective coverages and retentions at September 30, 2019:
 Initial Coverage at Issuance Coverage at Sept. 30, 2019 First Layer Retention
Bellemeade 2015-1 Ltd. (1)$300,000
 $6,046
 $129,900
Bellemeade 2017-1 Ltd. (2)368,100
 249,737
 165,700
Bellemeade 2018-1 Ltd. (3)374,460
 362,603
 168,510
Bellemeade 2018-2 Ltd. (4)653,278
 507,534
 352,258
Bellemeade 2018-3 Ltd. (5)506,110
 488,430
 179,331
Bellemeade 2019-1 Ltd. (6)341,790
 293,595
 208,046
Bellemeade 2019-2 Ltd. (7)621,022
 621,022
 221,794
Bellemeade 2019-3 Ltd. (8)700,920
 700,920
 232,093
(1)Issued in July 2015, covering in-force policies issued between January 1, 2009 and March 31, 2013.
(2)Issued in October 2017, covering in-force policies issued between January 1, 2017 and June 30, 2017.
(3)Issued in April 2018, covering in-force policies issued between July 1, 2017 and December 31, 2017.
(4)Issued in August 2018, covering in-force policies issued between April 1, 2013 and December 31, 2015.
(5)Issued in October 2018, covering in-force policies issued between January 1, 2018 and June 30, 2018.
(6)Issued in March 2019, covering in-force policies primarily issued between 2005-2008 under United Guaranty Residential Insurance Company (“UGRIC”); as well as policies issued through 2015 under both UGRIC and Arch Mortgage Insurance Company.
(7)Issued in April 2019, covering in-force policies issued between July 1, 2018 and December 31, 2018.
(8)Issued in July 2019, covering in-force policies issued in 2016.

In October 2019, we entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re 2019-4 Ltd. Such agreement provides for up to $577.3 million of aggregate excess of loss reinsurance coverage at inception in excess of $162.4 million of aggregate losses for new delinquencies on a portfolio of in-force policies issued in the first half of 2019.

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

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At September 30, 20172019 and December 31, 2016,2018, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, and deferred reinsurance charge asset, by type and by operating segment were as follows:
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Insurance segment: 
  
 
  
Case reserves$1,524,718
 $1,414,603
$1,506,217
 $1,489,644
IBNR reserves3,411,009
 3,187,451
3,297,090
 3,266,796
Total net reserves4,935,727
 4,602,054
4,803,307
 4,756,440
Reinsurance segment:      
Case reserves1,011,298
 762,730
1,178,486
 1,082,917
Additional case reserves162,632
 92,524
174,241
 191,002
IBNR reserves1,534,236
 1,517,983
1,730,100
 1,578,907
Deferred reinsurance charge asset(802) —
Total net reserves2,707,364
 2,373,237
3,082,827
 2,852,826
Mortgage segment:      
Case reserves458,960
 593,222
285,458
 355,606
IBNR reserves84,926
 59,791
155,432
 122,304
Total net reserves (1)543,886
 653,013
440,890
 477,910
Other segment:      
Case reserves232,345
 125,703
434,495
 364,052
Additional case reserves31,575
 9,513
24,495
 36,512
IBNR reserves436,831
 353,865
573,201
 551,266
Total net reserves700,751
 489,081
1,032,191
 951,830
Total: 
  
 
  
Case reserves3,227,321
 2,896,258
3,404,656
 3,292,219
Additional case reserves194,207
 102,037
198,736
 227,514
IBNR reserves5,467,002
 5,119,090
5,755,823
 5,519,273
Deferred reinsurance charge asset(802) —
Total net reserves$8,887,728
 $8,117,385
$9,359,215
 $9,039,006
(1)At September 30, 2017,2019, total net reserves include $481.5$309.9 million from U.S. primary mortgage insurance business, of which 72.2%61.8% represents policy years 20072009 and prior 11.7%and the remainder from 2008later policy years. At December 31, 2018, total net reserves include $375.8 million from U.S. mortgage insurance business, of which 73.4% represents policy years 2009 and prior and the remainder from later policy years.
At September 30, 20172019 and December 31, 2016,2018, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:
 September 30,
2017		 December 31,
2016
Insurance segment:   
Professional lines (1)$1,321,024
 $1,293,667
Construction and national accounts1,064,949
 976,109
Excess and surplus casualty (2)683,852
 687,305
Programs677,879
 667,677
Property, energy, marine and aviation439,409
 302,057
Travel, accident and health80,391
 72,726
Lenders products53,512
 42,147
Other (3)614,711
 560,366
Total net reserves$4,935,727
 $4,602,054
 September 30,
2019		 December 31,
2018
Insurance segment:   
Professional lines (1)$1,259,731
 $1,247,914
Construction and national accounts1,223,245
 1,166,143
Excess and surplus casualty (2)524,981
 631,370
Programs548,552
 482,045
Property, energy, marine and aviation343,652
 388,710
Travel, accident and health99,564
 83,836
Lenders products29,836
 52,007
Other (3)773,746
 704,415
Total net reserves$4,803,307
 $4,756,440
(1)Includes professional liability, executive assurance and healthcare business.
(2)Includes casualty and contract binding business.
(3)Includes alternative markets, excess workers’ compensation and surety business.
At September 30, 20172019 and December 31, 2016,2018, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, and including deferred reinsurance charge asset, were as follows:
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Reinsurance segment:      
Casualty (1)$1,482,463
 $1,355,362
$1,630,159
 $1,551,550
Other specialty (2)503,947
 428,205
672,042
 582,420
Property excluding property catastrophe (3)392,002
 297,200
459,768
 422,612
Marine and aviation140,432
 147,700
133,960
 130,683
Property catastrophe128,988
 86,026
105,952
 90,635
Other (4)(3)59,532
 58,744
80,946
 74,926
Total net reserves$2,707,364
 $2,373,237
$3,082,827
 $2,852,826
(1)Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.
(2)Includes non-excess motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
(3)Includes facultative business.
(4)Includes life, casualty clash and other.

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Mortgage Operations Supplemental Information
The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at the end of the last two quarters:September 30, 2019 and December 31, 2018:
(U.S. Dollars in millions)September 30, 2017 June 30, 2017September 30, 2019 December 31, 2018
Amount % Amount %Amount % Amount %
Insurance In Force (IIF) (1):              
U.S. primary mortgage insurance$250,375
 72.3
 $244,235
 73.4
$284,496
 69.7
 $276,538
 72.1
Mortgage reinsurance26,869
 7.8
 26,120
 7.8
25,440
 6.2
 25,975
 6.8
Other (2)68,925
 19.9
 62,503
 18.8
98,054
 24.0
 81,147
 21.2
Total$346,169
 100.0
 $332,858
 100.0
$407,990
 100.0
 $383,660
 100.0
              
Risk In Force (RIF) (3):              
U.S. primary mortgage insurance$64,005
 92.5
 $62,362
 92.6
$72,916
 92.0
 $70,995
 92.3
Mortgage reinsurance2,433
 3.5
 2,453
 3.6
2,086
 2.6
 2,217
 2.9
Other (2)2,742
 4.0
 2,517
 3.7
4,216
 5.3
 3,728
 4.8
Total$69,180
 100.0
 $67,332
 100.0
$79,218
 100.0
 $76,940
 100.0
(1)Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance.
(2)Includes GSE credit risk-sharing transactions and international insurance business.
(3)Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for credit risk-sharing or reinsurance transactions.

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The insurance in force and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at September 30, 2017:2019:
(U.S. Dollars in millions)IIF RIF DelinquencyIIF RIF Delinquency
Amount % Amount % Rate (1)Amount % Amount % Rate (1)
Policy year:                  
2007 and prior$22,206
 8.9
 $5,052
 7.9
 10.30%
20085,192
 2.1
 1,273
 2.0
 6.27%
20091,192
 0.5
 282
 0.4
 2.72%
2009 and prior$17,943
 6.3
 $4,156
 5.7
 8.48%
20101,368
 0.5
 369
 0.6
 1.70%442
 0.2
 117
 0.2
 3.21%
20114,415
 1.8
 1,205
 1.9
 1.09%1,919
 0.7
 533
 0.7
 1.46%
201214,995
 6.0
 4,101
 6.4
 0.60%6,919
 2.4
 1,929
 2.6
 0.81%
201322,719
 9.1
 6,217
 9.7
 0.77%13,552
 4.8
 3,782
 5.2
 0.94%
201424,747
 9.9
 6,582
 10.3
 0.81%14,950
 5.3
 4,111
 5.6
 1.04%
201544,453
 17.8
 11,417
 17.8
 0.47%27,984
 9.8
 7,431
 10.2
 0.79%
201663,805
 25.5
 16,027
 25.0
 0.32%44,091
 15.5
 11,445
 15.7
 0.88%
201745,283
 18.1
 11,480
 17.9
 0.06%47,430
 16.7
 12,136
 16.6
 0.82%
201857,472
 20.2
 14,511
 19.9
 0.62%
201951,794
 18.2
 12,765
 17.5
 0.09%
Total$250,375
 100.0
 $64,005
 100.0
 1.98%$284,496
 100.0
 $72,916
 100.0
 1.48%
(1)Represents the ending percentage of loans in default.
The insurance in force and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2018:
(U.S. Dollars in millions)IIF RIF Delinquency
Amount % Amount % Rate (1)
Policy year:         
2009 and prior$21,210
 7.7
 $4,900
 6.9
 8.90%
2010646
 0.2
 175
 0.2
 2.62%
20112,530
 0.9
 701
 1.0
 1.57%
20129,650
 3.5
 2,664
 3.8
 0.78%
201316,823
 6.1
 4,676
 6.6
 0.89%
201418,274
 6.6
 4,947
 7.0
 0.97%
201533,781
 12.2
 8,849
 12.5
 0.69%
201652,324
 18.9
 13,407
 18.9
 0.77%
201754,287
 19.6
 13,793
 19.4
 0.55%
201867,013
 24.2
 16,883
 23.8
 0.15%
Total$276,538
 100.0
 $70,995
 100.0
 1.60%
(1)Represents the ending percentage of loans in default.
The following tables provide supplemental disclosures on risk in force for our U.S. primary mortgage insurance business at the end of the last two quarters:September 30, 2019 and December 31, 2018:
(U.S. Dollars in millions)September 30, 2019 December 31, 2018
Amount % Amount %
Credit quality (FICO):       
>=740$41,975
 57.6
 $41,066
 57.8
680-73925,013
 34.3
 23,954
 33.7
620-6795,501
 7.5
 5,485
 7.7
<620427
 0.6
 490
 0.7
Total$72,916
 100.0
 $70,995
 100.0
Weighted average FICO score743
   743
  
        
Loan-to-value (LTV):       
95.01% and above$8,948
 12.3
 $7,918
 11.2
90.01% to 95.00%40,086
 55.0
 39,370
 55.5
85.01% to 90.00%20,708
 28.4
 20,643
 29.1
85.00% and below3,174
 4.4
 3,064
 4.3
Total$72,916
 100.0
 $70,995
 100.0
Weighted average LTV93.1%   93.0%  
        
Total RIF, net of external reinsurance$57,768
   $55,755
  

(U.S. Dollars in millions)September 30, 2017 June 30, 2017
Amount % Amount %
Credit quality (FICO):       
>=740$37,297
 58.3
 $36,378
 58.3
680-73920,822
 32.5
 20,122
 32.3
620-6795,178
 8.1
 5,118
 8.2
<620708
 1.1
 744
 1.2
Total$64,005
 100.0
 $62,362
 100.0
Weighted average FICO score743
   743
  
        
Loan-to-value (LTV):       
95.01% and above$6,175
 9.6
 $5,983
 9.6
90.01% to 95.00%35,703
 55.8
 34,718
 55.7
85.01% to 90.00%19,247
 30.1
 18,810
 30.2
85.00% and below2,880
 4.5
 2,851
 4.6
Total$64,005
 100.0
 $62,362
 100.0
Weighted average LTV92.9%   92.8%  
        
Total RIF, net of external reinsurance$47,980
   $45,774
  

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(U.S. Dollars in millions)September 30, 2017 June 30, 2017September 30, 2019 December 31, 2018
Amount % Amount %Amount % Amount %
Total RIF by State:              
Texas$5,120
 8.0
 $5,075
 8.1
$5,599
 7.7
 $5,491
 7.7
California3,671
 5.7
 3,524
 5.7
4,984
 6.8
 4,505
 6.3
Florida2,764
 4.3
 2,622
 4.2
3,821
 5.2
 3,541
 5.0
Virginia2,743
 4.3
 2,691
 4.3
2,907
 4.0
 2,931
 4.1
Georgia2,667
 3.7
 2,573
 3.6
Illinois2,602
 3.6
 2,482
 3.5
Minnesota2,480
 3.4
 2,400
 3.4
North Carolina2,378
 3.7
 2,346
 3.8
2,469
 3.4
 2,505
 3.5
Washington2,312
 3.6
 2,311
 3.7
2,466
 3.4
 2,408
 3.4
Georgia2,293
 3.6
 2,239
 3.6
Maryland2,209
 3.5
 2,160
 3.5
2,443
 3.4
 2,407
 3.4
Illinois2,200
 3.4
 2,157
 3.5
Minnesota2,138
 3.3
 2,072
 3.3
Others36,177
 56.5
 35,165
 56.4
40,478
 55.5
 39,752
 56.0
Total$64,005
 100.0
 $62,362
 100.0
$72,916
 100.0
 $70,995
 100.0
The following table provides supplemental disclosures for our U.S. primary mortgage insurance business related to insured loans and loss metrics:
(U.S. Dollars in thousands, except policy, loan and claim count)Nine Months Ended
 Three Months EndedSeptember 30,
September 30,
2017		 June 30,
2017		2019 2018
Roll-forward of insured loans in default:       
Beginning delinquent number of loans 23,903
 26,234
20,665
 27,068
New notices 9,028
 8,858
28,728
 27,258
Cures (7,891) (9,078)(27,877) (31,111)
Paid claims (1,270) (2,111)(2,273) (2,854)
Ending delinquent number of loans (1) 23,770
 23,903
19,243
 20,361
       
Ending number of policies in force (1) 1,202,619
 1,183,659
1,304,263
 1,270,728
       
Delinquency rate (1) 1.98% 2.02%1.48% 1.60%
       
Losses:       
Number of claims paid 1,270
 2,111
2,273
 2,854
Total paid claims $59,832
 $85,539
$91,601
 $118,492
Average per claim $47.1
 $40.5
$40.3
 $41.5
Severity (2) 103.5% 104.4%96.6% 102.0%
Average reserve per default (in thousands) (1) $19.3
 $20.4
Average reserve per default (in thousands)$14.7
 $18.1
(1)Includes first lien primary and pool policies.
(2)Represents total paid claims divided by RIF of loans for which claims were paid.
The risk-to-capital ratio, which represents total current (non-delinquent) risk in force, net of reinsurance, divided by total statutory capital, for Arch MI U.S. was approximately 11.212.9 to 1 at September 30, 2017,2019, compared to 12.013.0 to 1 at June 30, 2017.December 31, 2018.
Shareholders’ Equity and Book Value per Share
Total shareholders’ equity available to Arch was $8.91$11.16 billion at September 30, 2017,2019, compared to $8.25$9.44 billion at December 31, 2016.2018. The increase was primarily attributable to net income, reflecting contributions from bothreflected strong underwriting and investing activities.
investment returns.

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The following table presents the calculation of book value per share:
(U.S. dollars in thousands, except
share data)
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Total shareholders’ equity available to Arch$8,911,144
 $8,253,718
$11,158,096
 $9,439,827
Less preferred shareholders’ equity772,555
 772,555
780,000
 780,000
Common shareholders’ equity available to Arch$8,138,589
 $7,481,163
$10,378,096
 $8,659,827
Common shares and common share equivalents outstanding, net of treasury shares (1)136,540,573
 135,550,337
405,230,531
 402,454,834
Book value per share$59.61
 $55.19
$25.61
 $21.52
(1)Excludes the effects of 6,784,64919,170,417 and 6,872,49420,076,593 stock options and 419,9081,609,195 and 381,4611,307,304 restricted stock units outstanding at September 30, 20172019 and December 31, 2016,2018, respectively.
Liquidity and Capital ResourcesLIQUIDITY
Refer to the ‘Liquidity and Capital Resources’ section contained in Item 7 of our 2016 Form 10-K for a general discussion of our liquidity and capital resources.
This section does not include information specific to Watford Re.Watford. We do not guarantee or provide credit support for Watford, Re, and our financial exposure to Watford Re is limited to our investment in Watford Re’sWatford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions with Watford Re.Watford.
The following table provided an analysisLiquidity is a measure of our capital structure:ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.

(U.S. dollars in thousands, except 
share data)
September 30,
2017		 December 31,
2016
Debt:   
ACGL senior notes, due May 2034$297,030
 $296,957
Arch-U.S. senior notes, due Nov 2043 (1)494,596
 494,525
ACF senior notes, due Dec 2026 (2)495,955
 495,689
ACF senior notes, due Dec 2046 (2)445,145
 445,087
Revolving credit agreement borrowings due Oct 2021400,000
 500,000
Total$2,132,726
 $2,232,258
    
Shareholders’ equity available to Arch:   
Series C non-cumulative preferred shares$92,555
 $322,555
Series E non-cumulative preferred shares450,000
 450,000
Series F non-cumulative preferred shares230,000
 —
Common shareholders’ equity8,138,589
 7,481,163
Total$8,911,144
 $8,253,718
    
Total capital available to Arch$11,043,870
 $10,485,976
    
Debt to total capital (%)19.3
 21.3
Debt and prefered to total capital (%)26.3
 28.7
Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares.
(1)Issued by Arch Capital Group (U.S.) Inc., a wholly owned subsidiary of ACGL, and fully and unconditionally guaranteed by ACGL.
(2)Issued by Arch Capital Finance LLC (“ACF”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by ACGL.
For the nine months ended September 30, 2017, ACGL2019, Arch Capital received dividends of $182.5$86.4 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”),Bermuda, our Bermuda-based reinsurer and insurer, which can pay approximately $1.79$2.54 billion to ACGLArch Capital during the remainder of 20172019 without providing an affidavit to the Bermuda Monetary Authority (“BMA”). For the nine months ended September 30, 2019 Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) received $465.0 million of dividends from Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S.
In August 2017, ACGL completedWe expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, at a $230.0minimum, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.

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Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities, excluding amounts related to the ‘other’ segment (i.e., Watford). See note 11, “Variable Interest Entities and Noncontrolling Interests,” for cash flows related to Watford.
 Nine Months Ended
 September 30,
 2019 2018
Total cash provided by (used for): 
  
Operating activities$1,366,762
 $947,656
Investing activities(1,093,054) (181,774)
Financing activities(45,757) (713,511)
Effects of exchange rate changes on foreign currency cash(6,981) (9,867)
Increase (decrease) in cash and restricted cash$220,970
 $42,504
•Cash provided by operating activities for the nine months ended September 30, 2019 reflected a higher level of premiums collected than in the 2018 period.
•Cash used for investing activities for the nine months ended September 30, 2019 was higher than in the 2018 period, reflecting a higher level of securities purchased.
•Cash used for financing activities for the nine months ended September 30, 2019 was lower than in the 2018 period. The 2018 period reflected $250.0 million underwritten public offering of 5.45%paydowns on our revolving credit agreement borrowings, $184.5 million of repurchases under our share repurchase program and $92.6 million related to redemption of our Series FC preferred shares.
CAPITAL RESOURCES
This section does not include information specific to Watford. We do not guarantee or provide credit support for Watford, and our financial exposure to Watford is limited to our investment in Watford’s senior notes, common and preferred shares and in September 2017, usedcounterparty credit risk (mitigated by collateral) arising from reinsurance transactions with Watford.
The following table provides an analysis of our capital structure:
(U.S. dollars in thousands, except 
share data)
Sep 30,
2019		 Dec 31,
2018
Debt:   
Senior notes, due May 2034$300,000
 $300,000
Arch-U.S. senior notes, due Nov 2043 (1)500,000
 500,000
Arch Finance senior notes, due Dec 2026 (1)500,000
 500,000
Arch Finance senior notes, due Dec 2046 (1)450,000
 450,000
Deferred debt costs on senior notes(15,963) (16,472)
Revolving credit agreement borrowings due Oct 2021 (2)—
 —
Total$1,734,037
 $1,733,528
    
Shareholders’ equity available to Arch:   
Series E non-cumulative preferred shares$450,000
 $450,000
Series F non-cumulative preferred shares330,000
 330,000
Common shareholders’ equity10,378,096
 8,659,827
Total$11,158,096
 $9,439,827
    
Total capital available to Arch$12,892,133
 $11,173,355
    
Debt to total capital (%)13.5
 15.5
Preferred to total capital (%)6.1
 7.0
Debt and preferred to total capital (%)19.5
 22.5
(1)Fully and unconditionally guaranteed by Arch Capital.
(2)$500 million unsecured facility for revolving loans and letters of credit.
Arch Capital and Arch-U.S. are each holding companies and, accordingly, they conduct substantially all of their operations through their operating subsidiaries. Arch Capital Finance LLC (“Arch Finance”) is a wholly owned subsidiary of Arch U.S. MI Holdings Inc. As a result, Arch Capital, Arch-U.S. and Arch Finance's cash flows and their ability to service their debt depends upon the net proceeds received and other available funds to redeem in part its outstanding 6.75% Series C preferred shares.
Our U.S. insurance and reinsuranceearnings of their operating subsidiaries, are subject to insurance laws and regulationsor affiliates in the jurisdictions in which they operate. The abilitycase of our regulated insurance subsidiaries to pay dividends or make distributions is dependentArch Finance, and on their ability to meet applicable regulatory standards. These regulations include restrictions that limitdistribute the amount of dividendsearnings, loans or other distributions,payments from such as loanssubsidiaries or cash advances, availableaffiliates to shareholders without prior approval of the insurance regulatory authorities.Arch Capital, Arch-U.S. and Arch Finance, respectively.
In addition, Arch MI U.S. is required to maintain compliance with the GSEs requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The financial requirements require an eligible mortgage insurer’s available assets, which generally include only the most liquid assets of an insurer, to meet or exceed “minimum required assets” as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the delinquency status of non-performing loans) and are subject to a minimum amount. Arch MI U.S. satisfied the PMIERs’ financial requirements as of September 30, 20172019 with an estimated PMIER sufficiency ratio of 122%154%, compared to 122%141% at June 30, 2017.December 31, 2018.
For the nine months ended September 30, 2017, Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S., received $342.0 million of dividends from subsidiaries of United Guaranty Corporation, including United Guaranty Residential Insurance Company (“UGRIC”). Of such amount, $263.0 million was contributed to Arch Mortgage Insurance Company. UGRIC may not pay additional dividends during the remainder of 2017.
For the nine months ended September 30, 2017, Arch-U.S. received $50.0 million of dividends from Arch Reinsurance Company (“Arch Re U.S.”), our U.S.-licensed reinsurer. Arch Re U.S. can pay approximately $78.4 million to Arch-U.S. during the remainder of 2017, subject to the approval of the Commissioner of the Delaware Department of Insurance.
Pursuant to our 2014 acquisition of the CMG Entities, we made a contingent consideration payment of $71.7 million in April 2017. The maximum amount of remaining contingent


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Pursuant to our 2014 acquisition of the CMG Mortgage Insurance Company and its affiliated mortgage insurance companies, we made a contingent consideration payment of $61.5 million in April 2019. The maximum amount of remaining contingent consideration payments over the remaining earn-out period is $68.3$6.6 million.
The following table summarizes our cash flows from operating, investingArch Capital, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and financing activities, excluding amounts relatedaffiliates, through certain reinsurance arrangements beneficial to the ‘other’ segment (i.e., Watford Re). See Note 3, “Variable Interest Entities,”ratings of such subsidiaries. Historically, our insurance, reinsurance and mortgage insurance subsidiaries have entered into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business. The reinsurance agreements between our U.S.-based property casualty insurance and reinsurance subsidiaries and Arch Re Bermuda were canceled on a cutoff basis as of January 1, 2018. As a result, the level of subject business ceded to Arch Re Bermuda for cash flows related to Watford Re.the reported periods was substantially lower than in 2017 and prior periods.
SHARE REPURCHASE PROGRAM
 Nine Months Ended
 September 30,
 2017 2016
Total cash provided by (used for): 
  
Operating activities$860,197
 $831,086
Investing activities(486,201) (1,131,147)
Financing activities(348,337) 372,393
Effects of exchange rate changes on foreign currency cash11,492
 (5,322)
Increase (decrease) in cash$37,151
 $67,010
•Cash provided by operating activities forThe board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. For the nine months ended September 30, 2017 was higher than in2019, Arch Capital repurchased 0.1 million shares under the 2016 period, primarily reflecting higher premiums collected, partially offset by a higher levelshare repurchase program with an aggregate purchase price of paid losses.
•Cash used for investing activities for$2.9 million. Since the nine months endedinception of the share repurchase program through September 30, 2017 was lower than in the 2016 period, reflecting changes in cash collateral related to securities lending. In addition, activity2019, Arch Capital has repurchased 386.3 million common shares for the 2017 period reflected higher net salesan aggregate purchase price of investments than in the 2016 period.
•Cash used for financing activities for the nine months ended September 30, 2017 was higher than the cash provided in the 2016 period, reflecting changes in cash collateral related to securities lending and a $100.0 million paydown of revolving credit agreement borrowings. Activity for the 2016 period reflected a $434.9 million inflow from the issuance of preferred shares and $75.3 million of repurchases under our share repurchase program.
$3.97 billion. At September 30, 2017,2019, approximately $160.9 million of share repurchases were available under the program. On November 8, 2019, the board of directors of ACGL increased the aggregate purchase amount authorized under the share repurchase program to $1.0 billion. Repurchases under this authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. We will continue to monitor our investable assets were $19.70 billion (excludingshare price and, depending upon results of operations, market conditions and the $2.30 billiondevelopment of investable assets related to the ‘other’ segment). Our unfunded investment commitments totaled approximately $1.58 billion at September 30, 2017. Please refer to Item 1A “Risk Factors” of our 2016 Form 10-K for a discussion of other risks relating to our business and investment portfolio.
We expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, at a minimum, will be met by funds generated from underwriting activities and investment income,economy, as well as other factors, we will consider share repurchases on an opportunistic basis.
CATASTROPHIC EVENTS AND SEVERE ECONOMIC EVENTS
We have large aggregate exposures to natural and man-made catastrophic events and severe economic events. Catastrophes can be caused by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.various events, including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes, explosions,
 
Off-Balance Sheet Arrangementssevere winter weather, fires, droughts and other natural disasters. Catastrophes can also cause losses in non-property business such as mortgage insurance, workers’ compensation or general liability. In addition to the nature of property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration, tend to generally increase the size of losses from catastrophic events over time.
Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. We seek to limit the probable maximum pre-tax loss to a specific level for severe catastrophic events. Currently, we seek to limit our 1-in-250 year return period net probable maximum loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders’ equity available to Arch. We reserve the right to change this threshold at any time.
Based on in-force exposure estimated as of October 1, 2019, our modeled peak zone catastrophe exposure was a windstorm affecting the Northeastern U.S., with a net probable maximum pre-tax loss of $414 million, followed by windstorms affecting Florida Tri-County and the Gulf of Mexico regions with net probable maximum pre-tax losses of $398 million and $357 million, respectively. Our exposures to other perils, such as U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of October 1, 2019, our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 70% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Japan earthquake) was substantially less than both our peak zone windstorm and earthquake exposures.
Effective July 1, 2019, our insurance operations had in effect a reinsurance program which provided coverage for certain property-catastrophe related losses equal to $275 million in excess of various retentions per occurrence.
We also have significant exposure to losses due to mortgage defaults resulting from severe economic events in the future. For our U.S. mortgage insurance business, we have developed a proprietary risk model (“Realistic Disaster Scenario” or “RDS”) that simulates the maximum loss resulting from a severe economic downturn impacting the housing market. The RDS models the collective impact of adverse conditions for key economic indicators, the most significant of which is a decline in home prices. The RDS model projects paths of future home prices, unemployment rates, income levels and interest rates and assumes correlation across states and geographic regions.  The resulting future performance of our in-force portfolio is then estimated under the economic stress scenario, reflecting loan and borrower information.

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Currently, we seek to limit our modeled RDS loss from a severe economic event to approximately 25% of total tangible shareholders’ equity available to Arch (total shareholders’ equity available to Arch less goodwill and intangible assets). We reserve the right to change this threshold at any time. Based on in-force exposure estimated as of October 1, 2019, our modeled RDS loss was approximately 9% of tangible shareholders’ equity available to Arch.
Net probable maximum loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. RDS loss estimates are net of expected reinsurance recoveries and after income tax. Catastrophe loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our catastrophe loss estimates include clash estimates from other zones. Our catastrophe loss estimates and RDS loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than 25% of our total shareholders' equity or tangible shareholders’ equity from one or more catastrophic events or severe economic events due to several factors, including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders' equity exposed to a single catastrophic event or severe economic event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risks Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Catastrophic Events and Severe Economic Events” in our 2018 Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20162018 Form 10-K.
Market Sensitive Instruments and Risk ManagementMARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of September 30, 2017.2019. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of
several components, including liquidity, basis and price risks. We have not included Watford Re in the following analyses as we do not guarantee or provide credit support for Watford, Re, and our financial exposure to Watford Re is limited to our investment in Watford Re’sWatford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.
An analysis of material changes in market risk exposures at September 30, 20172019 that affect the quantitative and qualitative disclosures presented in our 20162018 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management”) were as follows: 
Investment Market Risk
Fixed Income Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments which invest in fixed income securities and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our interest rate sensitive securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, at times interest rate movements in certain credit sectors exhibit a much lower correlation to changes in U.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables.

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The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our fixed income securities:
(U.S. dollars in
billions)
Interest Rate Shift in Basis PointsInterest Rate Shift in Basis Points
-100 -50 — +50 +100-100 -50 — +50 +100
Sep. 30, 2017 
  
  
  
  
Sep 30, 2019 
  
  
  
  
Total fair value$18.95
 $18.64
 $18.35
 $18.07
 $17.79
$20.91
 $20.55
 $20.21
 $19.82
 $19.48
Change from base3.3% 1.6%   (1.5)% (3.0)%3.5% 1.7%   (1.9)% (3.6)%
Change in unrealized value$0.61
 $0.29
   $(0.28) $(0.55)$0.71
 $0.34
   $(0.38) $(0.73)
                  
Dec. 31, 2016         
Dec 31, 2018         
Total fair value$17.95
 $17.62
 $17.31
 $17.00
 $16.70
$19.23
 $18.91
 $18.62
 $18.30
 $17.98
Change from base3.7% 1.8%   (1.8)% (3.5)%3.3% 1.6%   (1.7)% (3.4)%
Change in unrealized value$0.64
 $0.31
   $(0.31) $(0.61)$0.61
 $0.30
   $(0.32) $(0.63)
In addition, we consider the effect of credit spread movements on the fairmarket value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments and investment funds accounted for using the equity method which

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invest in fixed income securities and the corresponding change in unrealized appreciation. As credit spreads widen, the fair value of our fixed income securities falls, and the converse is also true.
The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on our fixed income securities:
(U.S. dollars in
billions)		Credit Spread Shift in Percentage PointsCredit Spread Shift in Percentage Points
-100 -50 — +50 +100-100 -50 — +50 +100
Sep. 30, 2017 
  
  
  
  
Sep 30, 2019 
  
  
  
  
Total fair value$18.73
 $18.55
 $18.35
 $18.14
 $17.96
$20.59
 $20.41
 $20.21
 $20.01
 $19.82
Change from base2.1% 1.1%   (1.1)% (2.1)%1.9% 1.0%   (1.0)% (1.9)%
Change in unrealized value$0.39
 $0.20
   $(0.20) $(0.39)$0.38
 $0.20
   $(0.20) $(0.38)
                  
Dec. 31, 2016         
Dec 31, 2018         
Total fair value$17.79
 $17.55
 $17.31
 $17.07
 $16.83
$19.08
 $18.84
 $18.62
 $18.39
 $18.15
Change from base2.8% 1.4%   (1.4)% (2.8)%2.5% 1.2%   (1.2)% (2.5)%
Change in unrealized value$0.48
 $0.24
   $(0.24) $(0.48)$0.47
 $0.22
   $(0.22) $(0.47)
Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR attempts to take into account a broad cross-section of risks facing a portfolio by utilizing relevant securities volatility data skewed towards the most recent months and quarters. VaR measures the amount of a portfolio at risk for outcomes 1.65 standard deviations from the mean based on normal market conditions over a one year time horizon and is expressed as a percentage of the portfolio’s initial value. In other words, 95% of the time, should the risks taken into account in the VaR model perform per their historical tendencies, the portfolio’s loss in any one year period is expected to be less than or equal to the calculated VaR, stated as a percentage of the measured portfolio’s initial value. As of September 30, 2017,2019, our portfolio’s VaR was estimated to be 3.76%3.34% compared to an estimated 3.75%3.02% at December 31, 2016.
2018.
Equity Securities. At September 30, 20172019 and December 31, 2016,2018, the fair value of our investments in equity securities totaled $546.0$559.1 million and $558.0$368.8 million, respectively. These investments are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately $54.6$55.9 million and $55.8$36.9 million at September 30, 20172019 and December 31, 2016,2018, respectively, and would have decreased book value per common share by approximately $0.40$0.14 and $0.41,$0.09, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $54.6$55.9 million and $55.8$36.9 million at September 30, 20172019 and December 31, 2016,2018, respectively, and would have increased book value per common share by approximately $0.40$0.14 and $0.41,$0.09, respectively.
Investment-Related Derivatives. At September 30, 2017,2019, the notional value of all derivative instruments (excluding to-be-announced mortgage backed securities which are included in the fixed income securities analysis above and foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $3.06$7.53 billion, compared to $2.12$4.95 billion at December 31, 2016.2018. If the underlying exposure of each investment-related derivative held at September 30, 20172019 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $30.6$75.3 million, and a decrease in book value per common share of approximately $0.22$0.19 per share, compared to $21.2$49.5 million and $0.16$0.12 per share, respectively, on investment-related derivatives held at December 31, 2016.2018. If the underlying exposure of each investment-related derivative held at September 30, 20172019 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $30.6$75.3 million, and an increase in book value per common share of approximately $0.22$0.19 per share, compared to $21.2$49.5 million and $0.16$0.12 per share, respectively, on investment-related derivatives held at December 31, 2016.2018. See note 9,8, “Derivative Instruments,” of the notes accompanying to our consolidated financial statements for additional disclosures concerning derivatives.
For further discussion on investment activity, please refer to “Financial Condition—Investable Assets.”
Foreign Currency Exchange Risk
Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than the U.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities andliabilities. We may also utilize foreign currency forward contracts and currency options as part of our investment strategy. From timeSee note 8, “Derivative Instruments,” to time, we may elect to over or underweight one or more currencies, which could increase our exposure toconsolidated financial statements for additional information.


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foreign currency fluctuations and increase the volatility of our shareholders’ equity.
For further discussion on foreign exchange activity, please refer to “—Results of Operations” and note 9, “Derivative Instruments,” of the notes accompanying our consolidated financial statements.
The following table provides a summary of our net foreign currency exchange exposures, as well as foreign currency derivatives in place to manage these exposures:
(U.S. dollars in thousands, except
per share data)
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives$(713,065) $(63,077)$206,486
 $(561,311)
Shareholders’ equity denominated in foreign currencies (1)356,048
 290,752
542,970
 478,678
Net foreign currency forward contracts outstanding (2)(191,878) (250,263)52,491
 241,442
Net exposures denominated in foreign currencies$(548,895) $(22,588)$801,947
 $158,809
      
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies: 
  
 
  
Shareholders’ equity$54,890
 $2,259
$(80,195) $(15,881)
Book value per common share$0.40
 $0.02
Book value per share$(0.20) $(0.04)
      
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies: 
  
 
  
Shareholders’ equity$(54,890) $(2,259)$80,195
 $15,881
Book value per common share$(0.40) $(0.02)
Book value per share$0.20
 $0.04
(1)Represents capital contributions held in the foreign currencies of our operating units.
(2)Represents the net notional value of outstanding foreign currency forward contracts.
Although we generally attempt to match the currency of our projected liabilities with investments in the same currencies, from time to time we may elect to over or underweight one or more currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility of our shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “—Results of Operations.”
Other Financial InformationEffects of Inflation
We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect our reserve for losses and loss adjustment expenses and interest rates. The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The anticipated effects of inflation on us are considered in our catastrophe loss models. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled.
OTHER FINANCIAL INFORMATION
The consolidated financial statements as of September 30, 20172019 and for the three month and nine month periods ended September 30, 20172019 and 20162018 have been reviewed by PricewaterhouseCoopers LLP, the registrant's independent public accountants, whose report is included as an exhibit to this filing. The report of PricewaterhouseCoopers LLP states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which information is hereby incorporated by reference. 

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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to applicable Exchange Act Rules as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to information being recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to ACGLArch Capital and its consolidated subsidiaries.
We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.
Changes in Internal Controls Over Financial Reporting
We acquired all of the issued and outstanding capital stock of UGC on December 31, 2016. As allowed under SEC guidance, management’s assessment of and conclusion regarding the design and operating effectiveness of internal control over financial reporting excluded the internal control over financial reporting of UGC, which is relevant to the Company’s consolidated financial statements as of and for the nine months ended September 30, 2017. UGC represents 14% of total assets as of September 30, 2017 and 13% of our total revenues for the nine months ended September 30, 2017. The financial reporting systems of UGC have not yet been fully integrated into our financial reporting systems and, as such, we did not have the practical ability to perform an assessment of UGC’s internal control over financial reporting in time for the current quarter-end. Management expects to complete the process of integrating UGC’s internal control over financial reporting during the 2017 fourth quarter. The UGC acquisition represents a material change in internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) for the nine months ended September 30, 2017.
There have been no changes in internal control over financial reporting that occurred during the quarter ended September 30, 20172019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting, other than the UGC acquisition as described in the preceding paragraph.reporting.


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PART II.  OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of September 30, 2017,2019, we were not a party to any litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our purchases of our common shares for the 20172019 third quarter:
  Issuer Purchases of Equity Securities
Period 
Total Number of Shares
Purchased (1)
 Average Price Paid per Share 
Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs
 
Approximate Dollar
Value of Shares that
 May Yet be Purchased
Under the Plan or
Programs (2)
7/1/2017 - 7/31/2017 4,414
 $94.39
 —
 $446,501
8/1/2017 - 8/31/2017 4,074
 96.99
 —
 $446,501
9/1/2017 - 9/30/2017 15,618
 95.38
 —
 $446,501
Total 24,106
 $95.47
 —
 $446,501
  Issuer Purchases of Equity Securities
Period 
Total Number of Shares
Purchased (1)
 Average Price Paid per Share 
Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs
 
Approximate Dollar
Value of Shares that
 May Yet be Purchased
Under the Plan or
Programs (2)
7/1/2019 - 7/31/2019 27,535
 $38.56
 —
 $160,867
8/1/2019 - 8/31/2019 18,304
 39.17
 —
 $160,867
9/1/2019 - 9/30/2019 22,686
 41.13
 —
 $160,867
Total 68,525
 $39.57
 —
  
(1)Represents repurchases by ACGLArch Capital of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair value, as determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights were exercised.
(2)Remaining amount available at September 30, 20172019 under ACGL’sArch Capital’s share repurchase authorization, under which repurchases may be effected from time to time in open market or privately negotiated transactions. On November 8, 2019, the board of directors of ACGL increased the aggregate purchase amount authorized under the share repurchase program to $1.0 billion. Repurchases under this authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2019.2021.


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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
In accordance with Section 10a(i)(2) of the Securities Exchange Act of 1934, as amended, we are responsible for disclosing non-audit services to be provided by our independent auditor, PricewaterhouseCoopers LLP, which are approved by the Audit Committee of our board of directors. During the 20172019 third quarter, the Audit Committee approved engagements of PricewaterhouseCoopers LLP for permitted non-audit services, which consisted of tax consulting services, tax compliance services and other accounting consulting services.
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934


Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.
Certain of our non-U.S. subsidiaries provideunderwrite insurance and facultative reinsurance on a global basis to non-U.S. insureds and insurers, including for liability, marine, aviation and energy risks. Coverage provided to non-Iranian business may indirectly cover an exposure in Iran. For example, certain of our operations underwrite global marine hull and cargo policies that provide coverage for vessels navigating into and out of ports worldwide. In lightworldwide, including Iran. For the quarter ended September 30, 2019, there has been no material amount of European Union and U.S. modificationspremium allocated or apportioned to activities relating to Iran, sanctions this year, including the issuance of General License H, and consistent with General License H, we have been notified that certain of our policyholders have begunare unable to attribute gross revenues or will begin to, ship cargo to andnet profits from Iran, and thatany such cargo may include transporting crude oil from Iran to another country. Since these policies because they insure multiple voyages and fleets containing multiple ships, we are unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. We intend for ourships. Such non-U.S. subsidiaries towill continue to provide such coverage only to the extent permitted by applicable law.


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ITEM 6. EXHIBITS
Exhibit No.Description
   Incorporated by Reference
10.1
Exhibit Number		Exhibit DescriptionFormOriginal NumberDate FiledFiled Herewith
15 
Share Appreciation Right Agreement, dated as of May 6, 2011 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.2
Share Appreciation Right Agreement, dated as of May 9, 2012, between Arch Capital Group Ltd. and Maamoun Rajeh†
10.3
Share Appreciation Right Agreement, dated as of May 9, 2012 between Arch Capital Group Ltd. and Andrew Rippert†
10.4
Share Appreciation Right Agreement, dated as of July 1, 2012, between Arch Capital Group Ltd. and Maamoun Rajeh†
10.5
Share Appreciation Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Nicolas Papadopoulo and Maamoun Rajeh for November 12, 2012 grants†
10.6
Restricted Share Agreement, dated as of November 12, 2012 between Arch Capital Group Ltd. and Nicholas Papadopoulo†
10.7
Restricted Share Unit Agreement, dated as of November 12, 2012 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.8
Restricted Share Agreement, dated as of November 12, 2012 between Arch Capital Group Ltd. and Andrew Rippert†
10.9
Share Appreciation Agreement, dated as of November 12, 2012 between Arch Capital Group Ltd. and Andrew Rippert†
10.10
Share Appreciation Right Agreement, dated as of May 9, 2013 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.11
Share Appreciation Right Agreement, dated as of May 9, 2013 between Arch Capital Group Ltd. and Andrew Rippert†
10.12
Share Appreciation Right Agreement, dated as of February 4, 2014 between Arch Capital Group Ltd. and Andrew Rippert†
10.13
Share Appreciation Right Agreement, dated as of May 13, 2014 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.14
Share Appreciation Right Agreement, dated as of May 13, 2014 between Arch Capital Group Ltd. and Andrew Rippert†
10.15
Share Appreciation Right Agreement, dated as of July 1, 2014 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.16
Restricted Share Agreement, dated as of November 6, 2014 between Arch Capital Group Ltd. and Nicolas Papadopoulo†
10.17
Share Appreciation Right Agreement, dated as of November 6, 2014 between Arch Capital Group Ltd. and Nicolas Papadopoulo†
10.18
Stock Option Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Nicolas Papadopoulo, Maamoun Rajeh, and Andrew Rippert for May 13, 2015 grants†
10.19
Restricted Share Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Nicolas Papadopoulo, Maamoun Rajeh, and Andrew Rippert for May 13, 2015 grants†
10.20
Stock Option Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Nicolas Papadopoulo, Maamoun Rajeh, and Andrew Rippert for May 13, 2016 grants†
10.21
Restricted Share Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Nicolas Papadopoulo, Maamoun Rajeh, and Andrew Rippert for May 13, 2016 grants†
10.22
Stock Option Agreement, dated as of February 24, 2017 between Arch Capital Group Ltd. and Constantine Iordanou†
10.23
Stock Option Agreement, dated as of May 8, 2017 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.24
Restricted Share Agreement, dated as of May 8, 2017 between Arch Capital Group Ltd. and Maamoun Rajeh†
10.25
Consulting Letter Agreement, dated September 19, 2017, between Arch Capital Group Ltd. and David McElroy
10.26
Employment Agreement, dated as of October 1, 2017 between Arch Capital Group Ltd. and Maamoun Rajeh
10.27
Employment Agreement, dated as of October 1, 2017 between Arch Capital Group Ltd. and Nicholas Papadopoulo
10.28
Employment Agreement, dated as of October 30, 2017, between Arch Capital Group Ltd. and Andrew Rippert
15
Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1
 X
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 X
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 X
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 X
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following financial information from Arch Capital Group Ltd.’s Quarterly Report for the quarter ended September 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three and nine month periods ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2017 and 2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements.X
101.INSXBRL Instance Document   
†101.SCH Management contract or compensatory plan or arrangement.XBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document





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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  ARCH CAPITAL GROUP LTD.
  (REGISTRANT)
   
  /s/ Constantine IordanouMarc Grandisson
Date: November 3, 20178, 2019 Constantine IordanouMarc Grandisson
  President and Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors
   
  /s/ Mark D. LyonsFrançois Morin
Date: November 3, 20178, 2019 Mark D. LyonsFrançois Morin
  Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


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