Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements		Page No.
Report of Independent Registered Public Accounting Firm		94
Consolidated Balance Sheets
	At December 31, 2017 and December 31, 2016	96
Consolidated Statements of Income
	For the years ended December 31, 2017, 2016 and 2015	97
Consolidated Statements of Comprehensive Income
	For the years ended December 31, 2017, 2016 and 2015	98
Consolidated Statements of Changes in Shareholders’ Equity
	For the years ended December 31, 2017, 2016 and 2015	99
Consolidated Statements of Cash Flows
	For the years ended December 31, 2017, 2016 and 2015	100
Notes to Consolidated Financial Statements
	Note 1 - General	101
	Note 2 - Businesses Acquired	101
	Note 3 - Significant Accounting Policies	102
	Note 4 - VIE and Noncontrolling Interests	111
	Note 5 - Segment Information	113
	Note 6 - Reserve for Losses and Loss Adjustment Expenses	121
	Note 7 - Short Duration Contracts	123
	Note 8 - Reinsurance	135
	Note 9 - Investment Information	136
	Note 10 - Fair Value	141
	Note 11 - Derivative Instruments	147
	Note 12 - Other Comprehensive Income (Loss)	148
	Note 13 - Earnings Per Common Share	150
	Note 14 - Income Taxes	150
	Note 15 - Transactions with Related Parties	153
	Note 16 - Commitments and Contingencies	153
	Note 17 - Senior Notes	156
	Note 18 - Goodwill and Intangible Assets	156
	Note 19 - Shareholders’ Equity	157
	Note 20 - Share-Based Compensation	159
	Note 21 - Retirement Plans	162
	Note 22 - Legal Proceedings	162
	Note 23 - Statutory Information	162
	Note 24 - Unaudited Condensed Quarterly Financial Information	165
	Note 25 - Guarantor Financial Information	166
	Note 26 - Subsequent Event	174

ARCH CAPITAL	93	2017 FORM 10-K

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Arch Capital Group Ltd.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Arch Capital Group Ltd. (The Company) and its subsidiaries as of December 31, 2017 and December 31, 2016, and the related consolidated statements of income, statements of comprehensive income, statements of changes in shareholders’ equity, and statements of cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying: Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

ARCH CAPITAL	94	2017 FORM 10-K

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 28, 2018

We have served as the Company’s or its predecessor’s auditor since 1995.

ARCH CAPITAL	95	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data)
	December 31,
	2017				2016
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $13,869,460 and $13,522,671)	$	13,876,003			$	13,426,577
Short-term investments available for sale, at fair value (amortized cost: $1,468,955 and $611,878)	1,469,042				612,005
Collateral received under securities lending, at fair value (amortized cost: $476,605 and $762,554)	476,615				762,565
Equity securities available for sale, at fair value (cost: $416,010 and $475,085)	495,804				518,041
Other investments available for sale, at fair value (cost: $198,163 and $149,077)	264,989				167,970
Investments accounted for using the fair value option	4,216,237				3,421,220
Investments accounted for using the equity method	1,041,322				811,273
Total investments	21,840,012				19,719,651
Cash	606,199				842,942
Accrued investment income	113,133				124,483
Securities pledged under securities lending, at fair value (amortized cost: $463,181 and $746,409)	464,917				744,980
Premiums receivable	1,135,249				1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	2,540,143				2,114,138
Contractholder receivables	1,978,414				1,717,436
Ceded unearned premiums	926,611				859,567
Deferred acquisition costs	535,824				447,560
Receivable for securities sold	205,536				58,284
Goodwill and intangible assets	652,611				781,553
Other assets	1,053,009				889,080
Total assets	$	32,051,658			$	29,372,109
Liabilities
Reserve for losses and loss adjustment expenses	$	11,383,792			$	10,200,960
Unearned premiums	3,622,314				3,406,870
Reinsurance balances payable	323,496				300,407
Contractholder payables	1,978,414				1,717,436
Collateral held for insured obligations	240,183				301,406
Senior notes	1,732,884				1,732,258
Revolving credit agreement borrowings	816,132				756,650
Securities lending payable	476,605				762,554
Payable for securities purchased	449,186				76,183
Other liabilities	782,717				806,260
Total liabilities	21,805,723				20,060,984
Commitments and Contingencies
Redeemable noncontrolling interests	205,922				205,553
Shareholders’ Equity
Non-cumulative preferred shares	872,555				772,555
Convertible non-voting common equivalent preferred shares	489,627				1,101,304
Common shares ($0.0033 par, shares issued: 183,290,742 and 174,644,101)	611				582
Additional paid-in capital	1,230,617				531,687
Retained earnings	8,562,889				7,996,701
Accumulated other comprehensive income (loss), net of deferred income tax	118,044				(114,541		)
Common shares held in treasury, at cost (shares: 52,312,803 and 51,856,584)	(2,077,741		)		(2,034,570		)
Total shareholders' equity available to Arch	9,196,602				8,253,718
Non-redeemable noncontrolling interests	843,411				851,854
Total shareholders' equity	10,040,013				9,105,572
Total liabilities, noncontrolling interests and shareholders' equity	$	32,051,658			$	29,372,109

See Notes to Consolidated Financial Statements

ARCH CAPITAL	96	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data)
	Year Ended December 31,
	2017				2016				2015
Revenues
Net premiums written	$	4,961,373			$	4,031,391			$	3,817,531
Change in unearned premiums	(116,841		)		(146,569		)		(83,626		)
Net premiums earned	4,844,532				3,884,822				3,733,905
Net investment income	470,872				366,742				348,090
Net realized gains (losses)	149,141				137,586				(185,842		)
Other-than-temporary impairment losses	(7,138		)		(30,794		)		(26,152		)
Less investment impairments recognized in other comprehensive income, before taxes	—				352				6,036
Net impairment losses recognized in earnings	(7,138		)		(30,442		)		(20,116		)
Other underwriting income	30,253				57,173				35,497
Equity in net income of investment funds accounted for using the equity method	142,286				48,475				25,455
Other income (loss)	(2,571		)		(800		)		(399		)
Total revenues	5,627,375				4,463,556				3,936,590
Expenses
Losses and loss adjustment expenses	2,967,446				2,185,599				2,050,903
Acquisition expenses	775,458				667,625				662,778
Other operating expenses	684,451				624,090				603,288
Corporate expenses	83,752				81,746				49,745
Amortization of intangible assets	125,778				19,343				22,926
Interest expense	117,431				66,252				45,874
Net foreign exchange losses (gains)	115,782				(36,651		)		(66,118		)
Total expenses	4,870,098				3,608,004				3,369,396
Income before income taxes	757,277				855,552				567,194
Income taxes:
Current tax (benefit) expense	(45,736		)		50,745				44,194
Deferred tax expense (benefit)	173,304				(19,371		)		(3,582		)
Income tax expense	127,568				31,374				40,612
Net income	$	629,709			$	824,178			$	526,582
Net (income) loss attributable to noncontrolling interests	(10,431		)		(131,440		)		11,156
Net income available to Arch	619,278				692,738				537,738
Preferred dividends	(46,041		)		(28,070		)		(21,938		)
Loss on redemption of preferred shares	(6,735		)		—				—
Net income available to Arch common shareholders	$	566,502			$	664,668			$	515,800
Net income per common share and common share equivalent
Basic	$	4.21			$	5.50			$	4.24
Diluted	$	4.07			$	5.33			$	4.09
Weighted average common shares and common share equivalents outstanding
Basic	134,712,788				120,792,114				121,786,127
Diluted	139,261,675				124,717,493				126,038,743

See Notes to Consolidated Financial Statements

ARCH CAPITAL	97	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands)
	Year Ended December 31,
	2017				2016				2015
Comprehensive Income
Net income	$	629,709			$	824,178			$	526,582
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 year	252,904				(21,013		)		(77,244		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—				(352		)		(6,036		)
Reclassification of net realized gains, net of income taxes, included in net income	(67,863		)		(56,361		)		(28,233		)
Foreign currency translation adjustments	47,014				(20,381		)		(34,111		)
Comprehensive income	861,764				726,071				380,958
Net (income) loss attributable to noncontrolling interests	(10,431		)		(131,440		)		11,156
Foreign currency translation adjustments attributable to noncontrolling interests	530				68				265
Comprehensive income available to Arch	$	851,863			$	594,699			$	392,379

See Notes to Consolidated Financial Statements

ARCH CAPITAL	98	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in thousands)
	Year Ended December 31,
	2017				2016				2015
Non-cumulative preferred shares
Balance at beginning of year	$	772,555			$	325,000			$	325,000
Preferred shares issued	330,000				450,000				—
Preferred shares redeemed	(230,000		)		(2,445		)		—
Balance at end of year	872,555				772,555				325,000
Convertible non-voting common equivalent preferred shares
Balance at beginning of year	1,101,304				—				—
Series D preferred shares issued	—				1,101,304				—
Preferred shares converted to common shares	(611,677		)		—				—
Balance at end of year	489,627				1,101,304				—
Common shares
Balance at beginning of year	582				577				572
Common shares issued, net	29				5				5
Balance at end of year	611				582				577
Additional paid-in capital
Balance at beginning of year	531,687				467,339				383,073
Common shares issued, net	18,732				11,919				10,576
Issue costs on preferred shares issued	(10,306		)		(15,101		)		—
Reversal of issue costs on preferred shares redeemed	6,735				—				—
Preferred shares converted to common shares	611,653				—				—
Exercise of stock options	4,432				9,448				15,926
Amortization of share-based compensation	67,856				56,581				56,096
Other	(172		)		1,501				1,668
Balance at end of year	1,230,617				531,687				467,339
Retained earnings
Balance at beginning of year	7,996,701				7,332,032				6,816,232
Cumulative effect of an accounting change	(314		)		—				—
Balance at beginning of year, as adjusted	7,996,387				7,332,032				6,816,232
Net income	629,709				824,178				526,582
Net (income) loss attributable to noncontrolling interests	(10,431		)		(131,439		)		11,156
Preferred share dividends	(46,041		)		(28,070		)		(21,938		)
Loss on redemption of preferred shares	(6,735		)		—				—
Balance at end of year	8,562,889				7,996,701				7,332,032
Accumulated other comprehensive income (loss)
Balance at beginning of year	(114,541		)		(16,502		)		128,856
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of year	(27,641		)		50,085				161,598
Unrealized holding gains (losses) arising during period, net of reclassification adjustment	185,041				(77,374		)		(105,477		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—				(352		)		(6,036		)
Balance at end of year	157,400				(27,641		)		50,085
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of year	(86,900		)		(66,587		)		(32,742		)
Foreign currency translation adjustments	47,014				(20,381		)		(34,111		)
Foreign currency translation adjustments attributable to noncontrolling interests	530				68				266
Balance at end of year	(39,356		)		(86,900		)		(66,587		)
Balance at end of year	118,044				(114,541		)		(16,502		)
Common shares held in treasury, at cost
Balance at beginning of year	(2,034,570		)		(1,941,904		)		(1,562,019		)
Shares repurchased for treasury	(43,171		)		(92,666		)		(379,885		)
Balance at end of year	(2,077,741		)		(2,034,570		)		(1,941,904		)
Total shareholders’ equity available to Arch	9,196,602				8,253,718				6,166,542
Non-redeemable noncontrolling interests	843,411				851,854				738,831
Total shareholders’ equity	$	10,040,013			$	9,105,572			$	6,905,373

See Notes to Consolidated Financial Statements

ARCH CAPITAL	99	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)
	Year Ended December 31,
	2017				2016				2015
Operating Activities
Net income	$	629,709			$	824,178			$	526,582
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(174,517		)		(178,507		)		149,961
Net impairment losses recognized in earnings	7,138				30,442				20,116
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	(79,540		)		5,644				3,857
Amortization of intangible assets	125,778				19,343				22,926
Share-based compensation	67,798				56,581				56,096
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	614,534				372,244				181,658
Unearned premiums, net of ceded unearned premiums	116,841				146,569				83,626
Premiums receivable	(31,405		)		(71,613		)		(26,783		)
Deferred acquisition costs	(78,378		)		(38,597		)		(29,008		)
Reinsurance balances payable	8,529				31,542				(5,885		)
Other items, net	(93,870		)		198,818				14,760
Net Cash Provided By Operating Activities	1,112,617				1,396,644				997,906
Investing Activities
Purchases of fixed maturity investments	(36,806,913		)		(35,532,810		)		(29,451,873		)
Purchases of equity securities	(1,021,016		)		(665,702		)		(515,413		)
Purchases of other investments	(2,020,624		)		(1,389,406		)		(1,749,525		)
Proceeds from sales of fixed maturity investments	35,686,779				34,559,966				28,094,047
Proceeds from sales of equity securities	1,056,401				751,728				564,011
Proceeds from sales, redemptions and maturities of other investments	1,528,617				1,149,328				1,250,883
Proceeds from redemptions and maturities of fixed maturity investments	907,417				755,007				748,529
Net settlements of derivative instruments	(28,563		)		(17,068		)		(5,056		)
Proceeds from investment in joint venture	—				—				40,000
Net (purchases) sales of short-term investments	(734,554		)		(123,410		)		169,095
Change in cash collateral related to securities lending	12,540				(155,248		)		(6,662		)
Acquisitions, net of cash	(27,709		)		(1,992,720		)		818
Purchases of fixed assets	(22,841		)		(15,303		)		(15,736		)
Other	110,470				(45,905		)		(36,993		)
Net Cash Used For Investing Activities	(1,359,996		)		(2,721,543		)		(913,875		)
Financing Activities
Proceeds from issuance of preferred shares, net	319,694				434,899				—
Redemption of preferred shares	(230,000		)		(2,445		)		—
Purchases of common shares under share repurchase program	—				(75,256		)		(365,383		)
Proceeds from common shares issued, net	(21,048		)		(2,418		)		4,861
Proceeds from borrowings	253,415				1,386,741				431,362
Repayments of borrowings	(197,000		)		(219,171		)		—
Change in cash collateral related to securities lending	(12,540		)		155,248				6,662
Dividends paid to redeemable noncontrolling interests	(17,989		)		(17,989		)		(18,307		)
Other	(51,896		)		4,130				(41,913		)
Preferred dividends paid	(46,041		)		(28,070		)		(21,938		)
Net Cash Provided By (Used For) Financing Activities	(3,405		)		1,635,669				(4,656		)
Effects of exchange rate changes on foreign currency cash	14,041				(21,154		)		(11,751		)
Increase (decrease) in cash	(236,743		)		289,616				67,624
Cash beginning of year	842,942				553,326				485,702
Cash end of year	$	606,199			$	842,942			$	553,326
Income taxes paid	$	51,781			$	50,621			$	40,273
Interest paid	$	117,374			$	63,288			$	52,728
Non-cash consideration paid in convertible non-voting common equivalent preferred shares	$	—			$	1,101,304			$	—

See Notes to Consolidated Financial Statements

ARCH CAPITAL	100	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

Arch Capital Group Ltd. (“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 Arch Capital and its subsidiaries. Similarly, “Common Shares” means the common shares of Arch Capital. The Company’s consolidated financial statements include the results of Watford Holdings Ltd., and its wholly owned subsidiaries (“Watford Re”). See Note 4.

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

2. Business Acquired

Arch MI Asia Limited

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.

United Guaranty Corporation

On December 31, 2016, the Company’s U.S.-based subsidiaries completed the acquisition of all of the issued and outstanding shares of capital stock of United Guaranty Corporation, a North Carolina corporation (“UGC”) pursuant to the Stock Purchase Agreement with American International Group, Inc. (“AIG”) entered into on August 15, 2016 (“Stock Purchase Agreement”). The acquisition under the Stock Purchase Agreement is referred to herein as the “UGC acquisition.”

The UGC acquisition expanded the scale of the Company’s existing mortgage insurance business by combining UGC’s position as the market leader in the U.S. private mortgage

insurance industry with the Company’s financial strength and history of innovation.

The aggregate purchase price paid by the Company was $3.26 billion, consisting of cash consideration of $2.16 billion and convertible non-voting common equivalent preferred shares of Arch Capital with a fair value of $1.1 billion. In connection with the UGC acquisition, the 50% quota share reinsurance agreement between United Guaranty Residential Insurance Company and three subsidiaries of AIG relating to policy years 2014, 2015 and 2016 was amended to terminate on a run-off basis as of 12:01 a.m. on January 1, 2017.

The following table summarizes the fair value of net assets acquired and allocation of purchase price, measured as of the acquisition date:

		Total				Useful Life
Purchase price
Cash paid		$	2,159,524
Convertible non-voting common equivalent preferred shares (1)		1,101,304
Total purchase price (a)		$	3,260,828
Assets acquired
Cash		$	187,715
Investments, at fair value		3,404,267
Accrued investment income		33,770
Premiums receivable		34,545
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses		27,280
Ceded unearned premiums		302,090
Intangible asset -- acquired insurance contracts		350,000				9 years
Intangible asset -- distribution relationships		115,000				20 years
Intangible asset -- operating platform		15,000				5 years
Intangible asset -- insurance licenses		27,000				Indefinite
Other assets acquired		133,222
Total assets acquired		4,629,889
Liabilities acquired
Reserves for losses and loss adjustment expenses		$	577,268
Unearned premiums		837,175
Reinsurance balances payable		49,295
Other liabilities acquired		94,081
Total liabilities acquired		1,557,819
Net assets acquired (b)		$	3,072,070
Goodwill (a)-(b)		$	188,758

(1) Based upon a formula set forth in the Stock Purchase Agreement, AIG received 1,276,282 of Arch Capital’s convertible non-voting common equivalent preferred shares, each of which is convertible into 10 shares of Arch Capital fully paid non-assessable common stock. The Company has determined that, based on a review of the terms, features and rights of the Company’s non-voting common equivalent preferred shares compared to the rights of the Company’s common shareholders, the underlying 12,762,820 common shares that the convertible securities converted to were common share equivalents at the time of their issuance. See Note 19 for further details.

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Prior to our acquisition, UGC, which is based in Greensboro, North Carolina, operated its U.S. business through its primary operating subsidiaries: United Guaranty Residential Insurance Company, which is licensed and operates in all 50 states, the District of Columbia and Puerto Rico; and United Guaranty Mortgage Indemnity Company (“UGMIC”), which is licensed in 48 states and the District of Columbia.

The Company recognized goodwill of $188.8 million that is primarily attributed to UGC’s assembled workforce, access to the mortgage insurance market and additional synergies to be realized in the future. Under U.S. tax principles, the UGC acquisition was structured as a deemed asset acquisition under Internal Revenue Code Section 338(h)(10). As an asset acquisition, the tax bases in the acquired assets were adjusted to fair market value. Any remaining purchase price was allocated to intangible assets and goodwill, which are amortizable over 15 years. The Company estimated that $126.9 million of goodwill along with each of the identified intangible assets was expected to be deductible for tax purposes at December 31, 2016. The Company includes the operations of UGC in its mortgage segment (see Note 5).

Supplemental Pro Forma Information

The following table presents unaudited pro forma consolidated information for the years ended December 31, 2016 and 2015 and assumes the UGC acquisition occurred on January 1, 2015. The pro forma financial information is presented for informational purposes only and does not necessarily reflect the results that would have occurred had the acquisition taken place on January 1, 2015, nor is it necessarily indicative of future results. Significant adjustments used to determine the pro forma results below include amortization of intangible assets and financing adjustments related to the Company’s issuance of senior notes, revolving credit agreement borrowings and preferred shares, and the corresponding income tax effects. Non-recurring transaction costs have been included in the unaudited pro forma results in the 2015 period.

	Unaudited Pro Forma
	Year Ended December 31,
	2016				2015
Total revenues	$	5,311,729			$	4,840,084
Net income available to Arch common shareholders	$	913,882			$	718,463
Net income per common share and common share equivalent
Basic	$6.84				$5.34
Diluted	$6.65				$5.18

3. Significant Accounting Policies

(a) Basis of Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Arch Capital and its subsidiaries, including Arch Reinsurance Ltd. (“Arch Re Bermuda”), Arch Reinsurance Company (“Arch Re U.S.”), Arch-U.S., Arch Insurance Company, Arch Specialty Insurance Company, Arch Excess & Surplus Insurance Company, Arch Indemnity Insurance Company, Arch Insurance Canada Ltd. (“Arch Insurance Canada”), Arch Reinsurance Europe Underwriting Designated Activity Company (“Arch Re Europe”), Arch Mortgage Insurance Company, Arch Mortgage Guaranty Company, United Guaranty Residential Insurance Company, Arch Mortgage Insurance Designated Activity Company (“Arch MI Europe”), Arch Insurance Company (Europe) Limited (“Arch Insurance Company Europe”), Lloyd’s of London syndicate 2012 and related companies (“Arch Syndicate 2012”), Gulf Reinsurance Limited and Watford Re. 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. The Company’s principal estimates include:

•	The reserve for losses and loss adjustment expenses;

•	Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses, including the provision for uncollectible amounts;

•	Estimates of written and earned premiums;

•	The valuation of the investment portfolio and assessment of other-than-temporary impairments (“OTTI”);

•	The valuation of purchased intangible assets;

•	The assessment of goodwill and intangible assets for impairment; and

•	the valuation of deferred tax assets.

(b) Premium Revenues and Related Expenses

Insurance. Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Premiums written include estimates in the Company’s programs, specialty lines, lenders products business and for participation in involuntary pools. Such premium estimates are derived from multiple sources which include the historical

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experience of the underlying business, similar business and available industry information. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of in-force insurance policies.

Reinsurance. Reinsurance premiums written include amounts reported by brokers and ceding companies, supplemented by the Company’s own estimates of premiums where reports have not been received. The determination of premium estimates requires a review of the Company’s experience with the ceding companies, familiarity with each market, the timing of the reported information, an analysis and understanding of the characteristics of each line of business, and management’s judgment of the impact of various factors, including premium or loss trends, on the volume of business written and ceded to the Company. On an ongoing basis, the Company’s underwriters review the amounts reported by these third parties for reasonableness based on their experience and knowledge of the subject class of business, taking into account the Company’s historical experience with the brokers or ceding companies. In addition, reinsurance contracts under which the Company assumes business generally contain specific provisions which allow the Company to perform audits of the ceding company to ensure compliance with the terms and conditions of the contract, including accurate and timely reporting of information. Based on a review of all available information, management establishes premium estimates where reports have not been received. Premium estimates are updated when new information is received and differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined.

Reinsurance premiums written are recorded based on the type of contracts the Company writes. Premiums on the Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten. For excess of loss contracts, premiums are recorded as written based on the terms of the contract. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to incept and are based on information provided by the brokers and the ceding companies. For multi-year reinsurance treaties which are payable in annual installments, generally, only the initial annual installment is included as premiums written at policy inception due to the ability of the reinsured to commute or cancel coverage during the term of the policy. The remaining annual installments are included as premiums written at each successive anniversary date within the multi-year term.

Reinstatement premiums for the Company’s insurance and reinsurance operations are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. Reinstatement premiums, if obligatory, are fully earned when recognized. The accrual of reinstatement premiums is based on

an estimate of losses and loss adjustment expenses, which reflects management’s judgment.

Premium estimates are reviewed by management at least quarterly. Such review includes a comparison of actual reported premiums to expected ultimate premiums along with a review of the aging and collection of premium estimates. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustment to these estimates is recorded in the period in which it becomes known. Adjustments to premium estimates could be material and such adjustments could directly and significantly impact earnings favorably or unfavorably in the period they are determined because the estimated premium may be fully or substantially earned. A significant portion of amounts included as premiums receivable, which represent estimated premiums written, net of commissions, are not currently due based on the terms of the underlying contracts.

Reinsurance 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. Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period. Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well as related acquisition expenses, are recorded based upon the projected experience under such contracts.

The Company also writes certain reinsurance business that is intended to provide insurers with risk management solutions that complement traditional reinsurance. Under these contracts, the Company assumes a measured amount of insurance risk in exchange for an anticipated margin, which is typically lower than on traditional reinsurance contracts. The terms and conditions of these contracts may include additional or return premiums based on loss experience, loss corridors, sublimits and caps. Examples of such business include aggregate stop-loss coverages, financial quota share coverages and multi-year retrospectively rated excess of loss coverages. If these contracts are deemed to transfer risk, they are accounted for as reinsurance. Otherwise, such contracts are accounted for under the deposit method.

Mortgage. Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide for payment of premiums on a monthly, annual or single basis. Upon renewal, the Company

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is not able to re-underwrite or re-price its policies. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of the revenue from single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the estimated expiration of risk of the policy. If single premium policies related to insured loans are canceled due to repayment by the borrower and the policy is a non-refundable product, the remaining unearned premium related to each canceled policy is recognized as earned premium upon notification of the cancellation.

Unearned premiums represent the portion of premiums written that is applicable to the estimated unexpired risk of insured loans. A portion of premium payments may be refundable if the insured cancels coverage, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount to trigger a lender permitted or legally required cancellation, or the value of the property has increased sufficiently in accordance with the terms of the contract. Premium refunds reduce premiums earned in the consolidated statements of income. Generally, only unearned premiums are refundable.

Acquisition Costs. Acquisition costs that are directly related and incremental to the successful acquisition or renewal of business are deferred and amortized based on the type of contract. The Company’s insurance and reinsurance operations capitalize incremental direct external costs that result from acquiring a contract but do not capitalize salaries, benefits and other internal underwriting costs. For the Company’s mortgage insurance operations, which include a substantial direct sales force, both external and certain internal direct costs are deferred and amortized. For property and casualty insurance and reinsurance contracts, deferred acquisition costs are amortized over the period in which the related premiums are earned. Consistent with mortgage insurance industry accounting practice, amortization of acquisition costs related to the mortgage insurance contracts for each underwriting year’s book of business is recorded in proportion to estimated gross profits. Estimated gross profits are comprised of earned premiums and losses and loss adjustment expenses. For each underwriting year, the Company estimates the rate of amortization to reflect actual experience and any changes to persistency or loss development.

Deferred acquisition costs are carried at their estimated realizable value and take into account anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income.

A premium deficiency occurs if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition costs

and maintenance costs exceed unearned premiums (including expected future premiums) and anticipated investment income. A premium deficiency reserve (“PDR”) is recorded by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency.

To assess the need for a PDR on mortgage exposures, the Company develops loss projections based on modeled loan defaults related to its current policies in force. This projection is based on recent trends in default experience, severity and rates of defaulted loans moving to claim, as well as recent trends in the rate at which loans are prepaid, and incorporates anticipated interest income. Evaluating the expected profitability of the Company’s existing mortgage insurance business and the need for a PDR for its mortgage business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues.

No premium deficiency charges were recorded by the Company during 2017, 2016 or 2015.

(c) Deposit Accounting

Certain assumed reinsurance contracts that are deemed not to transfer insurance risk, are accounted for using the deposit method of accounting. However, it is possible that the Company could incur financial losses on such contracts. Management exercises significant judgment in the assumptions used in determining whether assumed contracts should be accounted for as reinsurance contracts or deposit contracts. For those contracts that contain only significant underwriting risk, the estimated profit margin is deferred and amortized over the contract period and such amount is included in the Company’s underwriting results. When the estimated profit margin is explicit, the margin is reflected as other underwriting income and any adverse financial results on such contracts are reflected as incurred losses. When the estimated profit margin is implicit, the margin is reflected as an offset to paid losses and any adverse financial results on such contracts are reflected as incurred losses. Additional judgments are required when applying the accounting guidance with respect to the revenue recognition criteria for contracts deemed to transfer only significant underwriting risk. For those contracts that contain only significant timing risk, an accretion rate is established at inception of the contract based on actuarial estimates whereby the deposit accounting liability is increased to the estimated amount payable over the contract term. The accretion on the deposit is based on the expected rate of return required to fund the expected future payment obligations. Periodically the Company reassesses the estimated ultimate liability and the related expected rate of return. The accretion of the deposit accounting liability as well as changes to the estimated ultimate liability and the accretion rate would be reflected as part of

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interest expense in the Company’s results of operations. Any negative accretion in a deposit accounting liability is shown in other underwriting income in the Company’s results of operations.

Under some of these contracts, the ceding company retains the related assets on a funds-held basis. Such amounts are included in “Other assets” on the Company’s balance sheet. Interest income produced by those assets are recorded as part of net investment income in the Company's results of operations.

(d) Retroactive Accounting

Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and, accordingly, the Company bifurcates the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately where practical. Underwriting income generated in connection with retroactive reinsurance contracts is deferred and amortized into income over the settlement period while losses are charged to income immediately. Subsequent changes in estimated amount or timing of cash flows under such retroactive reinsurance contracts are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.

(e) Reinsurance Ceded

In the normal course of business, the Company purchases reinsurance to increase capacity and to limit the impact of individual losses and events on its underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses pro rata, excess of loss and facultative reinsurance contracts. Reinsurance ceding commissions that represent a recovery of acquisition costs are recognized as a reduction to acquisition costs while the remaining portion is deferred. The accompanying consolidated statement of income reflects premiums and losses and loss adjustment expenses and acquisition costs, net of reinsurance ceded. See Note 8 for information on the Company's reinsurance usage. Reinsurance premiums ceded and unpaid losses and loss adjustment expenses recoverable are estimated in a manner consistent with that of the original policies issued and the terms of the reinsurance contracts. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.

(f) Cash

Cash includes cash equivalents, which are investments with original maturities of three months or less that are not managed by external or internal investment advisors.

(g) Investments

The Company currently classifies substantially all of its fixed maturity investments, equity securities and short-term investments as “available for sale” and, accordingly, they are carried at estimated fair value (also known as fair value) with the changes in fair value recorded as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity. The fair value of fixed maturity securities and equity securities is generally determined from quotations received from nationally recognized pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments comprise securities due to mature within one year of the date of issue. Short-term investments include certain cash equivalents which are part of investment portfolios under the management of external and internal investment managers.

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. Such securities have been reclassified as “Securities pledged under securities lending, at fair value.” 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. Collateral received is required at a rate of 102% or greater of the fair value of the loaned securities including accrued investment income and is monitored and maintained by the lending agent. Such collateral is reflected as “Collateral received under securities lending, at fair value.”

The Company’s investment portfolio includes certain funds that, due to their ownership structure, are accounted for by the Company using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Changes in the carrying value of such investments are recorded in net income as “Equity in net income (loss) of investment funds accounted for using the equity method.” As such, fluctuations in the carrying value of the investment funds accounted for using the equity method may increase the volatility of the Company’s reported results of operations.

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Other investments include funds and separately managed accounts with holdings in Asian and emerging markets, fixed maturities, term loans and other investment strategies. The fair value for certain of the Company’s other investments are determined using net asset values (“NAVs”) as advised by external fund managers. The NAV is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. Certain of the funds are accounted for as available for sale equity securities, regardless of the nature of the investments held within the fund.

The Company elected to carry certain fixed maturity securities, equity securities and other investments at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in “Net realized gains (losses).” The primary reasons for electing the fair value option were to address simplification and cost-benefit considerations.

The Company invests in limited partner interests and shares of limited liability companies. Such amounts are included in investments accounted for using the equity method, other investments available for sale and investments accounted for using the fair value option. These investments can often have characteristics of a variable interest entity (“VIE”). A VIE refers to entities that have 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 the characteristic of a controlling financial interest. If the Company is determined to be the primary beneficiary, it is required to consolidate the VIE. The primary beneficiary 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. At inception of the VIE as well as on an ongoing basis, the Company determines whether it is the primary beneficiary based on an analysis of the Company’s level of involvement in the VIE, the contractual terms, and the overall structure of the VIE. 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 Company performs quarterly reviews of its investments to determine whether declines in fair value below the cost basis are considered other-than-temporary in accordance with applicable accounting guidance regarding the recognition and presentation of OTTI. The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. These factors include (i) an analysis of the liquidity, business prospects and overall financial condition of the issuer, (ii) the time period in which

there was a significant decline in value, (iii) the significance of the decline and (iv) the analysis of specific credit events. The Company evaluates the unrealized losses of its equity securities by issuer and forecasts a reasonable period of time by which the fair value of the securities would increase and the Company would recover its cost. If the Company is unable to forecast a reasonable period of time in which to recover the cost of its equity securities, a net impairment loss in earnings equivalent to the entire unrealized loss is recognized.

When there are credit-related losses associated with debt securities for which the Company does not have an intent to sell and it is more likely than not that it will not be required to sell the security before recovery of its cost basis, the amount of the OTTI related to a credit loss is recognized in earnings and the amount of the OTTI related to other factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income (loss). The amount of the credit loss of an impaired debt security is the difference between the amortized cost and the greater of (i) the present value of expected future cash flows and (ii) the fair value of the security. In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in fair value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income. See Note 9 for additional information.

Net investment income includes interest and dividend income together with amortization of market premiums and discounts and is net of investment management and custody fees. Anticipated prepayments and expected maturities are used in applying the interest method for certain investments such as mortgage and other asset-backed securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in net investment income when determined.

Investment gains or losses realized on the sale of investments, except for certain fund investments, are determined on a first-in, first-out basis and are reflected in net income. Investment gains or losses realized on the sale of certain fund investments are determined on an average cost basis. Unrealized appreciation or decline in the value of available for sale securities, which are carried at fair value, is excluded from net

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income and recorded as a separate component of accumulated other comprehensive income, net of applicable deferred income tax.

(h) Derivative Instruments

The Company recognizes all derivative instruments, including embedded derivative instruments, at fair value in its consolidated balance sheets. The Company employs the use of derivative instruments within its operations to mitigate risks arising from assets and liabilities held in foreign currencies as well as part of its overall investment strategy. For such instruments, changes in assets and liabilities measured at fair value are recorded as “Net realized gains” in the consolidated statements of income. In addition, the Company’s derivative instruments include amounts related to underwriting activities where an insurance or reinsurance contract meets the accounting definition of a derivative instrument. For such contracts, changes in fair value are reflected in “Other underwriting income” in the consolidated statements of income as the underlying contract originates from the Company’s underwriting operations. For the periods ended 2017, 2016, and 2015, the Company did not designate any derivative instruments as hedges under the relevant accounting guidance. See Note 11 for additional information.

(i) Reserves for Losses and Loss Adjustment Expenses

Insurance and Reinsurance. The reserve for losses and loss adjustment expenses consists of estimates of unpaid reported losses and loss adjustment expenses and estimates for losses incurred but not reported. The reserve for unpaid reported losses and loss adjustment expenses, established by management based on reports from ceding companies and claims from insureds, excludes estimates of amounts related to losses under high deductible policies, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. Such reserves are supplemented by management’s estimates of reserves for losses incurred for which reports or claims have not been received. The Company’s reserves are based on a combination of reserving methods, incorporating both Company and industry loss development patterns. The Company selects the initial expected loss and loss adjustment expense ratios based on information derived by its underwriters and actuaries during the initial pricing of the business, supplemented by industry data where appropriate. Such ratios consider, among other things, rate changes and changes in terms and conditions that have been observed in the market. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in income in the period in which they are determined. As actual loss information has been reported, the Company has developed its own loss experience and its reserving methods include other actuarial techniques. Over time, such techniques have been given further weight in

its reserving process based on the continuing maturation of the Company’s reserves. Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss adjustment expenses may differ materially from the amounts recorded in the accompanying consolidated financial statements. Losses and loss adjustment expenses are recorded on an undiscounted basis, except for excess workers’ compensation and employers’ liability business written by the Company’s insurance operations.

Mortgage. The reserves for mortgage guaranty insurance losses and loss adjustment expenses are the estimated claim settlement costs on notices of delinquency that have been received by the Company, as well as loan delinquencies that have been incurred but have not been reported by the lenders. Consistent with primary mortgage insurance industry accounting practice, the Company does not establish loss reserves for future claims on insured loans that are not currently delinquent (defined as two consecutive missed payments). The Company establishes loss reserves on a case-by-case basis when insured loans are reported delinquent using estimated claim rates and average claim sizes for each cohort, net of any salvage recoverable. The Company also reserves for delinquencies that have occurred but have not yet been reported to the Company prior to the close of an accounting period. To determine this reserve, the Company estimates the number of delinquencies not yet reported using historical information regarding late reported delinquencies and applies estimated claim rates and claim sizes for the estimated delinquencies not yet reported.

The establishment of reserves across the Company’s segments is an inherently uncertain process, are necessarily based on estimates, and the ultimate net cost may vary from such estimates. The methods for making such estimates and for establishing the resulting liability are reviewed and updated using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations.

(j) Contractholder Receivables and Payables and Collateral Held for Insured Obligations

Certain insurance policies written by the Company’s insurance operations feature large deductibles, primarily in its construction and national accounts lines of business. Under such contracts, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet in contractholder payables and contractholder receivables, respectively. In the event that the Company is unable to collect from the policyholder, the Company would be liable for such defaulted amounts. Collateral, primarily in the form of letters of credit, cash and trusts, is obtained from the

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policyholder to mitigate the Company’s credit risk. In the instances where the Company receives collateral in the form of cash, the Company reflects it in “Collateral held for insured obligations.”

(k) Foreign Exchange

Assets and liabilities of foreign operations whose functional currency is not the U.S. Dollar are translated at the prevailing exchange rates at each balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The net effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income tax. Monetary assets and liabilities, such as premiums receivable and the reserve for losses and loss adjustment expenses, denominated in foreign currencies are revalued at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses included in net income. Accounts that are classified as non-monetary, such as deferred acquisition costs and the unearned premium reserves, are not revalued. In the case of foreign currency denominated fixed maturity securities which are classified as “available for sale,” the change in exchange rates between the local currency in which the investments are denominated and the Company’s functional currency at each balance sheet date is included in unrealized appreciation or decline in value of securities, a component of accumulated other comprehensive income, net of applicable deferred income tax.

(l) Income Taxes

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. A valuation allowance is recorded if it is more likely than not that some or all of a deferred tax asset may not be realized. The Company considers future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance. In the event the Company determines that it will not be able to realize all or part of its deferred income tax assets in the future, an adjustment to the deferred income tax assets would be charged to income in the period in which such determination is made. In addition, if the Company subsequently assesses that the valuation allowance is no longer needed, a benefit would be recorded to income in the period in which such determination is made. See Note 14 for additional information.

The Company recognizes a tax benefit where it concludes that it is more likely than not that the tax benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. The

Company records interest and penalties related to unrecognized tax benefits in the provision for income taxes.

(m) Share-Based Payment Arrangements

The Company applies a fair value based measurement method in accounting for its share-based payment arrangements with eligible employees and directors. Compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding increase in shareholders’ equity. No value is attributed to awards that employees forfeit because they fail to satisfy vesting conditions. The Company’s share-based payment arrangements generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. The share-based compensation expense associated with such awards that have graded vesting features and vest based on service conditions only is calculated on a straight-line basis over the requisite service period for the entire award. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date. In November 2012, the Company issued off-cycle share-based awards, which cliff vested on the fifth anniversary of the grant date. The expense for such grant was amortized on a straight-line basis over the five-year requisite service period. These charges had no impact on the Company’s cash flows or total shareholders’ equity. See Note 3(q) and Note 20 for information relating to the Company’s share-based payment awards.

(n) Guaranty Fund and Other Related Assessments

Liabilities for guaranty fund and other related assessments in the Company’s insurance and reinsurance operations are accrued when the Company receives notice that an amount is payable, or earlier if a reasonable estimate of the assessment can be made.

(o) Treasury Shares

Treasury shares are common shares purchased by the Company and not subsequently canceled. These shares are recorded at cost and result in a reduction of the Company’s shareholders’ equity in its Consolidated Balance Sheets.

(p) Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired and is assigned to the applicable reporting unit at acquisition. Goodwill is evaluated for impairment on an annual basis. Impairment tests may be performed more frequently if the facts

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and circumstances indicate a possible impairment. In performing impairment tests, the Company may first assess qualitative factors to determine whether it is more likely than not (that is, more than a 50% probability) that the fair value of a reporting unit exceeds its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the accounting guidance.

Indefinite-lived intangible assets, such as insurance licenses are evaluated for impairment similar to goodwill. Finite-lived intangible assets and liabilities include the value of acquired insurance and reinsurance contracts, which are estimated based on the present value of future expected cash flows and amortized in proportion to the estimated profits expected to be realized. Other finite-lived intangible assets or liabilities, including favorable or unfavorable contracts, are amortized over their useful lives. Finite-lived intangible assets and liabilities are periodically reviewed for indicators of impairment. An impairment is recognized when the carrying amount is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value.

If goodwill or intangible assets are impaired, such assets are written down to their fair values with the related expense recorded in the Company’s results of operations. See Note 18 for information relating to the Company’s goodwill and intangible assets.

(q) Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2017. This ASU was issued in the 2016 first quarter to improve and simplify the accounting for employee share-based payment transactions. This ASU provides simplifications with respect to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows for these types of transactions. With respect to the forfeiture accounting policy election, the Company has elected to account for forfeitures as they occur, which did not result in a material cumulative effect adjustment. With respect to the change in presentation in the statement of cash flows related to excess tax benefits, the Company has applied the guidance prospectively and prior periods have not been adjusted.

The Company adopted ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” prospectively effective October 1, 2017. The ASU provides updated guidance that eliminates the requirement to calculate the implied fair value of goodwill (i.e., step 2 of the current goodwill impairment test) to measure a

goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit's fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., step 1 of the current goodwill impairment test). The adoption of this ASU did not have a material effect on the Company's results of operations, financial position or liquidity.

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. The Company does not expect that the cumulative effect adjustment as a result of the adoption of this ASU will be material, mostly because the accounting for insurance contracts is outside of the scope of ASU 2014-09.

ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and 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 significantly changes the income statement impact of equity instruments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with any changes in fair value recognized in net income rather than other comprehensive income. The ASU is effective in the 2018 first quarter. Upon adoption of this ASU, the Company expects to record a cumulative effect adjustment of $149.8 million in retained earnings and an offsetting decrease in accumulated other comprehensive income. The adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but will increase volatility in the Company's results of operations.

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ASU 2016-16, “Income Taxes - Intra-Entity Transfers of Assets Other than Inventory (Topic 740),” was issued in the 2016 fourth quarter. This ASU requires entities to recognize current and deferred income tax resulting from an intra-entity asset transfer when the transfer occurs. Previously, recognition of income tax consequences under GAAP was not allowed until the asset had been sold to a third party. The ASU is effective in the 2018 first quarter. The Company does not expect that the cumulative effect adjustment as a result of the adoption of this ASU will be material.

ASU 2016-02, “Leases,” was issued in the 2016 first quarter pertaining to the accounting for leases by a lessee. The ASU requires that the lessee recognize an asset and a liability for leases with a lease term greater than 12 months regardless of whether the lease is classified as operating or financing. Under current accounting, operating leases are not reflected in the balance sheet. The ASU is effective for the 2019 first quarter, though early application is permitted, and should be applied on a modified retrospective basis. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements. The Company's lease obligations under various non-cancelable operating lease agreements amounted to $169.0 million at December 31, 2017.

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” was issued in the 2016 second quarter. The ASU changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The ASU requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The ASU is effective for the 2020 first quarter, though early application is permitted in the 2019 first quarter, and should be applied on a modified retrospective basis for the majority of the provisions. The Company is currently assessing the impact the implementation of this ASU will have on its consolidated financial statements.

ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230),” was issued in the 2016 third quarter. The ASU addresses several clarifications on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. Among several other cash flow issues, the ASU specifically addresses the classification of debt prepayment or debt issuance costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The ASU also provides a broader principle on identifying the type of activity of the cash flow item by focusing on the cash flow item’s nature and the predominant source or use of that item. The ASU is effective in the 2018 first quarter and should be applied retrospectively. Early adoption is permitted. The Company is assessing the impact the

implementation of this ASU will have on the classification and presentation of its statements of cash flows.

ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash" 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’s results of operations, financial position, comprehensive income or net cash provided from operating activities.

ASU 2018-02 “Income Statement-Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” 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 (“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 amount of the reclassification 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 the date of the enactment of the Tax Cuts Act related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts Act related to items remaining in AOCI are recognized or at the beginning of the period of adoption. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

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4.	Variable Interest Entity and Noncontrolling Interests

Variable interest entity

A 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, Watford Re raised approximately $1.1 billion of capital consisting of $907.3 million in common equity ($895.6 million net of issuance costs) and $226.6 million in preference equity ($219.2 million net of issuance costs and discount). 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. Subsidiaries of the Company act as Watford Re’s reinsurance and insurance underwriting managers. HPS Investment Partners, LLC (formerly Highbridge Principal Strategies, LLC) (“HPS”) manages Watford Re’s non-investment grade credit portfolios, and the Company manages Watford Re’s investment grade portfolios, each under separate long term services agreements. In connection with the capital raise at Watford Re, warrants to purchase a total of 1.7 million common shares were issued to the Company and HPS. The warrants are only exercisable if Watford Re has consummated an initial public offering of its common shares or otherwise effected a listing of its common shares on a U.S. national securities exchange and certain targeted returns are achieved for existing common shareholders. The warrants expire on March 25, 2020. John Rathgeber, previously Vice Chairman of Arch Worldwide Reinsurance Group, is CEO of Watford Re. In addition, Marc Grandisson and Nicolas Papadopoulo, both officers of the Company, serve on the board of directors of Watford Re.

The Company concluded that Watford Re is a VIE due to both the reinsurance underwriting management services agreements with the Company and the investment management agreements with HPS and the Company. These agreements provide for services for an extended period of time with limited termination rights by Watford Re. In addition, these agreements allow for both the Company and HPS to participate in the favorable

results of Watford Re in the form of performance fees. To determine if the Company is the primary beneficiary of Watford Re, the Company concluded that the most significant activity of Watford Re pertains to the insurance activities arising from the reinsurance underwriting management services agreement. As such, the Company concluded that it is the primary beneficiary of Watford Re and includes the results of Watford Re in its consolidated financial statements.

The Company concluded that Watford Re should be reflected in a separate operating segment (‘other’) and provides the income statement and total investable assets, total assets and total liabilities of Watford Re within Note 5.

Because Watford Re is an independent company, the assets of Watford Re can be used only to settle obligations of Watford Re and Watford Re is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions.

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

	December 31,
	2017				2016
Assets
Investments accounted for using the fair value option	$	2,426,066			$	1,857,623
Cash	54,503				74,893
Accrued investment income	18,261				17,017
Premiums receivable	177,492				189,911
Reinsurance recoverable on unpaid and paid losses and LAE	42,777				24,420
Ceded unearned premiums	24,762				12,145
Deferred acquisition costs, net	85,961				86,379
Receivable for securities sold	36,374				1,326
Goodwill and intangible assets	7,650				7,650
Other assets	140,808				111,386
Total assets of consolidated VIE	$	3,014,654			$	2,382,750
Liabilities
Reserves for losses and loss adjustment expenses	$	798,262			$	510,809
Unearned premiums	330,644				293,480
Reinsurance balances payable	18,424				12,289
Revolving credit agreement borrowings	441,132				256,650
Payable for securities purchased	42,501				42,922
Other liabilities	215,186				88,976
Total liabilities of consolidated VIE	$	1,846,149			$	1,205,126
Redeemable noncontrolling interests	$	220,622			$	220,253

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The following table summarizes Watford Re’s cash flow from operating, investing and financing activities.

	Year Ended December 31,
	2017			2016			2015
Total cash provided by (used for):
Operating activities	286,558			288,006			293,736
Investing activities	(471,640	)		(118,829	)		(556,837	)
Financing activities	162,152			(195,647	)		361,917

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 December 31, 2017. The portion of Watford Re’s income or loss attributable to third party investors is recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’

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

	December 31,
	2017				2016
Balance, beginning of year	$	851,854			$	738,831
Amounts attributable to noncontrolling interests	(7,913		)		113,091
Foreign currency translation adjustments	(530		)		(68		)
Balance, end of year	$	843,411			$	851,854

Redeemable noncontrolling interests

The Company accounts for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet. Such redeemable noncontrolling interests relate to the 9,065,200 cumulative redeemable preference shares (“Watford Preference Shares”) issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per share. The Watford Preference Shares were issued at a discounted amount of $24.50 per share. Holders of the Watford Preference Shares will be entitled to receive, if declared by Watford Re’s board, quarterly cash dividends on the last day of March, June, September, and December. Dividends will accrue from the closing date to June 30, 2019 at a fixed rate of 8.5% per annum. From June 30, 2019 and subsequent, dividends will accrue based on a floating rate equal to the 3 month U.S. dollar LIBOR (with a 1% floor) plus a margin based on the difference between the fixed rate and the 5 year mid swap rate to the floating rate as set out on the Bloomberg Screen IRSB 18. The Watford Preference Shares may be redeemed by Watford Re on or after June 30, 2019 or at the option of the preferred shareholders at any time on or after June 30, 2034. Because the redemption features are not solely within the control of Watford Re, the

Company accounts for the redeemable noncontrolling interests in the Watford Preference Shares in the mezzanine section of its consolidated balance sheets. Preferred dividends on the Watford Preference Shares, including the accretion of the discount and issuance costs, was $19.6 million for 2017, 2016 and 2015. Preferred dividends, including the accretion of the discount and issuance costs, are included in ‘amounts attributable to noncontrolling interests’ in the Company’s consolidated statements of income.

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

	December 31,
	2017				2016				2015
Balance, beginning of year	$	205,553			$	205,182			$	219,512
Shares acquired by the Company (1)	—				—				(14,700		)
Accretion of preference share issuance costs	369				371				370
Balance, end of year	$	205,922			$	205,553			$	205,182

(1) During the 2015 second quarter, the Company acquired Gulf Re, which owns 600,000 Watford Preference Shares. Such shares, net of a discount, along with related dividends and accretion of the discount, are eliminated in consolidation.

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

	December 31,
	2017				2016				2015
Amounts attributable to non-redeemable noncontrolling interests	$	7,913			$	(113,091	)		$	29,984
Dividends attributable to redeemable noncontrolling interests	(18,344		)		(18,349		)		(18,828		)
Net (income) loss attributable to noncontrolling interests	$	(10,431	)		$	(131,440	)		$	11,156

Bellemeade Re

UGC entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re I Ltd. in July 2015, with Bellemeade Re II Ltd. in May 2016 and the Company entered into an aggregate excess of loss reinsurance agreement with Bellemeade 2017-1 Ltd. in October 2017 (the “Bellemeade Agreements”), special purpose reinsurance companies domiciled in Bermuda. Bellemeade Re I Ltd. and Bellemeade Re II Ltd. each 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 while Bellemeade 2017-1 Ltd. provided for up to approximately $368.1 million of aggregate excess of loss reinsurance coverage at inception for new delinquencies on portfolios of in-force policies issued between January 1, 2017 and June 30, 2017. See Note 8 for further details. At the time the Bellemeade Agreements were entered into, the applicability of the

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accounting guidance was that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, we concluded that Bellemeade Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd. 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 Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd., the Company does not consolidate such companies in its consolidated financial statements.

The following table presents total assets of Bellemeade Re I Ltd., Bellemeade Re II Ltd. and Bellemeade 2017-1 Ltd. 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 Re I Ltd.	$	92,390			$	471			$	832			$	1,303
Bellemeade Re II Ltd.	135,201				20				527				547
Bellemeade 2017-1 Ltd.	347,139				391				1,867				2,258
Total	$	574,730			$	882			$	3,226			$	4,108

5. Segment Information

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

The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the Chairman and Chief Executive Officer of Arch Capital, the President and Chief Operating Officer of Arch Capital and the Chief Financial Officer of 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: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).

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

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

•

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

•	Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.

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

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

•	Other: includes alternative market risks (including captive insurance programs), excess workers’

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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 1000 companies and smaller transaction business programs.

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

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

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

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

•

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

•	Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures,

equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.

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

The mortgage segment includes the results of AMIC, UGRIC and UGMIC, leading providers of mortgage insurance products and services to the U.S. market, and and Arch MI Europe, a leading provider of mortgage insurance products and services to the European market. AMIC, UGRIC and UGMIC are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a government sponsored enterprise, or “GSE.” The mortgage segment also includes GSE credit risk-sharing transactions and mortgage reinsurance for the U.S. and Australian markets.

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

The ‘other’ segment includes the results of Watford Re (see Note 4). 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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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, summary information regarding net premiums written and earned by major line of business and net premiums written by location:

	Year Ended December 31, 2017
	Insurance				Reinsurance				Mortgage				Sub-Total				Other				Total
Gross premiums written (1)	$	3,081,086			$	1,640,399			$	1,368,138			$	6,088,254			$	600,304			$	6,368,425
Premiums ceded	(958,646		)		(465,925		)		(256,796		)		(1,679,998		)		(47,187		)		(1,407,052		)
Net premiums written	2,122,440				1,174,474				1,111,342				4,408,256				553,117				4,961,373
Change in unearned premiums	(9,422		)		(31,853		)		(54,176		)		(95,451		)		(21,390		)		(116,841		)
Net premiums earned	2,113,018				1,142,621				1,057,166				4,312,805				531,727				4,844,532
Other underwriting income	—				11,336				15,737				27,073				3,180				30,253
Losses and loss adjustment expenses	(1,622,444		)		(773,923		)		(134,677		)		(2,531,044		)		(436,402		)		(2,967,446		)
Acquisition expenses	(323,639		)		(221,250		)		(100,598		)		(645,487		)		(129,971		)		(775,458		)
Other operating expenses	(359,524		)		(146,663		)		(146,336		)		(652,523		)		(31,928		)		(684,451		)
Underwriting income (loss)	$	(192,589	)		$	12,121			$	691,292			510,824				(63,394		)		447,430
Net investment income													382,072				88,800				470,872
Net realized gains (losses)													148,798				343				149,141
Net impairment losses recognized in earnings													(7,138		)		—				(7,138		)
Equity in net income (loss) of investment funds accounted for using the equity method													142,286				—				142,286
Other income (loss)													(2,571		)		—				(2,571		)
Corporate expenses (2)													(61,602		)		—				(61,602		)
UGC transaction costs and other (2)													(22,150		)		—				(22,150		)
Amortization of intangible assets													(125,778		)		—				(125,778		)
Interest expense													(103,592		)		(13,839		)		(117,431		)
Net foreign exchange gains (losses)													(113,345		)		(2,437		)		(115,782		)
Income before income taxes													747,804				9,473				757,277
Income tax expense													(127,547		)		(21		)		(127,568		)
Net income													620,257				9,452				629,709
Dividends attributable to redeemable noncontrolling interests													—				(18,344		)		(18,344		)
Amounts attributable to nonredeemable noncontrolling interests													—				7,913				7,913
Net income (loss) available to Arch													620,257				(979		)		619,278
Preferred dividends													(46,041		)		—				(46,041		)
Loss on redemption of preferred shares													(6,735		)		—				(6,735		)
Net income (loss) available to Arch common shareholders													$	567,481			$	(979	)		$	566,502
Underwriting Ratios
Loss ratio	76.8		%		67.7		%		12.7		%		58.7		%		82.1		%		61.3		%
Acquisition expense ratio	15.3		%		19.4		%		9.5		%		15.0		%		24.4		%		16.0		%
Other operating expense ratio	17.0		%		12.8		%		13.8		%		15.1		%		6.0		%		14.1		%
Combined ratio	109.1		%		99.9		%		36.0		%		88.8		%		112.5		%		91.4		%
Goodwill and intangible assets	$	22,310			$	211			$	622,440			$	644,961			$	7,650			$	652,611
Total investable assets													$	19,716,421			$	2,440,067			$	22,156,488
Total assets													29,037,004				3,014,654				32,051,658
Total liabilities													19,959,574				1,846,149				21,805,723

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

(2)	Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of the presentation of such items.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2016
	Insurance				Reinsurance				Mortgage				Sub-Total				Other				Total
Gross premiums written (1)	$	3,027,049			$	1,494,397			$	499,725			$	5,019,363			$	535,094			$	5,202,134
Premiums ceded	(954,768		)		(440,541		)		(108,259		)		(1,501,760		)		(21,306		)		(1,170,743		)
Net premiums written	2,072,281				1,053,856				391,466				3,517,603				513,788				4,031,391
Change in unearned premiums	1,623				2,376				(104,750		)		(100,751		)		(45,818		)		(146,569		)
Net premiums earned	2,073,904				1,056,232				286,716				3,416,852				467,970				3,884,822
Other underwriting income	—				36,403				17,024				53,427				3,746				57,173
Losses and loss adjustment expenses	(1,359,313		)		(475,762		)		(28,943		)		(1,864,018		)		(321,581		)		(2,185,599		)
Acquisition expenses, net	(304,050		)		(212,258		)		(21,790		)		(538,098		)		(129,527		)		(667,625		)
Other operating expenses (2)	(350,260		)		(142,616		)		(96,672		)		(589,548		)		(25,163		)		(614,711		)
Underwriting income (loss)	$	60,281			$	261,999			$	156,335			478,615				(4,555		)		474,060
Net investment income													277,193				89,549				366,742
Net realized gains (losses)													69,586				68,000				137,586
Net impairment losses recognized in earnings													(30,442		)		—				(30,442		)
Equity in net income (loss) of investment funds accounted for using the equity method													48,475				—				48,475
Other income (loss)													(800		)		—				(800		)
Corporate expenses (2)													(49,396		)		—				(49,396		)
UGC transaction costs and other (2)													(41,729		)		—				(41,729		)
Amortization of intangible assets													(19,343		)		—				(19,343		)
Interest expense													(53,464		)		(12,788		)		(66,252		)
Net foreign exchange gains (losses)													31,409				5,242				36,651
Income before income taxes													710,104				145,448				855,552
Income tax (expense) benefit													(31,375		)		1				(31,374		)
Net income													678,729				145,449				824,178
Dividends attributable to redeemable noncontrolling interests													—				(18,349		)		(18,349		)
Amounts attributable to nonredeemable noncontrolling interests													—				(113,091		)		(113,091		)
Net income available to Arch													678,729				14,009				692,738
Preferred dividends													(28,070		)		—				(28,070		)
Net income available to Arch common shareholders													$	650,659			$	14,009			$	664,668
Underwriting Ratios
Loss ratio	65.5		%		45.0		%		10.1		%		54.6		%		68.7		%		56.3		%
Acquisition expense ratio	14.7		%		20.1		%		7.6		%		15.7		%		27.7		%		17.2		%
Other operating expense ratio	16.9		%		13.5		%		33.7		%		17.3		%		5.4		%		15.8		%
Combined ratio	97.1		%		78.6		%		51.4		%		87.6		%		101.8		%		89.3		%
Goodwill and intangible assets	$	25,206			$	956			$	747,741			$	773,903			$	7,650			$	781,553
Total investable assets													$	18,636,189			$	1,857,763			$	20,493,952
Total assets													26,989,359				2,382,750				29,372,109
Total liabilities													18,855,858				1,205,126				20,060,984

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

(2)	Certain expenses have been excluded from ‘corporate expenses’ and ‘other operating expenses’ and reflected in ‘UGC transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of the presentation of such items.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2015
	Insurance				Reinsurance				Mortgage				Sub-Total				Other				Total
Gross premiums written (1)	$	2,944,018			$	1,419,022			$	295,557			$	4,656,723			$	488,899			$	4,797,163
Premiums ceded	(898,347		)		(380,614		)		(28,064		)		(1,305,151		)		(22,940		)		(979,632		)
Net premiums written	2,045,671				1,038,408				267,493				3,351,572				465,959				3,817,531
Change in unearned premiums	(863		)		38,727				(53,383		)		(15,519		)		(68,107		)		(83,626		)
Net premiums earned	2,044,808				1,077,135				214,110				3,336,053				397,852				3,733,905
Other underwriting income	1,993				10,606				18,430				31,029				4,468				35,497
Losses and loss adjustment expenses	(1,292,647		)		(440,350		)		(40,247		)		(1,773,244		)		(277,659		)		(2,050,903		)
Acquisition expenses, net	(296,040		)		(222,470		)		(30,817		)		(549,327		)		(113,451		)		(662,778		)
Other operating expenses	(354,416		)		(155,811		)		(78,142		)		(588,369		)		(14,919		)		(603,288		)
Underwriting income (loss)	$	103,698			$	269,110			$	83,334			456,142				(3,709		)		452,433
Net investment income													271,680				76,410				348,090
Net realized gains (losses)													(99,133		)		(86,709		)		(185,842		)
Net impairment losses recognized in earnings													(20,116		)		—				(20,116		)
Equity in net income (loss) of investment funds accounted for using the equity method													25,455				—				25,455
Other income (loss)													(399		)		—				(399		)
Corporate expenses													(49,745		)		—				(49,745		)
Amortization of intangible assets													(22,926		)		—				(22,926		)
Interest expense													(41,518		)		(4,356		)		(45,874		)
Net foreign exchange gains (losses)													62,624				3,494				66,118
Income (loss) before income taxes													582,064				(14,870		)		567,194
Income tax benefit													(40,612		)		—				(40,612		)
Net income (loss)													541,452				(14,870		)		526,582
Dividends attributable to redeemable noncontrolling interests													—				(18,828		)		(18,828		)
Amounts attributable to nonredeemable noncontrolling interests													—				29,984				29,984
Net income (loss) available to Arch													541,452				(3,714		)		537,738
Preferred dividends													(21,938		)		—				(21,938		)
Net income (loss) available to Arch common shareholders													$	519,514			$	(3,714	)		$	515,800
Underwriting Ratios
Loss ratio	63.2		%		40.9		%		18.8		%		53.2		%		69.8		%		54.9		%
Acquisition expense ratio	14.5		%		20.7		%		14.4		%		16.5		%		28.5		%		17.8		%
Other operating expense ratio	17.3		%		14.5		%		36.5		%		17.6		%		3.7		%		16.2		%
Combined ratio	95.0		%		76.1		%		69.7		%		87.3		%		102.0		%		88.9		%
Goodwill and intangible assets	$	28,810			$	1,875			$	66,846			$	97,531			$	—			$	97,531
Total investable assets													$	14,644,831			$	1,696,107			$	16,340,938
Total assets													21,016,599				2,122,332				23,138,931
Total liabilities													14,956,274				1,072,102				16,028,376

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

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The following tables provide summary information regarding net premiums written and earned by major line of business and net premiums written by location:

INSURANCE SEGMENT	Year Ended December 31,
2017				2016				2015
Net premiums written (1)
Professional lines (2)	$	452,748			$	440,149			$	434,024
Programs	386,618				330,322				423,157
Construction and national accounts	327,648				328,997				299,463
Travel, accident and health	247,738				224,380				160,132
Excess and surplus casualty (3)	179,511				214,863				204,856
Property, energy, marine and aviation	172,240				175,376				203,186
Lenders products	96,867				105,650				106,916
Other (4)	259,070				252,544				213,937
Total	$	2,122,440			$	2,072,281			$	2,045,671
Net premiums earned (1)
Professional lines (2)	$	444,137			$	431,391			$	424,968
Programs	364,639				357,715				446,512
Construction and national accounts	324,517				322,072				296,828
Travel, accident and health	257,358				219,169				153,578
Excess and surplus casualty (3)	195,154				219,046				208,091
Property, energy, marine and aviation	173,779				188,938				216,127
Lenders products	97,043				98,517				90,906
Other (4)	256,391				237,056				207,798
Total	$	2,113,018			$	2,073,904			$	2,044,808
Net premiums written by client location (1)
United States	$	1,744,560			$	1,718,415			$	1,710,918
Europe	185,365				173,423				187,020
Asia and Pacific	100,062				93,752				64,638
Other	92,453				86,691				83,095
Total	$	2,122,440			$	2,072,281			$	2,045,671
Net premiums written by underwriting location (1)
United States	$	1,715,467			$	1,690,208			$	1,673,867
Europe	344,836				327,034				317,998
Other	62,137				55,039				53,806
Total	$	2,122,440			$	2,072,281			$	2,045,671

(1)	Insurance segment results include premiums written and earned assumed through intersegment transactions and exclude premiums written and earned ceded through intersegment transactions.

(2)	Includes professional liability, executive assurance and healthcare business.

(3)	Includes casualty and contract binding business.

(4)	Includes alternative markets, excess workers' compensation and surety business.

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REINSURANCE SEGMENT	Year Ended December 31,
2017				2016				2015
Net premiums written (1)
Other specialty (2)	$	459,213			$	348,852			$	298,794
Casualty (3)	340,429				305,252				303,093
Property excluding property catastrophe (4)	243,693				267,548				280,511
Property catastrophe	70,155				75,789				91,620
Marine and aviation	32,759				37,790				50,834
Other (5)	28,225				18,625				13,556
Total	$	1,174,474			$	1,053,856			$	1,038,408
Net premiums earned (1)
Other specialty (2)	$	408,566			$	329,994			$	311,307
Casualty (3)	341,122				300,160				310,249
Property excluding property catastrophe (4)	255,453				282,018				295,487
Property catastrophe	73,300				73,803				96,865
Marine and aviation	36,214				52,579				50,808
Other (5)	27,966				17,678				12,419
Total	$	1,142,621			$	1,056,232			$	1,077,135
Net premiums written (1)
Pro rata	$	708,694			$	558,671			$	537,556
Excess of loss	465,780				495,185				500,852
Total	$	1,174,474			$	1,053,856			$	1,038,408
Net premiums earned (1)
Pro rata	$	657,490			$	561,986			$	563,585
Excess of loss	485,131				494,246				513,550
Total	$	1,142,621			$	1,056,232			$	1,077,135
Net premiums written by client location (1)
United States	$	439,229			$	448,763			$	470,484
Europe	466,750				337,168				307,165
Bermuda	89,004				74,347				80,888
Asia and Pacific	86,133				111,821				94,609
Other	93,358				81,757				85,262
Total	$	1,174,474			$	1,053,856			$	1,038,408
Net premiums written by underwriting location (1)
United States	$	399,379			$	432,683			$	439,190
Bermuda	350,681				277,625				281,985
Europe and other	424,414				343,548				317,233
Total	$	1,174,474			$	1,053,856			$	1,038,408

(1)	Reinsurance segment results include premiums written and earned assumed through intersegment transactions and exclude premiums written and earned ceded through intersegment transactions.

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

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

(4)	Includes facultative business.

(5)	Includes life, casualty clash and other.

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	Year Ended December 31,
MORTGAGE SEGMENT	2017				2016				2015
Net premiums written by client location
United States	$	1,005,437			$	280,509			$	193,617
Other	105,905				110,957				73,876
Total	$	1,111,342			$	391,466			$	267,493
Net premiums written by underwriting location
United States	$	903,329			$	186,826			$	125,317
Other	208,013				204,640				142,176
Total	$	1,111,342			$	391,466			$	267,493
Net premiums earned by client location
United States	$	1,014,439			$	265,527			$	202,930
Other	42,727				21,189				11,180
Total	$	1,057,166			$	286,716			$	214,110
Net premiums earned by underwriting location
United States	$	901,858			$	155,929			$	113,062
Other	155,308				130,787				101,048
Total	$	1,057,166			$	286,716			$	214,110

OTHER SEGMENT	Year Ended December 31,
2017				2016				2015
Net premiums written (1)
Casualty (2)	$	311,742			$	329,149			$	333,679
Other specialty (3)	166,848				106,086				99,606
Property catastrophe	12,455				11,462				12,441
Property excluding property catastrophe	1,976				701				2,892
Marine and aviation	1,139				1,709				1,256
Other (4)	58,957				64,681				16,085
Total	$	553,117			$	513,788			$	465,959
Net premiums earned (1)
Casualty (2)	$	333,275			$	320,767			$	285,067
Other specialty (3)	135,855				101,768				92,229
Property catastrophe	12,690				11,421				12,540
Property excluding property catastrophe	1,392				1,436				1,340
Marine and aviation	1,024				1,811				1,585
Other (4)	47,491				30,767				5,091
Total	$	531,727			$	467,970			$	397,852
Net premiums written by client location (1)
United States	$	283,314			$	344,445			$	350,228
Europe	178,110				97,459				67,279
Bermuda	83,594				68,945				39,414
Other	8,099				2,939				9,038
Total	$	553,117			$	513,788			$	465,959

(1)	Other segment results include premiums written and earned assumed through intersegment transactions and exclude premiums written and earned ceded through intersegment transactions.

(2)	Includes professional liability, excess motor, programs and other.

(3)	Includes proportional motor and other.

(4)	Includes mortgage and other.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Reserve for Losses and Loss Adjustment Expenses

The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:

	Year Ended December 31,
	2017				2016				2015
Reserve for losses and loss adjustment expenses at beginning of year	$	10,200,960			$	9,125,250			$	9,036,448
Unpaid losses and loss adjustment expenses recoverable	2,083,575				1,828,837				1,778,303
Net reserve for losses and loss adjustment expenses at beginning of year	8,117,385				7,296,413				7,258,145
Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year	3,205,428				2,455,563				2,336,026
Prior years	(237,982		)		(269,964		)		(285,123		)
Total net incurred losses and loss adjustment expenses	2,967,446				2,185,599				2,050,903
Net losses and loss adjustment expense reserves of acquired business (1)	—				551,096				262
Foreign exchange (gains) losses	186,963				(102,367		)		(143,653		)
Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year	(505,424		)		(445,700		)		(454,179		)
Prior years	(1,847,488		)		(1,367,656		)		(1,415,065		)
Total net paid losses and loss adjustment expenses	(2,352,912		)		(1,813,356		)		(1,869,244		)
Net reserve for losses and loss adjustment expenses at end of year	8,918,882				8,117,385				7,296,413
Unpaid losses and loss adjustment expenses recoverable	2,464,910				2,083,575				1,828,837
Reserve for losses and loss adjustment expenses at end of year	$	11,383,792			$	10,200,960			$	9,125,250

(1)	The 2016 amount related to the acquisition of UGC.

2017 Prior Year Reserve Development

During 2017, the Company recorded estimated net favorable development on prior year loss reserves of $238.0 million, which consisted of $165.4 million from the reinsurance segment, $8.6 million from the insurance segment and $95.0 million from the mortgage segment, less adverse development of $31.0 million from the ‘other’ segment.

The reinsurance segment’s net favorable development of $165.4 million, or 14.5 points of net earned premium, consisted of $101.0 million from short-tailed lines and $64.4 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $82.6 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2009 to 2016 underwriting years (i.e., losses attributable to contracts having an inception or renewal date within the given twelve-month period). 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 2017. Net favorable development of $64.4 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $43.7 million, primarily from the 2002 to

2013 underwriting years, and in marine and aviation reserves of $19.6 million, spread across most underwriting years.

The insurance segment’s net favorable development of $8.6 million, or 4.0 points of net earned premium, consisted of $14.9 million of net favorable development from short-tailed lines and $11.8 million of net favorable development from long-tailed lines, partially offset by $18.1 million of net adverse development from medium-tailed lines. Favorable development in short-tailed lines predominantly consisted of $22.8 million of net favorable development in property lines, primarily from the 2011 to 2016 accident years (i.e., the year in which a loss occurred), partially offset by $11.8 million of adverse development on travel, accident and health business from the 2014 to 2016 accident years. Net favorable development in long-tailed lines of $11.8 million included $10.0 million of net favorable development on executive assurance business, primarily from the 2013 accident year, and $8.3 million of net favorable development in casualty business, primarily from the 2007 to 2013 accident years. Net adverse development in medium-tailed lines of $18.1 million included $56.3 million of net adverse development in program business, primarily from the 2013 to 2015 accident years and primarily driven by a few inactive programs that were non-renewed in 2015 and early in 2016, partially offset by $36.2 million of net

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favorable development in professional liability business, primarily from the 2010 to 2016 accident years.

The mortgage segment’s net favorable development of $95.0 million, or 9.0 points of net earned premium, for 2017, included $89.3 million of favorable development on U.S. primary mortgage business. Such development was primarily driven by lower than expected claim emergence across most origination years and also reflected $33.8 million related to second lien and other portfolios, primarily due to subrogation recoveries.

2016 Prior Year Reserve Development

During 2016, the Company recorded estimated net favorable development on prior year loss reserves of $270.0 million, which consisted of $218.8 million from the reinsurance segment, $33.1 million from the insurance segment, $21.2 million from the mortgage segment less adverse development of $3.1 million from the ‘other’ segment.

The reinsurance segment’s net favorable development of $218.8 million, or 20.7 points of net earned premium, consisted of $133.8 million from short-tailed lines and $85.0 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $113.6 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2009 to 2015 underwriting years. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during 2016. Net favorable development of $85.0 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $86.1 million, primarily from the 2002 to 2013 underwriting years.

The insurance segment’s net favorable development of $33.1 million, or 1.6 points of net earned premium, consisted of $8.7 million of net favorable development from short-tailed lines and $24.4 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines predominantly consisted of $17.2 million of net favorable development in property lines, primarily from the 2008 to 2014 accident years, partially offset by $11.1 million of adverse development on travel, accident and health business from the 2012 to 2015 accident years. Net favorable development in medium-tailed and long-tailed lines of $24.4 million included $53.8 million of net favorable development on professional lines, primarily from the 2008 to 2012 accident years, partially offset by $33.1 million of net adverse development in program business, primarily from the 2013 to 2015 accident years. The adverse development in program business was primarily driven by a few inactive programs that were non-renewed in 2015 and early in 2016.

The mortgage segment’s net favorable development of $21.2 million, or 7.4 points of net earned premium, for 2016, included $18.5 million of favorable development on U.S. primary mortgage business, reflecting a decrease in the number of delinquent loans and a lower claim rate on such loans. Such development was primarily from the 2004 to 2008 and 2014 origination years. The mortgage segment also experienced net favorable development of $2.7 million on U.S. mortgage reinsurance business.

2015 Prior Year Reserve Development

During 2015, the Company recorded estimated net favorable development on prior year loss reserves of $285.1 million, which consisted of $224.8 million from the reinsurance segment, $47.2 million from the insurance segment, $12.3 million from the mortgage segment and $0.8 million from the ‘other’ segment.

The reinsurance segment’s net favorable development of $224.8 million, or 20.9 points of net earned premium, consisted of $107.6 million from short-tailed lines and $117.2 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines included $80.9 million from property catastrophe and property other than property catastrophe reserves, primarily from the 2011 to 2014 underwriting years. The net reduction of loss estimates for the reinsurance segment’s short-tailed lines primarily resulted from varying levels of reported and paid claims activity than previously anticipated which led to decreases in certain loss ratio selections during 2015. Net favorable development of $117.2 million in medium-tailed and long-tailed lines included reductions in casualty reserves of $99.7 million, primarily from the 2003 to 2006 underwriting years and the 2008 and 2009 underwriting years, and marine and aviation reserves of $11.7 million, primarily from the 2008 to 2012 underwriting years. The balance of net favorable development was spread across various lines and underwriting years.

The insurance segment’s net favorable development of $47.2 million, or 2.3 points of net earned premium, consisted of $27.3 million of net favorable development from short-tailed lines and $19.9 million of net favorable development from medium-tailed and long-tailed lines. Favorable development in short-tailed lines predominantly consisted of $32.4 million of net favorable development in property lines, primarily from the 2011 to 2014 accident years. Net favorable development in medium-tailed and long-tailed lines of $19.9 million included $29.7 million of net favorable development on professional lines, primarily from the 2005 to 2010 accident years, partially offset by $15.0 million of net adverse development in program business, primarily from the 2013 and 2014 accident years.

The mortgage segment’s net favorable development of $12.3 million, or 5.7 points of net earned premium, included $11.1 million of favorable development on U.S. primary mortgage

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business, reflecting a decrease in the number of delinquent loans and a lower claim rate on such loans. Such development was primarily from the 2003 to 2008 origination years. The mortgage segment also experienced net favorable development of $1.2 million on U.S. mortgage reinsurance business.

7. Short Duration Contracts

The Company’s reserves for losses and loss adjustment expenses primarily relate to short-duration contracts with various characteristics (e.g., type of coverage, geography, claims duration). The Company considered such information in determining the level of disaggregation for disclosures related to its short-duration contracts, as detailed in the table below:

Reportable segment		Level of disaggregation		Included lines of business
Insurance		Property energy, marine and aviation		Property energy, marine and aviation
		Third party occurrence business		Excess and surplus casualty (excluding contract binding); construction and national accounts; and other (including alternative market risks, excess workers’ compensation and employer’s liability insurance coverages)
		Third party claims-made business		Professional lines
		Multi-line and other specialty		Programs; contract binding (part of excess and surplus casualty); travel, accident and health; lenders products; and other (contract and commercial surety coverages)
Reinsurance		Casualty		Casualty
		Property catastrophe		Property catastrophe
		Property excluding property catastrophe		Property excluding property catastrophe
		Marine and aviation		Marine and aviation
		Other specialty		Other specialty
Mortgage		Direct mortgage insurance in the U.S.		Mortgage insurance on U.S. primary exposures

The Company determined the following to be insignificant for disclosure purposes: (i) amounts included in the ‘other’ segment (i.e., Watford Re) as described in Note 4; (ii) certain mortgage business, including non-U.S. primary business, second lien and student loan exposures, global mortgage reinsurance and various GSE credit risk-sharing products; and (iii) certain reinsurance business, including casualty clash and non-traditional lines. Such amounts are included as reconciling items.

The Company is required to establish reserves for losses and loss adjustment expenses (“Loss Reserves”) that arise from the business the Company underwrites. Loss Reserves for the

insurance, reinsurance and mortgage segments represent estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events which have occurred at or before the balance sheet date. Loss Reserves do not reflect contingency reserve allowances to account for future loss occurrences. Losses arising from future events will be estimated and recognized at the time the losses are incurred and could be substantial.

Insurance Segment

Loss Reserves for the insurance segment are comprised of (1) estimated amounts for (1) reported losses (“case reserves”) and (2) incurred but not reported losses (“IBNR reserves”). Generally, claims personnel determine whether to establish a case reserve for the estimated amount of the ultimate settlement of individual claims. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. The Company also contracts with a number of outside third party administrators in the claims process who, in certain cases, have limited authority to establish case reserves. The work of such administrators is reviewed and monitored by our claims personnel. Loss Reserves are also established to provide for loss adjustment expenses and represent the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. Periodically, adjustments to the case reserves may be made as additional information is reported or payments are made. IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

Ultimate losses and loss adjustment expenses are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate losses and loss adjustment expenses with respect to any line of business, past experience with respect to that line of business is the primary resource, developed through both industry and company experience, but cannot be relied upon in isolation. Uncertainties in estimating ultimate losses and loss adjustment expenses are magnified by the length of the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail.” During this period additional facts regarding coverages written in prior accident years, as well as about actual claims and trends, may

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become known and, as a result, may lead to adjustments of the related Loss Reserves. If the Company determines that an adjustment is appropriate, the adjustment is recorded in the accounting period in which such determination is made. Accordingly, should Loss Reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted respectively. The Company authorizes managing general agents, general agents and other producers to write program business on the Company’s behalf within prescribed underwriting authorities. This delegated authority process introduces additional complexity to the actuarial determination of unpaid future losses and loss adjustment expenses. In order to monitor adherence to the underwriting guidelines given to such parties, the Company periodically performs underwriting and claims due diligence reviews.

In determining ultimate losses and loss adjustment expenses, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate losses and loss adjustment expenses, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and adjust for them so that the future can be projected more reliably. Because of the factors previously discussed, this process requires the substantial use of informed judgment and is inherently uncertain.

Although Loss Reserves are initially determined based on underwriting and pricing analyses, the Company’s insurance segment applies several generally accepted actuarial methods, as discussed below, on a quarterly basis to evaluate the Loss Reserves, in addition to the expected loss method, in particular for Loss Reserves from more mature accident years (the year in which a loss occurred). Each quarter, as part of the reserving process, the segments’ actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for the projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to Loss Reserves may be supported. The Company places more or less reliance on a particular actuarial

method based on the facts and circumstances at the time the estimates of Loss Reserves are made.

These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:

•

Expected loss methods - these methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss and loss adjustment expense ratios are typically developed based upon the information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data available from organizations, such as statistical bureaus and consulting firms, where appropriate. These ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. Expected loss methods are useful for estimating ultimate losses and loss adjustment expenses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available, and is commonly applied when limited loss experience exists for a company.

•

Historical incurred loss development methods - these methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. These methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods may be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses may be less reliable than other methods.

•

Historical paid loss development methods - these methods, like historical incurred loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant. These methods use historical loss payments over discrete periods of time to estimate future losses and necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use incurred losses to estimate ultimate losses, they may be more reliable than the other methods that use incurred losses in situations where there are significant changes in how incurred losses are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes

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in payments have a larger impact on estimates of ultimate losses) than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

•

Adjusted historical paid and incurred loss development methods - these methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes. As such, these methods utilize more judgment than historical paid and incurred loss development methods.

•

Bornhuetter-Ferguson (“B-F”) paid and incurred loss methods - these methods utilize actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of expected ultimate losses. The B-F paid and incurred loss methods are useful when there are few reported claims and a relatively less stable pattern of reported losses.

•

Frequency-Severity methods - These methods utilize actual paid and incurred claim experience, but break the data down into its component pieces: claim counts, often expressed as a ratio to exposure or premium (frequency), and average claim size (severity). The component pieces are projected to an ultimate level and multiplied together to result in an estimate of ultimate loss. These methods are especially useful when the severity of claims can be confined to a relatively stable range of estimated ultimate average claim value.

•	Additional analyses - other methodologies are often used in the reserving process for specific types of claims or events, such as catastrophic or other specific major events. These include vendor catastrophe models, which are typically used in the estimation of Loss Reserves at the early stage of known catastrophic events before information has been reported to an insurer or reinsurer.

In the initial reserving process for short-tail insurance lines (consisting of property, energy, marine and aviation and other exposures including travel, accident and health and lenders products), the Company relies on a combination of the reserving methods discussed above. For catastrophe-exposed business, the reserving process also includes the usage of catastrophe models for known events and a heavy reliance on analysis of

individual catastrophic events and management judgment. The development of losses on short-tail business can be unstable, especially for policies characterized by high severity, low frequency losses. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in their reserving process, including that historical paid and reported development patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and underwriters’ judgment as to potential loss exposures can be relied on. The expected loss ratios used in the initial reserving process for short-tail business have varied over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, policy changes (such as attachment points, class and limits) and geographical distribution. As losses in short-tail lines are reported relatively quickly, expected loss ratios are selected for the current accident year based upon actual attritional loss ratios for earlier accident years, adjusted for rate changes, inflation, changes in reinsurance programs and expected attritional losses based on modeling. Furthermore, ultimate losses for short-tail business are known in a reasonably short period of time.

In the initial reserving process for medium-tail and long-tail insurance lines (consisting of third party occurrence business, third party claims made business, and other exposures including surety, programs and contract binding exposures), the Company primarily relies on the expected loss method. The development of the Company’s medium-tail and long-tail business may be unstable, especially if there are high severity major events, as a portion of the Company’s casualty business is in high excess layers. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in reserving for medium-tail and long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the policy is entered into, that the loss development patterns, which are based on a combination of company and industry loss development patterns and adjusted to reflect differences in the insurance segment’s mix of business, are reasonable and that claims personnel and underwriters analyses of our exposure to major events are assumed to be the best estimate of exposure to the known claims on those events. The expected loss ratios used in the initial reserving process for medium-tail and long-tail business for recent accident years have varied over time, in some cases significantly, from earlier accident years. As the credibility of historical experience for earlier accident years increases, the experience from these accident years will be given a greater weighting in the actuarial analysis to determine future accident year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.

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The following tables present information on the insurance segment’s short-duration insurance contracts:

Property, energy, marine and aviation ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	342,098			$	333,686			$	314,637			$	300,508			$	299,861			$	290,993			$	285,126			$	281,811			$	285,067			$	287,032			$	1,973			4,381
2009						256,250				259,982				231,557				220,486				206,060				199,705				197,824				192,701				191,662				1,562				3,616
2010										198,659				188,515				152,886				140,554				129,278				129,624				128,199				126,563				1,300				3,656
2011														268,853				272,041				231,308				219,908				210,468				210,445				205,792				1,351				4,193
2012																		232,056				231,903				204,993				198,706				197,277				193,321				5,663				4,230
2013																						158,989				156,460				148,557				142,493				135,975				4,828				4,224
2014																										148,814				145,829				149,054				138,940				21,416				3,845
2015																														112,419				110,507				105,525				17,473				4,443
2016																																		105,111				102,473				10,023				5,848
2017																																						283,457				115,840				4,999
																																		Total				$	1,770,740
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	50,328			$	129,186			$	200,305			$	225,227			$	256,437			$	261,696			$	263,747			$	263,050			$	263,329			$	264,060
2009						38,452				116,418				143,390				159,997				169,290				173,725				177,793				178,152				178,770
2010										28,509				66,229				88,019				106,365				111,465				118,513				120,608				120,006
2011														34,319				99,454				141,402				167,127				199,986				204,924				202,538
2012																		20,502				92,663				138,099				161,070				167,692				180,202
2013																						32,041				84,306				110,166				118,910				122,972
2014																										25,748				53,495				78,600				85,659
2015																														23,468				65,157				77,241
2016																																		24,919				84,581
2017																																						30,635
																		Total																				1,346,664
																		All outstanding liabilities before 2008, net of reinsurance																				5,898
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	429,974

Third party occurrence business ($000’s except claim count)
		Incurred losses and allocated loss adjustment expenses, net of reinsurance																																								December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	278,283			$	282,364			$	281,294			$	279,642			$	298,194			$	303,315			$	306,439			$	302,951			$	300,907			$	309,202			$	34,070			36,315
2009						273,205				268,831				270,615				271,924				275,531				276,737				267,700				263,175				261,663				43,633				51,319
2010										248,528				266,875				262,303				261,937				264,774				262,961				260,346				251,452				48,387				63,402
2011														261,257				268,249				283,774				288,999				282,716				286,277				280,762				61,506				71,823
2012																		265,476				288,301				292,560				294,291				280,531				275,881				93,816				66,360
2013																						293,920				309,790				318,836				316,113				298,195				118,746				67,103
2014																										331,802				338,081				342,384				346,244				168,257				75,314
2015																														360,217				395,234				401,768				228,728				76,796
2016																																		390,892				397,778				291,483				74,522
2017																																						418,036				380,920				61,461
																																		Total				$	3,240,981
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	6,233			$	21,705			$	50,097			$	85,737			$	119,496			$	165,098			$	190,562			$	204,324			$	218,691			$	234,190
2009						5,678				21,625				47,108				82,685				122,643				153,248				171,268				183,719				192,239
2010										6,848				27,000				50,500				81,261				117,939				137,677				158,050				171,928
2011														7,085				26,867				48,183				81,927				126,169				151,558				177,379
2012																		7,079				31,827				62,392				89,182				117,305				141,642
2013																						7,098				30,362				73,512				105,358				130,875
2014																										9,476				40,863				72,525				113,952
2015																														11,237				45,615				89,832
2016																																		11,702				44,207
2017																																						13,406
																		Total																				1,309,650
																		All outstanding liabilities before 2008, net of reinsurance																				98,833
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	2,030,164

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Third party claims-made business ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	326,344			$	380,158			$	391,971			$	397,864			$	383,508			$	394,166			$	397,483			$	385,827			$	373,924			$	365,413			$	8,263			9,140
2009						288,072				323,359				313,043				311,581				306,875				306,889				309,987				306,203				304,159				9,205				10,910
2010										289,396				315,244				336,798				342,670				335,768				318,926				302,938				291,327				19,771				12,335
2011														284,961				327,623				319,230				313,824				319,354				300,172				292,332				34,161				11,712
2012																		314,017				316,819				314,818				309,949				288,426				279,911				42,710				14,544
2013																						299,609				317,560				321,195				319,418				299,194				75,577				13,994
2014																										262,969				277,812				299,922				282,886				79,059				13,219
2015																														257,183				279,590				281,031				132,145				13,323
2016																																		277,541				295,844				160,040				15,300
2017																																						274,527				224,115				12,371
																																		Total				$	2,966,624
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	18,826			$	74,174			$	132,721			$	175,437			$	210,488			$	235,920			$	248,340			$	286,493			$	291,913			$	292,598
2009						11,418				55,701				108,805				150,949				188,347				203,205				237,204				246,875				251,702
2010										13,971				71,297				128,921				164,107				199,653				216,353				231,200				241,035
2011														13,639				71,797				129,221				173,497				206,608				226,667				243,228
2012																		17,531				68,125				119,653				162,636				186,520				212,019
2013																						18,777				86,512				136,262				177,048				200,876
2014																										13,702				62,817				129,095				174,852
2015																														8,957				52,176				101,643
2016																																		10,644				68,904
2017																																						9,397
																		Total																				1,796,254
																		All outstanding liabilities before 2008, net of reinsurance																				94,246
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	1,264,616

Multi-line and other specialty ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	228,750			$	246,842			$	240,896			$	237,743			$	237,782			$	232,710			$	231,985			$	228,847			$	227,998			$	226,269			$	4,583			39,947
2009						287,455				297,410				292,302				286,205				277,500				278,581				273,199				270,529				262,856				4,718				40,158
2010										257,953				263,470				252,313				256,766				248,777				244,157				243,183				242,440				7,597				44,325
2011														272,539				285,840				284,566				285,771				286,014				284,299				280,741				10,045				54,533
2012																		381,207				395,058				396,245				396,090				396,844				389,279				16,298				68,049
2013																						400,828				416,785				412,528				435,766				448,309				24,100				85,508
2014																										495,095				529,670				535,028				571,128				48,415				124,746
2015																														526,703				545,738				555,746				80,967				139,767
2016																																		540,699				566,047				143,653				175,566
2017																																						574,401				296,812				156,337
																																		Total				$	4,117,216
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	62,274			$	119,634			$	135,970			$	165,075			$	185,746			$	194,954			$	205,046			$	209,195			$	212,041			$	215,400
2009						75,808				140,605				184,199				207,502				220,646				243,587				249,349				253,226				252,680
2010										62,874				118,378				151,587				186,890				207,073				215,542				221,494				227,939
2011														70,742				146,999				180,843				218,510				242,123				252,116				261,470
2012																		98,509				220,377				282,856				319,491				343,797				361,402
2013																						106,585				208,103				268,829				327,952				372,287
2014																										137,388				274,923				356,986				445,002
2015																														168,341				305,372				390,423
2016																																		197,384				354,907
2017																																						195,435
																		Total																				3,076,945
																		All outstanding liabilities before 2008, net of reinsurance																				41,039
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	1,081,310

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2017:

		Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
		Year 1			Year 2			Year 3			Year 4			Year 5			Year 6			Year 7			Year 8			Year 9			Year 10
Property, energy, marine and aviation		18.7	%		35.9	%		18.6	%		9.7	%		7.0	%		3.7	%		0.8	%		(0.2	)%		0.2	%		0.3	%
Third party occurrence business		2.6	%		7.6	%		10.2	%		11.7	%		12.5	%		10.4	%		8.1	%		4.9	%		4.0	%		5.0	%
Third party claims-made business		4.6	%		18.0	%		18.6	%		14.0	%		10.3	%		6.7	%		6.3	%		5.7	%		1.5	%		0.2	%
Multi-line and other specialty		28.0	%		25.6	%		13.6	%		12.5	%		7.8	%		4.9	%		3.1	%		2.0	%		0.5	%		1.5	%

Reinsurance Segment

Loss Reserves for the Company’s reinsurance segment are comprised of (1) case reserves, (2) additional case reserves (“ACRs”) and (3) IBNR reserves. The Company receives reports of claims notices from ceding companies and records case reserves based upon the amount of reserves recommended by the ceding company. Case reserves may be supplemented by ACRs, which are often estimated by the Company’s claims personnel ahead of official notification from the ceding company, or when judgment regarding the size or severity of the known event differs from the ceding company. In certain instances, the Company establishes ACRs even when the ceding company does not report any liability on a known event. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert the Company to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of business, and significant changes in the frequency or severity of individual claims. Such information is often used in the process of estimating IBNR reserves. IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating Loss Reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

The estimation of Loss Reserves for the reinsurance segment is subject to the same risk factors as the estimation of Loss Reserves for the insurance segment. In addition, the inherent uncertainties of estimating such reserves are even greater for reinsurers, due primarily to the following factors: (1) the claim-tail for reinsurers is generally longer because claims are first reported to the ceding company and then to the reinsurer through one or more intermediaries, (2) the reliance on premium estimates, where reports have not been received from the ceding company, in the reserving process, (3) the potential for writing a number of reinsurance contracts with different ceding companies with the same exposure to a single loss event, (4) the diversity of loss development patterns among different types of reinsurance contracts, (5) the necessary reliance on the

ceding companies for information regarding reported claims and (6) the differing reserving practices among ceding companies.

As with the insurance segment, the process of estimating Loss Reserves for the reinsurance segment involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. As discussed above, such uncertainty is greater for reinsurers compared to insurers. As a result, our reinsurance operations obtain information from numerous sources to assist in the process. Pricing actuaries from the reinsurance segment devote considerable effort to understanding and analyzing a ceding company’s operations and loss history during the underwriting of the business, using a combination of ceding company and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting and payment patterns, and rate change history. This analysis is used to project expected loss ratios for each treaty during the upcoming contract period.

As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases and may be attributed to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant’s physical condition many years after an accident occurs, the case reserving approach of the ceding company, etc. In the reserving process, the Company assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in their actuarial methods. This means that the reinsurance segment must rely on estimates for a longer period of time than does an insurance company. Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, 2017 there were no significant backlogs related to the processing of assumed reinsurance information at our reinsurance operations.

The reinsurance segment relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, underwriters, actuaries, and claims personnel often perform audits of ceding companies and regularly review information received from ceding companies for unusual or unexpected

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results. Material findings are usually discussed with the ceding companies. The Company sometimes encounters situations where they determine that a claim presentation from a ceding company is not in accordance with contract terms. In these situations, the Company attempts to resolve the dispute with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, the Company will vigorously defend its position in such disputes.

Although Loss Reserves are initially determined based on underwriting and pricing analysis, the Company applies several generally accepted actuarial methods, as discussed above, on a quarterly basis to evaluate its Loss Reserves in addition to the expected loss method, in particular for reserves from more mature underwriting years (the year in which business is underwritten). Each quarter, as part of the reserving process, the Company’s actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to Loss Reserves may be supported. Estimated Loss Reserves for more mature underwriting years are now based more on actual loss activity and historical patterns than on the initial assumptions based on pricing indications. More recent underwriting years rely more heavily on internal pricing assumptions. The Company places more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of Loss Reserves are made.

In the initial reserving process for short-tail reinsurance lines (consisting of property excluding property catastrophe and property catastrophe exposures), the Company relies on a combination of the reserving methods discussed above. For known catastrophic events, the reserving process also includes the usage of catastrophe models and a heavy reliance on analysis which includes ceding company inquiries and management judgment. The development of property losses may be unstable, especially where there is high catastrophic exposure, may be characterized by high severity, low frequency losses for excess and catastrophe-exposed business and may be highly correlated across contracts. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in reserving for short-tail lines, including that historical paid and reported development

patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and our underwriters’ judgment and guidance received from ceding companies as to potential loss exposures may be relied on. The expected loss ratios used in the initial reserving process for property exposures have varied over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, terms and conditions and geographical distribution. As losses in property lines are reported relatively quickly, expected loss ratios are selected for the current underwriting year incorporating the experience for earlier underwriting years, adjusted for rate changes, inflation, changes in reinsurance programs, expectations about present and future market conditions and expected attritional losses based on modeling. Due to the short-tail nature of property business, reported loss experience emerges quickly and ultimate losses are known in a reasonably short period of time.

In the initial reserving process for medium-tail and long-tail reinsurance lines (consisting of casualty, other specialty, marine and aviation and other exposures), the Company primarily relies on the expected loss method. The development of medium-tail and long-tail business may be unstable, especially if there are high severity major events, with business written on an excess of loss basis typically having a longer tail than business written on a pro rata basis. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. Our reinsurance operations make a number of key assumptions in reserving for medium-tail and long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the contract is entered into, historical paid and reported development patterns are stable and claims personnel and underwriters analyses of our exposure to major events are assumed to be our best estimate of our exposure to the known claims on those events. The expected loss ratios used in our reinsurance operations’ initial reserving process for medium-tail and long-tail contracts have varied over time due to changes in pricing, terms and conditions and reinsurance structure. As the credibility of historical experience for earlier underwriting years increases, the experience from these underwriting years will be used in the actuarial analysis to determine future underwriting year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present information on the reinsurance segment’s short-duration insurance contracts:

Casualty ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	284,807			$	291,045			$	290,375			$	284,525			$	276,674			$	274,953			$	276,071			$	272,057			$	268,307			$	266,449			$	29,569			N/A
2009						267,280				287,553				305,904				285,865				280,815				270,122				253,577				239,120				235,781				33,749				N/A
2010										197,835				198,624				201,815				193,171				182,433				171,232				165,316				161,187				40,306				N/A
2011														154,704				158,216				152,135				147,428				143,138				140,183				134,058				32,068				N/A
2012																		148,782				146,714				142,572				130,527				120,206				114,412				42,802				N/A
2013																						170,464				163,691				159,723				153,317				141,024				58,572				N/A
2014																										219,789				225,116				222,518				236,671				88,374				N/A
2015																														225,118				223,789				232,755				103,595				N/A
2016																																		216,583				228,972				96,985				N/A
2017																																						267,312				180,407				N/A
																																		Total				$	2,018,621
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	3,588			$	22,929			$	47,551			$	73,955			$	94,295			$	132,406			$	161,446			$	183,398			$	195,919			$	207,737
2009						3,308				19,575				47,349				74,204				106,140				135,759				150,023				160,520				170,106
2010										2,231				21,547				39,251				54,476				72,794				83,458				94,554				102,576
2011														2,343				12,005				22,736				40,372				56,663				66,391				73,578
2012																		1,373				8,929				15,733				27,176				38,676				50,266
2013																						2,573				10,233				23,837				44,473				56,270
2014																										3,992				16,242				41,257				64,223
2015																														4,486				20,338				47,362
2016																																		5,721				25,707
2017																																						6,437
																		Total																				804,262
																		All outstanding liabilities before 2008, net of reinsurance																				265,408
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	1,479,767

Property catastrophe ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	148,631			$	106,096			$	121,101			$	120,270			$	120,667			$	116,249			$	114,856			$	114,481			$	114,295			$	113,798			$	231			N/A
2009						75,227				33,007				20,101				18,610				17,460				17,205				16,202				15,849				13,739				(158		)		N/A
2010										97,686				50,159				41,827				41,840				46,192				46,592				46,400				46,656								N/A
2011														213,931				193,757				174,820				161,563				157,745				157,038				154,731								N/A
2012																		150,630				123,381				108,710				102,178				99,931				99,113				165				N/A
2013																						68,712				48,992				37,279				32,725				30,149				55				N/A
2014																										46,408				31,865				26,147				23,222				701				N/A
2015																														33,912				18,538				12,054				1,895				N/A
2016																																		24,918				18,217				2,427				N/A
2017																																						79,714				6,086				N/A
																																		Total				$	591,393
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	52,629			$	79,836			$	89,405			$	98,147			$	108,720			$	112,398			$	113,113			$	113,280			$	113,338			$	113,467
2009						10,132				13,647				13,526				15,105				15,370				15,374				15,400				15,417				13,634
2010										8,868				24,322				32,694				39,465				41,601				43,477				44,990				45,066
2011														62,695				87,958				120,806				136,072				141,788				144,417				146,563
2012																		25,850				70,849				83,863				90,768				92,927				94,056
2013																						12,320				19,497				24,597				26,570				28,427
2014																										13,694				20,402				19,027				19,889
2015																														(3,705		)		(2,495		)		1,989
2016																																		(7,176		)		1,796
2017																																						28,864
																		Total																				493,751
																		All outstanding liabilities before 2008, net of reinsurance																				870
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	98,512

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Property excluding property catastrophe ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	212,864			$	187,495			$	190,891			$	196,239			$	191,461			$	188,574			$	186,573			$	186,114			$	180,188			$	178,940			$	1,198			N/A
2009						216,844				193,877				171,389				164,633				163,873				161,800				158,856				149,305				148,511				1,092				N/A
2010										143,002				128,702				118,475				112,741				110,802				108,671				104,875				101,693				2,004				N/A
2011														206,719				179,368				166,857				163,226				159,084				157,774				155,510				4,243				N/A
2012																		156,362				122,033				124,129				119,572				115,159				112,936				4,234				N/A
2013																						115,913				77,266				70,923				66,552				64,834				5,034				N/A
2014																										144,093				117,947				99,784				91,079				8,288				N/A
2015																														214,620				189,004				184,637				18,164				N/A
2016																																		177,002				146,338				28,121				N/A
2017																																						260,425				80,297				N/A
																																		Total				$	1,444,903
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	56,096			$	125,684			$	146,850			$	161,523			$	167,161			$	173,245			$	174,276			$	174,095			$	175,016			$	176,443
2009						66,401				117,101				134,441				138,824				140,664				143,183				144,290				145,099				146,209
2010										37,942				76,757				88,591				93,782				96,011				97,169				97,814				98,248
2011														47,595				121,216				141,080				145,591				147,648				148,751				148,996
2012																		26,093				78,296				93,524				102,211				103,210				103,850
2013																						26,066				42,994				50,106				53,290				54,097
2014																										23,585				63,045				71,983				76,939
2015																														75,404				119,122				149,655
2016																																		33,347				95,680
2017																																						25,242
																		Total																				1,075,359
																		All outstanding liabilities before 2008, net of reinsurance																				4,472
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	374,016

Marine and aviation ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	132,706			$	158,928			$	165,593			$	159,588			$	155,884			$	154,475			$	152,625			$	152,602			$	150,668			$	148,445			$	719			N/A
2009						50,165				41,601				35,803				34,107				31,268				30,026				28,598				28,355				27,391				1,728				N/A
2010										40,978				42,314				38,537				35,445				33,544				31,928				31,177				30,336				678				N/A
2011														39,350				32,945				35,879				32,429				28,804				27,207				27,261				4,316				N/A
2012																		59,050				58,926				55,131				52,375				51,169				49,815				7,966				N/A
2013																						39,147				38,019				37,049				35,641				35,541				9,967				N/A
2014																										31,179				29,418				27,630				25,929				8,391				N/A
2015																														33,740				37,618				31,828				7,911				N/A
2016																																		27,368				22,766				14,599				N/A
2017																																						28,817				18,451				N/A
																																		Total				$	428,129
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	11,284			$	50,877			$	83,413			$	112,852			$	128,381			$	140,907			$	143,208			$	145,105			$	145,538			$	145,545
2009						6,921				16,313				19,457				22,594				22,698				23,041				23,648				24,151				24,251
2010										8,523				13,402				16,753				18,479				20,222				26,540				27,186				27,548
2011														4,421				12,122				16,530				19,234				15,957				16,631				21,985
2012																		2,662				11,459				27,588				33,386				35,129				36,333
2013																						5,043				13,980				18,713				21,709				22,724
2014																										4,314				8,159				11,796				12,677
2015																														9				13,431				19,043
2016																																		(7,326		)		(1,680		)
2017																																						1,661
																		Total																				310,087
																		All outstanding liabilities before 2008, net of reinsurance																				17,414
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	135,456

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other specialty ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																																										December 31, 2017
																																										Total of IBNR liabilities plus expected development on reported claims				Cumulative number of reported claims
		Year ended December 31,
Accident year		2008 unaudited				2009 unaudited				2010 unaudited				2011 unaudited				2012 unaudited				2013 unaudited				2014 unaudited				2015 unaudited				2016 unaudited				2017
2008		$	43,813			$	37,434			$	34,099			$	30,237			$	28,288			$	30,217			$	28,783			$	28,669			$	27,691			$	27,418			$	2,185			N/A
2009						61,515				50,560				45,378				39,257				37,133				35,141				36,397				36,874				37,888				2,734				N/A
2010										44,243				33,744				26,696				24,401				23,402				23,077				22,845				22,587				1,713				N/A
2011														114,407				99,156				94,970				93,396				91,617				90,215				89,611				3,001				N/A
2012																		230,125				218,333				208,036				202,055				200,025				203,304				21,566				N/A
2013																						259,466				232,696				222,481				218,827				220,073				28,371				N/A
2014																										283,337				264,072				266,007				258,880				35,422				N/A
2015																														218,258				209,337				207,514				39,024				N/A
2016																																		233,315				230,646				59,666				N/A
2017																																						294,469				131,878				N/A
																																		Total				$	1,592,390
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2008		$	5,324			$	14,998			$	21,037			$	22,318			$	22,985			$	24,840			$	24,207			$	24,814			$	24,867			$	24,789
2009						9,440				27,981				30,885				30,764				30,756				30,652				31,172				31,977				32,113
2010										4,193				13,786				17,018				18,060				18,861				19,480				19,712				20,334
2011														29,027				58,746				71,240				75,942				79,549				81,396				83,732
2012																		47,063				125,181				148,565				159,908				167,996				172,326
2013																						58,851				122,477				149,149				165,824				175,813
2014																										71,180				151,264				187,952				201,529
2015																														57,095				119,284				144,104
2016																																		68,307				145,348
2017																																						80,549
																		Total																				1,080,637
																		All outstanding liabilities before 2008, net of reinsurance																				9,012
														Liabilities for losses and loss adjustment expenses, net of reinsurance																								$	520,765

The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2017:

		Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
		Year 1			Year 2			Year 3			Year 4			Year 5			Year 6			Year 7			Year 8			Year 9			Year 10
Casualty		1.7	%		7.3	%		9.7	%		11.2	%		10.5	%		10.2	%		7.3	%		5.9	%		4.4	%		4.4	%
Property catastrophe		27.2	%		28.5	%		13.5	%		8.7	%		4.6	%		2.0	%		1.4	%		0.1	%		(6.5	)%		0.1	%
Property excluding property catastrophe		30.6	%		37.8	%		12.3	%		5.3	%		1.7	%		1.5	%		0.5	%		0.3	%		0.6	%		0.8	%
Marine and aviation		8.7	%		25.5	%		17.2	%		10.1	%		1.8	%		7.1	%		6.4	%		1.4	%		0.3	%		—	%
Other specialty		25.7	%		35.7	%		13.5	%		4.7	%		3.1	%		2.7	%		0.7	%		2.4	%		0.3	%		(0.3	)%

Mortgage Segment

The Company’s mortgage segment includes (1) direct mortgage insurance in the U.S., (2) direct mortgage insurance in Europe, (3) global mortgage reinsurance and (4) various GSE credit risk-sharing products, with the latter three categories along with second lien and student loan exposures excluded on the basis of insignificance for the purposes of presenting disclosures related to short duration contracts.

For direct mortgage insurance business, the Company establishes case reserves for loans that have been reported as delinquent by loan servicers as well as those that are delinquent but not reported (IBNR reserves). The Company’s U.S. mortgage insurance operations also reserve for the expenses of adjusting claims related to these delinquencies. The trigger that creates a case reserve estimate is that an insured loan is reported to us as being two payments in arrears. The actuarial reviews and documentation created in the reserving process are completed in accordance with generally accepted actuarial

standards. The selected assumptions reflect the actuary’s judgment based on historical data and experience combined with information concerning current underwriting, economic, judicial, regulatory and other influences on ultimate claim settlements.

Because the reserving process requires the Company to forecast future conditions, it is inherently uncertain and requires significant judgment and estimation. The use of different estimates would result in the establishment of different reserve levels. Additionally, changes in accounting estimates are likely to occur from period to period as economic conditions change and the ultimate liability may vary significantly from the estimates used. Major risk factors include (but are not limited to) changes in home prices and borrower equity, which can limit the borrower’s ability to sell the property and satisfy the outstanding loan balance, and changes in unemployment, which can affect the borrower’s income and ability to make mortgage payments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The lead methodology used by the Company is a frequency-severity method based on the inventory of pending delinquencies. Each month the loan servicers report the delinquency status of each insured loan. Using the frequency-severity method allows the Company to take advantage of its knowledge of the number of delinquent loans and the coverage provided (“risk size”) on those loans by directly relating the reserves to these amounts. The delinquencies are grouped into homogeneous cohorts for analysis, reflecting product type and age of delinquency. A claim rate is then developed for each cohort which represents the frequency with which the delinquencies become claims. The claim rates are based on an analysis of the patterns of emerging cure counts and claim counts, the foreclosure status of the pending delinquencies, the product and geographical mix of the delinquencies and our view of future economic and claim conditions, which include trends in home prices and unemployment. Claim rates can vary materially by age of delinquency, depending on the mix of delinquencies and economic conditions.

Claim size estimates are determined by examining the risk sizes on the delinquent loans and estimating the portion of risk that will be paid, as well as any expenses. This is done based on a review of historical development patterns, an assessment of economic conditions and the level of equity the borrowers may have in their homes, as well as considering economic conditions and loss mitigation opportunities. Mortgage insurance is generally not subject to large claim sizes, as with some other

lines of insurance. A claim size over $250,000 is rare, and this helps reduce the volatility of claim size estimates. The claim rate and claim size assumptions generate case reserves for the population of reported delinquencies. The reserve for unreported delinquencies (included in IBNR reserves) is estimated by looking at historical patterns of reporting. Claim rates and claim sizes can then be assigned to estimated unreported delinquencies using assumptions made in the establishment of case reserves.

Mortgage insurance Loss Reserves are short-tail, in the sense that the vast majority of delinquencies are resolved within two years of being reported. While reserves are initially analyzed by reserve cohort, as described above, they are also rolled up by underwriting year to ensure that reserve assumptions are consistent with the performance of the underwriting year. The accuracy of prior reserve assumptions is also checked in hindsight to determine if adjustments are needed.

Loss Reserves for the Company’s mortgage reinsurance business and GSE credit-risk sharing transactions are comprised of case reserves and IBNR reserves. The Company’s mortgage reinsurance operations receive reports of delinquent loans and claims notices from ceding companies and record case reserves based upon the amount of reserves recommended by the ceding company. In addition, specific claim and delinquency information reported by ceding companies is used in the process of estimating IBNR reserves.

The tables below include the acquired business of UGC across all periods presented. Due to the length of time for which claims incurred typically remain outstanding prior to payment and the Company’s formation of the mortgage segment in 2014, the Company determined that six accident years was sufficient for its current disclosures. The following table presents information on the mortgage segment’s short-duration insurance contracts:

Direct mortgage insurance business in the U.S. ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance																					December 31, 2017
																					Total of IBNR liabilities plus expected development on reported claims			Cumulative number of paid claims
		Year ended December 31,
Accident year		2012 unaudited			2013 unaudited			2014 unaudited			2015 unaudited			2016 unaudited			2017
2012		520,835			480,592			475,317			469,238			467,296			459,467				538			14,929
2013					469,311			419,668			411,793			405,809			395,693				639			9,249
2014								316,095			297,151			279,434			266,027				969			5,932
2015											222,790			197,238			198,001				2,014			3,910
2016														183,556			170,532				3,915			2,004
2017																	179,376				27,163			227
														Total			$	1,669,096
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
2012		(106,065	)		186,605			327,605			395,695			426,024			441,577
2013					41,447			203,957			308,956			353,189			373,909
2014								20,099			129,159			201,925			233,879
2015											16,159			92,431			151,222
2016														11,462			72,201
2017																	8,622
																	1,281,410
					All outstanding liabilities before 2012, net of reinsurance												56,299
																	$	443,985

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2017:

Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
		Year 1			Year 2			Year 3			Year 4			Year 5			Year 6
U.S. Primary		2.4	%		44.0	%		28.6	%		12.7	%		5.9	%		3.4	%

Other Segment

Loss Reserves for the ‘other’ segment (i.e., Watford Re) are comprised of case reserves, ACRs and IBNR reserves. For all business assumed by Watford Re, the Company acts as reinsurance underwriting manager, provides actuarial and risk management services and recommends a level of Loss Reserves to Watford Re. The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. The estimation of Loss Reserves for Watford Re is subject to the same risk factors as the estimation of Loss Reserves for the Company’s insurance, reinsurance and mortgage segments as described earlier. Watford Re performs its own reserve reviews and sets its reserves independently. As noted previously, the Company determined that amounts in the ‘other’ segment are insignificant for the purposes of these footnote disclosures.

For the year ended December 31, 2017, the Company did not make any significant changes in its methodologies or assumptions as described above (a) to determine the presented amounts of IBNR reserves, (b) for expected development on case reserves.

The Company measures claim frequency information on an individual claim count basis. Claim counts are provided for the insurance and mortgage segments, where reliable information is available. For insurance business, any claim which is reported to the Company is included in the count, even if it is subsequently settled without liability to the Company. The Company does not include claim count information for losses from U.S. insurance pool business where individual loss information is unavailable and impracticable to obtain. For mortgage business, only delinquencies which subsequently become claims are included in the claim count. For reinsurance business, claim counts are not provided. A significant amount of the Company’s reinsurance business is written on a proportional basis, for which individual loss information is typically unavailable and impracticable to obtain.

For the year ended December 31, 2017, the Company did not make any significant changes in its methodologies or assumptions as described above to calculate the cumulative claim frequency.

The following table represents a reconciliation of the disclosures of net incurred and paid loss development tables to the reserve for losses and loss adjustment expenses at December 31, 2017:

	December 31, 2017
Net outstanding liabilities
Insurance
Property, energy, marine and aviation	$	429,974
Third party occurrence business	2,030,164
Third party claims-made business	1,264,616
Multi-line and other specialty	1,081,310
Reinsurance
Casualty	1,479,767
Property catastrophe	98,512
Property excluding property catastrophe	374,016
Marine and aviation	135,456
Other specialty	520,765
Mortgage
U.S. primary	443,985
Other short duration lines not included in disclosures	887,624
Total for short duration lines	8,746,189
Unpaid losses and loss adjustment expenses recoverable
Insurance
Property, energy, marine and aviation	345,188
Third party occurrence business	980,850
Third party claims-made business	681,664
Multi-line and other specialty	138,586
Reinsurance
Casualty	433,139
Property catastrophe	208,417
Property excluding property catastrophe	54,473
Marine and aviation	25,506
Other specialty	76,962
Mortgage
U.S. primary	27,448
Other short duration lines not included in disclosures	26,605
Intercompany eliminations	(539,519		)
Total for short duration lines	2,459,319
Lines other than short duration	26,744
Discounting	(20,016		)
Unallocated claims adjustment expenses	171,556
	178,284
Total gross reserves for losses and loss adjustment expenses	$	11,383,792

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Reinsurance

In the normal course of business, the Company’s insurance subsidiaries cede a portion of their premium through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis. The Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.

The effects of reinsurance on the Company’s written and earned premiums and losses and loss adjustment expenses with unaffiliated reinsurers were as follows:

	Year Ended December 31,
	2017				2016				2015
Premiums Written
Direct	$	4,447,457			$	3,337,690			$	3,086,919
Assumed	1,920,968				1,864,444				1,710,244
Ceded	(1,407,052		)		(1,170,743		)		(979,632		)
Net	$	4,961,373			$	4,031,391			$	3,817,531
Premiums Earned
Direct	$	4,379,131			$	3,192,653			$	3,002,508
Assumed	1,856,573				1,730,884				1,659,456
Ceded	(1,391,172		)		(1,038,715		)		(928,059		)
Net	$	4,844,532			$	3,884,822			$	3,733,905
Losses and Loss Adjustment Expenses
Direct	$	2,568,327			$	1,976,853			$	1,830,785
Assumed	1,442,077				847,038				752,304
Ceded	(1,042,958		)		(638,292		)		(532,186		)
Net	$	2,967,446			$	2,185,599			$	2,050,903

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At December 31, 2017, approximately 69.9% of the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) of $2.54 billion were due from carriers which had an A.M. Best rating of “A-” or better while 30.1% were from companies not rated, a substantial portion of which was collateralized through reinsurance trusts or letters of credit. The largest reinsurance recoverables from any one carrier was approximately 2.2% of the Company’s total shareholders’ equity at December 31, 2017. At December 31, 2016,

approximately 75.7% of the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) of $2.11 billion were due from carriers which had an A.M. Best rating of “A-” or better while 24.2% were from companies not rated, a substantial portion of which was collateralized through reinsurance trusts or letters of credit. The largest reinsurance recoverables from any one carrier was approximately 2.4% of the Company’s total shareholders’ equity at December 31, 2016. Although the Company has not experienced any material credit losses to date, an inability of its reinsurers or retrocessionaires to meet their obligations to it over the relevant exposure periods for any reason could have a material adverse effect on its financial condition and results of operations.

On July 29, 2015, UGC entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re, a special purpose reinsurance company domiciled in Bermuda, at inception for new delinquencies on a portfolio of in-force policies issued between January 1, 2009 and March 31, 2013 through a mortgage insurance-linked notes offering by Bellemeade Re I Ltd.

On May 9, 2016, UGC entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re at inception for new delinquencies on a portfolio of in-force policies issued in 2008 and prior years through a mortgage insurance-linked notes offering by Bellemeade Re II Ltd.

On October 25, 2017, the Company entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re at inception for new delinquencies on a portfolio of in-force policies issued between January 1, 2017 and June 30, 2017 through a mortgage insurance-linked notes offering by Bellemeade 2017-1 Ltd.

The following table summarizes the respective coverages and retentions at December 31, 2017:

	Initial Coverage at Issuance				Coverage at December 31, 2017				First Layer Retention
Bellemeade Re I	$	300,000			$	92,390			$	129,900
Bellemeade Re II	300,000				135,201				646,900
Bellemeade 2017-1	368,100				347,139				165,700

For the respective coverage periods, the ceding insurers 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. The ceding insurers 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Investment Information

At December 31, 2017, total investable assets of $22.16 billion included $19.72 billion held by the Company and $2.44 billion attributable to Watford Re.

Available For Sale Investments

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

	Estimated				Gross				Gross				Cost or				OTTI
	Fair				Unrealized				Unrealized				Amortized				Unrealized
	Value				Gains				Losses				Cost				Losses (2)
December 31, 2017
Fixed maturities (1):
Corporate bonds	$	4,434,439			$	30,943			$	(32,340	)		$	4,435,836			$	(73	)
Mortgage backed securities	316,141				1,640				(2,561		)		317,062				(15		)
Municipal bonds	2,158,840				20,285				(12,308		)		2,150,863				—
Commercial mortgage backed securities	545,817				2,131				(4,268		)		547,954				—
U.S. government and government agencies	3,484,257				2,188				(28,769		)		3,510,838				—
Non-U.S. government securities	1,612,754				48,764				(17,321		)		1,581,311				—
Asset backed securities	1,780,143				5,147				(8,614		)		1,783,610				—
Total	14,332,391				111,098				(106,181		)		14,327,474				(88		)
Equity securities	504,333				88,739				(5,583		)		421,177				—
Other investments	264,989				66,946				(120		)		198,163				—
Short-term investments	1,469,042				650				(563		)		1,468,955				—
Total	$	16,570,755			$	267,433			$	(112,447	)		$	16,415,769			$	(88	)
December 31, 2016
Fixed maturities (1):
Corporate bonds	$	4,392,373			$	27,606			$	(46,905	)		$	4,411,672			$	(2,285	)
Mortgage backed securities	490,093				4,794				(8,357		)		493,656				(3,323		)
Municipal bonds	3,713,434				8,554				(29,154		)		3,734,034				(201		)
Commercial mortgage backed securities	536,051				2,876				(6,508		)		539,683				—
U.S. government and government agencies	2,804,540				9,319				(24,437		)		2,819,658				—
Non-U.S. government securities	1,096,440				19,036				(56,872		)		1,134,276				—
Asset backed securities	1,123,987				6,897				(6,526		)		1,123,616				(22		)
Total	14,156,918				79,082				(178,759		)		14,256,595				(5,831		)
Equity securities	532,680				62,627				(17,517		)		487,570				—
Other investments	167,970				21,358				(2,465		)		149,077				—
Short-term investments	612,005				272				(145		)		611,878				—
Total	$	15,469,573			$	163,339			$	(198,886	)		$	15,505,120			$	(5,831	)

(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the 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.”

(2)	Represents the total OTTI recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2017, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $0.3 million, compared to a net unrealized loss of $2.8 million at December 31, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Less than 12 Months								12 Months or More								Total
	Estimated				Gross				Estimated				Gross				Estimated				Gross
	Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
	Value				Losses				Value				Losses				Value				Losses
December 31, 2017
Fixed maturities (1):
Corporate bonds	$	2,320,716			$	(25,411	)		$	279,082			$	(6,929	)		$	2,599,798			$	(32,340	)
Mortgage backed securities	221,113				(1,715		)		28,380				(846		)		249,493				(2,561		)
Municipal bonds	1,030,389				(8,438		)		132,469				(3,870		)		1,162,858				(12,308		)
Commercial mortgage backed securities	225,164				(1,899		)		57,291				(2,369		)		282,455				(4,268		)
U.S. government and government agencies	2,646,415				(26,501		)		111,879				(2,268		)		2,758,294				(28,769		)
Non-U.S. government securities	1,218,514				(15,546		)		93,530				(1,775		)		1,312,044				(17,321		)
Asset backed securities	1,111,246				(5,915		)		209,207				(2,699		)		1,320,453				(8,614		)
Total	8,773,557				(85,425		)		911,838				(20,756		)		9,685,395				(106,181		)
Equity securities	166,562				(5,583		)		—				—				166,562				(5,583		)
Other investments	15,025				(120		)		—				—				15,025				(120		)
Short-term investments	109,528				(563		)		—				—				109,528				(563		)
Total	$	9,064,672			$	(91,691	)		$	911,838			$	(20,756	)		$	9,976,510			$	(112,447	)
December 31, 2016
Fixed maturities (1):
Corporate bonds	$	1,700,813			$	(43,011	)		$	46,902			$	(3,894	)		$	1,747,715			$	(46,905	)
Mortgage backed securities	402,699				(8,134		)		6,105				(223		)		408,804				(8,357		)
Municipal bonds	1,513,308				(28,504		)		29,636				(650		)		1,542,944				(29,154		)
Commercial mortgage backed securities	231,374				(6,331		)		5,635				(177		)		237,009				(6,508		)
U.S. government and government agencies	1,888,018				(24,437		)		—				—				1,888,018				(24,437		)
Non-U.S. government securities	807,598				(56,872		)		—				—				807,598				(56,872		)
Asset backed securities	627,557				(5,465		)		65,723				(1,061		)		693,280				(6,526		)
Total	7,171,367				(172,754		)		154,001				(6,005		)		7,325,368				(178,759		)
Equity securities	269,381				(17,517		)		—				—				269,381				(17,517		)
Other investments	39,299				(2,465		)		—				—				39,299				(2,465		)
Short-term investments	29,146				(145		)		—				—				29,146				(145		)
Total	$	7,509,193			$	(192,881	)		$	154,001			$	(6,005	)		$	7,663,194			$	(198,886	)

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

At December 31, 2017, on a lot level basis, approximately 3,830 security lots out of a total of approximately 7,450 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 $1.3 million. The Company believes that such securities were temporarily impaired at December 31, 2017. 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.

ARCH CAPITAL	137	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

		December 31, 2017								December 31, 2016
Maturity		Estimated Fair Value				Amortized Cost				Estimated Fair Value				Amortized Cost
Due in one year or less		$	550,711			$	548,771			$	560,830			$	557,675
Due after one year through five years		7,436,153				7,434,801				6,158,148				6,211,099
Due after five years through 10 years		3,369,635				3,369,750				4,676,847				4,710,017
Due after 10 years		333,791				325,526				610,962				620,849
		11,690,290				11,678,848				12,006,787				12,099,640
Mortgage backed securities		316,141				317,062				490,093				493,656
Commercial mortgage backed securities		545,817				547,954				536,051				539,683
Asset backed securities		1,780,143				1,783,610				1,123,987				1,123,616
Total		$	14,332,391			$	14,327,474			$	14,156,918			$	14,256,595

Securities Lending Agreements

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

The Company receives collateral in the form of cash or securities. Cash collateral primarily consists of short-term investments. At December 31, 2017, the fair value of the cash collateral received on securities lending was $199.9 million and the fair value of security collateral received was $276.7 million. At December 31, 2016, the fair value of the cash collateral received on securities lending was $212.4 million and the fair value of security collateral received was $550.1 million.

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
December 31, 2017
U.S. government and government agencies		$	343,425			$	20,309			$	76,086			$	—			$	439,820
Corporate bonds		28,003				—				—				—				28,003
Equity securities		8,782				—				—				—				8,782
Total		$	380,210			$	20,309			$	76,086			$	—			$	476,605
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 11																		$	—
Amounts related to securities lending not included in offsetting disclosure in Note 11																		$	476,605
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 11																		$	—
Amounts related to securities lending not included in offsetting disclosure in Note 11																		$	762,554

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Other Investments

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

	December 31,
	2017				2016
Available for sale securities:
Asian and emerging markets	$	135,140			$	84,778
Investment grade fixed income	53,878				33,923
Credit related funds	18,365				7,469
Other	57,606				41,800
Total available for sale	264,989				167,970
Fair value option:
Term loan investments (par value: $1,223,453 and $1,208,537)	1,200,882				1,190,799
Mezzanine debt funds	252,160				127,943
Credit related funds	175,422				218,298
Investment grade fixed income	102,347				75,468
Asian and emerging markets	258,541				178,568
Other (1)	147,029				129,717
Total fair value option	2,136,381				1,920,793
Total	$	2,401,370			$	2,088,763

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

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

Fair Value Option

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

	December 31,
	2017				2016
Fixed maturities	$	1,642,855			$	1,099,116
Other investments	2,136,381				1,920,793
Short-term investments	297,426				373,669
Equity securities	139,575				27,642
Investments accounted for using the fair value option	$	4,216,237			$	3,421,220

Limited Partnership Interests

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

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

	December 31,
	2017				2016
Investments accounted for using the equity method (1)	$	1,041,321			$	800,970
Investments accounted for using the fair value option (2)	130,471				90,804
Total	$	1,171,792			$	891,774

(1)	Aggregate unfunded commitments were $1,020.1 million at December 31, 2017, compared to $776.6 million at December 31, 2016.

(2)	Aggregate unfunded commitments were $100.4 million at December 31, 2017, compared to $16.7 million at December 31, 2016.

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Net Investment Income

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

	Year Ended December 31,
	2017				2016				2015
Fixed maturities	$	385,919			$	295,502			$	283,998
Equity securities	11,752				12,536				13,534
Short-term investments	10,964				6,071				669
Other (1)	154,266				132,815				112,927
Gross investment income	562,901				446,924				411,128
Investment expenses	(92,029		)		(80,182		)		(63,038		)
Net investment income	$	470,872			$	366,742			$	348,090

(1)	Includes dividends and other distributions from investment funds, term loan investments, funds held balances, cash balances and other.

Net Realized Gains (Losses)

Net realized gains (losses) were as follows, excluding the other-than-temporary impairment provisions:

	Year Ended December 31,
	2017				2016				2015
Available for sale securities:
Gross gains on investment sales	$	286,415			$	309,896			$	281,786
Gross losses on investment sales	(203,873		)		(214,447		)		(218,970		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	29,451				47,890				(84,620		)
Other investments	51,124				58,687				(122,171		)
Equity securities	18,707				366				(85		)
Short-term investments	272				93				1,462
Derivative instruments (1)	(7,356		)		(22,612		)		(7,114		)
Other (2)	(25,599		)		(42,287		)		(36,130		)
Net realized gains (losses)	$	149,141			$	137,586			$	(185,842	)

(1)	See Note 11 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 equity in net income related to investment funds accounted for using the equity method of $142.3 million for 2017, compared to $48.5 million for 2016 and $25.5 million for 2015. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair 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.

A summary of financial information for the Company’s investments accounted for using the equity method is as follows:

	December 31,
	2017				2016
Invested assets	$	22,351,894			$	16,414,190
Total assets	23,932,507				17,988,367
Total liabilities	2,734,662				1,499,160
Net assets	$	21,197,845			$	16,489,207

	Year Ended December 31,
	2017				2016				2015
Total revenues	$	3,867,874			$	2,279,737			$	1,429,007
Total expenses	782,773				656,940				521,555
Net income (loss)	$	3,085,101			$	1,622,797			$	907,452

Other-Than-Temporary Impairments

The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance.

The following table details the net impairment losses recognized in earnings by asset class:

	Year Ended December 31,
	2017				2016				2015
Fixed maturities:
Mortgage backed securities	$	(1,488	)		$	(964	)		$	(1,794	)
Corporate bonds	(2,884		)		(5,674		)		(10,841		)
Non-U.S. government securities	(376		)		(823		)		—
Asset backed securities	—				(14,736		)		—
U.S. government and government agencies	(426		)		—				—
Municipal bonds	(375		)		(726		)		—
Total	(5,549		)		(22,923		)		(12,635		)
Short-term investments	—				—				(2,341		)
Equity securities	(1,422		)		(3,990		)		(4,206		)
Other investments	(167		)		(3,529		)		(934		)
Net impairment losses recognized in earnings	$	(7,138	)		$	(30,442	)		$	(20,116	)

A description of the methodology and significant inputs used to measure the amount of net impairment losses recognized in earnings in 2017 is as follows:

•	Corporate bonds – the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain

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corporate bonds. Impairment losses were primarily from foreign currency impacts;

•

Mortgage backed securities – the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. Impairment losses primarily reflected the Company’s decision to liquidate a portfolio of mortgage backed securities in April 2017. The Company recorded impairment losses on securities in such portfolio that were in an unrealized loss position at March 31, 2017;

•	Equity securities – the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. Impairment losses were primarily on equities which were in an unrealized loss position for a significant length of time.

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

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:

	Year Ended December 31,
	2017				2016				2015
Balance at start of year	$	13,138			$	26,875			$	20,196
Credit loss impairments recognized on securities not previously impaired	31				2,186				12,777
Credit loss impairments recognized on securities previously impaired	210				582				1,673
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	(12,612		)		(16,505		)		(7,771		)
Balance at end of year	$	767			$	13,138			$	26,875

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations.

The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 16 for further details.

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

	December 31,
	2017				2016
Assets used for collateral or guarantees:
Affiliated transactions	$	4,323,726			$	3,871,971
Third party agreements	1,674,304				1,513,079
Deposits with U.S. regulatory authorities	616,987				472,890
Deposits with non-U.S. regulatory authorities	55,895				44,399
Total restricted assets	$	6,670,912			$	5,902,339

10. Fair Value

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

The levels in the hierarchy are defined as follows:

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

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

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

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

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the 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.

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 $20.9 billion of financial assets and liabilities measured at fair value at December 31, 2017, approximately $181.5 million, or 0.9%, were priced using non-binding broker-dealer quotes. Of the $19.1 billion of financial assets and liabilities measured at fair value at December 31, 2016, approximately $234.0 million, or 1.2%, were priced using non-binding broker-dealer quotes.

Fixed maturities

The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when

possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:

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

• Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. One security is included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

• Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

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• 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. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

• Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.

• Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. 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 2017, the Company transferred $17.6 million of fixed maturities 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.

Other investments

The Company determined that exchange-traded investments 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. 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. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers, based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. 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. During 2017, the Company transferred $33.7 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 Company’s 2014 acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies (the “CMG Entities”) 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

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(losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs

which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2017:

					Fair Value Measurement Using:
	Estimated Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets measured at fair value:
Available for sale securities:
Fixed maturities (1):
Corporate bonds	$	4,434,439			$	—			$	4,424,979			$	9,460
Mortgage backed securities	316,141				—				315,754				387
Municipal bonds	2,158,840				—				2,158,840				—
Commercial mortgage backed securities	545,817				—				545,277				540
U.S. government and government agencies	3,484,257				3,408,902				75,355				—
Non-U.S. government securities	1,612,754				—				1,612,754				—
Asset backed securities	1,780,143				—				1,775,143				5,000
Total	14,332,391				3,408,902				10,908,102				15,387
Equity securities	504,333				498,182				6,151				—
Short-term investments	1,469,042				1,420,732				48,310				—
Other investments	76,427				74,611				1,816				—
Other investments measured at net asset value (2)	188,562
Total other investments	264,989				74,611				1,816				—
Derivative instruments (4)	15,747				—				15,747				—
Fair value option:
Corporate bonds	1,068,725				—				1,056,508				12,217
Non-U.S. government bonds	195,788				—				195,788				—
Mortgage backed securities	20,491				—				20,491				—
Municipal bonds	15,210				—				15,210				—
Commercial mortgage backed securities	11,997				—				11,997				—
Asset backed securities	99,354				—				99,354				—
U.S. government and government agencies	231,290				231,019				271				—
Short-term investments	297,426				40,166				257,260				—
Equity securities	139,576				67,440				72,136				—
Other investments	1,128,094				82,291				986,636				59,167
Other investments measured at net asset value (2)	1,008,287
Total	4,216,238				420,916				2,715,651				71,384
Total assets measured at fair value	$	20,802,740			$	5,823,343			$	13,695,777			$	86,771
Liabilities measured at fair value:
Contingent consideration liabilities	$	(60,996	)		$	—			$	—			$	(60,996	)
Securities sold but not yet purchased (3)	(34,375		)		—				(34,375		)		—
Derivative instruments (4)	(20,464		)		—				(20,464		)		—
Total liabilities measured at fair value	$	(115,835	)		$	—			$	(54,839	)		$	(60,996	)

(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 9, “Investment Information—Securities Lending Agreements.”

(2)

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

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

(4)	See Note 11, “Derivative Instruments.”

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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:

					Fair Value Measurement Using:
	Estimated Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets measured at fair value:
Available for sale securities:
Fixed maturities (1):
Corporate bonds	$	4,392,373			$	—			$	4,374,029			$	18,344
Mortgage backed securities	490,093				—				490,093				—
Municipal bonds	3,713,434				—				3,713,434				—
Commercial mortgage backed securities	536,051				—				536,051				—
U.S. government and government agencies	2,804,540				2,691,575				112,965				—
Non-U.S. government securities	1,096,440				—				1,096,440				—
Asset backed securities	1,123,987				—				1,112,698				11,289
Total	14,156,918				2,691,575				11,435,710				29,633
Equity securities	532,680				529,695				2,985				—
Short-term investments	612,005				608,862				3,143				—
Other investments	112,313				112,313				—				—
Other investments measured at net asset value (2)	55,657
Total other investments	167,970				112,313				—				—
Derivative instruments (4)	28,410				—				28,410				—
Fair value option:
Corporate bonds	790,935				—				790,935				—
Non-U.S. government bonds	61,747				—				61,747				—
Mortgage backed securities	18,624				—				18,624				—
Asset backed securities	30,324				—				30,324				—
U.S. government and government agencies	197,486				197,486				—				—
Short-term investments	373,669				309,127				64,542				—
Equity securities	27,642				25,328				2,314				—
Other investments	1,226,242				80,706				1,120,536				25,000
Other investments measured at net asset value (2)	694,551
Total	3,421,220				612,647				2,089,022				25,000
Total assets measured at fair value	$	18,919,203			$	4,555,092			$	13,559,270			$	54,633
Liabilities measured at fair value:
Contingent consideration liabilities	$	(122,350	)		$	—			$	—			$	(122,350	)
Securities sold but not yet purchased (3)	(33,157		)		—				(33,157		)		—
Derivative instruments (4)	(26,049		)		—				(26,049		)		—
Total liabilities measured at fair value	$	(181,556	)		$	—			$	(59,206	)		$	(122,350	)

(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 9, “Investment Information—Securities Lending Agreements.”

(2)

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

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

(4)	See Note 11, “Derivative Instruments.”

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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 for 2017 and 2016:

					Assets																Liabilities
	Available For Sale								Fair Value Option
	Structured Securities (1)				Corporate Bonds				Corporate Bonds				Other Investments				Total				Contingent Consideration Liabilities
Year Ended December 31, 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				688				1,021				4				5,492				(10,837		)
Included in other comprehensive income	7				713				—				—				720				—
Purchases, issuances, sales and settlements
Purchases	—				4,935				—				1,348				6,283				—
Issuances	—				—				—				—				—				—
Sales	(13,640		)		(14,897		)		—				—				(28,537		)		—
Settlements	(1,457		)		(455		)		(275		)		(901		)		(3,088		)		72,191
Transfers in and/or out of Level 3	5,949				132				11,471				33,716				51,268				—
Balance at end of year	$	5,927			$	9,460			$	12,217			$	59,167			$	86,771			$	(60,996	)
Year Ended December 31, 2016
Balance at beginning of year	$	57,500			$	16,368			$	—			$	—			$	73,868			$	(96,048	)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(14,730		)		1,200				—				—				(13,530		)		(26,912		)
Included in other comprehensive income	—				—				—				—				—				74
Purchases, issuances, sales and settlements
Purchases	—				776				—				—				776				—
Issuances	—				—				—				—				—				—
Sales	—				—				—				—				—				—
Settlements	(31,481		)		—				—				—				(31,481		)		536
Transfers in and/or out of Level 3	—				—				—				25,000				25,000				—
Balance at end of year	$	11,289			$	18,344			$	—			$	25,000			$	54,633			$	(122,350	)

(1)	Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.

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

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at December 31, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At December 31, 2017, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.73 billion and had a fair value of $2.04 billion. At December 31, 2016, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.73 billion and had a fair value of $1.90 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 value of the senior notes is classified within Level 2.

Fair Value Measurements on a Non-Recurring Basis

The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investment funds accounted for using the equity method, certain other investments, goodwill and intangible assets, and long-lived assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

Investments accounted for using the equity method. When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using the techniques discussed above in “—Fair Value Measurements on a Recurring Basis.”

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Goodwill and Intangible Assets. The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When the Company determines goodwill and intangible assets may be impaired, the Company uses techniques including discounted expected future cash flows, to measure fair value.

Long-Lived Assets. The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable.

11. 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
	Asset Derivatives				Liability Derivatives				Notional Value (1)
December 31, 2017
Futures contracts (2)	$	3,371			$	(1,542	)		$	1,452,497
Foreign currency forward contracts (2)	4,478				(4,381		)		686,941
TBAs (3)	27,184				—				27,066
Other (2)	7,898				(14,541		)		1,457,345
Total	$	42,931			$	(20,464	)
December 31, 2016
Futures contracts (2)	$	360			$	(9,398	)		$	1,655,530
Foreign currency forward contracts (2)	9,354				(12,941		)		1,186,386
TBAs (3)	—				—				—
Other (2)	20,287				(3,710		)		1,014,863
Total	$	30,001			$	(26,049	)

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

(2)	The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’ Such amounts include risk in force on GSE credit-risk sharing transactions that are accounted for as derivatives.

(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 December 31, 2017 or 2016.

The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Effectively, contractual close-out netting reduces the derivatives credit exposure from a gross to a net exposure. At December 31, 2017, $40.6 million and $19.6 million, respectively, of asset derivatives and liability derivatives were subject to a master netting agreement compared to $28.4 million and $26.0 million, respectively, at December 31, 2016. The remaining derivatives

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

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

Derivatives not designated as hedging instruments		Year Ended December 31,
	2017				2016				2015
Net realized gains (losses):
Futures contracts		$	9,318			$	(5,474	)		$	(21,533	)
Foreign currency forward contracts		(14,495		)		(9,588		)		16,045
TBAs		9				577				1,452
Other		(2,188		)		(8,127		)		(3,078		)
Total		$	(7,356	)		$	(22,612	)		$	(7,114	)

12. Other Comprehensive Income (Loss)

The following table presents the changes in each component of AOCI, net of noncontrolling interests:

	Unrealized Appreciation on Available-For-Sale Investments				Foreign Currency Translation Adjustments				Total
Year Ended December 31, 2017
Beginning balance	$	(27,641	)		$	(86,900	)		$	(114,541	)
Other comprehensive income (loss) before reclassifications	252,904				47,544				300,448
Amounts reclassified from accumulated other comprehensive income	(67,863		)		—				(67,863		)
Net current period other comprehensive income (loss)	185,041				47,544				232,585
Ending balance	$	157,400			$	(39,356	)		$	118,044
Year Ended December 31, 2016
Beginning balance	$	50,085			$	(66,587	)		$	(16,502	)
Other comprehensive income (loss) before reclassifications	(21,365		)		(20,313		)		(41,678		)
Amounts reclassified from accumulated other comprehensive income	(56,361		)		—				(56,361		)
Net current period other comprehensive income (loss)	(77,726		)		(20,313		)		(98,039		)
Ending balance	$	(27,641	)		$	(86,900	)		$	(114,541	)
Year Ended December 31, 2015
Beginning balance	$	161,598			$	(32,742	)		$	128,856
Other comprehensive income (loss) before reclassifications	(83,280		)		(33,845		)		(117,125		)
Amounts reclassified from accumulated other comprehensive income	(28,233		)		—				(28,233		)
Net current period other comprehensive income (loss)	(111,513		)		(33,845		)		(145,358		)
Ending balance	$	50,085			$	(66,587	)		$	(16,502	)

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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):

		Consolidated Statement of Income		Amounts Reclassified from AOCI
Details About		Line Item That Includes		Year Ended December 31,
AOCI Components		Reclassification		2017				2016				2015
Unrealized appreciation on available-for-sale investments
		Net realized gains		$	82,542			$	95,448			$	62,817
		Other-than-temporary impairment losses		(7,138		)		(30,794		)		(26,152		)
		Total before tax		75,404				64,654				36,665
		Income tax (expense) benefit		(7,541		)		(8,293		)		(8,432		)
		Net of tax		$	67,863			$	56,361			$	28,233

Following are the related tax effects allocated to each component of other comprehensive income (loss):

	Before Tax				Tax Expense				Net of Tax
	Amount				(Benefit)				Amount
Year Ended December 31, 2017
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	266,559			$	13,655			$	252,904
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	—				—				—
Less reclassification of net realized gains (losses) included in net income	75,404				7,541				67,863
Foreign currency translation adjustments	47,549				535				47,014
Other comprehensive income (loss)	$	238,704			$	6,649			$	232,055
Year Ended December 31, 2016
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(26,159	)		$	(5,146	)		$	(21,013	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	(352		)		—				(352		)
Less reclassification of net realized gains (losses) included in net income	64,654				8,293				56,361
Foreign currency translation adjustments	(20,120		)		261				(20,381		)
Other comprehensive income (loss)	$	(111,285	)		$	(13,178	)		$	(98,107	)
Year Ended December 31, 2015
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(77,311	)		$	(67	)		$	(77,244	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (loss)	(6,036		)		—				(6,036		)
Less reclassification of net realized gains (losses) included in net income	36,665				8,432				28,233
Foreign currency translation adjustments	(35,679		)		(1,568		)		(34,111		)
Other comprehensive income (loss)	$	(155,691	)		$	(10,067	)		$	(145,624	)

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13. Earnings Per Common Share

The calculation of basic earnings per common share is computed by dividing income available to Arch common shareholders by the weighted average number of Common Shares and common share equivalents outstanding. The following table sets forth the computation of basic and diluted earnings per common share:

	Year Ended December 31,
	2017				2016				2015
Numerator:
Net income	$	629,709			$	824,178			$	526,582
Amounts attributable to noncontrolling interests	(10,431		)		(131,440		)		11,156
Net income available to Arch	619,278				692,738				537,738
Preferred dividends	(46,041		)		(28,070		)		(21,938		)
Loss on redemption of preferred shares	(6,735		)		—				—
Net income available to Arch common shareholders	$	566,502			$	664,668			$	515,800
Denominator:
Weighted average common shares outstanding	125,843,876				120,757,243				121,786,127
Series D preferred securities (1)	8,868,912				34,871				—
Weighted average common shares outstanding – basic	134,712,788				120,792,114				121,786,127
Effect of dilutive common share equivalents:
Nonvested restricted shares	1,312,198				1,292,359				1,253,938
Stock options (2)	3,236,689				2,633,020				2,998,678
Weighted average common shares and common share equivalents outstanding – diluted	139,261,675				124,717,493				126,038,743
Earnings per common share:
Basic	$	4.21			$	5.50			$	4.24
Diluted	$	4.07			$	5.33			$	4.09

(1)	The company has determined that, based on a review of the terms, features and rights of the Company’s non-voting common equivalent preferred shares compared to the rights of the Company’s common shareholders, the underlying common shares that the convertible securities convert to were common share equivalents at the time of their issuance.

(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 2017, 2016 and 2015, the number of stock options excluded were 867,817, 722,729 and 799,535, respectively.

14. Income Taxes

Arch Capital is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to Arch Capital or any of its operations until March 31, 2035. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda.

Arch Capital and its non-U.S. subsidiaries will be subject to U.S. federal income tax only to the extent that they derive U.S.

source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. Arch Capital and its non-U.S. subsidiaries will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors (subject to reduction by any applicable income tax treaty). Arch Capital and its non-U.S. subsidiaries intend to conduct their operations in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, therefore, will not be required to pay U.S. federal income taxes (other than U.S. excise taxes on insurance and reinsurance premium and withholding taxes on dividends and certain other U.S. source investment income). However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that Arch Capital or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If Arch Capital or any of its non-U.S. subsidiaries

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were subject to U.S. income tax, Arch Capital’s shareholders’ equity and earnings could be materially adversely affected. Arch Capital has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which Arch Capital’s subsidiaries and branches are subject to tax are the United States, United Kingdom, Ireland, Canada, Switzerland, Australia and Denmark.

The components of income taxes attributable to operations were as follows:

	Year Ended December 31,
	2017				2016				2015
Current expense (benefit):
United States	$	(51,705	)		$	40,300			$	37,186
Non-U.S.	5,969				10,445				7,008
	(45,736		)		50,745				44,194
Deferred expense (benefit):
United States	169,093				(14,641		)		(4,893		)
Non-U.S.	4,211				(4,730		)		1,311
	173,304				(19,371		)		(3,582		)
Income tax expense	$	127,568			$	31,374			$	40,612

The Company’s income or loss before income taxes was earned in the following jurisdictions:

	Year Ended December 31,
	2017				2016				2015
Income Before Income Taxes:
Bermuda	$	406,054			$	801,155			$	508,561
United States	381,157				51,577				57,527
Other	(29,934		)		2,820				1,106
Total	$	757,277			$	855,552			$	567,194

The expected tax provision computed on pre-tax income or loss at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The statutory tax rates by jurisdiction were as follows: Bermuda (0.0%), United States (35.0%), United Kingdom (19.25%), Ireland (12.5%), Denmark (22.0%), Canada (26.5%), Gibraltar (10.0%), Australia (30.0%), Hong Kong (16.5%) and the Netherlands (20.0%).

A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate follows:

	Year Ended December 31,
	2017				2016				2015
Expected income tax expense (benefit) computed on pre-tax income at weighted average income tax rate	$	126,262			$	17,365			$	20,058
Addition (reduction) in income tax expense (benefit) resulting from:
Tax-exempt investment income	(13,330		)		(8,830		)		(9,588		)
Meals and entertainment	1,063				954				897
State taxes, net of U.S. federal tax benefit	732				1,073				858
Foreign branch taxes	5,752				5,496				1,456
Prior year adjustment	(559		)		(4,756		)		2,510
Foreign exchange gains & losses	(572		)		223				670
Changes in applicable tax rate	7,745				1,209				40
Dividend withholding taxes	232				3,319				6,323
Change in valuation allowance	14,798				4,730				2,917
Contingent consideration	3,785				9,353				11,548
Share based compensation	(18,733		)		—				—
Uncertain tax position	—				—				2,008
Other	393				1,238				915
Income tax expense (benefit)	$	127,568			$	31,374			$	40,612

The effect of a change in tax laws or rates on deferred taxes assets and liabilities is recognized in income in the period in which such change is enacted. On December 22, 2017, the Tax Cuts Act was signed into law by the President of the United States which significantly changes the U.S. tax law in many way including a reduction of the U.S. federal income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Cuts Act, the Company remeasured certain of its U.S. net deferred tax assets and liabilities.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts Act. Pursuant to the guidance within SAB 118, the Company’s remeasurement of its deferred taxes included certain provisional effects associated with enactment of the Tax Cuts Act for which measurement could be reasonably estimated. Provisional amounts may be adjusted in 2018 during the measurement period in accordance with SAB 118 when additional information is obtained. Additional information that may affect the provisional amounts would include, completion of the Company’s U.S. subsidiaries’ 2017 tax return filings, and

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potential future guidance from the IRS with respect to the transitional adjustment pertaining to loss reserve discounting as well as the utilization of alternative minimum tax (“AMT”) credits.

Deferred income tax assets and liabilities reflect temporary differences based on enacted tax rates between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities were as follows:

	December 31,
	2017				2016
Deferred income tax assets:
Net operating loss	$	33,723			$	13,061
AMT credit carryforward	12,327				5,350
Discounting of net loss reserves	33,659				64,220
Deferred ceding commission	6,934				15,505
Net unearned premium reserve	47,682				71,760
Compensation liabilities	20,234				37,757
Foreign tax credit carryforward	6,610				6,421
Interest expense	3,815				2,678
Goodwill and intangible assets	3,688				9,269
Bad debt reserves	5,073				6,961
Net unrealized foreign exchange gains	464				1,308
Net unrealized decline of investments	1,602				7,384
Other, net	10,760				12,123
Deferred tax assets before valuation allowance	186,571				253,797
Valuation allowance	(30,591		)		(17,028		)
Deferred tax assets net of valuation allowance	155,980				236,769
Deferred income tax liabilities:
Depreciation and amortization	(2,333		)		(7,038		)
Deposit accounting liability	(2,392		)		(4,078		)
Contingency reserve	(110,632		)		(19,400		)
Other, net	(1,061		)		(1,228		)
Total deferred tax liabilities	(116,418		)		(31,744		)
Net deferred income tax assets	$	39,562			$	205,025

The Company provides a valuation allowance to reduce certain deferred tax assets to an amount which management expects to more likely than not be realized. As of December 31, 2017, the Company’s valuation allowance was $30.6 million, compared to $17.0 million at December 31, 2016. The valuation allowance in both periods was primarily attributable to: (1) a full valuation allowance on the Company’s Canadian and Australian operations; (2) unutilized foreign tax credits; and (3) certain other deferred tax assets relating to loss carryforwards that have a limited use.

At December 31, 2017, the Company has net operating loss carryforwards in its U.K. operating subsidiaries of approximately $46.4 million. Additionally, the Company’s U.K. operations have a foreign tax credit carryforward of $6.3 million at December 31, 2017. These operating losses and foreign tax credits can be carried forward without expiration.

Due to uncertainty surrounding their future utilization, a valuation allowance of $14.8 million is in place. Beginning in 2017, the U.K. losses are subject to usage restrictions that will limit the amount of carried forward losses which may be utilized in a given year. Such restrictions are not expected to limit the utilization of the Company’s existing U.K. loss carryforwards that have been recognized in the financial statements.

At December 31, 2017, net operating loss carryforwards in Ireland were approximately $15.3 million. Although these losses may be carried forward indefinitely, an offsetting valuation allowance of $1.2 million exists given management’s expectation that certain losses, which are specific to an individual Irish entity, will not be utilized in the future.

At December 31, 2017, net operating loss carryforwards in Australia were approximately $19.6 million. Although these losses may be carried forward indefinitely, subject to certain business and ownership continuity requirements, the associated net deferred tax asset of $5.9 million is fully offset by a valuation allowance of $5.9 million.

At December 31, 2017, net operating loss carryforwards in Hong Kong were approximately $9.5 million. Although these losses may be carried forward indefinitely the associated net deferred tax asset is offset by a valuation allowance of $1.5 million.

At December 31, 2017, net operating loss carryforwards in the U.S. were approximately $76.9 million. This includes $4.6 million net operating loss carryforwards from Watford Re. Watford Re’s $1.0 million deferred tax asset is fully offset by a valuation allowance. The Company’s net operating loss carryforwards are currently available to offset future taxable income of the Company’s U.S. subsidiaries. Under applicable law, the U.S. net operating loss carryforwards expire between 2029-2037.

On January 30, 2014, the Company’s U.S. mortgage operations underwent an ownership change for U.S. federal income tax purposes as a result of the Company’s acquisition of the CMG Entities. As a result of this ownership change, a limitation has been imposed upon the utilization of approximately $10.8 million of the Company’s existing U.S. net operating loss carryforwards. Utilization is limited to approximately $0.6 million per year in accordance with Section 382 of the Internal Revenue Code of 1986 as amended (“the Code”). Additionally, the Company has an AMT credit carryforward in the amount of $12.3 million which, beginning in 2018, and pursuant to the Tax Cuts Act, will either be available to offset the Company’s regular tax liability or refundable.

The Company’s U.S. mortgage operations are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the Code for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is

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allowed only to the extent that the Company purchases non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the U.S. Treasury Department in an amount equal to the tax benefit derived from deducting any portion of the statutory contingency reserves. T&L Bonds are reflected in ‘other assets’ on the Company’s balance sheet and totaled approximately $177.2 million at December 31, 2017, compared to $16.2 million at December 31, 2016.

Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of the Company's U.S., U.K. and Ireland subsidiaries as it is the Company’s intention that all such earnings will be indefinitely reinvested. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding tax in the jurisdiction of the paying entity. The Company no longer intends to indefinitely reinvest earnings from the Company's Canada subsidiary, however, no income or withholding taxes have been accrued as the Canada subsidiary does not have positive cumulative earnings and profits and therefore a distribution from this particular subsidiary would not be subject to income taxes or withholding taxes. Potential tax implications of repatriation from the Company’s unremitted earnings that are indefinitely reinvested are driven by facts at the time of distribution. Therefore it is not practicable to estimate the income tax liabilities that might be incurred if such earnings were remitted. Distributions from the U.K. or Ireland would not be subject to withholding tax and no deferred income tax liability would need to be accrued.

The Company recognizes interest and penalties relating to unrecognized tax benefits in the provision for income taxes. As of December 31, 2017, the Company’s total unrecognized tax benefits, including interest and penalties, were $2.0 million. If recognized, the full amount of the unrecognized tax benefit would generally decrease the current year annual effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	December 31,
	2017				2016
Balance at beginning of year	$	2,008			$	2,008
Additions based on tax positions related to the current year	—				—
Additions for tax positions of prior years	—				—
Reductions for tax positions of prior years	—				—
Settlements	—				—
Balance at end of year	$	2,008			$	2,008

The Company or its subsidiaries or branches files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company’s examination by the tax authorities in the U.S. for the 2009 through 2011 tax years closed with no change. The following table details open tax years that are potentially subject to examination by local tax

authorities, in the following major jurisdictions:

Jurisdiction		Tax Years
United States		2014-2017
United Kingdom		2012-2017
Ireland		2013-2017
Canada		2013-2017
Switzerland		2011-2017
Denmark		2014-2017

As of December 31, 2017, the Company’s current income tax recoverable (included in “Other assets”) was $104.8 million.

15. Transactions with Related Parties

Kewsong Lee, a director of Arch Capital until November 2, 2017, resigned from Arch Capital’s Board of Directors because of the expansion of his duties at The Carlyle Group (“Carlyle”) following his promotion to co-CEO effective January 1, 2018. As part of its investment philosophy, the Company invests a portion of its investment portfolio in alternative investment funds. As of December 31, 2017, the total value of the Company’s investments in funds or other investments managed by Carlyle was approximately $293.0 million, and the Company had aggregate unfunded commitments to funds managed by Carlyle of $468.8 million. The Company may make additional commitments to funds managed by Carlyle from time to time. During 2017, 2016 and 2015, the Company made aggregate capital contributions to funds managed by Carlyle of $131.8 million, $62.1 million and $116.5 million, respectively. During 2017, 2016 and 2015, the Company received aggregate cash distributions from funds managed by Carlyle of $55.6 million, $21.5 million and $44.6 million, respectively.

Certain directors and executive officers of the Company own common and preference shares of Watford Re. See note 4, “Variable Interest Entity and Noncontrolling Interests,” for information about Watford Re.

16. Commitments and Contingencies

Concentrations of Credit Risk

The creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty.

The areas where significant concentrations of credit risk may exist include unpaid losses and loss adjustment expenses recoverable, contractholder receivables, ceded unearned

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premiums, paid losses and loss adjustment expenses recoverable net of reinsurance balances payable, investments and cash and cash equivalent balances. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. In addition, certain insurance policies written by the Company’s insurance operations feature large deductibles, primarily in its construction and national accounts lines of business. Under such contracts, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet in contractholder payables and contractholder receivables, respectively. In the event that the Company is unable to collect from the policyholder, the Company would be liable for such defaulted amounts. Collateral, primarily in the form of letters of credit, cash and trusts, is obtained from the policyholder to mitigate the Company’s credit risk. In the instances where the company receives collateral in the form of cash, the Company records a related liability in “Collateral held for insured obligations.”

In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances owed to the Company. The following table summarizes the percentage of the Company’s gross premiums written generated from or placed by the largest brokers:

Broker		Year Ended December 31,
	2017			2016			2015
Aon Corporation and its subsidiaries		11.3	%		14.4	%		13.1	%
Marsh & McLennan Companies and its subsidiaries		10.7	%		13.5	%		15.3	%

No other broker and no one insured or reinsured accounted for more than 10% of gross premiums written for 2017, 2016 and 2015.

The Company’s available for sale investment portfolio is managed in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification, which limit the allowable holdings of any single issue. There were no investments in any entity in excess of 10% of the Company’s shareholders’ equity at December 31, 2017 other than investments issued or guaranteed by the United States government or its agencies.

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 $1.70 billion and $1.29 billion at December 31, 2017 and 2016, respectively.

Letter of Credit and Revolving Credit Facilities

As of December 31, 2017, Arch Capital and certain of its subsidiaries had a $350.0 million secured facility for letters of credit and $500.0 million unsecured facility for revolving loans and letters of credit (the “Credit Agreement”). Obligations of each borrower under the secured facility for letters of credit are secured by cash and eligible securities of such borrower held in collateral accounts. Subject to the receipt of commitments, the secured facility may be increased by up to an aggregate of $350.0 million, and the unsecured facility may be increased to an amount not to exceed $750.0 million. Arch Capital has a one-time option to convert any or all outstanding revolving loans of Arch Capital and/or Arch-U.S. to term loans with the same terms as the revolving loans except that any prepayments may not be reborrowed. Arch-U.S. guarantees the obligations of Arch Capital, and Arch Capital guarantees the obligations of Arch-U.S. Borrowings of revolving loans may be made at a variable rate based on LIBOR or an alternative base rate at the option of Arch Capital. Secured letters of credit are available for issuance on behalf of Arch Capital insurance and reinsurance subsidiaries. The Credit Agreement and related documents are structured such that each party that requests a letter of credit or borrowing does so only for itself and for only its own obligations.

The Credit Agreement contains customary representations, conditions to issuance of letters of credit and borrowings which include, among other things: (i) the maintenance of a debt to total capital ratio of not greater than 0.35 to 1; (ii) consolidated tangible net worth in excess of and consolidated tangible net worth in excess of $5.63 billion plus 25% of future aggregate net income (not including any future net losses) for each quarterly period ending after December 31, 2016 plus 25% of future aggregate net cash proceeds from the issuance of common or preferred equity (other than the proceeds of which are used to fund the repurchase or redemption of our preferred securities (“Refinanced Preferred Securities”)), minus 70% of up to $750.0 million of the aggregate book value of any preferred securities of Arch Capital which are repurchased or redeemed by Arch Capital or its subsidiaries (other than Refinanced Preferred Securities); and (iii) that Arch Capital’s principal insurance and reinsurance subsidiaries that are borrowers under the Credit Agreement maintain a financial strength rating of at least a “B++” from A.M. Best or “BBB+” from S&P. In addition, certain of Arch Capital’s subsidiaries which are party to the Credit Agreement are required to maintain minimum shareholders’ equity levels. Commitments under the

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Amended Credit Agreement will expire on October 26, 2021, and all loans then outstanding under the Amended Credit Agreement must be repaid. Letters of credit issued under the Amended Credit Agreement will not have an expiration date later than October 26, 2022. Arch Capital and its subsidiaries which are party to the Credit Agreement were in compliance with all covenants contained in the Credit Agreement at December 31, 2017.

In addition, certain of Arch Capital’s subsidiaries had outstanding letters of credit of $160.1 million, which were issued on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). The principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which certain of Arch Capital’s subsidiaries has entered into reinsurance arrangements. This is required to ensure that such counterparties are permitted to take credit for reinsurance obtained in United States jurisdictions where such subsidiaries are not licensed or otherwise admitted as an insurer, as required under insurance regulations in the United States, and to comply with requirements of Lloyd’s of London in connection with qualifying quota share and other arrangements. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of business and the loss experience of such business. When issued, these letters of credit are secured by a portion of the investment portfolio. Arch Capital and its’ subsidiaries which are party to the LOC Facilities were in compliance with all covenants contained in the LOC Facilities at December 31, 2017. At such date, approximately $324.4 million of letters of credit under the LOC Facilities were outstanding, which were secured by investments with a fair value of $388.0 million, and $375.0 million of borrowings were outstanding under the Credit Agreement. Under the $350.0 million secured letter of credit facility, Arch Capital’s subsidiaries had $164.3 million of letters of credit outstanding and remaining capacity of $185.7 million at December 31, 2017.

Watford Re has access to a $100 million letter of credit facility expiring on May 19, 2018 and an $800 million secured credit facility expiring on June 4, 2018, that provides for borrowings and the issuance of letters of credit not to exceed $400 million. Borrowings of revolving loans may be made by Watford Re at a variable rate based on LIBOR or an alternative base rate at the option of Watford Re. At December 31, 2017, Watford Re had $109.5 million in outstanding letters of credit under the two facilities and $441.1 million of borrowings outstanding under the secured credit facility, backed by Watford Re’s investment portfolio. Watford Re was in compliance with all covenants contained in both of its credit facilities at December 31, 2017. The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford

Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions.

Contingent Consideration Liability

Pursuant to the Company’s 2014 acquisition of the CMG Entities, the Company made a contingent consideration payment of $71.7 million in April 2017. The maximum remaining amount of contingent consideration payments is $68.2 million over the remaining earn-out period. To the extent that the adjusted book value of the CMG Entities drops below the cumulative amount paid by the Company, no additional payments would be due.

Leases and Purchase Obligations

At December 31, 2017, the future minimum rental commitments, exclusive of escalation clauses and maintenance costs and net of rental income, for all of the Company’s operating leases are as follows:

2018	$	28,553
2019	28,562
2020	27,721
2021	25,031
2022	21,634
2023 and thereafter	37,463
Total	$	168,964

All of these leases are for the rental of office space, with expiration terms that range from 2018 to 2026. Rental expense, net of income from subleases, was approximately $31.1 million, $24.2 million and $23.8 million for 2017, 2016 and 2015, respectively.

At December 31, 2017, the Company has entered into capital lease agreements. The future lease payments for the Company’s capital leases are expected to be $9.7 million, $5.6 million and $0.2 million for 2018, 2019 and 2020, respectively.

The Company has also entered into certain agreements which commit the Company to purchase goods or services, primarily related to software and computerized systems. Such purchase obligations were approximately $29.7 million and $24.8 million at December 31, 2017 and 2016, respectively.

Employment and Other Arrangements

At December 31, 2017, the Company has entered into employment agreements with certain of its executive officers. Such employment arrangements provide for compensation in the form of base salary, annual bonus, share-based awards, participation in the Company’s employee benefit programs and the reimbursements of expenses.

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17. Senior Notes

The Company’s senior notes payable at December 31, 2017 and 2016 were as follows:

									Carrying Amount at
		Interest			Principal				December 31,
		(Fixed)			Amount				2017				2016
2034 notes (1)		7.350	%		300,000				297,053				296,957
2043 notes (2)		5.144	%		500,000				494,621				494,525
2026 notes (3)		4.011	%		500,000				496,043				495,689
2046 notes (4)		5.031	%		450,000				445,167				445,087
					$	1,750,000			$	1,732,884			$	1,732,258

(1) Senior notes of Arch Capital issued on May 4, 2004 and due May 1, 2034 (“2034 notes”). The 2034 notes are Arch Capital’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2034 notes are due on May 1st and November 1st of each year. Arch Capital may redeem the 2034 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.

(2) Senior notes of Arch-U.S., a wholly-owned subsidiary of Arch Capital, issued on December 13, 2013 and due November 1, 2043 (“2043 notes”), fully and unconditionally guaranteed by Arch Capital. The 2043 notes are unsecured and unsubordinated obligations of Arch-U.S. and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. and Arch Capital, respectively. Interest payments on the 2043 notes are due on May 1st and November 1st of each year. Arch-U.S. may redeem the 2043 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.

(3) Senior notes of Arch Capital Finance LLC (“Arch Finance”), a wholly-owned finance subsidiary of Arch Capital, issued on December 8, 2016 and due December 15, 2026 (“2026 notes”), fully and unconditionally guaranteed by Arch Capital. The 2026 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2026 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2026 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.

(4) Senior notes of Arch Finance issued on December 8, 2016 and due December 15, 2046 (“2046 notes”), fully and unconditionally guaranteed by Arch Capital. The 2046 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2046 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2046 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.

18. Goodwill and Intangible Assets

The following table shows an analysis of goodwill and intangible assets:

	Goodwill				Intangible assets (indefinite life)				Intangible assets (finite life)				Total
Net balance at Dec. 31, 2015	$	15,536			$	33,524			$	48,471			$	97,531
Acquisitions	188,758				34,650				481,049				704,457
Amortization	—				—				(19,343		)		(19,343		)
Foreign currency movements and other adjustments	(272		)		—				(820		)		(1,092		)
Net balance at Dec. 31, 2016	204,022				68,174				509,357				781,553
Acquisitions	806				—				2,300				3,106
Amortization	—				—				(125,778		)		(125,778		)
Foreign currency movements and other adjustments	(6,592		)		—				322				(6,270		)
Net balance at Dec. 31, 2017	$	198,236			$	68,174			$	386,201			$	652,611
Gross balance at Dec. 31, 2017	$	205,192			$	68,174			$	619,101			$	892,467
Accumulated amortization	—				—				(231,520		)		(231,520		)
Foreign currency movements and other adjustments	(6,956		)		—				(1,380		)		(8,336		)
Net balance at Dec. 31, 2017	$	198,236			$	68,174			$	386,201			$	652,611

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The following table presents the components of goodwill and intangible assets:

	Gross Balance				Accumulated Amortization				Foreign Currency Translation Adjustment and Other				Net Balance
Dec. 31, 2017
Acquired insurance contracts	$	435,067			$	(182,947	)		$	(150	)		$	251,970
Operating platform	44,900				(26,422		)		—				18,478
Distribution relationships	147,611				(28,321		)		(1,230		)		118,060
Goodwill	205,192				—				(6,956		)		198,236
Insurance licenses	68,174				—				—				68,174
Unfavorable service contract	(9,533		)		6,997				—				(2,536		)
Other	1,056				(827		)		—				229
Total	$	892,467			$	(231,520	)		$	(8,336	)		$	652,611
Dec. 31, 2016
Acquired insurance contracts	$	435,067			$	(72,771	)		$	(150	)		$	362,146
Operating platform	44,900				(17,442		)		—				27,458
Distribution relationships	145,311				(20,675		)		(1,552		)		123,084
Goodwill	204,386				—				(364		)		204,022
Insurance licenses	68,174				—				—				68,174
Unfavorable service contract	(9,533		)		5,762				—				(3,771		)
Other	1,056				(616		)		—				440
Total	$	889,361			$	(105,742	)		$	(2,066	)		$	781,553

The estimated remaining amortization expense for the Company’s intangible assets with finite lives is as follows:

2018	$	106,075
2019	74,324
2020	46,485
2021	29,839
2022	23,945
2023 and thereafter	105,533
Total	$	386,201

The estimated remaining useful lives of these assets range from one to nineteen years at December 31, 2017.

The Company’s impairment reviews for goodwill and intangible assets did not result in the recognition of impairment losses for 2017, 2016 and 2015.

19. Shareholders’ Equity

Authorized and Issued

The authorized share capital of Arch Capital consists of 600 million Common Shares, par value of $0.0033 per share, and 50 million Preferred Shares, par value of $0.01 per share.

Common Shares

The following table presents a roll-forward of changes in Arch Capital’s issued and outstanding Common Shares:

	Year Ended December 31,
	2017			2016			2015
Common Shares:
Shares issued and outstanding, beginning of year	174,644,101			173,107,849			171,672,408
Shares issued (1)	1,129,448			1,149,112			1,001,667
Conversion of Series D preferred shares (2)	7,088,620			—			—
Restricted shares issued, net of cancellations	428,573			387,140			433,774
Shares issued and outstanding, end of year	183,290,742			174,644,101			173,107,849
Common shares in treasury, end of year	(52,312,803	)		(51,856,584	)		(50,480,066	)
Shares issued and outstanding, end of year	130,977,939			122,787,517			122,627,783

(1)	Includes shares issued from the exercise of stock options and stock appreciation rights, and shares issued from the employee share purchase plan.

(2)	Such shares represent common shares that were issued upon conversion of the non-voting common equivalent preference shares issued in connection with the AIG acquisition.

Share Repurchase Program

The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. At December 31, 2017, approximately $446.5 million of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

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The Company’s repurchases under the share repurchase program were as follows:

	Year Ended December 31,
	2017				2016				2015
Aggregate cost of shares repurchased	$	—			$	75,256			$	365,383
Shares repurchased	—				1,140,137				5,949,625
Average price per share repurchased	$	—			$	66.01			$	61.41

Since the inception of the share repurchase program through December 31, 2017, Arch Capital has repurchased approximately 125.2 million common shares for an aggregate purchase price of $3.68 billion.

Treasury Shares

In May 2010, Arch Capital’s shareholders approved amendments to the bye-laws to permit Arch Capital to hold its own acquired shares as treasury shares in lieu of cancellation, as determined by Arch Capital’s board of directors. From May 5, 2010 to December 31, 2017, all repurchases of Arch Capital’s common shares in connection with the share repurchase plan noted above and other share-based transactions were held in the treasury under the cost method, and the cost of the common shares acquired is included in ‘Common shares held in treasury, at cost.’ At December 31, 2017, Arch Capital held 52.3 million shares for an aggregate cost of $2.08 billion in treasury, at cost.

Convertible Non-Voting Common Equivalent Preferred Shares

On December 31, 2016, the Company completed the acquisition of all of the outstanding shares of capital stock of UGC. Based upon a formula set forth in the Stock Purchase Agreement, AIG received 1,276,282 of Arch Capital’s Series D convertible non-voting common equivalent preferred shares (“Series D Preferred Shares”). Each Series D Preferred Share converts to 10 shares of Arch Capital fully paid non-assessable common stock.

The Company has determined that based on a review of the terms, features and rights of the series D preferred shares compared to the rights of the Company’s common shareholders, the underlying 12,762,820 common shares that the convertible securities convert to were common share equivalents at the time of their issuance.

On June 8, 2017, Arch Capital 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 Series D Preferred Shares owned by AIG. Pursuant to the Amendment, Arch Capital permitted AIG to transfer: (i) 638,141 Series D Preferred Shares from and after June 8, 2017, and up to an additional 95,721 of the Series D 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 Arch Capital common shares issuable upon conversion of the Series D Preferred Shares by AIG and (ii) any and all of the Series D 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 other terms of the Investor Rights Agreement remain in effect.

In June 2017, Arch Capital completed an underwritten public secondary offering of 7,088,620 common shares by AIG following transfer of 708,862 Series D Preferred Shares. Proceeds from the sale of common shares pursuant to the public offering were received by AIG. At December 31, 2017, 567,420 Series D Preferred Shares were outstanding, representing 5,674,200 common share equivalents.

Series F Preferred Shares

In August 2017 and November 2017, Arch Capital completed combined $330 million of underwritten public offerings ($230 million in August 2017 and $100 million in November 2017) of 13.2 million depositary shares (the “Series F Depositary Shares”), each of which represents a 1/1,000th interest in a share 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 Series F Depositary Share) (the “Series F Preferred Shares”). Each Series F Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series F Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).

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 committee of the board. Any such dividends will be payable from, and including, the date of original issue on a noncumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 5.45%. Dividends on the Series F Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series 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 Series F Depositary Shares will be

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redeemed if and to the extent the related Series F Preferred Shares are redeemed by the Company. Neither the Series F 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 net proceeds from the Series F Preferred Share offerings were used to redeem the Company’s outstanding 6.75% Series C Non-Cumulative Preferred Shares, as described below.

Series E Preferred Shares

On September 29, 2016, Arch Capital completed a $450 million underwritten public offering of 18.0 million depositary shares (the “Series E Depositary Shares”), each of which represents a 1/1,000th interest in a share of its 5.25% Non-Cumulative Preferred Shares, Series E, have a $0.01 par value and $25,000 liquidation preference per share (equivalent to $25 liquidation preference per Series E Depositary Share) (the “Series E Preferred Shares”). Each Series E Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series E Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).

Holders of Series E Preferred Shares will be entitled to receive dividend payments only when, as and if declared by our board of directors or a duly authorized committee of the board. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 5.25%. Dividends on the Series E Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series E preferred shares.

Except in specified circumstances relating to certain tax or corporate events, the Series E Preferred Shares are not redeemable prior to September 29, 2021 (the fifth anniversary of the issue date). On and after that date, the Series E Preferred Shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series E Preferred Shares (equivalent to $25 per Series E Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Series E Depositary Shares will be redeemed if and to the extent the related Series E Preferred Shares are redeemed by the Company. Neither the Series E Depositary Shares nor the Series E Preferred Shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series E Preferred Shares are not convertible into any other securities. The Series E

Preferred Shares will not have voting rights, except under limited circumstances.

Series C Preferred Shares

On April 2, 2012, Arch Capital completed the underwritten public offering of $325.0 million of its 6.75% Series C non-cumulative preferred shares (“Series C Preferred Shares”). In the 2016 fourth quarter, Arch Capital repurchased 97,807 Series C preferred shares at a weighted average price of $25.48 per share ($2.5 million aggregate cost). In September 2017, the Company used the net proceeds from the August 2017 Series F Preferred Shares offering to redeem 9.2 million Series C Preferred Shares at $25 per share ($230 million aggregate cost). The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and unpaid dividends to (but excluding) 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. On January 2, 2018, the net proceeds from the November 2017 Series F Preferred Shares offering were used to redeem the Company’s remaining outstanding Series C Preferred Shares.

20. Share-Based Compensation

Long Term Incentive and Share Award Plans

The Company utilizes share-based compensation plans for officers, other employees and directors of Arch Capital and its subsidiaries to provide competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of performance goals and to promote the creation of long-term value for shareholders by aligning the interests of such persons with those of shareholders.

The 2015 Long Term Incentive and Share Award Plan (the (“2015 Plan”) became effective as of May 7, 2015 following approval by shareholders of the Company. Officers, other employees and directors of Arch Capital and its subsidiaries will be eligible for grants of awards under the 2015 Plan. The 2015 Plan will terminate as to future awards on February 26, 2025.

The number of common shares reserved for grants of awards under the 2015 Plan, subject to anti-dilution adjustments in the event of certain changes in the Company’s capital structure is 4,300,000. In addition, no more than 50% of such common shares may be issued in connection with full value awards (i.e., awards other than stock options or SARs) and no more than 2,000,000 common shares may be issued as incentive stock options under Section 422 of the Code. At December 31, 2017, 1,312,899 shares are available for future issuance.

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The 2012 Long Term Incentive and Share Award Plan (the “2012 Plan”) became effective as of May 9, 2012 (the “Effective Date”) following approval by shareholders of the Company. The 2012 Plan provides for the grant to eligible employees and directors stock options, stock appreciation rights (“SARs”), restricted shares, restricted share units payable in common shares or cash, share awards in lieu of cash awards, dividend equivalents and other share-based awards. The 2012 Plan also provides the Company’s non-employee directors with the opportunity to receive the annual retainer fee for Board service in common shares. The 2012 Plan will terminate as to future awards on February 28, 2022.

The number of common shares reserved for grants of awards under the 2012 Plan, subject to anti-dilution adjustments in the event of certain changes in the Company’s capital structure is 7,433,924 which is the sum of (i) 4,280,000 and (ii) 3,153,924 shares remaining available for grants under the 2007 Plan. In addition, no more than 50% of such common shares may be issued in connection with full value awards (i.e., awards other than stock options or SARs) and no more than 2,000,000 common shares may be issued as incentive stock options under Section 422 of the Code. At December 31, 2017, 475,546 shares are available for grant under the 2012 Plan.

Upon shareholder approval on May 6, 2016, the Amended and Restated Arch Capital Group Ltd. 2007 Employee Share Purchase Plan (the “ESPP”) became effective. After the amendment and restatement, a total of 1,563,259 common shares were reserved for issuance. The purpose of the ESPP is to give employees of Arch Capital and its subsidiaries an opportunity to purchase common shares through payroll deductions, thereby encouraging employees to share in the economic growth and success of Arch Capital and its subsidiaries. The ESPP is designed to qualify as an “employee share purchase plan” under Section 423 of the Code. At December 31, 2017, approximately 1,209,876 shares remain available for issuance.

The ESPP provides for consecutive six-month offering periods (or other periods of not more than 27 months as determined by the compensation committee) under which participating employees can elect to have up to 20% of their total compensation withheld and applied to the purchase of common shares of the Company at the end of the period. Unless otherwise determined by the compensation committee before an offering period commences, (1) the purchase price will be 85% of the fair market value of the common shares at the beginning of the offering period; and (2) the maximum number of common shares that may be purchased by an employee in any offering period is 3,000 shares. In addition, applicable Code limitations specify, in general, that a participant’s right to purchase stock under the ESPP cannot accumulate at a rate in excess of $25,000 (based on the value at the beginning of the applicable offering periods) per calendar year.

Stock Options and Stock Appreciation Rights

The Company generally issues stock options and SARs to eligible employees, with exercise prices equal to the fair market values of the Company’s Common Shares on the grant dates. Such grants generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. In addition, in November 2012 the Company issued off-cycle stock options and SARs to certain employees, which vested on the fifth anniversary of the grant date. Option awards and SARs have a 10 year contractual life. Refer to Note 3(m) for details related to the Company’s accounting for stock options and SARs.

For purposes of determining estimated fair value, the Company has computed the estimated fair values of share-based compensation related to stock options and SARs using the Black-Scholes option valuation model and has applied the assumptions set forth in the following table. As described above, stock options and SARs generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. The expected life assumption (i.e., the estimated period of time between the date an option or SAR is granted and the date the option or SAR is exercised) was based on an expected term analysis which incorporated the Company’s historical exercise experience. The Company based its estimate of expected volatility for stock options and SARs granted during 2017 on daily historical trading data of its common shares from September 20, 2002, the date marking the completion of the Company’s transition as a worldwide insurance and reinsurance company. For stock options and SARs granted during 2016 and 2015, the Company based its volatility estimate under the same method used for 2017, using the period from September 20, 2002 through the last day of the applicable period.

	Year Ended December 31,
	2017			2016			2015
Dividend yield	0.0	%		0.0	%		0.0	%
Expected volatility	21.3	%		21.7	%		22.1	%
Risk free interest rate	2.0	%		1.4	%		1.8	%
Expected option life	6.0 years			6.0 years			6.0 years

The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s employee stock options and SARs have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of its employee stock options and SARs. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and

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which could materially impact the Company’s fair value determination.

A summary of stock option and SAR activity under the Company’s Long Term Incentive and Share Award Plans during 2017 is presented below:

	Year Ended December 31, 2017
	Number of Options / SARs			Weighted Average Exercise Price				Weighted Average Contractual Term		Aggregate Intrinsic Value
Outstanding, beginning of year	6,872,494			$	43.74
Granted	843,690			$	95.60
Exercised	(1,073,311	)		$	34.45
Forfeited or expired	(52,815	)		$	70.92
Outstanding, end of year	6,590,058			$	51.67			5.37		$	261,674
Exercisable, end of year	5,583,343			$	45.83			4.75		$	251,918

The aggregate intrinsic value of stock options and SARs exercised represents the difference between the exercise price of the stock options and SARs and the closing market price of the Company’s common shares on the exercise dates. During 2017, the Company received proceeds of $4.4 million from the exercise of stock options and recognized a tax benefit of $7.6 million from the exercise of stock options and SARs.

	Year Ended December 31,
	2017				2016				2015
Weighted average grant date fair value	$	24.46			$	17.12			$	15.90
Aggregate intrinsic value of Options/SARs exercised	$	64,173			$	59,617			$	38,616

Restricted Common Shares and Restricted Units

The Company also issues restricted share and unit awards to eligible employees and directors, for which the fair value is equal to the fair market values of the Company’s Common Shares on the grant dates. Restricted share and unit awards generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. In addition, in November 2012 the Company issued off-cycle restricted share and unit awards to certain employees, which vested on the fifth anniversary of the grant date. Refer to Note 3(m) for details related to the Company’s accounting for restricted share and unit awards.

A summary of restricted share and restricted unit activity under the Company’s Long Term Incentive and Share Award Plans for 2017 is presented below:

	Restricted Common Shares				Restricted Unit Awards
Unvested Shares:
Unvested balance, beginning of year	1,646,324				223,486
Granted	476,483				105,909
Vested	(1,235,894		)		(170,494		)
Forfeited	(47,910		)		(6,742		)
Unvested balance, end of year	839,003				152,159
Weighted Average Grant Date Fair Value:
Unvested balance, beginning of year	$	54.96			$	54.84
Granted	$	96.03			$	96.10
Vested	$	50.94			$	51.23
Forfeited	$	71.12			$	72.46
Unvested balance, end of year	$	83.29			$	86.82

The following table presents the weighted average grant date fair value of restricted shares and restricted unit awards granted and the aggregate fair value of restricted shares and unit awards vesting in each year.

	Year Ended December 31,
	2017				2016				2015
Restricted shares and restricted unit awards granted	582,392				480,980				571,978
Weighted average grant date fair value	$	96.05			$	71.73			$	62.69
Aggregate fair value of vested restricted shares and units awards	$	133,848			$	45,206			$	43,800

The aggregate intrinsic value of restricted units outstanding at December 31, 2017 was $27.6 million, and the aggregate intrinsic value of restricted units vested and deferred was $13.8 million.

The issuance of share-based awards and amortization thereon has no effect on the Company’s consolidated shareholders’ equity.

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Share-Based Compensation Expense

The following tables present pre-tax and after-tax share-based compensation expense recognized as well as the unrecognized compensation cost associated with unvested awards and the weighted average period over which it is expected to be recognized.

	Year Ended December 31,
	2017				2016				2015
Pre-Tax
Stock options and SARs	$	18,536			$	14,095			$	12,715
Restricted share and unit awards	46,884				40,398				41,481
ESPP	2,443				2,089				1,893
Total	$	67,863			$	56,582			$	56,089
After-Tax
Stock options and SARs	$	16,219			$	11,885			$	10,504
Restricted share and unit awards	37,708				31,660				32,889
ESPP	2,171				1,861				1,694
Total	$	56,098			$	45,406			$	45,087

	December 31, 2017
	Stock Options and SARs				Restricted Common Shares and Units
Unrecognized compensation cost related to unvested awards	$	10,357			$	40,942
Weighted average recognition period (years)	1.08				1.11

21. Retirement Plans

For purposes of providing employees with retirement benefits, the Company maintains defined contribution retirement plans. Contributions are based on the participants’ eligible compensation. For 2017, 2016 and 2015, the Company expensed $40.7 million, $30.6 million and $29.7 million, respectively, related to these retirement plans.

22. Legal Proceedings

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of December 31, 2017, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

23. Statutory Information

The Company’s insurance and reinsurance subsidiaries are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate. These regulations include certain restrictions on the amount of dividends or other distributions available to shareholders without prior approval of the insurance regulatory authorities.

The actual and required statutory capital and surplus for the Company’s principal operating subsidiaries at December 31, 2017 and 2016:

	December 31,
	2017				2016
Actual capital and surplus (1):
Bermuda	$	9,841,225			$	8,960,248
Ireland	543,929				607,410
United States	4,850,148				4,660,855
United Kingdom	320,857				340,300
Canada	63,390				71,247
Required capital and surplus:
Bermuda	$	3,761,939			$	3,077,684
Ireland	383,966				283,544
United States	1,816,919				1,811,938
United Kingdom	270,242				276,928
Canada	35,846				35,858

(1)	Such amounts include ownership interests in affiliated insurance and reinsurance subsidiaries.

There were no state-prescribed or permitted regulatory accounting practices for any of the Company’s insurance or reinsurance entities that resulted in reported statutory surplus that differed from that which would have been reported under the prescribed practices of the respective regulatory authorities, including the National Association of Insurance Commissioners. The differences between statutory financial statements and statements prepared in accordance with GAAP vary by jurisdiction, however, with the primary differences being that statutory financial statements may not reflect deferred acquisition costs, certain net deferred tax assets, goodwill and intangible assets, unrealized appreciation or depreciation on debt securities and certain unauthorized reinsurance recoverables and include contingency reserves.

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The statutory net income (loss) for the Company’s principal operating subsidiaries for 2017, 2016 and 2015 was as follows:

	Year Ended December 31,
	2017				2016				2015
Statutory net income (loss):
Bermuda	$	881,665			$	886,492			$	514,151
Ireland	(14,438		)		26,935				29,041
United States	500,412				67,826				76,604
United Kingdom	(33,257		)		(7,512		)		(6,924		)
Canada	158				621				(1,098		)

Bermuda

The Company has two Bermuda based subsidiaries: Arch Re Bermuda, a Class 4 insurer and long-term insurer, and Watford Re, a Class 4 insurer. Under the Bermuda Insurance Act 1978 (the “Insurance Act”), these subsidiaries are required to maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin and the enhanced capital requirement as determined by the Bermuda Monetary Authority (“BMA”). The enhanced capital requirement is calculated based on the Bermuda Solvency Capital Requirement model, a risk-based model that takes into account the risk characteristics of different aspects of the company’s business. At December 31, 2017 and 2016, all such requirements were met.

The ability of these subsidiaries to pay dividends is limited under Bermuda law and regulations. Under the Insurance Act, Arch Re Bermuda is restricted with respect to the payment of dividends. Arch Re Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins following the declaration of those dividends. Accordingly, Arch Re Bermuda can pay approximately $2.17 billion to Arch Capital during 2018 without providing an affidavit to the BMA.

Ireland

The Company has two Irish subsidiaries: Arch Re Europe, an authorized life and non-life reinsurer, and Arch MI Europe, an authorized non-life insurer. Irish authorized reinsurers and insurers, such as Arch Re Europe and Arch MI Europe, are also subject to the general body of Irish laws and regulations including the provisions of the Companies Act 2014. Arch Re Europe and Arch MI Europe are subject to the supervision of the Central Bank of Ireland (“CBOI”) and must comply with Irish insurance acts and regulations as well as with directions and guidance issued by the CBOI. These subsidiaries are

required to maintain a minimum level of capital. At December 31, 2017 and 2016, these requirements were met.

The amount of dividends these subsidiaries are permitted to declare is limited to accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. The solvency and capital requirements must still be met following any distribution. Dividends or distributions, if any, made by Arch Re Europe would result in an increase in available capital at Arch Re Bermuda.

United States

The Company’s U.S. insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. The ability of the Company’s regulated insurance subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.

Dividends or distributions, if any, made by Arch Re U.S. would result in an increase in available capital at Arch-U.S., the Company’s U.S. holding company. Arch Re U.S. can declare a maximum of approximately $128.8 million of dividends during 2018 subject to the approval of the Commissioner of the Delaware Department of Insurance.

Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company have each been approved as an eligible mortgage insurer by Fannie Mae and Freddie Mac, subject to maintaining certain ongoing requirements (“eligible mortgage insurers”). In April 2015, the GSEs published comprehensive, revised requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” As clarified and revised by the Guidance Letters issued by the GSEs in December 2016 and March 2017, the PMIERs apply to the Company’s eligible mortgage insurers, but do not apply to Arch Mortgage Guaranty Company, which is not GSE-approved.

The amount of assets required to satisfy the revised financial requirements of the PMIERs at any point in time will be affected by many factors, including macro-economic conditions, the size and composition of our eligible mortgage insurers’ mortgage insurance portfolio at the point in time, and the amount of risk ceded to reinsurers that may be deducted in our calculation of “minimum required assets.” The Company’s eligible mortgage insurers satisfied the PMIERs’ financial requirements as of December 31, 2017.

The Company’s U.S. mortgage insurance subsidiaries are subject to detailed regulation by their domiciliary and primary

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regulators, the Wisconsin Office of the Commissioner of Insurance (“Wisconsin OCI”) for Arch Mortgage Insurance Company and Arch Mortgage Guaranty Company, the North Carolina Department of Insurance (“NC DOI”) for United Guaranty Residential Insurance Company, and by state insurance departments in each state in which they are licensed. As mandated by state insurance laws, mortgage insurers are generally mono-line companies restricted to writing a single type of insurance business, such as mortgage insurance business. Each company is subject to either Wisconsin or North Carolina statutory requirements as to payment of dividends. Generally, both Wisconsin and North Carolina law precludes any dividend before giving at least 30 days’ notice to the Wisconsin OCI or NC DOI, as applicable, and prohibits paying any dividend unless it is fair and reasonable to do so. In addition, the state regulators and the GSEs limit or restrict our eligible mortgage insurers’ ability to pay stockholder dividends or otherwise return capital to shareholders. Under North Carolina law, United Guaranty Residential Insurance Company can declare a maximum of approximately $302.7 million of dividends during 2018 subject to the approval of the NC DOI. In certain instances, approval by the GSEs would be required for dividends or other forms of return of capital to shareholders due to the requirements under PMIERs, including the minimum required assets imposed on our eligible mortgage insurers by the GSEs. Such dividend would result in an increase in available capital at Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S.

Mortgage insurance companies licensed in Wisconsin or North Carolina are required to establish contingency loss reserves for purposes of statutory accounting in an amount equal to at least 50% of net earned premiums. These amounts generally cannot be withdrawn for a period of 10 years and are separate liabilities for statutory accounting purposes, which affects the ability to pay dividends. However, with prior regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.

Under Wisconsin and North Carolina law, as well as that of 14 other states, a mortgage insurer must maintain a minimum amount of statutory capital relative to its risk in force in order for the mortgage insurer to continue to write new business. While formulations of minimum capital vary in certain jurisdictions, the most common measure applied allows for a maximum risk-to-capital ratio of 25 to 1. Wisconsin and North Carolina both require a mortgage insurer to maintain a “minimum policyholder position” calculated in accordance with their respective regulations. Policyholders' position consists primarily of statutory policyholders' surplus plus the statutory contingency reserve, less ceded reinsurance. While the statutory contingency reserve is reported as a liability on the statutory balance sheet, for risk-to-capital ratio calculations, it is included as capital for purposes of statutory capital.

United Kingdom

The Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) regulate insurance and reinsurance companies and the FCA regulates firms carrying on insurance mediation activities operating in the U.K., both under the Financial Services and Markets Act 2000. The Company’s European insurance operations are conducted on two platforms: Arch Insurance Company Europe and Arch Syndicate 2012. Arch Syndicate 2012 has one member, Arch Syndicate Investments Ltd. (“ASIL”) and is managed by Arch Underwriting at Lloyd’s Ltd (“AUAL”). All U.K. companies are also subject to a range of statutory provisions, including the laws and regulations of the Companies Acts 2006 (as amended) (the “U.K. Companies Acts”).

Arch Insurance Company Europe and AUAL (on behalf of itself, Arch Syndicate 2012 and ASIL) must maintain a margin of solvency at all times under the Solvency II Directive from the European Insurance and Occupational Pensions Authority. The regulations stipulate that insurers are required to maintain the minimum capital requirement and solvency capital requirement at all times. The capital requirements are calculated by reference to standard formulae defined in Solvency II. At December 31, 2017 and 2016, our subsidiaries were in compliance with these requirements.

As a corporate member of Lloyd’s, ASIL is subject to the oversight of the Council of Lloyd’s. The capital required to support a Syndicate’s underwriting capacity, or funds at Lloyd’s, is assessed annually and is determined by Lloyd’s in accordance with the capital adequacy rules established by the PRA. The Company has provided capital to support the underwriting of Arch Syndicate 2012 in the form of pledged assets provided by Arch Re Bermuda. The amount which the Company provides as funds at Lloyd’s is not available for distribution to the Company for the payment of dividends. Lloyd’s is supervised by the PRA and required to implement certain rules prescribed by the PRA under the Lloyd’s Act of 1982 regarding the operation of the Lloyd’s market. With respect to managing agents and corporate members, Lloyd’s prescribes certain minimum standards relating to management and control, solvency and other requirements and monitors managing agents’ compliance with such standards.

Under U.K. law, all U.K. companies are restricted from declaring a dividend to their shareholders unless they have “profits available for distribution.” The calculation as to whether a company has sufficient profits is based on its accumulated realized profits minus its accumulated realized losses. U.K. insurance regulatory laws do not prohibit the payment of dividends, but the PRA or FCA, as applicable, requires that insurance companies and insurance intermediaries maintain certain solvency margins and may restrict the payment of a dividend by Arch Insurance Company Europe, AUAL and ASIL.

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Canada

Arch Insurance Canada and the Canadian branch of Arch Re U.S. (“Arch Re Canada”) are subject to federal, as well as provincial and territorial, regulation in Canada. The Office of the Superintendent of Financial Institutions (“OSFI”) is the federal regulatory body that, under the Insurance Companies Act (Canada), regulates federal Canadian and non-Canadian insurance companies operating in Canada. Arch Insurance Canada and Arch Re Canada are subject to regulation in the provinces and territories in which they underwrite insurance/reinsurance, and the primary goal of insurance/reinsurance regulation at the provincial and territorial levels is to govern the market conduct of insurance/reinsurance companies. Arch Insurance Canada is licensed to carry on insurance business by OSFI and in each province and territory. Arch Re Canada is

licensed to carry-on reinsurance business by OSFI and in the provinces of Ontario and Quebec.

Under the Insurance Companies Act (Canada), Arch Insurance Canada is required to maintain an adequate amount of capital in Canada, calculated in accordance with a test promulgated by OSFI called the Minimum Capital Test (“MCT”), and Arch Re Canada is required to maintain an adequate margin of assets over liabilities in Canada, calculated in accordance with a test promulgated by OSFI called the Branch Adequacy of Assets Test. Dividends or distributions, if any, made by Arch Insurance Canada would result in an increase in available capital at Arch Insurance Company (see “—United States” section).

24. Unaudited Condensed Quarterly Financial Information

The following table summarizes the 2017 and 2016 unaudited condensed quarterly financial information:

	Fourth Quarter				Third Quarter				Second Quarter				First Quarter
Year Ended December 31, 2017
Net premiums written	$	1,111,015			$	1,325,403			$	1,248,695			$	1,276,260
Net premiums earned	1,224,755				1,261,886				1,240,874				1,117,017
Net investment income	125,415				116,459				111,124				117,874
Net realized gains (losses)	26,978				66,275				21,735				34,153
Net impairment losses recognized in earnings	(1,723		)		(1,878		)		(1,730		)		(1,807		)
Underwriting income (loss)	182,111				(142,172		)		195,419				212,072
Net income (loss) attributable to Arch	214,640				(33,656		)		185,167				253,127
Preferred dividends	(11,105		)		(12,369		)		(11,349		)		(11,218		)
Net income (loss) available to Arch common shareholders	203,535				(52,760		)		173,818				241,909
Net income (loss) per common share -- basic	$	1.50			$	(0.39	)		$	1.29			$	1.80
Net income (loss) per common share -- diluted	$	1.46			$	(0.39	)		$	1.25			$	1.74
Year Ended December 31, 2016
Net premiums written	$	872,315			$	1,014,278			$	1,023,563			$	1,121,235
Net premiums earned	968,855				958,403				1,005,985				951,579
Net investment income	91,051				93,618				88,338				93,735
Net realized gains (losses)	(93,061		)		125,105				68,218				37,324
Net impairment losses recognized in earnings	(13,593		)		(3,867		)		(5,343		)		(7,639		)
Underwriting income	114,096				127,647				116,626				115,691
Net income attributable to Arch	74,013				252,872				211,055				154,798
Preferred dividends	(11,617		)		(5,484		)		(5,485		)		(5,484		)
Net income available to Arch common shareholders	62,396				247,388				205,570				149,314
Net income per common share -- basic	$	0.51			$	2.05			$	1.70			$	1.24
Net income per common share -- diluted	$	0.50			$	1.98			$	1.65			$	1.20

ARCH CAPITAL	165	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25. Guarantor Financial Information

The following tables present condensed consolidating balance sheets at December 31, 2017 and 2016 and condensed consolidating statements of income, comprehensive income and cash flows for 2017, 2016 and 2015 for Arch Capital, Arch-U.S., a 100% owned subsidiary of Arch Capital, and Arch Capital's other subsidiaries.

	December 31, 2017
Condensed Consolidating Balance Sheet	Arch Capital (Parent Guarantor)				Arch-U.S. (Subsidiary Issuer)				Other Arch Capital Subsidiaries				Consolidating Adjustments and Eliminations				Arch Capital Consolidated
Assets
Total investments	$	96,540			$	46,281			$	21,711,891			$	(14,700	)		$	21,840,012
Cash	9,997				30,380				565,822				—				606,199
Investments in subsidiaries	9,396,621				4,097,765				—				(13,494,386		)		—
Due from subsidiaries and affiliates	394				—				1,828,864				(1,829,258		)		—
Premiums receivable	—				—				2,967,701				(1,832,452		)		1,135,249
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	—				—				8,442,192				(5,902,049		)		2,540,143
Contractholder receivables	—				—				1,978,414				—				1,978,414
Ceded unearned premiums	—				—				2,165,789				(1,239,178		)		926,611
Deferred acquisition costs	—				—				693,053				(157,229		)		535,824
Goodwill and intangible assets	—				—				652,611				—				652,611
Other assets	13,176				49,585				1,860,505				(86,671		)		1,836,595
Total assets	$	9,516,728			$	4,224,011			$	42,866,842			$	(24,555,923	)		$	32,051,658
Liabilities
Reserve for losses and loss adjustment expenses	$	—			$	—			$	17,236,401			$	(5,852,609	)		$	11,383,792
Unearned premiums	—				—				4,861,491				(1,239,177		)		3,622,314
Reinsurance balances payable	—				—				2,155,947				(1,832,451		)		323,496
Contractholder payables	—				—				1,978,414				—				1,978,414
Collateral held for insured obligations	—				—				240,183								240,183
Deposit accounting liabilities	—				—				—				—				—
Senior notes	297,053				494,621				941,210				—				1,732,884
Revolving credit agreement borrowings	—				—				816,132				—				816,132
Due to subsidiaries and affiliates	235				536,919				1,292,104				(1,829,258		)		—
Other liabilities	22,838				29,317				1,949,696				(293,343		)		1,708,508
Total liabilities	320,126				1,060,857				31,471,578				(11,046,838		)		21,805,723
Redeemable noncontrolling interests	—				—				220,622				(14,700		)		205,922
Shareholders' Equity
Total shareholders' equity available to Arch	9,196,602				3,163,154				10,331,231				(13,494,385		)		9,196,602
Non-redeemable noncontrolling interests	—				—				843,411				—				843,411
Total shareholders' equity	9,196,602				3,163,154				11,174,642				(13,494,385		)		10,040,013
Total liabilities, noncontrolling interests and shareholders' equity	$	9,516,728			$	4,224,011			$	42,866,842			$	(24,555,923	)		$	32,051,658

ARCH CAPITAL	166	2017 FORM 10-K

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2016
Condensed Consolidating Balance Sheet	Arch Capital (Parent Guarantor)				Arch-U.S. (Subsidiary Issuer)				Other Arch Capital Subsidiaries				Consolidating Adjustments and Eliminations				Arch Capital Consolidated
Assets
Total investments	$	2,612			$	41,672			$	19,690,067			$	(14,700	)		$	19,719,651
Cash	1,687				71,955				769,300				—				842,942
Investments in subsidiaries	8,660,586				3,716,681				—				(12,377,267		)		—
Due from subsidiaries and affiliates	14,297				51,298				1,866,681				(1,932,276		)		—
Premiums receivable	—				—				1,579,865				(507,430		)		1,072,435
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	—				—				6,114,518				(4,000,380		)		2,114,138
Contractholder receivables	—				—				1,717,436				—				1,717,436
Ceded unearned premiums	—				—				1,985,311				(1,125,744		)		859,567
Deferred acquisition costs	—				—				577,461				(129,901		)		447,560
Goodwill and intangible assets	—				—				781,553				—				781,553
Other assets	15,725				49,244				1,901,786				(149,928		)		1,816,827
Total assets	$	8,694,907			$	3,930,850			$	36,983,978			$	(20,237,626	)		$	29,372,109
Liabilities
Reserve for losses and loss adjustment expenses	$	—			$	—			$	14,164,191			$	(3,963,231	)		$	10,200,960
Unearned premiums	—				—				4,532,614				(1,125,744		)		3,406,870
Reinsurance balances payable	—				—				807,837				(507,430		)		300,407
Contractholder payables	—				—				1,717,436				—				1,717,436
Collateral held for insured obligations	—				—				301,406				—				301,406
Deposit accounting liabilities	—				—				22,150				—				22,150
Senior notes	296,957				494,525				940,776				—				1,732,258
Revolving credit agreement borrowings	100,000				—				656,650				—				756,650
Due to subsidiaries and affiliates	26,270				535,584				1,370,422				(1,932,276		)		—
Other liabilities	17,962				54,823				1,867,040				(316,978		)		1,622,847
Total liabilities	441,189				1,084,932				26,380,522				(7,845,659		)		20,060,984
Redeemable noncontrolling interests	—				—				220,253				(14,700		)		205,553
Shareholders' Equity
Total shareholders' equity available to Arch	8,253,718				2,845,918				9,531,349				(12,377,267		)		8,253,718
Non-redeemable noncontrolling interests	—				—				851,854				—				851,854
Total shareholders' equity	8,253,718				2,845,918				10,383,203				(12,377,267		)		9,105,572
Total liabilities, noncontrolling interests and shareholders' equity	$	8,694,907			$	3,930,850			$	36,983,978			$	(20,237,626	)		$	29,372,109

ARCH CAPITAL	167	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2017
Condensed Consolidating Statement of Income and Comprehensive Income	Arch Capital (Parent Guarantor)				Arch-U.S. (Subsidiary Issuer)				Other Arch Capital Subsidiaries				Consolidating Adjustments and Eliminations				Arch Capital Consolidated
Revenues
Net premiums earned	$	—			$	—			$	4,844,532			$	—			$	4,844,532
Net investment income	243				1,420				559,963				(90,754		)		470,872
Net realized gains (losses)	—				—				149,141				—				149,141
Net impairment losses recognized in earnings	—				—				(7,138		)		—				(7,138		)
Other underwriting income	—				—				30,253				—				30,253
Equity in net income (loss) of investment funds accounted for using the equity method	—				—				142,286				—				142,286
Other income (loss)	(482		)		—				(2,089		)		—				(2,571		)
Total revenues	(239		)		1,420				5,716,948				(90,754		)		5,627,375
Expenses
Losses and loss adjustment expenses	—				—				2,967,446				—				2,967,446
Acquisition expenses	—				—				775,458				—				775,458
Other operating expenses	—				—				684,451				—				684,451
Corporate expenses	67,450				4,152				12,150				—				83,752
Amortization of intangible assets	—				—				125,778				—				125,778
Interest expense	23,560				47,993				135,342				(89,464		)		117,431
Net foreign exchange (gains) losses	2				—				68,900				46,880				115,782
Total expenses	91,012				52,145				4,769,525				(42,584		)		4,870,098
Income (loss) before income taxes	(91,251		)		(50,725		)		947,423				(48,170		)		757,277
Income tax (expense) benefit	—				10,333				(137,901		)		—				(127,568		)
Income (loss) before equity in net income of subsidiaries	(91,251		)		(40,392		)		809,522				(48,170		)		629,709
Equity in net income of subsidiaries	710,529				303,991				—				(1,014,520		)		—
Net income	619,278				263,599				809,522				(1,062,690		)		629,709
Net (income) loss attributable to noncontrolling interests	—				—				(11,721		)		1,290				(10,431		)
Net income available to Arch	619,278				263,599				797,801				(1,061,400		)		619,278
Preferred dividends	(46,041		)		—				—				—				(46,041		)
Loss on redemption of preferred shares	(6,735		)		—				—				—				(6,735		)
Net income available to Arch common shareholders	$	566,502			$	263,599			$	797,801			$	(1,061,400	)		$	566,502
Comprehensive income (loss) available to Arch	$	851,863			$	288,752			$	983,475			$	(1,272,227	)		$	851,863

ARCH CAPITAL	168	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2016
Condensed Consolidating Statement of Income and Comprehensive Income	Arch Capital (Parent Guarantor)				Arch-U.S. (Subsidiary Issuer)				Other Arch Capital Subsidiaries				Consolidating Adjustments and Eliminations				Arch Capital Consolidated
Revenues
Net premiums earned	$	—			$	—			$	3,884,822			$	—			$	3,884,822
Net investment income	694				3,162				393,114				(30,228		)		366,742
Net realized gains (losses)	12				5				137,569				—				137,586
Net impairment losses recognized in earnings	—				—				(30,442		)		—				(30,442		)
Other underwriting income	—				—				73,671				(16,498		)		57,173
Equity in net income (loss) of investment funds accounted for using the equity method	—				—				48,475				—				48,475
Other income (loss)	180				—				(980		)		—				(800		)
Total revenues	886				3,167				4,506,229				(46,726		)		4,463,556
Expenses
Losses and loss adjustment expenses	—				—				2,185,599				—				2,185,599
Acquisition expenses	—				—				667,625				—				667,625
Other operating expenses	—				—				624,090				—				624,090
Corporate expenses	49,540				1,940				30,266				—				81,746
Amortization of intangible assets	—				—				19,343				—				19,343
Interest expense	23,769				27,165				60,757				(45,439		)		66,252
Net foreign exchange (gains) losses	—				—				(17,217		)		(19,434		)		(36,651		)
Total expenses	73,309				29,105				3,570,463				(64,873		)		3,608,004
Income (loss) before income taxes	(72,423		)		(25,938		)		935,766				18,147				855,552
Income tax (expense) benefit	—				8,676				(40,050		)		—				(31,374		)
Income (loss) before equity in net income of subsidiaries	(72,423		)		(17,262		)		895,716				18,147				824,178
Equity in net income of subsidiaries	765,161				54,497				—				(819,658		)		—
Net income	692,738				37,235				895,716				(801,511		)		824,178
Net (income) loss attributable to noncontrolling interests	—				—				(132,727		)		1,287				(131,440		)
Net income available to Arch	692,738				37,235				762,989				(800,224		)		692,738
Preferred dividends	(28,070		)		—				—				—				(28,070		)
Net income available to Arch common shareholders	$	664,668			$	37,235			$	762,989			$	(800,224	)		$	664,668
Comprehensive income (loss) available to Arch	$	594,699			$	13,444			$	684,447			$	(697,891	)		$	594,699

ARCH CAPITAL	169	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2015
Condensed Consolidating Statement of Income and Comprehensive Income	Arch Capital (Parent Guarantor)				Arch-U.S. (Subsidiary Issuer)				Other Arch Capital Subsidiaries				Consolidating Adjustments and Eliminations				Arch Capital Consolidated
Revenues
Net premiums earned	$	—			$	—			$	3,733,905			$	—			$	3,733,905
Net investment income	1				2,342				368,413				(22,666		)		348,090
Net realized gains (losses)	—				1				(185,843		)		—				(185,842		)
Net impairment losses recognized in earnings	—				—				(20,116		)		—				(20,116		)
Other underwriting income	—				—				35,739				(242		)		35,497
Equity in net income (loss) of investment funds accounted for using the equity method	—				—				25,455				—				25,455
Other income (loss)	—				—				(399		)		—				(399		)
Total revenues	1				2,343				3,957,154				(22,908		)		3,936,590
Expenses
Losses and loss adjustment expenses	—				—				2,050,903				—				2,050,903
Acquisition expenses	—				—				662,778				—				662,778
Other operating expenses	—				—				603,288				—				603,288
Corporate expenses	48,107				3,689				(2,051		)		—				49,745
Amortization of intangible assets	—				—				22,926				—				22,926
Interest expense	23,450				26,502				18,024				(22,102		)		45,874
Net foreign exchange (gains) losses	—				—				(41,622		)		(24,496		)		(66,118		)
Total expenses	71,557				30,191				3,314,246				(46,598		)		3,369,396
Income (loss) before income taxes	(71,556		)		(27,848		)		642,908				23,690				567,194
Income tax (expense) benefit	—				9,732				(50,344		)		—				(40,612		)
Income (loss) before equity in net income of subsidiaries	(71,556		)		(18,116		)		592,564				23,690				526,582
Equity in net income of subsidiaries	609,294				50,156				—				(659,450		)		—
Net income	537,738				32,040				592,564				(635,760		)		526,582
Net (income) loss attributable to noncontrolling interests	—				—				10,351				805				11,156
Net income available to Arch	537,738				32,040				602,915				(634,955		)		537,738
Preferred dividends	(21,938		)		—				—				—				(21,938		)
Net income available to Arch common shareholders	$	515,800			$	32,040			$	602,915			$	(634,955	)		$	515,800
Comprehensive income (loss) available to Arch	$	392,379			$	838			$	482,047			$	(482,885	)		$	392,379

ARCH CAPITAL	170	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2017
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 Activities
Net Cash Provided By (Used For) Operating Activities	$	159,130			$	(10,289	)		$	1,667,490			$	(703,714	)		$	1,112,617
Investing Activities
Purchases of fixed maturity investments	—				—				(36,806,913		)		—				(36,806,913		)
Purchases of equity securities	—				—				(1,021,016		)		—				(1,021,016		)
Purchases of other investments	—				—				(2,020,624		)		—				(2,020,624		)
Proceeds from the sales of fixed maturity investments	—				—				35,686,779				—				35,686,779
Proceeds from the sales of equity securities	—				—				1,056,401				—				1,056,401
Proceeds from the sales, redemptions and maturities of other investments	—				—				1,528,617				—				1,528,617
Proceeds from redemptions and maturities of fixed maturity investments	—				—				907,417				—				907,417
Net settlements of derivative instruments	—				—				(28,563		)		—				(28,563		)
Net (purchases) sales of short-term investments	(93,864		)		(4,586		)		(636,104		)		—				(734,554		)
Change in cash collateral related to securities lending	—				—				12,540				—				12,540
Contributions to subsidiaries	20,457				(73,700		)		(423,998		)		477,241				—
Issuance of intercompany loans	—				—				(47,000		)		47,000				—
Repayments of intercompany loans	—				47,000				80,840				(127,840		)		—
Acquisitions, net of cash	—				—				(27,709		)		—				(27,709		)
Purchases of fixed assets	(18		)		—				(22,823		)		—				(22,841		)
Other	—				—				131,111				(20,641		)		110,470
Net Cash Provided By (Used For) Investing Activities	(73,425		)		(31,286		)		(1,631,045		)		375,760				(1,359,996		)
Financing Activities
Proceeds from issuance of preferred shares, net	319,694				—				—				—				319,694
Redemption of preferred shares	(230,000		)		—				—				—				(230,000		)
Proceeds from common shares issued, net	(21,048		)		—				477,244				(477,244		)		(21,048		)
Proceeds from intercompany borrowings	—				—				47,000				(47,000		)		—
Proceeds from borrowings	—				—				253,415				—				253,415
Repayments of intercompany loans	—				—				(127,840		)		127,840				—
Repayments of borrowings	(100,000		)		—				(97,000		)		—				(197,000		)
Change in cash collateral related to securities lending	—				—				(12,540		)		—				(12,540		)
Dividends paid to redeemable noncontrolling interests	—				—				(19,264		)		1,275				(17,989		)
Dividends paid to parent (1)	—				—				(702,442		)		702,442				—
Other	—				—				(72,537		)		20,641				(51,896		)
Preferred dividends paid	(46,041		)		—				—				—				(46,041		)
Net Cash Provided By (Used For) Financing Activities	(77,395		)		—				(253,964		)		327,954				(3,405		)
Effects of exchange rates changes on foreign currency cash	—				—				14,041				—				14,041
Increase (decrease) in cash	8,310				(41,575		)		(203,478		)		—				(236,743		)
Cash beginning of year	1,687				71,955				769,300				—				842,942
Cash end of year	$	9,997			$	30,380			$	565,822			$	—			$	606,199

(1)	Included in net cash provided by (used for) operating activities in the Arch Capital (Parent Guarantor) and/or Arch-U.S. (Subsidiary Issuer) columns.

ARCH CAPITAL	171	2017 FORM 10-K

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2016
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 Activities
Net Cash Provided By (Used For) Operating Activities	$	148,211			$	6,395			$	1,465,166			$	(223,128	)		$	1,396,644
Investing Activities
Purchases of fixed maturity investments	—				—				(35,532,810		)		—				(35,532,810		)
Purchases of equity securities	—				—				(665,702		)		—				(665,702		)
Purchases of other investments	—				—				(1,389,406		)		—				(1,389,406		)
Proceeds from the sales of fixed maturity investments	—				—				34,559,966				—				34,559,966
Proceeds from the sales of equity securities	—				—				751,728				—				751,728
Proceeds from the sales, redemptions and maturities of other investments	—				—				1,149,328				—				1,149,328
Proceeds from redemptions and maturities of fixed maturity investments	—				41,500				713,507				—				755,007
Net settlements of derivative instruments	—				—				(17,068		)		—				(17,068		)
Net (purchases) sales of short-term investments	(2,075		)		(40,963		)		(80,372		)		—				(123,410		)
Change in cash collateral related to securities lending	—				—				(155,248		)		—				(155,248		)
Contributions to subsidiaries	(479,912		)		(887,650		)		(546,269		)		1,913,831				—
Issuance of intercompany loans	—				—				(1,460,000		)		1,460,000				—
Acquisitions, net of cash	—				—				(1,992,720		)		—				(1,992,720		)
Purchases of fixed assets	(8		)		—				(15,295		)		—				(15,303		)
Other	2,000				—				(47,905		)		—				(45,905		)
Net Cash Provided By (Used For) Investing Activities	(479,995		)		(887,113		)		(4,728,266		)		3,373,831				(2,721,543		)
Financing Activities
Proceeds from issuance of preferred shares, net	434,899				—				—				—				434,899
Redemption of preferred shares	(2,445		)		—				—				—				(2,445		)
Purchases of common shares under share repurchase program	(75,256		)		—				—				—				(75,256		)
Proceeds from common shares issued, net	(2,418		)		435,450				1,478,381				(1,913,831		)		(2,418		)
Proceeds from intercompany borrowings	—				500,000				960,000				(1,460,000		)		—
Proceeds from borrowings	—				—				1,386,741				—				1,386,741
Repayments of borrowings	—				—				(219,171		)		—				(219,171		)
Change in cash collateral related to securities lending	—				—				155,248				—				155,248
Dividends paid to redeemable noncontrolling interests	—				—				(19,264		)		1,275				(17,989		)
Dividends paid to parent (1)	—				—				(221,853		)		221,853				—
Other	(48		)		200				3,978				—				4,130
Preferred dividends paid	(28,070		)		—				—				—				(28,070		)
Net Cash Provided By (Used For) Financing Activities	326,662				935,650				3,524,060				(3,150,703		)		1,635,669
Effects of exchange rates changes on foreign currency cash	—				—				(21,154		)		—				(21,154		)
Increase (decrease) in cash	(5,122		)		54,932				239,806				—				289,616
Cash beginning of year	6,809				17,023				529,494				—				553,326
Cash end of year	$	1,687			$	71,955			$	769,300			$	—			$	842,942

(1)	Included in net cash provided by (used for) operating activities in the Arch Capital (Parent Guarantor) and/or Arch-U.S. (Subsidiary Issuer) columns.

ARCH CAPITAL	172	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 2015
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 Activities
Net Cash Provided By (Used For) Operating Activities	$	404,144			$	5,505			$	1,074,021			$	(485,764	)		$	997,906
Investing Activities
Purchases of fixed maturity investments	—				(3,505		)		(29,448,368		)		—				(29,451,873		)
Purchases of equity securities	(8,070		)		—				(507,343		)		—				(515,413		)
Purchases of other investments	—				—				(1,749,525		)		—				(1,749,525		)
Proceeds from the sales of fixed maturity investments	—				24,507				28,069,540				—				28,094,047
Proceeds from the sales of equity securities	—				—				564,011				—				564,011
Proceeds from the sales, redemptions and maturities of other investments	—				—				1,250,883				—				1,250,883
Proceeds from redemptions and maturities of fixed maturity investments	—				—				748,529				—				748,529
Net settlements of derivative instruments	—				—				(5,056		)		—				(5,056		)
Proceeds from investment in joint venture	—				—				40,000				—				40,000
Net (purchases) sales of short-term investments	57				(338		)		169,376				—				169,095
Change in cash collateral related to securities lending	—				—				(6,662		)		—				(6,662		)
Contributions to subsidiaries	(10,000		)		—				(49,348		)		59,348				—
Issuance of intercompany loans	—				(39,500		)		(27,500		)		67,000				—
Acquisitions, net of cash	—				—				818				—				818
Purchases of fixed assets	(80		)		—				(15,656		)		—				(15,736		)
Other	—				—				(36,993		)		—				(36,993		)
Net Cash Provided By (Used For) Investing Activities	(18,093		)		(18,836		)		(1,003,294		)		126,348				(913,875		)
Financing Activities
Purchases of common shares under share repurchase program	(365,383		)		—				—				—				(365,383		)
Proceeds from common shares issued, net	4,861				—				59,348				(59,348		)		4,861
Proceeds from intercompany borrowings	—				27,500				39,500				(67,000		)		—
Proceeds from borrowings	—				—				431,362				—				431,362
Change in cash collateral relating to securities lending	—				—				6,662				—				6,662
Dividends paid to redeemable noncontrolling	—				—				(19,263		)		956				(18,307		)
Dividends paid to parent (1)	—				—				(484,808		)		484,808				—
Other	—				67				(41,980		)		—				(41,913		)
Preferred dividends paid	(21,938		)		—				—				—				(21,938		)
Net Cash Provided By (Used For) Financing Activities	(382,460		)		27,567				(9,179		)		359,416				(4,656		)
Effects of exchange rates changes on foreign currency cash	—				—				(11,751		)		—				(11,751		)
Increase (decrease) in cash	3,591				14,236				49,797				—				67,624
Cash beginning of year	3,218				2,787				479,697				—				485,702
Cash end of year	$	6,809			$	17,023			$	529,494			$	—			$	553,326

(1)	Included in net cash provided by (used for) operating activities in the Arch Capital (Parent Guarantor) and/or Arch-U.S. (Subsidiary Issuer) columns.

ARCH CAPITAL	173	2017 FORM 10-K

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

26. Subsequent Event

On January 2, 2018, the Company redeemed all remaining outstanding Series C Preferred Shares at $25 per share ($92.6 million aggregate cost), plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares will be removed from additional paid-in capital and the Company will record a $2.7 million loss on redemption of preferred shares. Such adjustment will have no impact on total shareholders’ equity or cash flows.

ARCH CAPITAL	174	2017 FORM 10-K