This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto presented under Item 8.
We are a Delaware limited liability company owned and a 100% owned indirect subsidiary of ACGL. We were formed on November 3, 2016. On December 8, 2016, we completed a public offering of (i) $500.0 million principal amount of 4.011% senior notes due December 15, 2026 and (ii) $450.0 million principal amount of 5.031% senior notes due December 15,
For the period from November 3, 2016 to December 31, 2016, our revenues consisted of $1.2 million of net investment income, including (i) $1.0 million on the Promissory Notes from U.S. MI Holdings and (ii) $0.2 million on short-term investments. In future periods, we expect that substantially all of our revenues will consist of interest income received on the Promissory Notes.
The preparation of our financial statements in accordance with GAAP requires us to make many estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation. We base our estimates on assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe that the following critical accounting policies affect significant estimates used in the preparation of our financial statements.
We are a limited liability company owned indirectly by ACGL through U.S. MI Holdings. U.S. MI Holdings is the direct owner of 100% of our limited liability company interests. Our primary source of operating cash inflows is collections from
U.S. MI Holdings related to promissory notes receivable while our primary source of cash outflows are related to the senior notes described below. Our readily available cash totaled $0.1 million at December 31, 2016.
The following table summarizes our cash flows from operating, investing and financing activities:
provided by financing activities for 2016 consisted of $940.7 million of net proceeds related to the issuance of senior notes and $9.3 million of capital contributions.
We are dependent upon payments on our promissory notes receivable from U.S. MI Holdings in order to service our senior notes. U.S. MI Holdings is dependent upon dividends or distributions from its mortgage insurance subsidiaries, including AMIC, UGRIC and UGMIC. If U.S. MI Holdings is not able to perform its obligations to us, our results of operations and financial condition would be materially and adversely affected. Even if U.S. MI Holdings makes payments to us in accordance with the terms of the Promissory Notes, we will require additional funds, in the form of capital contributions, loans or otherwise, to make the first scheduled payment of interest and principal on the Senior Notes and may require additional funds thereafter.
To the Board of Managers and Member of Arch Capital Finance LLC:
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arch Capital Finance LLC as of December 31, 2016, and the results of its operations and its cash flows for the period then ended, in accordance with accounting principles generally accepted in the United States of America.
Arch Capital Finance LLC (the “Company”), a Delaware limited liability company, is a 100% owned indirect subsidiary of Arch Capital Group Ltd. (“ACGL”) through its wholly owned subsidiary Arch U.S. MI Holdings Inc. (“U.S. MI Holdings”). U.S. MI Holdings is the direct owner of 100% of the Company’s limited liability company interests. The Company was formed on November 3, 2016.
On December 8, 2016, the Company completed a public offering of $500.0 million principal amount of 4.011% senior notes due December 15, 2026 (“2026 notes”) and $450.0 million principal amount of 5.031% senior notes due December 15, 2046 (“2046 notes” and, together with the 2026 notes, the “Senior Notes”). ACGL has issued a full and unconditional guarantee (the “Guarantee”) of the Senior Notes. The Company was formed for the sole purpose of issuing the senior notes and has no business activities.
The Company defers debt issuance costs and amortizes such costs into interest expense over the terms of the 2026 notes and 2046 notes. The unamortized debt issuance costs were $9.2 million at December 31, 2016.
a promissory note receivable of $450.0 million principal amount bearing interest at 5.031% due December 1, 2046 (“2046 promissory note”), which was issued at par. Interest payments on the 2046 promissory note are due on June 1st and December 1st of each year. U.S. MI Holdings may redeem the 2046 promissory note at any time and from time to time, in whole or in part, at a price equal to 100% of the principal amount to be paid.
The Company may use various financial instruments in the normal course of its business. The carrying values of cash, accrued interest receivable and accrued interest payable approximated their fair values at December 31, 2016, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
As of December 31, 2016, 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.