ARCH CAPITAL GROUP LTD. - FORM 8-K - EX-99.2

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EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a11-18612_1ex99d1.htm
8-K - 8-K - ARCH CAPITAL GROUP LTD.	a11-18612_18k.htm

Exhibit 99.2

	Wessex House, 5th Floor
	45 Reid Street
	Hamilton HM 12 Bermuda

	441-278-9250
	441-278-9255 fax

	Contact:
	John C.R. Hele
	Executive Vice President and
	Chief Financial Officer

Financial Supplement

Financial Information

as of June 30, 2011

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

This report is for informational purposes only. It should be read in conjunction with documents filed by Arch Capital Group Ltd. with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q. Please refer to the Company’s website at www.archcapgroup.bm for further information describing Arch Capital Group Ltd. All information in this financial supplement has been adjusted to reflect the three-for-one share split effected in May 2011. In addition, the Company has reclassified the presentation of certain prior period information to conform to the current period presentation.

Arch Capital Group Ltd. and Subsidiaries

Table of Contents

		Page(s)

I.	Financial Highlights	1

II.	Consolidated Financial Statements
	a. Consolidated Statements of Income	2
	b. Consolidated Balance Sheets	3
	c. Consolidated Statements of Changes in Shareholders’ Equity	4
	d. Consolidated Statements of Comprehensive Income	5
	e. Consolidated Statements of Cash Flows	6

III.	Segment Information
	a. Overview	7
	b. Consolidated Segment Underwriting Results	8-9
	c. Insurance Segment Underwriting Results	10-11
	d. Reinsurance Segment Underwriting Results	12-13

IV.	Investment Information
	a. Investable Asset Summary, Investment Portfolio Metrics and Credit Quality Distribution	14
	b. Composition of Fixed Maturities and Analysis of Corporate Exposures	15
	c. Mortgage Backed, Commercial Mortgage Backed and Asset Backed Securities	16
	d. Bank Loan Investments	17

V.	Other
	a. Comments on Regulation G	18
	b. Operating Income Reconciliation	19
	c. Share Repurchase Activity	20
	d. Annualized Operating Return on Average Common Equity	21
	e. Capital Structure	22

Arch Capital Group Ltd. and Subsidiaries

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.

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

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

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights

(U.S. dollars in thousands, except share data)

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change

Gross premiums written	$	911,939		$	817,100		11.6	%	$	1,876,505		$	1,770,787		6.0	%

Net premiums written	$	706,543		$	624,258		13.2	%	$	1,470,821		$	1,392,012		5.7	%

Net premiums earned	$	642,879		$	623,011		3.2	%	$	1,276,574		$	1,292,928		(1.3	)%

Underwriting income (loss)	$	2,236		$	62,244		(96.4	)%	$	(61,282	)	$	86,162		(171.1	)%

Net investment income	$	86,671		$	90,537		(4.3	)%	$	174,978		$	183,509		(4.6	)%
Per diluted share	$	0.63		$	0.57		10.5	%	$	1.26		$	1.12		12.5	%

Net income available to common shareholders	$	91,881		$	236,990		(61.2	)%	$	111,176		$	447,523		(75.2	)%
Per diluted share	$	0.67		$	1.48		(54.7	)%	$	0.80		$	2.74		(70.8	)%

After-tax operating income available to common shareholders (1)	61,478			$	132,182		(53.5	)%	$	69,337		$	230,913		(70.0	)%
Per diluted share	$	0.45		$	0.83		(45.8	)%	$	0.50		$	1.42		(64.8	)%

Comprehensive income	$	136,521		$	275,720		(50.5	)%	$	183,179		$	495,150		(63.0	)%

Cash flow from operations	$	221,967		$	205,514		8.0	%	$	446,547		$	390,137		14.5	%

Diluted weighted average common shares and common share equivalents outstanding	137,975,599			159,795,909			(13.7	)%	139,234,931			163,160,070			(14.7	)%

Underwriting ratios:
Loss ratio	67.1		%	58.3		%	8.8	%	72.5		%	61.2		%	11.3	%
Acquisition expense ratio	17.1		%	17.1		%	0.0	%	17.1		%	17.3		%	(0.2	)%
Other operating expense ratio	15.4		%	14.6		%	0.8	%	15.2		%	14.9		%	0.3	%
Combined ratio	99.6		%	90.0		%	9.6	%	104.8		%	93.4		%	11.4	%

Financial measures:

Growth in book value per common share	2.2		%	6.7		%	(67.5	)%	3.4		%	12.4		%	(72.9	)%

Annualized operating return on average common equity	6.1		%	13.0		%	(53.1	)%	3.3		%	11.4		%	(71.1	)%

Total return on investments (2)	1.65		%	1.74		%	-9 bps		3.17		%	3.35		%	-18 bps

(1) See page 18, Comments on Regulation G.

(2) Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses and includes the effect of financial market conditions along with foreign currency fluctuations.

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

(U.S. dollars in thousands, except share data)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Gross premiums written	$	911,939		$	964,566		$	664,212		$	831,788		$	817,100		$	953,687		$	718,712		$	937,328		$	911,920		$	1,876,505		$	1,770,787
Net premiums written	706,543			764,278			482,911			636,117			624,258			767,754			519,087			727,308			693,854			1,470,821			1,392,012

Net premiums earned	$	642,879		$	633,695		$	632,146		$	627,409		$	623,011		$	669,917		$	708,538		$	734,385		$	699,258		$	1,276,574		$	1,292,928
Fee income	784			815			2,814			874			883			794			894			826			817			1,599			1,677
Losses and loss adjustment expenses	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(363,145		)	(428,051		)	(410,360		)	(444,914		)	(398,858		)	(925,502		)	(791,196		)
Acquisition expenses, net	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(107,475		)	(117,624		)	(120,549		)	(122,739		)	(123,814		)	(219,393		)	(225,099		)
Other operating expenses	(99,166		)	(95,394		)	(114,454		)	(97,325		)	(91,030		)	(101,118		)	(99,305		)	(93,723		)	(87,779		)	(194,560		)	(192,148		)
Underwriting income (loss)	2,236			(63,518		)	48,356			60,486			62,244			23,918			79,218			73,835			89,624			(61,282		)	86,162

Net investment income	86,671			88,307			90,601			90,768			90,537			92,972			93,551			100,213			100,485			174,978			183,509
Net realized gains (losses)	45,210			20,695			74,027			68,828			62,114			47,782			89,901			70,638			(11,793		)	65,905			109,896
Net impairment losses recognized in earnings	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(4,643		)	(20,863		)	(4,364		)	(6,016		)
Equity in net income (loss) of investment funds accounted for using the equity method	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			69,119			75,890			35,646			28,702
Other income (loss)	(4,265		)	4,567			6,165			1,840			4,528			5,978			5,428			5,687			4,950			302			10,506
Other expenses	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(10,503		)	(5,688		)	(6,680		)	(6,020		)	(11,515		)	(18,423		)	(16,191		)
Interest expense	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(7,916		)	(7,260		)	(7,015		)	(6,001		)	(5,712		)	(15,479		)	(15,176		)
Net foreign exchange (losses) gains	(18,375		)	(36,912		)	6,039			(65,157		)	48,625			38,601			9,051			(19,755		)	(53,658		)	(55,287		)	87,226
Income before income taxes	96,611			25,385			230,607			151,231			244,871			223,747			291,352			283,073			167,408			121,996			468,618
Income tax benefit (expense)	1,731			371			3,505			(3,200		)	(1,420		)	(6,753		)	(195		)	(2,205		)	(8,818		)	2,102			(8,173		)

Net income	98,342			25,756			234,112			148,031			243,451			216,994			291,157			280,868			158,590			124,098			460,445
Preferred dividends	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(12,922		)	(12,922		)
Net income available to common shareholders	$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	274,407		$	152,129		$	111,176		$	447,523

Underwriting Ratios
Loss ratio	67.1		%	77.9		%	58.1		%	57.3		%	58.3		%	63.9		%	57.9		%	60.6		%	57.0		%	72.5		%	61.2		%
Acquisition expense ratio	17.1		%	17.0		%	16.5		%	17.6		%	17.1		%	17.4		%	16.9		%	16.6		%	17.6		%	17.1		%	17.3		%
Other operating expense ratio	15.4		%	15.1		%	18.1		%	15.5		%	14.6		%	15.1		%	14.0		%	12.8		%	12.6		%	15.2		%	14.9		%
Combined ratio	99.6		%	110.0		%	92.7		%	90.4		%	90.0		%	96.4		%	88.8		%	90.0		%	87.2		%	104.8		%	93.4		%

Net premiums written to gross premiums written	77.5		%	79.2		%	72.7		%	76.5		%	76.4		%	80.5		%	72.2		%	77.6		%	76.1		%	78.4		%	78.6		%

Net income per common share
Basic	$	0.70		$	0.14		$	1.59		$	0.96		$	1.55		$	1.32		$	1.65		$	1.52		$	0.84		$	0.84		$	2.87
Diluted	$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	1.46		$	0.81		$	0.80		$	2.74

Weighted average common shares and common share equivalents outstanding
Basic	131,232,269			133,499,241			143,320,146			146,993,373			152,962,620			159,117,078			172,139,922			180,468,657			181,252,173			132,359,493			156,022,848
Diluted	137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			187,601,448			187,878,951			139,234,931			163,160,070

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

(U.S. dollars in thousands, except share data)

	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,		December 31,		September 30,		June 30,
	2011			2011			2010			2010			2010			2010		2009		2009		2009
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852		$	9,326,574		$	9,202,122	$	9,306,482	$	9,185,443	$	8,884,829
Short-term investments available for sale, at fair value	704,495			1,130,142			915,841			780,671			554,304			669,798		571,489		706,157		660,859
Investment of funds received under securities lending, at fair value (1)	145,224			9,951			69,660			200,020			209,635			177,954		91,160		252,500		309,000
Equity securities available for sale, at fair value	320,434			361,639			310,194			79,805			38,879			41,537		249		74		—
Other investments available for sale, at fair value	299,845			293,073			275,538			229,488			211,241			125,262		58,751		51,031		48,896
Investments accounted for using the fair value option	321,790			256,614			219,173			175,841			140,541			147,471		139,787		130,082		59,281
TALF investments, at fair value	399,341			400,970			402,449			410,881			407,469			406,997		250,265		250,517		—
Investments accounted for using the equity method	399,968			449,206			508,334			500,737			474,971			467,597		468,667		447,918		436,529
Total investments	11,838,099			11,817,612			11,659,048			12,070,295			11,363,614			11,238,738		10,886,850		11,023,722		10,399,394

Cash	411,001			406,877			362,740			365,997			341,469			338,708		334,571		385,149		336,693
Accrued investment income	71,083			69,057			74,837			79,180			72,102			74,214		70,673		77,762		70,854
Investment in joint venture	105,982			105,495			105,698			104,347			103,540			102,946		102,855		101,473		100,656
Fixed maturities and short-term investments pledged under securities lending, at fair value	150,501			198,418			75,575			203,221			214,564			184,221		212,820		609,334		559,385
Securities purchased under agreements to resell using funds received under securities lending (1)	—			185,176			—			—			—			—		115,839		358,996		247,473
Premiums receivable	712,397			633,144			503,434			662,634			706,503			699,385		595,030		697,806		735,969
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,855,342			1,772,130			1,763,985			1,715,122			1,721,059			1,711,307		1,720,270		1,768,344		1,793,680
Prepaid reinsurance premiums	278,587			259,624			263,448			267,240			256,952			250,841		277,985		283,290		283,488
Deferred acquisition costs, net	310,616			302,271			277,861			297,250			293,982			298,371		280,372		303,826		307,896
Receivable for securities sold	733,931			749,708			56,145			1,329,508			1,084,122			1,427,085		187,171		998,431		1,192,659
Other assets	746,267			734,317			669,164			624,395			634,242			628,407		609,323		592,701		613,788
Total Assets	$	17,213,806		$	17,233,829		$	15,811,935		$	17,719,189		$	16,792,149		$	16,954,223	$	15,393,759	$	17,200,834	$	16,641,935

Liabilities
Reserve for losses and loss adjustment expenses	8,564,908			8,319,324			8,098,454			8,054,677			7,940,104			$	7,898,162	$	7,873,412	$	7,879,586	$	7,809,034
Unearned premiums	1,589,497			1,504,162			1,370,075			1,524,100			1,492,550			1,495,265		1,433,331		1,627,519		1,632,989
Reinsurance balances payable	154,860			131,512			132,452			130,274			128,723			114,254		156,500		159,898		158,974
Senior notes	300,000			300,000			300,000			300,000			300,000			300,000		300,000		300,000		300,000
Revolving credit agreement borrowings	100,000			100,000			100,000			125,000			125,000			100,000		100,000		100,000		100,000
TALF borrowings, at fair value	318,441			322,222			325,770			331,797			336,213			346,746		217,565		219,843		—
Securities lending payable	155,072			203,925			78,021			209,411			219,796			189,024		219,116		625,706		574,014
Payable for securities purchased	838,787			1,266,390			200,192			1,649,462			1,192,181			1,429,529		136,381		1,197,411		1,432,395
Other liabilities	750,972			760,759			693,968			676,558			659,579			702,486		634,105		630,049		604,561
Total Liabilities	12,772,537			12,908,294			11,298,932			13,001,279			12,394,146			12,575,466		11,070,410		12,740,012		12,611,967

Commitments and Contingencies

Shareholders’ Equity
Non-cumulative preferred shares - Series A and B	325,000			325,000			325,000			325,000			325,000			325,000		325,000		325,000		325,000
Common shares	541			535			534			531			529			527		548		595		610
Additional paid-in capital	142,001			120,109			110,325			100,640			83,828			95,926		253,466		592,334		681,445
Retained earnings	4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342		3,605,809		3,321,113		3,046,706
Accumulated other comprehensive income (loss), net of deferred income tax	263,584			225,405			204,503			388,370			173,231			140,962		138,526		221,780		(23,793		)
Common shares held in treasury, at cost	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—		—		—		—
Total Shareholders’ Equity	4,441,269			4,325,535			4,513,003			4,717,910			4,398,003			4,378,757		4,323,349		4,460,822		4,029,968
Total Liabilities and Shareholders’ Equity	$	17,213,806		$	17,233,829		$	15,811,935		$	17,719,189		$	16,792,149		$	16,954,223	$	15,393,759	$	17,200,834	$	16,641,935

Common shares outstanding, net of treasury shares (2)	132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802		164,285,034		178,572,927		182,942,418

Book value per common share	$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64	$	24.34	$	23.16	$	20.25

(1) The Company’s collateral received under securities lending agreements is reinvested in (i) fixed maturities and short-term investments (shown as “Investment of funds received under securities lending , at fair value”) and (ii) collateralized borrowings (shown as “Securities purchased under agreements to resell using funds received under securities lending agreements”).

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

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Non-Cumulative Preferred Shares - Series A and B
Balance at beginning and end of period	$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000

Common Shares
Balance at beginning of period	535			534			531			529			527			548			595			610			605			534			548
Common shares issued, net	6			1			3			2			7			4			4			1			5			7			11
Purchases of common shares under share repurchase program	—			—			—			—			(5		)	(25		)	(51		)	(16		)	0			—			(30		)
Balance at end of period	541			535			534			531			529			527			548			595			610			541			529

Additional Paid-in Capital
Balance at beginning of period	120,109			110,325			100,640			83,828			95,926			253,466			592,334			681,445			671,547			110,325			253,466
Common shares issued	3,904			8			1,334			283			3,275			14			1,173			0			2,557			3,912			3,289
Exercise of stock options	2,245			4,127			2,716			10,486			7,964			16,700			12,380			2,905			705			6,372			24,664
Common shares retired	—			—			—			—			(36,212		)	(181,350		)	(358,611		)	(98,632		)	(2,483		)	—			(217,562		)
Amortization of share-based compensation	13,877			5,628			5,615			6,074			12,280			7,096			6,199			6,576			9,949			19,505			19,376
Other	1,866			21			20			(31		)	595			—			(9		)	40			(830		)	1,887			595
Balance at end of period	142,001			120,109			110,325			100,640			83,828			95,926			253,466			592,334			681,445			142,001			83,828

Retained Earnings
Balance at beginning of period	4,441,848			4,422,553			4,194,902			4,053,332			3,816,342			3,605,809			3,321,113			3,046,706			2,894,577			4,422,553			3,605,809
Dividends declared on preferred shares	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(12,922		)	(12,922		)
Net income	98,342			25,756			234,112			148,031			243,451			216,994			291,157			280,868			158,590			124,098			460,445
Balance at end of period	4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342			3,605,809			3,321,113			3,046,706			4,533,729			4,053,332

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	225,405			204,503			388,370			173,231			140,962			138,526			221,780			(23,793		)	(261,333		)	204,503			138,526
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	37,180			20,194			(185,221		)	208,310			38,476			5,240			(83,840		)	248,581			241,588			57,374			43,716
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(3,217		)	(16,518		)	(863		)	(1,038		)
Foreign currency translation adjustments, net of deferred income tax	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			209			12,470			2,570			(7,973		)
Balance at end of period	263,584			225,405			204,503			388,370			173,231			140,962			138,526			221,780			(23,793		)	263,584			173,231

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			—			—			—			(549,912		)	—
Shares repurchased for treasury	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(237,917		)	—			—			—			—			(273,674		)	(237,917		)
Balance at end of period	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			—			—			(823,586		)	(237,917		)

Total Shareholders’ Equity	$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349		$	4,460,822		$	4,029,968		$	4,441,269		$	4,398,003

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income

(U.S. dollars in thousands)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Comprehensive Income
Net income	$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	280,868		$	158,590		$	124,098		$	460,445
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	84,862			40,370			(141,807		)	264,609			71,087			42,847			(8,954		)	300,733			219,648			125,232			113,934
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(3,217		)	(16,518		)	(863		)	(1,038		)
Reclassification of net realized (gains) losses, net of income taxes, included in net income	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(32,611		)	(37,607		)	(74,886		)	(52,152		)	21,940			(67,858		)	(70,218		)
Foreign currency translation adjustments	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			209			12,470			2,570			(7,973		)
Other comprehensive income (loss)	38,179			20,902			(183,867		)	215,139			32,269			2,436			(83,254		)	245,573			237,540			59,081			34,705
Comprehensive Income	$	136,521		$	46,658		$	50,245		$	363,170		$	275,720		$	219,430		$	207,903		$	526,441		$	396,130		$	183,179		$	495,150

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Operating Activities
Net income	$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	280,868		$	158,590		$	124,098		$	460,445
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(62,406		)	(49,483		)	(70,680		)	(70,612		)	11,831			(71,367		)	(111,889		)
Net impairment losses included in earnings	1,684			2,680			3,230			2,075			4,410			1,606			4,493			4,643			20,863			4,364			6,016
Equity in net income or loss of investment funds accounted for using the equity method and other income	18,945			(355		)	(26,110		)	(11,545		)	(3,368		)	(15,012		)	(37,819		)	(74,985		)	(80,662		)	18,590			(18,380		)
Share-based compensation	13,877			5,628			5,615			6,074			12,280			7,096			6,199			6,576			9,949			19,505			19,376
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	130,746			155,477			3,546			49,420			71,357			91,247			50,992			79,701			5,151			286,223			162,604
Unearned premiums, net of prepaid reinsurance premiums	63,987			130,136			(149,242		)	9,024			236			96,645			(188,951		)	(6,983		)	(4,775		)	194,123			96,881
Premiums receivable	(77,556		)	(118,688		)	157,034			63,197			(20,280		)	(116,571		)	99,023			41,108			(916		)	(196,244		)	(136,851		)
Deferred acquisition costs, net	(7,743		)	(22,518		)	18,910			47			2,038			(19,655		)	23,636			4,356			8,513			(30,261		)	(17,617		)
Reinsurance balances payable	23,109			(7,122		)	3,277			(4,853		)	19,267			(36,669		)	(1,467		)	(85		)	6,187			15,987			(17,402		)
Other liabilities	(26,613		)	33,366			(47,339		)	23,914			(57,219		)	41,448			(26,439		)	(5,849		)	5,189			6,753			(15,771		)
Other items, net	32,075			42,701			19,741			54,574			(4,252		)	(33,023		)	33,839			31,381			83,822			74,776			(37,275		)
Net Cash Provided By Operating Activities	221,967			224,580			144,513			267,424			205,514			184,623			183,983			290,119			223,742			446,547			390,137

Investing Activities
Purchases of:
Fixed maturity investments	(4,419,054		)	(3,250,938		)	(2,434,319		)	(5,018,619		)	(4,885,606		)	(4,597,713		)	(5,221,819		)	(6,675,195		)	(6,336,120		)	(7,669,992		)	(9,483,319		)
Equity securities	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(21,727		)	(52,283		)	(35,470		)	(34,532		)	—			(248,947		)	(74,010		)
Other investments	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(150,631		)	(132,819		)	(184,598		)	(8,528		)	(9,681		)	(207,365		)	(283,450		)
Proceeds from the sales of:
Fixed maturity investments	4,245,872			3,376,248			2,670,332			4,872,668			4,668,666			4,443,108			5,054,102			6,066,081			5,875,303			7,622,120			9,111,774
Equity securities	147,334			52,316			14,522			19,151			25,043			11,725			35,097			3,239			—			199,650			36,768
Other investments	116,760			84,920			133,211			68,843			87,536			89,510			200,912			79,378			(4,233		)	201,680			177,046
Proceeds from redemptions and maturities of fixed maturities	283,512			253,898			266,044			226,889			244,312			212,625			146,480			261,604			208,276			537,410			456,937
Net (purchases) sales of short-term investments	(276,391		)	(267,904		)	(129,794		)	(205,411		)	96,239			(102,921		)	129,070			(48,395		)	143,819			(544,295		)	(6,682		)
Change in investment of securities lending collateral	48,853			(125,904		)	131,389			10,385			(30,772		)	30,092			406,590			(51,692		)	323			(77,051		)	(680		)
Purchases of furniture, equipment and other	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(6,057		)	(1,803		)	(3,897		)	(4,067		)	(3,872		)	(12,348		)	(7,860		)
Net Cash Provided By (Used For) Investing Activities	(131,125		)	(68,013		)	276,028			(186,455		)	27,003			(100,479		)	526,467			(412,107		)	(126,185		)	(199,138		)	(73,476		)

Financing Activities
Purchases of common shares under share repurchase program	(29,552		)	(237,173		)	(258,150		)	(53,398		)	(269,054		)	(181,272		)	(358,656		)	(98,194		)	—			(266,725		)	(450,326		)
Proceeds from common shares issued, net	(1,397		)	2,875			4,693			8,586			3,779			10,591			9,194			2,152			308			1,478			14,370
Proceeds from borrowings	—			—			—			—			50,000			214,526			—			269,843			—			—			264,526
Repayments of borrowings	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(34,022		)	(86,317		)	(1,103		)	(50,000		)	—			(7,614		)	(120,339		)
Change in securities lending collateral	(48,853		)	125,904			(131,389		)	(10,385		)	30,772			(30,092		)	(406,590		)	51,692			(323		)	77,051			680
Other	2,467			714			(893		)	1,593			2,296			5,061			4,816			88			(1,291		)	3,181			7,357
Preferred dividends paid	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(12,922		)	(12,922		)
Net Cash Provided By (Used For) Financing Activities	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(222,690		)	(73,964		)	(758,800		)	169,120			(7,767		)	(205,551		)	(296,654		)

Effects of exchange rate changes on foreign currency cash	997			5,406			(526		)	9,270			(7,066		)	(6,043		)	(2,228		)	1,324			2,866			6,403			(13,109		)

Increase (decrease) in cash	4,124			44,137			(3,257		)	24,528			2,761			4,137			(50,578		)	48,456			92,656			48,261			6,898
Cash beginning of period	406,877			362,740			365,997			341,469			338,708			334,571			385,149			336,693			244,037			362,740			334,571
Cash end of period	$	411,001		$	406,877		$	362,740		$	365,997		341,469			$	338,708		$	334,571		$	385,149		$	336,693		$	411,001		$	341,469

Income taxes paid (received), net	$	2,296		$	3,670		$	3,140		$	1,928		$	1,430		$	704		$	5,021		$	4,234		$	19,887		$	5,966		$	2,134
Interest paid	$	13,084		$	2,191		$	12,831		$	1,832		$	13,437		$	1,785		$	12,556		$	529		$	11,312		$	15,275		$	15,222

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

The Company classifies its businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). The Company’s insurance and reinsurance operating segments each have segment 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, President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information.

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. 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 insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. Specialty product lines include: casualty; construction; executive assurance; healthcare; national accounts casualty; professional liability; programs; property, energy, marine and aviation; surety; travel and accident; and other (consisting of excess workers’ compensation, employers’ liability and collateral protection business).

The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance contracts. Classes of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of non-traditional, casualty clash and other business).

Corporate and other (non-underwriting) includes 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 (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, income taxes and dividends on the Company’s non-cumulative preferred shares.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Three Months Ended June 30, 2011 and 2010

(U.S. dollars in thousands)

	Three Months Ended									Three Months Ended
	June 30, 2011									June 30, 2010
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	635,005		$	277,766		$	911,939		$	616,353		$	203,695		$	817,100
Net premiums written	438,263			268,280			706,543			422,837			201,421			624,258

Net premiums earned	$	410,819		$	232,060		$	642,879		$	405,473		$	217,538		$	623,011
Fee income	702			82			784			874			9			883
Losses and loss adjustment expenses	(301,642		)	(129,980		)	(431,622		)	(275,294		)	(87,851		)	(363,145		)
Acquisition expenses, net	(66,543		)	(44,096		)	(110,639		)	(65,359		)	(42,116		)	(107,475		)
Other operating expenses	(76,765		)	(22,401		)	(99,166		)	(71,727		)	(19,303		)	(91,030		)
Underwriting income (loss)	$	(33,429	)	$	35,665		2,236			$	(6,033	)	$	68,277		62,244

Net investment income							86,671									90,537
Net realized gains							45,210									62,114
Net impairment losses recognized in earnings							(1,684		)							(4,410		)
Equity in net income of investment funds accounted for using the equity method							5,973									(348		)
Other income (loss)							(4,265		)							4,528
Other expenses							(11,397		)							(10,503		)
Interest expense							(7,758		)							(7,916		)
Net foreign exchange (losses) gains							(18,375		)							48,625
Income before income taxes							96,611									244,871
Income tax benefit (expense)							1,731									(1,420		)

Net income							98,342									243,451
Preferred dividends							(6,461		)							(6,461		)
Net income available to common shareholders							$	91,881								$	236,990

Underwriting Ratios
Loss ratio	73.4		%	56.0		%	67.1		%	67.9		%	40.4		%	58.3		%
Acquisition expense ratio (2)	16.0		%	19.0		%	17.1		%	15.9		%	19.4		%	17.1		%
Other operating expense ratio	18.7		%	9.7		%	15.4		%	17.7		%	8.9		%	14.6		%
Combined ratio	108.1		%	84.7		%	99.6		%	101.5		%	68.7		%	90.0		%

Net premiums written to gross premiums written	69.0		%	96.6		%	77.5		%	68.6		%	98.9		%	76.4		%

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

(2) The acquisition expense ratio is adjusted to include certain fee income.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Six Months Ended June 30, 2011 and 2010

(U.S. dollars in thousands)

	Six Months Ended									Six Months Ended
	June 30, 2011									June 30, 2010
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,269,588		$	608,779		$	1,876,505		1,249,929			527,172			1,770,787
Net premiums written	887,554			583,267			1,470,821			875,761			516,251			1,392,012

Net premiums earned	$	818,410		$	458,164		$	1,276,574		834,950			457,978			$	1,292,928
Fee income	1,480			119			1,599			1,627			50			1,677
Losses and loss adjustment expenses	(599,365		)	(326,137		)	(925,502		)	(587,305		)	(203,891		)	(791,196		)
Acquisition expenses, net	(127,958		)	(91,435		)	(219,393		)	(132,790		)	(92,309		)	(225,099		)
Other operating expenses	(151,502		)	(43,058		)	(194,560		)	(152,447		)	(39,701		)	(192,148		)
Underwriting income (loss)	$	(58,935	)	$	(2,347	)	(61,282		)	$	(35,965	)	$	122,127		86,162

Net investment income							174,978									183,509
Net realized gains							65,905									109,896
Net impairment losses recognized in earnings							(4,364		)							(6,016		)
Equity in net income of investment funds accounted for using the equity method							35,646									28,702
Other income							302									10,506
Other expenses							(18,423		)							(16,191		)
Interest expense							(15,479		)							(15,176		)
Net foreign exchange gains (losses)							(55,287		)							87,226
Income before income taxes							121,996									468,618
Income tax expense							2,102									(8,173		)

Net income							124,098									460,445
Preferred dividends							(12,922		)							(12,922		)
Net income available to common shareholders							$	111,176								$	447,523

Underwriting Ratios
Loss ratio	73.2		%	71.2		%	72.5		%	70.3		%	44.5		%	61.2		%
Acquisition expense ratio (2)	15.5		%	20.0		%	17.1		%	15.7		%	20.2		%	17.3		%
Other operating expense ratio	18.5		%	9.4		%	15.2		%	18.3		%	8.7		%	14.9		%
Combined ratio	107.2		%	100.6		%	104.8		%	104.3		%	73.4		%	93.4		%

Net premiums written to gross premiums written	69.9		%	95.8		%	78.4		%	70.1		%	97.9		%	78.6		%

(2) The acquisition expense ratio is adjusted to include certain fee income.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Property, energy, marine and aviation	$	103,296	23.6	$	88,194	20.9	$	179,714	20.2	$	188,859	21.6
Programs	81,629		18.6	73,345		17.3	156,025		17.6	143,843		16.4
Professional liability	57,906		13.2	70,626		16.7	127,242		14.3	137,744		15.7
Executive assurance	53,974		12.3	52,514		12.4	100,091		11.3	113,507		13.0
National accounts casualty	4,397		1.0	3,877		0.9	44,588		5.0	34,686		4.0
Construction	42,408		9.7	44,276		10.5	73,917		8.3	72,568		8.3
Casualty	24,939		5.7	26,617		6.3	55,073		6.2	52,080		5.9
Travel and accident	19,284		4.4	15,272		3.6	40,785		4.6	37,078		4.2
Lenders products	21,526		4.9	22,208		5.3	42,600		4.8	38,527		4.4
Healthcare	8,422		1.9	9,989		2.4	17,539		2.0	18,513		2.1
Surety	9,618		2.2	7,012		1.7	19,352		2.2	15,103		1.7
Other (1)	10,864		2.5	8,907		2.0	30,628		3.5	23,253		2.7
Total	$	438,263	100.0	$	422,837	100.0	$	887,554	100.0	$	875,761	100.0

Net premiums earned
Property, energy, marine and aviation	$	76,644	18.7	$	80,818	19.9	$	150,243	18.4	$	175,855	21.1
Programs	71,934		17.5	68,381		16.9	138,952		17.0	134,540		16.1
Professional liability	57,767		14.1	63,642		15.7	132,011		16.1	131,551		15.8
Executive assurance	60,488		14.7	54,958		13.6	108,214		13.2	111,190		13.3
National accounts casualty	18,166		4.4	16,810		4.1	39,328		4.8	38,583		4.6
Construction	27,214		6.6	27,982		6.9	55,605		6.8	56,893		6.8
Casualty	24,829		6.0	28,148		6.9	53,256		6.5	56,217		6.7
Travel and accident	19,455		4.7	17,590		4.3	35,054		4.3	33,668		4.0
Lenders products	19,966		4.9	17,153		4.2	38,202		4.7	33,960		4.1
Healthcare	9,089		2.2	10,340		2.6	17,741		2.2	20,283		2.4
Surety	9,402		2.3	8,023		2.0	19,181		2.3	18,281		2.2
Other (1)	15,865		3.9	11,628		2.9	30,623		3.7	23,929		2.9
Total	$	410,819	100.0	$	405,473	100.0	$	818,410	100.0	$	834,950	100.0

Net premiums written by client location
United States	$	324,177	74.0	$	321,656	76.1	$	629,393	70.9	$	624,824	71.3
Europe	59,797		13.6	60,974		14.4	159,888		18.0	163,463		18.7
Other	54,289		12.4	40,207		9.5	98,273		11.1	87,474		10.0
Total	$	438,263	100.0	$	422,837	100.0	$	887,554	100.0	$	875,761	100.0

Net premiums written by underwriting location
United States	$	301,782	68.9	$	305,630	72.3	$	596,825	67.2	$	608,067	69.4
Europe	104,884		23.9	90,663		21.4	240,420		27.1	224,402		25.6
Other	31,597		7.2	26,544		6.3	50,309		5.7	43,292		5.0
Total	$	438,263	100.0	$	422,837	100.0	$	887,554	100.0	$	875,761	100.0

(1) Includes excess workers’ compensation and employers liability business.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Gross premiums written	$	635,005		$	634,583		$	527,783		$	624,490		$	616,353		$	633,576		$	563,087		$	673,986		$	636,645		$	1,269,588		$	1,249,929
Net premiums written	438,263			449,291			351,841			431,361			422,837			452,924			369,704			473,676			419,318			887,554			875,761

Net premiums earned	$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	443,319		$	417,454		$	818,410		$	834,950
Fee income	702			778			761			864			874			753			883			814			795			1,480			1,627
Losses and loss adjustment expenses	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(275,294		)	(312,011		)	(278,746		)	(303,304		)	(287,350		)	(599,365		)	(587,305		)
Acquisition expenses, net	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(65,359		)	(67,431		)	(60,926		)	(60,964		)	(58,748		)	(127,958		)	(132,790		)
Other operating expenses	(76,765		)	(74,737		)	(82,879		)	(77,078		)	(71,727		)	(80,720		)	(75,144		)	(72,452		)	(70,836		)	(151,502		)	(152,447		)
Underwriting income (loss)	$	(33,429	)	$	(25,506	)	$	(5,793	)	$	2,947		$	(6,033	)	$	(29,932	)	$	12,716		$	7,413		$	1,315		$	(58,935	)	$	(35,965	)

Underwriting Ratios
Loss ratio	73.4		%	73.0		%	65.5		%	64.4		%	67.9		%	72.6		%	65.3		%	68.4		%	68.8		%	73.2		%	70.3		%
Acquisition expense ratio (1)	16.0		%	14.9		%	15.4		%	16.1		%	15.9		%	15.5		%	14.1		%	13.6		%	13.9		%	15.5		%	15.7		%
Other operating expense ratio	18.7		%	18.3		%	20.5		%	18.7		%	17.7		%	18.8		%	17.6		%	16.3		%	17.0		%	18.5		%	18.3		%
Combined ratio	108.1		%	106.2		%	101.4		%	99.2		%	101.5		%	106.9		%	97.0		%	98.3		%	99.7		%	107.2		%	104.3		%

Net premiums written
Property, energy, marine and aviation	$	103,296		$	76,418		$	44,258		$	88,412		$	88,194		$	100,665		$	42,811		$	118,536		$	86,385		$	179,714		$	188,859
Programs	81,629			74,396			60,969			68,264			73,345			70,498			60,685			66,964			72,279			156,025			143,843
Professional liability	57,906			69,336			51,559			78,873			70,626			67,118			64,385			72,566			63,314			127,242			137,744
Executive assurance	53,974			46,117			54,448			51,503			52,514			60,993			58,561			58,529			52,919			100,091			113,507
National accounts casualty	4,397			40,191			14,024			19,215			3,877			30,809			16,553			30,726			7,582			44,588			34,686
Construction	42,408			31,509			20,014			20,245			44,276			28,292			20,227			30,259			50,649			73,917			72,568
Casualty	24,939			30,134			27,389			28,493			26,617			25,463			23,037			26,753			27,217			55,073			52,080
Travel and accident	19,284			21,501			14,486			19,673			15,272			21,806			15,528			15,998			19,557			40,785			37,078
Lenders products	21,526			21,074			30,942			23,452			22,208			16,319			34,150			14,774			13,188			42,600			38,527
Healthcare	8,422			9,117			10,290			8,705			9,989			8,524			10,610			10,854			9,667			17,539			18,513
Surety	9,618			9,734			7,918			11,128			7,012			8,091			10,716			12,025			9,254			19,352			15,103
Other (2)	10,864			19,764			15,544			13,398			8,907			14,346			12,441			15,692			7,307			30,628			23,253
Total	$	438,263		$	449,291		$	351,841		$	431,361		$	422,837		$	452,924		$	369,704		$	473,676		$	419,318		$	887,554		$	875,761

Net premiums earned
Property, energy, marine and aviation	$	76,644		$	73,599		$	77,811		$	82,301		$	80,818		$	95,037		$	91,549		$	94,471		$	78,570		$	150,243		$	175,855
Programs	71,934			67,018			69,462			68,404			68,381			66,159			67,672			69,436			71,809			138,952			134,540
Professional liability	57,767			74,244			63,152			69,900			63,642			67,909			64,987			63,368			62,655			132,011			131,551
Executive assurance	60,488			47,726			55,270			51,675			54,958			56,232			56,764			56,094			52,288			108,214			111,190
National accounts casualty	18,166			21,162			17,360			18,595			16,810			21,773			19,606			19,969			13,079			39,328			38,583
Construction	27,214			28,391			26,837			25,664			27,982			28,911			31,491			36,667			37,258			55,605			56,893
Casualty	24,829			28,427			25,893			27,503			28,148			28,069			27,198			30,004			31,246			53,256			56,217
Travel and accident	19,455			15,599			15,705			17,418			17,590			16,078			16,580			18,193			18,198			35,054			33,668
Lenders products	19,966			18,236			19,617			17,593			17,153			16,807			17,201			15,353			15,233			38,202			33,960
Healthcare	9,089			8,652			9,701			9,738			10,340			9,943			9,886			12,303			10,830			17,741			20,283
Surety	9,402			9,779			9,810			9,876			8,023			10,258			11,448			12,239			12,141			19,181			18,281
Other (2)	15,865			14,758			13,657			13,214			11,628			12,301			12,268			15,222			14,147			30,623			23,929
Total	$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	443,319		$	417,454		$	818,410		$	834,950

(1) The acquisition expense ratio is adjusted to include certain fee income.

(2) Includes excess workers’ compensation and employers liability business.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Casualty (1)	$	40,755	15.2	$	43,642	21.7	$	112,116	19.2	$	116,224	22.5
Property excluding property catastrophe (2)	53,938		20.1	57,880		28.7	125,088		21.4	132,807		25.7
Other specialty	43,937		16.4	18,920		9.4	121,582		20.8	73,682		14.3
Property catastrophe	108,235		40.3	70,403		35.0	175,196		30.0	159,205		30.8
Marine and aviation	19,978		7.4	9,609		4.8	44,142		7.6	30,847		6.0
Other	1,437		0.6	967		0.4	5,143		1.0	3,486		0.7
Total	$	268,280	100.0	$	201,421	100.0	$	583,267	100.0	$	516,251	100.0

Net premiums earned
Casualty (1)	$	51,493	22.2	$	59,501	27.4	$	99,987	21.8	$	129,937	28.4
Property excluding property catastrophe (2)	57,524		24.8	65,742		30.2	120,530		26.3	144,981		31.7
Other specialty	40,511		17.5	22,292		10.2	79,480		17.3	40,061		8.7
Property catastrophe	59,788		25.8	52,301		24.0	111,430		24.3	106,174		23.2
Marine and aviation	21,093		9.1	16,263		7.5	42,719		9.3	34,335		7.5
Other	1,651		0.6	1,439		0.7	4,018		1.0	2,490		0.5
Total	$	232,060	100.0	$	217,538	100.0	$	458,164	100.0	$	457,978	100.0

Net premiums written
Pro rata	$	105,036	39.2	$	84,957	42.2	$	210,528	36.1	$	202,994	39.3
Excess of loss	163,244		60.8	116,464		57.8	372,739		63.9	313,257		60.7
Total	$	268,280	100.0	$	201,421	100.0	$	583,267	100.0	$	516,251	100.0

Net premiums earned
Pro rata	$	103,967	44.8	$	102,374	47.1	$	210,620	46.0	$	233,245	50.9
Excess of loss	128,093		55.2	115,164		52.9	247,544		54.0	224,733		49.1
Total	$	232,060	100.0	$	217,538	100.0	$	458,164	100.0	$	457,978	100.0

Net premiums written by client location
United States	$	169,116	63.0	$	135,374	67.2	$	336,331	57.7	$	306,375	59.3
Europe	50,382		18.8	33,378		16.6	176,082		30.2	140,520		27.2
Bermuda	22,786		8.5	23,022		11.4	27,165		4.7	45,697		8.9
Other	25,996		9.7	9,647		4.8	43,689		7.4	23,659		4.6
Total	$	268,280	100.0	$	201,421	100.0	$	583,267	100.0	$	516,251	100.0

Net premiums written by underwriting location
Bermuda	$	175,018	65.2	$	116,568	57.9	$	321,614	55.1	$	281,502	54.5
United States	76,609		28.6	70,295		34.9	190,365		32.6	174,021		33.7
Other	16,653		6.2	14,558		7.2	71,288		12.3	60,728		11.8
Total	$	268,280	100.0	$	201,421	100.0	$	583,267	100.0	$	516,251	100.0

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

(2) Includes facultative business.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

Gross premiums written	$	277,766		$	331,013		$	139,015		$	208,770		$	203,695		$	323,477		$	159,229		$	266,193		$	278,389		$	608,779		$	527,172
Net premiums written	268,280			314,987			131,070			204,756			201,421			314,830			149,383			253,632			274,536			583,267			516,251

Net premiums earned	$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	291,066		$	281,804		$	458,164		$	457,978
Fee income	82			37			2,053			10			9			41			11			12			22			119			50
Losses and loss adjustment expenses	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(87,851		)	(116,040		)	(131,614		)	(141,610		)	(111,508		)	(326,137		)	(203,891		)
Acquisition expenses, net	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(42,116		)	(50,193		)	(59,623		)	(61,775		)	(65,066		)	(91,435		)	(92,309		)
Other operating expenses	(22,401		)	(20,657		)	(31,575		)	(20,247		)	(19,303		)	(20,398		)	(24,161		)	(21,271		)	(16,943		)	(43,058		)	(39,701		)
Underwriting income (loss)	$	35,665		$	(38,012	)	$	54,149		$	57,539		$	68,277		$	53,850		$	66,502		$	66,422		$	88,309		$	(2,347	)	$	122,127

Underwriting Ratios
Loss ratio	56.0		%	86.8		%	45.0		%	43.5		%	40.4		%	48.3		%	46.7		%	48.7		%	39.6		%	71.2		%	44.5		%
Acquisition expense ratio	19.0		%	20.9		%	18.3		%	20.4		%	19.4		%	20.9		%	21.2		%	21.2		%	23.1		%	20.0		%	20.2		%
Other operating expense ratio	9.7		%	9.1		%	13.9		%	9.4		%	8.9		%	8.5		%	8.6		%	7.3		%	6.0		%	9.4		%	8.7		%
Combined ratio	84.7		%	116.8		%	77.2		%	73.3		%	68.7		%	77.7		%	76.5		%	77.2		%	68.7		%	100.6		%	73.4		%

Net premiums written
Casualty (1)	$	40,755		$	71,361		$	32,274		$	38,276		$	43,642		$	72,582		$	68,693		$	85,084		$	72,490		$	112,116		$	116,224
Property excluding property catastrophe (2)	53,938			71,150			46,835			70,149			57,880			74,927			49,413			90,845			90,569			125,088			132,807
Other specialty	43,937			77,645			27,008			30,468			18,920			54,762			10,578			10,595			3,304			121,582			73,682
Property catastrophe	108,235			66,961			3,529			40,255			70,403			88,802			3,022			50,539			91,981			175,196			159,205
Marine and aviation	19,978			24,164			21,303			24,913			9,609			21,238			17,576			16,187			15,391			44,142			30,847
Other	1,437			3,706			121			695			967			2,519			101			382			801			5,143			3,486
Total	$	268,280		$	314,987		$	131,070		$	204,756		$	201,421		$	314,830		$	149,383		$	253,632		$	274,536		$	583,267		$	516,251

Net premiums earned
Casualty (1)	$	51,493		$	48,494		$	48,609		$	52,792		$	59,501		$	70,436		$	86,193		$	88,721		$	84,078		$	99,987		$	129,937
Property excluding property catastrophe (2)	57,524			63,006			70,744			66,438			65,742			79,239			94,716			94,837			87,304			120,530			144,981
Other specialty	40,511			38,969			30,296			25,254			22,292			17,769			24,085			23,251			25,912			79,480			40,061
Property catastrophe	59,788			51,642			54,768			54,206			52,301			53,873			56,937			61,772			58,763			111,430			106,174
Marine and aviation	21,093			21,626			22,445			16,106			16,263			18,072			18,882			21,666			25,063			42,719			34,335
Other	1,651			2,367			1,009			732			1,439			1,051			1,076			819			684			4,018			2,490
Total	$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	291,066		$	281,804		$	458,164		$	457,978

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

(2) Includes facultative business.

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Investable Asset Summary, Investment Portfolio Metrics and Credit Quality Distribution

(U.S. dollars in thousands)

	June 30,					March 31,					December 31,					September 30,					June 30,
	2011					2011					2010					2010					2010
Investable assets:
Fixed maturities available for sale, at fair value	$	9,247,002		77	%	$	8,916,017		76	%	$	8,957,859		76	%	$	9,692,852		80	%	$	9,326,574		80	%
Fixed maturities, at fair value (1)	102,897			1	%	117,391			1	%	124,969			1	%	117,250			1	%	101,882			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	150,501			1	%	161,888			1	%	75,575			1	%	184,226			2	%	195,372			2	%
Total fixed maturities	9,500,400			79	%	9,195,296			78	%	9,158,403			78	%	9,994,328			83	%	9,623,828			83	%
Short-term investments available for sale, at fair value	704,495			6	%	1,130,142			10	%	915,841			8	%	780,671			6	%	554,304			5	%
Short-term investments pledged under securities lending agreements, at fair value (2)	—			0	%	36,530			0	%	—			0	%	18,995			0	%	19,192			0	%
Cash	411,001			3	%	406,877			3	%	362,740			3	%	365,997			3	%	341,469			3	%
Equity securities available for sale, at fair value	320,434			3	%	361,639			3	%	310,194			3	%	79,805			1	%	38,879			0	%
Equity securities, at fair value (1)	152,844			1	%	100,117			1	%	94,204			1	%	58,591			0	%	38,659			0	%
Other investments available for sale, at fair value	299,845			2	%	293,073			2	%	275,538			2	%	229,488			3	%	211,241			2	%
Other investments, at fair value (1)	66,049			1	%	39,106			0	%	—			—		—			—		—			—
TALF investments, at fair value (3)	399,341			3	%	400,970			3	%	402,449			3	%	410,881			3	%	407,469			4	%
Investments accounted for using the equity method	399,968			3	%	449,206			4	%	508,334			4	%	500,737			4	%	474,971			4	%
Securities sold but not yet purchased	(51,626		)	0	%	(41,863		)	0	%	(41,143		)	(1	)%	(17,792		)	0	%	(14,750		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(104,856		)	(1	)%	(516,682		)	(4	)%	(144,047		)	(1	)%	(319,954		)	(3	)%	(108,059		)	(1	)%
Total investable assets (2)	$	12,097,895		100	%	$	11,854,411		100	%	$	11,842,513		100	%	$	12,101,747		100	%	$	11,587,203		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	2.87					2.73					2.83					3.11					2.90
Average credit quality	AA+					AA+					AA+					AA+					AA+
Imbedded book yield (before investment expenses)	3.23		%			3.36		%			3.52		%			3.53		%			3.39		%

Credit quality distribution of total fixed maturities (2) (4):
AAA	6,503,536			68	%	$	6,435,249		70	%	$	6,531,757		71	%	$	7,503,390		75	%	$	7,278,291		76	%
AA	1,194,430			13	%	1,043,463			11	%	1,053,666			12	%	993,018			10	%	1,011,324			10	%
A	765,831			7	%	697,002			7	%	605,483			7	%	573,298			6	%	543,359			6	%
BBB	472,491			5	%	425,913			5	%	388,564			4	%	347,810			4	%	274,738			3	%
BB	158,517			2	%	154,537			2	%	133,673			1	%	132,618			1	%	109,407			1	%
B	241,538			3	%	250,318			3	%	242,479			3	%	223,582			2	%	202,476			2	%
Lower than B	97,748			1	%	100,409			1	%	109,596			1	%	115,686			1	%	117,419			1	%
Not rated	66,309			1	%	88,405			1	%	93,185			1	%	104,926			1	%	86,814			1	%
Total fixed maturities, at fair value	$	9,500,400		100	%	$	9,195,296		100	%	$	9,158,403		100	%	$	9,994,328		100	%	$	9,623,828		100	%

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

(2) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending. This table excludes the collateral received and reinvested and includes the fixed maturities and short-term investments pledged under securities lending agreements, at fair value.

(3) The Company participates in the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”), which provides secured financing for asset-backed securities backed by certain types of consumer and small-business loans and legacy commercial mortgage-backed securities. TALF financing is non-recourse to the Company, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. The Company can deliver the collateralized securities to the Federal Reserve in full payment of the loan and is carrying the investments and borrowings at fair value.

(4) Ratings as assigned by the major rating agencies.

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Fixed Maturities and Analysis of Corporate Exposures

(U.S. dollars in thousands)

Composition of Fixed Maturities

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements, excluding TALF investments, at June 30, 2011:

			Gross		Gross			Net
	Fair		Unrealized		Unrealized			Unrealized			Amortized		Fair Value /
	Value		Gains		Losses			Gains (Losses)			Cost		Amortized Cost

Corporates	$	2,559,195	$	95,159	$	(8,552	)	$	86,607		$	2,472,588	103.5	%
Non-U.S. government-backed corporates	274,082		10,154		(327		)	9,827			264,255		103.7	%
FDIC guaranteed corporates	116,638		2,479		—			2,479			114,159		102.2	%
U.S. government and government agencies	1,166,222		16,925		(6,033		)	10,892			1,155,330		100.9	%
Agency mortgage-backed securities	1,295,571		14,932		(2,691		)	12,241			1,283,330		101.0	%
Non-agency mortgage-backed securities	244,952		4,235		(15,324		)	(11,089		)	256,041		95.7	%
Agency commercial mortgage-backed securities	418,857		14,129		(257		)	13,872			404,985		103.4	%
Non-agency commercial mortgage-backed securities	771,201		13,192		(3,164		)	10,028			761,173		101.3	%
Municipal bonds	1,141,706		51,558		(1,757		)	49,801			1,091,905		104.6	%
Non-U.S. government securities	775,380		45,346		(6,742		)	38,604			736,776		105.2	%
Asset-backed securities	736,596		26,023		(2,457		)	23,566			713,030		103.3	%
Total	$	9,500,400	$	294,132	$	(47,304	)	$	246,828		$	9,253,572	102.7	%

Corporates (Excluding Guaranteed Amounts)

The following table summarizes the Company’s corporate bonds by sector and by credit quality at June 30, 2011, excluding guaranteed amounts:

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Financials	$	1,264,242	49.4	%	10.5	%
Industrials	833,908		32.6	%	6.9	%
Utilities	89,614		3.5	%	0.7	%
Foreign agencies	75,120		2.9	%	0.6	%
All other (1)	296,311		11.6	%	2.4	%
Total	$	2,559,195	100.0	%	21.2	%

Credit quality distribution (2):
AAA	$	627,761	24.5	%	5.2	%
AA	470,311		18.4	%	3.9	%
A	608,045		23.8	%	5.0	%
BBB	418,519		16.4	%	3.5	%
BB	146,380		5.7	%	1.2	%
B	208,868		8.2	%	1.7	%
Lower than B	11,002		0.4	%	0.1	%
Not rated	68,309		2.6	%	0.6	%
Total	$	2,559,195	100.0	%	21.2	%

(1) Includes sovereign securities, supernational securities and other.

(2) Ratings as assigned by the major rating agencies.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at June 30, 2011, excluding guaranteed amounts:

	Estimated		% of Asset		% of Investable		Credit
Issuer	Fair Value		Class		Assets		Rating (2)

JPMorgan Chase & Co	$	60,021	2.3	%	0.5	%	A+
General Electric Co	57,950		2.3	%	0.5	%	AA+
MetLife Inc	36,136		1.4	%	0.3	%	A+
Banco Santander SA	35,869		1.4	%	0.3	%	AA
Wells Fargo & Company	30,710		1.2	%	0.3	%	AA-
National Australia Bank Limited	29,502		1.2	%	0.2	%	AA
Bank of America Corp	27,939		1.1	%	0.2	%	A
Total SA	26,552		1.0	%	0.2	%	AA-
Royal Dutch Shell PLC	26,111		1.0	%	0.2	%	AA
Australia & New Zealand Banking Group Ltd	25,497		1.0	%	0.2	%	AA
Total	$	356,287	13.9	%	2.9	%

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Mortgage-Backed, Commercial Mortgage-Backed and Asset-Backed Securities

(U.S. dollars in thousands)

The following table provides information on the Company’s mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) at June 30, 2011, excluding amounts guaranteed by the U.S. government:

				Average	Fair Value
	Issuance	Amortized		Credit			% of Amortized		% of Investable
	Year	Cost		Quality	Total		Cost		Assets

Non-agency MBS:	2003	$	2,633	AAA	$	2,642	100.3	%	0.0	%
	2004	16,729		A-	15,432		92.2	%	0.1	%
	2005	54,185		BB+	49,910		92.1	%	0.4	%
	2006	33,494		B-	29,948		89.4	%	0.2	%
	2007	47,664		CCC+	44,323		93.0	%	0.4	%
	2008	8,354		CCC	7,912		94.7	%	0.1	%
	2009 (6)	50,114		AAA	52,639		105.0	%	0.4	%
	2010 (6)	42,868		AAA	42,146		98.3	%	0.3	%
Total non-agency MBS		$	256,041	BBB+	$	244,952	95.7	%	2.0	%

Non-agency CMBS:	1998	$	3,562	AAA	$	3,662	102.8	%	0.0	%
	1999	26		AAA	25		96.2	%	0.0	%
	2001	671		AAA	660		98.4	%	0.0	%
	2002	35,532		AAA	35,931		101.1	%	0.3	%
	2003	52,628		AAA	54,976		104.5	%	0.5	%
	2004	39,967		AAA	40,157		100.5	%	0.3	%
	2005	50,506		AAA	50,472		99.9	%	0.4	%
	2006	6,804		A	6,777		99.6	%	0.1	%
	2007	72,054		AA+	77,662		107.8	%	0.6	%
	2008	197		AA+	192		97.5	%	0.0	%
	2010	238,693		AAA	239,422		100.3	%	2.0	%
	2011	260,533		AAA	261,265		100.3	%	2.2	%
Total non-agency CMBS		$	761,173	AAA	$	771,201	101.3	%	6.4	%

	Non-Agency MBS				Non-Agency
Additional Statistics	Re-REMICs		All Other		CMBS (1)

Wtd. average loan age (months)	60		66		41
Wtd. average life (months) (2)	27		61		44
Wtd. average loan-to-value % (3)	70.3	%	65.5	%	69.0	%
Total delinquencies (4)	19.8	%	21.6	%	4.1	%
Current credit support % (5)	33.5	%	15.3	%	26.1	%

(1) Loans defeased with government/agency obligations represented approximately 4% of the collateral underlying the Company’s CMBS holdings.

(2) The weighted average life for MBS is based on the interest rates in effect at June 30, 2011. The weighted average life for CMBS reflects the average life of the collateral underlying the Company’s CMBS holdings.

(3) The range of loan-to-values on MBS is 33.1% to 87.3%, while the range of loan-to-values on CMBS is 30.6% to 99.7%.

(4) Total delinquencies includes 60 days and over.

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

(6) Primarily represents Re-REMICs issued in 2009 and 2010 with an average credit quality of “AAA” from Fitch ratings.

The following table provides information on the Company’s asset-backed securities (ABS) June 30, 2011:

			Average	Fair Value
	Amortized		Credit			% of Amortized		% of Investable
	Cost		Quality	Total		Cost		Assets

Sector:
Credit cards (1)	$	280,605	AAA	$	293,935	104.8	%	2.4	%
Autos (2)	160,419		AAA	163,711		102.1	%	1.4	%
U.K. securitized (3)	92,720		AAA	95,230		102.7	%	0.8	%
Student loans (4)	45,585		AAA	46,339		101.7	%	0.4	%
Rate reduction bonds (5)	31,639		AAA	33,612		106.2	%	0.3	%
Other	87,232		AA	87,784		100.6	%	0.7	%
	698,200		AAA	720,611		103.2	%	6.0	%

Home equity (6)	$	4,698	AAA	$	4,262	90.7	%	0.0	%
	121		A	119		98.3	%	0.0	%
	8,183		BB to B	8,028		98.1	%	0.1	%
	1,643		CCC to C	3,513		213.8	%	0.0	%
	185		D	63		34.1	%	0.0	%
	14,830		BB	15,985		107.8	%	0.1	%

Total ABS	$	713,030	AAA	$	736,596	103.3	%	6.1	%

The effective duration of the total ABS was 1.2 years at June 30, 2011.

(1) The weighted average credit support % on credit cards is 19.4%.

(2) The weighted average credit support % on autos is 38.5%.

(3) The weighted average credit support % on U.K. securitized is 16.8%.

(4) The weighted average credit support % on student loans is 9.0%.

(5) The weighted average credit support % on rate reduction bonds is 19.3%.

(6) The weighted average credit support % on home equity is 23.0%.

The Company’s investment portfolio included $44.2 million par in sub-prime securities at June 30, 2011, with an estimated market value of $20.7 million and an average credit quality of “Ba2/BBB.” Such amounts were primarily in the home equity sector with the balance in other ABS, MBS and CMBS sectors. In addition, the portfolio of collateral backing the Company’s securities lending program contains approximately $9.5 million estimated market value of sub-prime securities with an average credit quality of “CCC” from Standard & Poors and “Caa3” from Moody’s.

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Bank Loan Investments

(U.S. dollars in thousands)

The Company’s investments in bank loans are included in the following categories at June 30, 2011:

	Carrying		% of Asset		% of Investable
	Value		Class		Assets

Investment funds accounted for using the equity method	$	156,355	47.9	%	1.3	%
Corporate bonds	103,874		31.8	%	0.9	%
Other investments	66,049		20.3	%	0.5	%
Total	$	326,278	100.0	%	2.7	%

The following table summarizes the Company’s bank loans by currency (translated into U.S. Dollars) at June 30, 2011:

	Carrying		% of Asset		% of Investable
	Value		Class		Assets

U.S.-denominated	$	220,389	67.5	%	1.8	%
Euro-denominated	105,889		32.5	%	0.9	%
Total	$	326,278	100.0	%	2.7	%

The following table summarizes the Company’s bank loans by major sector at June 30, 2011:

	Carrying		% of Asset		% of Investable
	Value		Class		Assets
Sector:
Consumer cyclical	$	68,860	21.1	%	0.6	%
Industrials	50,167		15.4	%	0.4	%
Media	44,536		13.6	%	0.4	%
Consumer non-cyclical	26,018		8.0	%	0.2	%
Basic materials	25,583		7.8	%	0.2	%
Utilities	22,387		6.9	%	0.2	%
All other	88,727		27.2	%	0.7	%
Total	$	326,278	100.0	%	2.7	%

Weighted average rating factor (Moody’s)	B2

Arch Capital Group Ltd. and Subsidiaries

Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to common shareholders, which is defined as net income available to common shareholders, excluding 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 and net foreign exchange gains or losses, net of income taxes. The presentation of after-tax operating income available to common shareholders is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on the following page.

The Company believes that 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 and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of net impairment losses included in earnings, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, net impairment losses included in earnings represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Due to these reasons, the Company excludes 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 and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

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

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation

(U.S. dollars in thousands, except share data)

The following table provides a reconciliation of after-tax operating income available to common shareholders to net income available to common shareholders along with related per common share results:

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

After-tax operating income available to common shareholders	$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		$	160,332		$	163,041		$	69,337		$	230,913
Net realized gains (losses), net of tax	44,799			21,585			71,821			68,611			61,119			45,503			88,592			69,190			(11,243		)	66,384			106,622
Net impairment losses recognized in earnings, net of tax	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(4,643		)	(20,786		)	(4,364		)	(6,016		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			69,119			75,890			35,646			28,702
Net foreign exchange (losses) gains, net of tax	(18,685		)	(37,142		)	6,581			(65,346		)	48,447			38,855			8,775			(19,591		)	(54,773		)	(55,827		)	87,302
Net income available to common shareholders	$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	274,407		$	152,129		$	111,176		$	447,523

Diluted per common share results:
After-tax operating income available to common shareholders	$	0.45		$	0.06		$	0.86		$	0.85		$	0.83		$	0.59		$	0.89		$	0.85		$	0.87		$	0.50		$	1.42
Net realized gains (losses), net of tax	0.32			0.15			0.48			0.45			0.38			0.27			0.49			0.37			(0.06		)	0.48			0.65
Net impairment losses recognized in earnings, net of tax	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.03		)	(0.01		)	(0.03		)	(0.03		)	(0.11		)	(0.03		)	(0.04		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	0.04			0.21			0.15			0.06			0.00			0.18			0.18			0.37			0.40			0.25			0.18
Net foreign exchange (losses) gains, net of tax	(0.13		)	(0.26		)	0.04			(0.43		)	0.30			0.23			0.05			(0.10		)	(0.29		)	(0.40		)	0.53
Net income available to common shareholders	$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	1.46		$	0.81		$	0.80		$	2.74

Weighted average common shares and common share equivalents outstanding — diluted	137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			187,601,448			187,878,951			139,234,931			163,160,070

Arch Capital Group Ltd. and Subsidiaries

Share Repurchase Activity

(U.S. dollars in thousands, except share data)

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

	Three Months Ended																		Cumulative
	June 30,		March 31,		December 31,		September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		June 30,
	2011		2011		2010		2010		2010		2010		2009		2009		2009		2011

Effect of share repurchases:
Aggregate cost of shares repurchased	$	29,552	$	237,173	$	258,151	$	53,398	$	269,054	$	181,272	$	358,655	$	98,194	$	0	$	2,537,197
Shares repurchased	881,961		8,062,383		8,679,051		2,043,195		10,932,681		7,589,739		15,444,813		4,599,741		—		104,102,346
Average price per share repurchased	$	33.51	$	29.42	$	29.74	$	26.13	$	24.61	$	23.88	$	23.22	$	21.35			$	24.37

Average book value per common share (1)	$	30.67	$	30.17	$	29.87	$	28.55	$	26.50	$	24.99	$	23.75	$	21.71	$	19.23

Average repurchase price-to-book multiple	1.09x		0.98x		1.00x		0.92x		0.93x		0.96x		0.98x		0.98x

Remaining share repurchase authorization (2)	$	962,803

(1)	Equals average of beginning and ending book value per common share for each period presented.
(2)	Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2012.

Arch Capital Group Ltd. and Subsidiaries

Annualized Operating Return on Average Common Equity

(U.S. dollars in thousands)

The following table provides the calculation of annualized operating return on average common equity:

	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009			2011			2010

After-tax operating income available to common shareholders	$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		$	160,332		$	163,041		$	69,337		$	230,913
Annualized after-tax operating income available to common shareholders (a)	$	245,912		$	31,436		$	517,956		$	522,688		$	528,728		$	394,924		$	637,724		$	641,328		$	652,164		$	138,674		$	461,826

Beginning common shareholders’ equity	$	4,000,535		$	4,188,003		$	4,392,910		$	4,073,003		$	4,053,757		$	3,998,349		$	4,135,822		$	3,704,968		$	3,305,396		$	4,188,003		$	3,998,349
Ending common shareholders’ equity	4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349			4,135,822			3,704,968			4,116,269			4,073,003
Average common shareholders’ equity (b)	$	4,058,402		$	4,094,269		$	4,290,457		$	4,232,957		$	4,063,380		$	4,026,053		$	4,067,086		$	3,920,395		$	3,505,182		$	4,152,136		$	4,035,676

Annualized operating return on average common equity (a)/(b)	6.1		%	0.8		%	12.1		%	12.3		%	13.0		%	9.8		%	15.7		%	16.4		%	18.6		%	3.3		%	11.4		%

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

(U.S. dollars in thousands, except share data)

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

	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,
	2011			2011			2010			2010			2010			2010			2009			2009			2009
Debt:
Senior notes, due May 1, 2034 (7.35%)	$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000
Revolving credit agreement borrowings, due August 30, 2011 (variable)	100,000			100,000			100,000			125,000			125,000			100,000			100,000			100,000			100,000
Total debt	$	400,000		$	400,000		$	400,000		$	425,000		$	425,000		$	400,000		$	400,000		$	400,000		$	400,000

Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%) (1)	$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000
Series B non-cumulative preferred shares (7.875%) (2)	125,000			125,000			125,000			125,000			125,000			125,000			125,000			125,000			125,000
Preferred shareholders’ equity	325,000			325,000			325,000			325,000			325,000			325,000			325,000			325,000			325,000
Common shareholders’ equity (a)	4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349			4,135,822			3,704,968
Total shareholders’ equity	$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349		$	4,460,822		$	4,029,968

Total capital	$	4,841,269		$	4,725,535		$	4,913,003		$	5,142,910		$	4,823,003		$	4,778,757		$	4,723,349		$	4,860,822		$	4,429,968

TALF non-recourse borrowings, at market value, due between 2012 to 2015 (various) (3)	318,441			322,222			325,770			331,797			336,213			346,746			217,565			219,843			—

Total capital and TALF non-recourse borrowings	$	5,159,710		$	5,047,757		$	5,238,773		$	5,474,707		$	5,159,216		$	5,125,503		$	4,940,914		$	5,080,665		$	4,429,968

Common shares outstanding, net of treasury shares (b)	132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802			164,285,034			178,572,927			182,942,418

Book value per common share (4) (a)/(b)	$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64		$	24.34		$	23.16		$	20.25

Leverage ratios:
Senior notes/total capital	6.2		%	6.3		%	6.1		%	5.8		%	6.2		%	6.3		%	6.4		%	6.2		%	6.8		%
Revolving credit agreement borrowings/total capital	2.1		%	2.1		%	2.0		%	2.4		%	2.6		%	2.1		%	2.1		%	2.1		%	2.3		%
Debt/total capital	8.3		%	8.5		%	8.1		%	8.3		%	8.8		%	8.4		%	8.5		%	8.2		%	9.0		%
Preferred/total capital	6.7		%	6.9		%	6.6		%	6.3		%	6.7		%	6.8		%	6.9		%	6.7		%	7.3		%
Debt and preferred/total capital	15.0		%	15.3		%	14.8		%	14.6		%	15.6		%	15.2		%	15.3		%	14.9		%	16.4		%

(1)	8,000,000 shares, $25 liquidation preference, redeemable by Company on or after February 1, 2011.
(2)	5,000,000 shares, $25 liquidation preference, redeemable by Company on or after May 15, 2011.
(3)	The Company participates in the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”), which provides secured financing for asset-backed securities backed by certain types of consumer and small-business loans and legacy commercial mortgage-backed securities. TALF financing is non-recourse to the Company, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. The Company can deliver the collateralized securities to the Federal Reserve in full defeasance of the loan. The Company excludes the TALF non-recourse borrowings from the calculations of leverage ratios and total capital due to the nature of the borrowings. If the TALF non-recourse borrowings were included in the leverage ratios and total capital, the ratio of debt to total capital would have been 13.9% and the ratio of debt and preferred to total capital would have been 20.2% at June 30, 2011.
(4)	Excludes the effects of stock options and restricted stock units outstanding.

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ARCH CAPITAL GROUP LTD. Reports