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

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EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a11-28430_1ex99d1.htm
8-K - 8-K - ARCH CAPITAL GROUP LTD.	a11-28430_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 September 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 Comprehensive Income	4
	d.	Consolidated Statements of Changes in Shareholders’ Equity	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								Nine Months Ended
	September 30,								September 30,
	2011			2010			Change		2011			2010			Change

Gross premiums written	$	860,289		$	831,788		3.4	%	$	2,736,794		$	2,602,575		5.2	%

Net premiums written	$	691,381		$	636,117		8.7	%	$	2,162,202		$	2,028,129		6.6	%

Net premiums earned	$	682,049		$	627,409		8.7	%	$	1,958,623		$	1,920,337		2.0	%

Underwriting income (loss)	$	38,890		$	60,486		(35.7	)%	$	(22,392	)	$	146,648		(115.3	)%

Net investment income	$	82,753		$	90,768		(8.8	)%	$	257,731		$	274,277		(6.0	)%
Per diluted share	$	0.60		$	0.59		1.7	%	$	1.86		$	1.71		8.8	%

Net income available to common shareholders	$	162,527		$	141,570		14.8	%	$	273,703		$	589,093		(53.5	)%
Per diluted share	$	1.19		$	0.92		29.3	%	$	1.98		$	3.68		(46.2	)%

After-tax operating income available to common shareholders (1)	$	107,409		$	130,672		(17.8	)%	$	176,746		$	361,585		(51.1	)%
Per diluted share	$	0.78		$	0.85		(8.2	)%	$	1.28		$	2.26		(43.4	)%

Comprehensive income	$	51,980		$	363,170		(85.7	)%	$	235,159		$	858,320		(72.6	)%

Cash flow from operations	$	309,924		$	267,424		15.9	%	$	756,471		$	657,561		15.0	%

Diluted weighted average common shares and common share equivalents outstanding	137,140,929			153,546,027			(10.7	)%	138,542,558			159,951,594			(13.4	)%

							% Point								% Point
							Change								Change
Underwriting ratios:
Loss ratio	62.2		%	57.3		%	4.9		68.9		%	59.9		%	9.0
Acquisition expense ratio	17.5		%	17.6		%	(0.1	)	17.2		%	17.4		%	(0.2	)
Other operating expense ratio	14.6		%	15.5		%	(0.9	)	15.0		%	15.1		%	(0.1	)
Combined ratio	94.3		%	90.4		%	3.9		101.1		%	92.4		%	8.7

Financial measures:

Growth in book value per common share	0.6		%	8.7		%	(8.1	)	4.0		%	22.2		%	(18.2	)

Annualized operating return on average common equity	10.4		%	12.3		%	(1.9	)	5.7		%	11.5		%	(5.8	)

Total return on investments (2)	(0.23		)%	3.61		%	-384 bps		2.97		%	7.08		%	-411 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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			2009			2009			2011			2010

Gross premiums written	$	860,289		$	911,939		$	964,566		$	664,212		$	831,788		$	817,100		$	953,687		$	718,712		$	937,328		$	2,736,794		$	2,602,575
Net premiums written	691,381			706,543			764,278			482,911			636,117			624,258			767,754			519,087			727,308			2,162,202			2,028,129

Net premiums earned	$	682,049		$	642,879		$	633,695		$	632,146		$	627,409		$	623,011		$	669,917		$	708,538		$	734,385		$	1,958,623		$	1,920,337
Fee income	848			784			815			2,814			874			883			794			894			826			2,447			2,551
Losses and loss adjustment expenses	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(363,145		)	(428,051		)	(410,360		)	(444,914		)	(1,349,486		)	(1,150,389		)
Acquisition expenses, net	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(107,475		)	(117,624		)	(120,549		)	(122,739		)	(339,598		)	(336,378		)
Other operating expenses	(99,818		)	(99,166		)	(95,394		)	(114,454		)	(97,325		)	(91,030		)	(101,118		)	(99,305		)	(93,723		)	(294,378		)	(289,473		)
Underwriting income (loss)	38,890			2,236			(63,518		)	48,356			60,486			62,244			23,918			79,218			73,835			(22,392		)	146,648

Net investment income	82,753			86,671			88,307			90,601			90,768			90,537			92,972			93,551			100,213			257,731			274,277
Net realized gains	30,199			45,210			20,695			74,027			68,828			62,114			47,782			89,901			70,638			96,104			178,724
Net impairment losses recognized in earnings	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(4,643		)	(7,103		)	(8,091		)
Equity in net income (loss) of investment funds accounted for using the equity method	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			69,119			5,097			38,410
Other income (loss)	2,432			(4,265		)	4,567			6,165			1,840			4,528			5,978			5,428			5,687			2,734			12,346
Other expenses	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(10,503		)	(5,688		)	(6,680		)	(6,020		)	(24,603		)	(21,987		)
Interest expense	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(7,916		)	(7,260		)	(7,015		)	(6,001		)	(23,604		)	(22,547		)
Net foreign exchange gains (losses)	60,040			(18,375		)	(36,912		)	6,039			(65,157		)	48,625			38,601			9,051			(19,755		)	4,753			22,069
Income before income taxes	166,721			96,611			25,385			230,607			151,231			244,871			223,747			291,352			283,073			288,717			619,849
Income tax benefit (expense)	2,267			1,731			371			3,505			(3,200		)	(1,420		)	(6,753		)	(195		)	(2,205		)	4,369			(11,373		)

Net income	168,988			98,342			25,756			234,112			148,031			243,451			216,994			291,157			280,868			293,086			608,476
Preferred dividends	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,383		)	(19,383		)
Net income available to common shareholders	$	162,527		$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	274,407		$	273,703		$	589,093

Underwriting Ratios
Loss ratio	62.2		%	67.1		%	77.9		%	58.1		%	57.3		%	58.3		%	63.9		%	57.9		%	60.6		%	68.9		%	59.9		%
Acquisition expense ratio	17.5		%	17.1		%	17.0		%	16.5		%	17.6		%	17.1		%	17.4		%	16.9		%	16.6		%	17.2		%	17.4		%
Other operating expense ratio	14.6		%	15.4		%	15.1		%	18.1		%	15.5		%	14.6		%	15.1		%	14.0		%	12.8		%	15.0		%	15.1		%
Combined ratio	94.3		%	99.6		%	110.0		%	92.7		%	90.4		%	90.0		%	96.4		%	88.8		%	90.0		%	101.1		%	92.4		%

Net premiums written to gross premiums written	80.4		%	77.5		%	79.2		%	72.7		%	76.5		%	76.4		%	80.5		%	72.2		%	77.6		%	79.0		%	77.9		%

Net income per common share
Basic	$	1.24		$	0.70		$	0.14		$	1.59		$	0.96		$	1.55		$	1.32		$	1.65		$	1.52		$	2.07		$	3.85
Diluted	$	1.19		$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	1.46		$	1.98		$	3.68

Weighted average common shares and common share equivalents outstanding
Basic	131,560,851			131,232,269			133,499,241			143,320,146			146,993,373			152,962,620			159,117,078			172,139,922			180,468,657			132,090,354			152,979,948
Diluted	137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			187,601,448			138,542,558			159,951,594

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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

	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,		December 31,		September 30,
	2011			2011			2011			2010			2010			2010			2010		2009		2009
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852		$	9,326,574		$	9,202,122	$	9,306,482	$	9,185,443
Short-term investments available for sale, at fair value	799,662			704,495			1,130,142			915,841			780,671			554,304			669,798		571,489		706,157
Investment of funds received under securities lending, at fair value (1)	44,553			145,224			9,951			69,660			200,020			209,635			177,954		91,160		252,500
Equity securities available for sale, at fair value	273,213			320,434			361,639			310,194			79,805			38,879			41,537		249		74
Other investments available for sale, at fair value	229,974			299,845			293,073			275,538			229,488			211,241			125,262		58,751		51,031
Investments accounted for using the fair value option	319,381			321,790			256,614			219,173			175,841			140,541			147,471		139,787		130,082
TALF investments, at fair value	392,455			399,341			400,970			402,449			410,881			407,469			406,997		250,265		250,517
Investments accounted for using the equity method	383,543			399,968			449,206			508,334			500,737			474,971			467,597		468,667		447,918
Total investments	11,972,615			11,838,099			11,817,612			11,659,048			12,070,295			11,363,614			11,238,738		10,886,850		11,023,722

Cash	369,895			411,001			406,877			362,740			365,997			341,469			338,708		334,571		385,149
Accrued investment income	71,264			71,083			69,057			74,837			79,180			72,102			74,214		70,673		77,762
Investment in joint venture	107,642			105,982			105,495			105,698			104,347			103,540			102,946		102,855		101,473
Fixed maturities and short-term investments pledged under securities lending, at fair value	72,399			150,501			198,418			75,575			203,221			214,564			184,221		212,820		609,334
Securities purchased under agreements to resell using funds received under securities lending (1)	20,032			—			185,176			—			—			—			—		115,839		358,996
Premiums receivable	606,963			712,397			633,144			503,434			662,634			706,503			699,385		595,030		697,806
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,840,191			1,855,342			1,772,130			1,763,985			1,715,122			1,721,059			1,711,307		1,720,270		1,768,344
Prepaid reinsurance premiums	267,846			278,587			259,624			263,448			267,240			256,952			250,841		277,985		283,290
Deferred acquisition costs, net	306,810			310,616			302,271			277,861			297,250			293,982			298,371		280,372		303,826
Receivable for securities sold	1,067,188			733,931			749,708			56,145			1,329,508			1,084,122			1,427,085		187,171		998,431
Other assets	727,183			746,267			734,317			669,164			624,395			634,242			628,407		609,323		592,701
Total Assets	$	17,430,028		$	17,213,806		$	17,233,829		$	15,811,935		$	17,719,189		$	16,792,149		$	16,954,223	$	15,393,759	$	17,200,834

Liabilities
Reserve for losses and loss adjustment expenses	8,523,522			8,564,908			8,319,324			8,098,454			8,054,677			7,940,104			$	7,898,162	$	7,873,412	$	7,879,586
Unearned premiums	1,578,419			1,589,497			1,504,162			1,370,075			1,524,100			1,492,550			1,495,265		1,433,331		1,627,519
Reinsurance balances payable	123,815			154,860			131,512			132,452			130,274			128,723			114,254		156,500		159,898
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			100,000			125,000			125,000			100,000		100,000		100,000
TALF borrowings, at fair value	314,137			318,441			322,222			325,770			331,797			336,213			346,746		217,565		219,843
Securities lending payable	74,696			155,072			203,925			78,021			209,411			219,796			189,024		219,116		625,706
Payable for securities purchased	1,161,591			838,787			1,266,390			200,192			1,649,462			1,192,181			1,429,529		136,381		1,197,411
Other liabilities	779,477			750,972			760,759			693,968			676,558			659,579			702,486		634,105		630,049
Total Liabilities	12,955,657			12,772,537			12,908,294			11,298,932			13,001,279			12,394,146			12,575,466		11,070,410		12,740,012

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	544			541			535			534			531			529			527		548		595
Additional paid-in capital	150,882			142,001			120,109			110,325			100,640			83,828			95,926		253,466		592,334
Retained earnings	4,696,256			4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342		3,605,809		3,321,113
Accumulated other comprehensive income, net of deferred income tax	146,576			263,584			225,405			204,503			388,370			173,231			140,962		138,526		221,780
Common shares held in treasury, at cost	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—		—		—
Total Shareholders’ Equity	4,474,371			4,441,269			4,325,535			4,513,003			4,717,910			4,398,003			4,378,757		4,323,349		4,460,822
Total Liabilities and Shareholders’ Equity	$	17,430,028		$	17,213,806		$	17,233,829		$	15,811,935		$	17,719,189		$	16,792,149		$	16,954,223	$	15,393,759	$	17,200,834

Common shares outstanding, net of treasury shares (2)	133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802		164,285,034		178,572,927

Book value per common share	$	31.20		$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64	$	24.34	$	23.16

(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 Comprehensive Income

(U.S. dollars in thousands)

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

Comprehensive Income
Net income	$	168,988		$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	280,868		$	293,086		$	608,476
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	(71,861		)	84,862			40,370			(141,807		)	264,609			71,087			42,847			(8,954		)	300,733			53,371			378,543
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(3,217		)	(3,303		)	(1,641		)
Reclassification of net realized gains, net of income taxes, included in net income	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(32,611		)	(37,607		)	(74,886		)	(52,152		)	(98,565		)	(126,517		)
Foreign currency translation adjustments	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			209			(9,430		)	(541		)
Other comprehensive income (loss)	(117,008		)	38,179			20,902			(183,867		)	215,139			32,269			2,436			(83,254		)	245,573			(57,927		)	249,844
Comprehensive Income	$	51,980		$	136,521		$	46,658		$	50,245		$	363,170		$	275,720		$	219,430		$	207,903		$	526,441		$	235,159		$	858,320

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			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	541			535			534			531			529			527			548			595			610			534			548
Common shares issued, net	3			6			1			3			2			7			4			4			1			10			13
Purchases of common shares under share repurchase program	—			—			—			—			—			(5		)	(25		)	(51		)	(16		)	—			(30		)
Balance at end of period	544			541			535			534			531			529			527			548			595			544			531

Additional Paid-in Capital
Balance at beginning of period	142,001			120,109			110,325			100,640			83,828			95,926			253,466			592,334			681,445			110,325			253,466
Common shares issued, net	(2		)	3,904			8			1,334			283			3,275			14			1,173			0			3,910			3,572
Exercise of stock options	3,007			2,245			4,127			2,716			10,486			7,964			16,700			12,380			2,905			9,379			35,150
Common shares retired	—			—			—			—			—			(36,212		)	(181,350		)	(358,611		)	(98,632		)	—			(217,562		)
Amortization of share-based compensation	5,781			13,877			5,628			5,615			6,074			12,280			7,096			6,199			6,576			25,286			25,450
Other	95			1,866			21			20			(31		)	595			—			(9		)	40			1,982			564
Balance at end of period	150,882			142,001			120,109			110,325			100,640			83,828			95,926			253,466			592,334			150,882			100,640

Retained Earnings
Balance at beginning 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			4,422,553			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		)	(19,383		)	(19,383		)
Net income	168,988			98,342			25,756			234,112			148,031			243,451			216,994			291,157			280,868			293,086			608,476
Balance at end of period	4,696,256			4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342			3,605,809			3,321,113			4,696,256			4,194,902

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	263,584			225,405			204,503			388,370			173,231			140,962			138,526			221,780			(23,793		)	204,503			138,526
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(102,568		)	37,180			20,194			(185,221		)	208,310			38,476			5,240			(83,840		)	248,581			(45,194		)	252,026
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(3,217		)	(3,303		)	(1,641		)
Foreign currency translation adjustments, net of deferred income tax	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			209			(9,430		)	(541		)
Balance at end of period	146,576			263,584			225,405			204,503			388,370			173,231			140,962			138,526			221,780			146,576			388,370

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			—			—			(549,912		)	—
Shares repurchased for treasury	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(237,917		)	—			—			—			(294,975		)	(291,533		)
Balance at end of period	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			—			(844,887		)	(291,533		)

Total Shareholders’ Equity	$	4,474,371		$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349		$	4,460,822		$	4,474,371		$	4,717,910

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

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

Operating Activities
Net income	$	168,988		$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	280,868		$	293,086		$	608,476
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(62,406		)	(49,483		)	(70,680		)	(70,612		)	(100,982		)	(184,423		)
Net impairment losses included in earnings	2,739			1,684			2,680			3,230			2,075			4,410			1,606			4,493			4,643			7,103			8,091
Equity in net income or loss of investment funds accounted for using the equity method and other income	31,734			18,945			(355		)	(26,110		)	(11,545		)	(3,368		)	(15,012		)	(37,819		)	(74,985		)	50,324			(29,925		)
Share-based compensation	5,781			13,877			5,628			5,615			6,074			12,280			7,096			6,199			6,576			25,286			25,450
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	48,397			130,746			155,477			3,546			49,420			71,357			91,247			50,992			79,701			334,620			212,024
Unearned premiums, net of prepaid reinsurance premiums	9,919			63,987			130,136			(149,242		)	9,024			236			96,645			(188,951		)	(6,983		)	204,042			105,905
Premiums receivable	82,200			(77,556		)	(118,688		)	157,034			63,197			(20,280		)	(116,571		)	99,023			41,108			(114,044		)	(73,654		)
Deferred acquisition costs, net	1,115			(7,743		)	(22,518		)	18,910			47			2,038			(19,655		)	23,636			4,356			(29,146		)	(17,570		)
Reinsurance balances payable	(19,368		)	23,109			(7,122		)	3,277			(4,853		)	19,267			(36,669		)	(1,467		)	(85		)	(3,381		)	(22,255		)
Other liabilities	5,925			(26,613		)	33,366			(47,339		)	23,914			(57,219		)	41,448			(26,439		)	(5,849		)	12,678			8,143
Other items, net	2,109			32,075			42,701			19,741			54,574			(4,252		)	(33,023		)	33,839			31,381			76,885			17,299
Net Cash Provided By Operating Activities	309,924			221,967			224,580			144,513			267,424			205,514			184,623			183,983			290,119			756,471			657,561

Investing Activities
Purchases of:
Fixed maturity investments	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(5,018,619		)	(4,885,606		)	(4,597,713		)	(5,221,819		)	(6,675,195		)	(10,116,781		)	(14,501,938		)
Equity securities	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(21,727		)	(52,283		)	(35,470		)	(34,532		)	(343,062		)	(139,165		)
Other investments	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(150,631		)	(132,819		)	(184,598		)	(8,528		)	(373,814		)	(376,405		)
Proceeds from the sales of:
Fixed maturity investments	2,299,627			3,323,456			3,232,541			2,670,332			4,872,668			4,668,666			4,443,108			5,054,102			6,066,081			8,855,624			13,984,442
Equity securities	111,467			147,334			52,316			14,522			19,151			25,043			11,725			35,097			3,239			311,117			55,919
Other investments	191,767			119,780			84,967			133,211			68,843			87,536			89,510			200,912			79,378			396,514			245,889
Proceeds from redemptions and maturities of fixed maturities	200,671			283,512			253,898			266,044			226,889			244,312			212,625			146,480			261,604			738,081			683,826
Net (purchases) sales of short-term investments	(123,211		)	459,091			(223,415		)	(129,794		)	(205,411		)	96,239			(102,921		)	129,070			(48,395		)	112,465			(212,093		)
Change in investment of securities lending collateral	80,376			48,853			(125,904		)	131,389			10,385			(30,772		)	30,092			406,590			(51,692		)	3,325			9,705
Purchases of furniture, equipment and other	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(6,057		)	(1,803		)	(3,897		)	(4,067		)	(15,526		)	(10,111		)
Net Cash Provided By (Used For) Investing Activities	(232,919		)	(131,125		)	(68,013		)	276,028			(186,455		)	27,003			(100,479		)	526,467			(412,107		)	(432,057		)	(259,931		)

Financing Activities
Purchases of common shares under share repurchase program	(20,833		)	(29,552		)	(237,173		)	(258,150		)	(53,398		)	(269,054		)	(181,272		)	(358,656		)	(98,194		)	(287,558		)	(503,724		)
Proceeds from common shares issued, net	1,609			(1,397		)	2,875			4,693			8,586			3,779			10,591			9,194			2,152			3,087			22,956
Proceeds from borrowings	—			—			—			—			—			50,000			214,526			—			269,843			—			264,526
Repayments of borrowings	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(34,022		)	(86,317		)	(1,103		)	(50,000		)	(11,839		)	(125,985		)
Change in securities lending collateral	(80,376		)	(48,853		)	125,904			(131,389		)	(10,385		)	30,772			(30,092		)	(406,590		)	51,692			(3,325		)	(9,705		)
Other	818			2,467			714			(893		)	1,593			2,296			5,061			4,816			88			3,999			8,950
Preferred dividends paid	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,383		)	(19,383		)
Net Cash Provided By (Used For) Financing Activities	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(222,690		)	(73,964		)	(758,800		)	169,120			(315,019		)	(362,365		)

Effects of exchange rate changes on foreign currency cash	(8,643		)	997			5,406			(526		)	9,270			(7,066		)	(6,043		)	(2,228		)	1,324			(2,240		)	(3,839		)

Increase (decrease) in cash	(41,106		)	4,124			44,137			(3,257		)	24,528			2,761			4,137			(50,578		)	48,456			7,155			31,426
Cash beginning of period	411,001			406,877			362,740			365,997			341,469			338,708			334,571			385,149			336,693			362,740			334,571
Cash end of period	$	369,895		$	411,001		$	406,877		$	362,740		$	365,997		341,469			$	338,708		$	334,571		$	385,149		$	369,895		$	365,997

Income taxes paid, net	$	3,662		$	2,296		$	3,670		$	3,140		$	1,928		$	1,430		$	704		$	5,021		$	4,234		$	9,628		$	4,062
Interest paid	$	2,177		$	13,084		$	2,191		$	12,831		$	1,832		$	13,437		$	1,785		$	12,556		$	529		$	17,452		$	17,054

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 September 30, 2011 and 2010

(U.S. dollars in thousands)

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

Gross premiums written (1)	$	634,280		$	227,837		$	860,289		$	624,490		$	208,770		$	831,788
Net premiums written	472,986			218,395			691,381			431,361			204,756			636,117

Net premiums earned	$	437,970		$	244,079		$	682,049		$	411,881		$	215,528		$	627,409
Fee income	661			187			848			864			10			874
Losses and loss adjustment expenses	(290,608		)	(133,376		)	(423,984		)	(265,411		)	(93,782		)	(359,193		)
Acquisition expenses, net	(76,763		)	(43,442		)	(120,205		)	(67,309		)	(43,970		)	(111,279		)
Other operating expenses	(77,078		)	(22,740		)	(99,818		)	(77,078		)	(20,247		)	(97,325		)
Underwriting income (loss)	$	(5,818	)	$	44,708		38,890			$	2,947		$	57,539		60,486

Net investment income							82,753									90,768
Net realized gains							30,199									68,828
Net impairment losses recognized in earnings							(2,739		)							(2,075		)
Equity in net income (loss) of investment funds accounted for using the equity method							(30,549		)							9,708
Other income							2,432									1,840
Other expenses							(6,180		)							(5,796		)
Interest expense							(8,125		)							(7,371		)
Net foreign exchange gains (losses)							60,040									(65,157		)
Income before income taxes							166,721									151,231
Income tax benefit (expense)							2,267									(3,200		)

Net income							168,988									148,031
Preferred dividends							(6,461		)							(6,461		)
Net income available to common shareholders							$	162,527								$	141,570

Underwriting Ratios
Loss ratio	66.4		%	54.6		%	62.2		%	64.4		%	43.5		%	57.3		%
Acquisition expense ratio (2)	17.4		%	17.8		%	17.5		%	16.1		%	20.4		%	17.6		%
Other operating expense ratio	17.6		%	9.3		%	14.6		%	18.7		%	9.4		%	15.5		%
Combined ratio	101.4		%	81.7		%	94.3		%	99.2		%	73.3		%	90.4		%

Net premiums written to gross premiums written	74.6		%	95.9		%	80.4		%	69.1		%	98.1		%	76.5		%

(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 — Nine Months Ended September 30, 2011 and 2010

(U.S. dollars in thousands)

	Nine Months Ended									Nine Months Ended
	September 30, 2011									September 30, 2010
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,903,868		$	836,616		$	2,736,794		$	1,874,419		$	735,942		$	2,602,575
Net premiums written	1,360,540			801,662			2,162,202			1,307,122			721,007			2,028,129

Net premiums earned	$	1,256,380		$	702,243		$	1,958,623		$	1,246,831		$	673,506		$	1,920,337
Fee income	2,141			306			2,447			2,491			60			2,551
Losses and loss adjustment expenses	(889,973		)	(459,513		)	(1,349,486		)	(852,716		)	(297,673		)	(1,150,389		)
Acquisition expenses, net	(204,721		)	(134,877		)	(339,598		)	(200,099		)	(136,279		)	(336,378		)
Other operating expenses	(228,580		)	(65,798		)	(294,378		)	(229,525		)	(59,948		)	(289,473		)
Underwriting income (loss)	$	(64,753	)	$	42,361		(22,392		)	$	(33,018	)	$	179,666		146,648

Net investment income							257,731									274,277
Net realized gains							96,104									178,724
Net impairment losses recognized in earnings							(7,103		)							(8,091		)
Equity in net income of investment funds accounted for using the equity method							5,097									38,410
Other income							2,734									12,346
Other expenses							(24,603		)							(21,987		)
Interest expense							(23,604		)							(22,547		)
Net foreign exchange gains							4,753									22,069
Income before income taxes							288,717									619,849
Income tax expense							4,369									(11,373		)

Net income							293,086									608,476
Preferred dividends							(19,383		)							(19,383		)
Net income available to common shareholders							$	273,703								$	589,093

Underwriting Ratios
Loss ratio	70.8		%	65.4		%	68.9		%	68.4		%	44.2		%	59.9		%
Acquisition expense ratio (2)	16.1		%	19.2		%	17.2		%	15.8		%	20.2		%	17.4		%
Other operating expense ratio	18.2		%	9.4		%	15.0		%	18.4		%	8.9		%	15.1		%
Combined ratio	105.1		%	94.0		%	101.1		%	102.6		%	73.3		%	92.4		%

Net premiums written to gross premiums written	71.5		%	95.8		%	79.0		%	69.7		%	98.0		%	77.9		%

(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						Nine Months Ended
	September 30,						September 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	$	114,631	24.2	$	88,412	20.5	$	294,345	21.6	$	277,271	21.2
Programs	79,086		16.7	68,264		15.8	235,111		17.3	212,107		16.2
Professional liability	66,484		14.1	78,873		18.3	183,775		13.5	216,617		16.6
Executive assurance	62,328		13.2	51,503		11.9	172,370		12.7	165,010		12.6
National accounts casualty	17,275		3.7	19,215		4.5	61,863		4.5	53,901		4.1
Construction	23,576		5.0	20,245		4.7	97,493		7.2	92,813		7.1
Casualty	30,563		6.5	28,493		6.6	85,636		6.3	80,573		6.2
Travel and accident	17,404		3.7	19,673		4.6	58,189		4.3	56,751		4.3
Lenders products	22,551		4.8	23,452		5.4	65,151		4.8	61,979		4.7
Healthcare	8,810		1.9	8,705		2.0	26,349		1.9	27,218		2.1
Surety	10,389		2.2	11,128		2.6	29,741		2.2	26,231		2.0
Other (1)	19,889		4.0	13,398		3.1	50,517		3.7	36,651		2.9
Total	$	472,986	100.0	$	431,361	100.0	$	1,360,540	100.0	$	1,307,122	100.0

Net premiums earned
Property, energy, marine and aviation	$	92,288	21.1	$	82,301	20.0	$	242,531	19.3	$	258,156	20.7
Programs	73,561		16.8	68,404		16.6	212,513		16.9	202,944		16.3
Professional liability	64,403		14.7	69,900		17.0	189,570		15.1	201,451		16.2
Executive assurance	56,783		13.0	51,675		12.5	171,841		13.7	162,865		13.1
National accounts casualty	19,642		4.5	18,595		4.5	58,970		4.7	57,178		4.6
Construction	28,590		6.5	25,664		6.2	84,195		6.7	82,557		6.6
Casualty	30,305		6.9	27,503		6.7	83,561		6.7	83,720		6.7
Travel and accident	19,051		4.3	17,418		4.2	54,105		4.3	51,086		4.1
Lenders products	18,293		4.2	17,593		4.3	56,495		4.5	51,553		4.1
Healthcare	9,340		2.1	9,738		2.4	27,081		2.2	30,021		2.4
Surety	10,091		2.3	9,876		2.4	29,272		2.3	28,157		2.3
Other (1)	15,623		3.6	13,214		3.2	46,246		3.6	37,143		2.9
Total	$	437,970	100.0	$	411,881	100.0	$	1,256,380	100.0	$	1,246,831	100.0

Net premiums written by client location
United States	$	313,028	66.2	$	298,188	69.1	$	942,421	69.3	$	923,012	70.6
Europe	64,870		13.7	64,320		14.9	224,758		16.5	227,783		17.4
Other	95,088		20.1	68,853		16.0	193,361		14.2	156,327		12.0
Total	$	472,986	100.0	$	431,361	100.0	$	1,360,540	100.0	$	1,307,122	100.0

Net premiums written by underwriting location
United States	$	302,547	64.0	$	285,126	66.1	$	899,372	66.1	$	884,974	67.7
Europe	145,112		30.7	133,349		30.9	385,532		28.3	357,751		27.4
Other	25,327		5.3	12,886		3.0	75,636		5.6	64,397		4.9
Total	$	472,986	100.0	$	431,361	100.0	$	1,360,540	100.0	$	1,307,122	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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			2009			2009			2011			2010

Gross premiums written	$	634,280		$	635,005		$	634,583		$	527,783		$	624,490		$	616,353		$	633,576		$	563,087		$	673,986		$	1,903,868		$	1,874,419
Net premiums written	472,986			438,263			449,291			351,841			431,361			422,837			452,924			369,704			473,676			1,360,540			1,307,122

Net premiums earned	$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	443,319		$	1,256,380		$	1,246,831
Fee income	661			702			778			761			864			874			753			883			814			2,141			2,491
Losses and loss adjustment expenses	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(275,294		)	(312,011		)	(278,746		)	(303,304		)	(889,973		)	(852,716		)
Acquisition expenses, net	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(65,359		)	(67,431		)	(60,926		)	(60,964		)	(204,721		)	(200,099		)
Other operating expenses	(77,078		)	(76,765		)	(74,737		)	(82,879		)	(77,078		)	(71,727		)	(80,720		)	(75,144		)	(72,452		)	(228,580		)	(229,525		)
Underwriting income (loss)	$	(5,818	)	$	(33,429	)	$	(25,506	)	$	(5,793	)	$	2,947		$	(6,033	)	$	(29,932	)	$	12,716		$	7,413		$	(64,753	)	$	(33,018	)

Underwriting Ratios
Loss ratio	66.4		%	73.4		%	73.0		%	65.5		%	64.4		%	67.9		%	72.6		%	65.3		%	68.4		%	70.8		%	68.4		%
Acquisition expense ratio (1)	17.4		%	16.0		%	14.9		%	15.4		%	16.1		%	15.9		%	15.5		%	14.1		%	13.6		%	16.1		%	15.8		%
Other operating expense ratio	17.6		%	18.7		%	18.3		%	20.5		%	18.7		%	17.7		%	18.8		%	17.6		%	16.3		%	18.2		%	18.4		%
Combined ratio	101.4		%	108.1		%	106.2		%	101.4		%	99.2		%	101.5		%	106.9		%	97.0		%	98.3		%	105.1		%	102.6		%

Net premiums written
Property, energy, marine and aviation	$	114,631		$	103,296		$	76,418		$	44,258		$	88,412		$	88,194		$	100,665		$	42,811		$	118,536		$	294,345		$	277,271
Programs	79,086			81,629			74,396			60,969			68,264			73,345			70,498			60,685			66,964			235,111			212,107
Professional liability	66,484			57,906			59,385			51,559			78,873			70,626			67,118			64,385			72,566			183,775			216,617
Executive assurance	62,328			53,974			56,068			54,448			51,503			52,514			60,993			58,561			58,529			172,370			165,010
National accounts casualty	17,275			4,397			40,191			14,024			19,215			3,877			30,809			16,553			30,726			61,863			53,901
Construction	23,576			42,408			31,509			20,014			20,245			44,276			28,292			20,227			30,259			97,493			92,813
Casualty	30,563			24,939			30,134			27,389			28,493			26,617			25,463			23,037			26,753			85,636			80,573
Travel and accident	17,404			19,284			21,501			14,486			19,673			15,272			21,806			15,528			15,998			58,189			56,751
Lenders products	22,551			21,526			21,074			30,942			23,452			22,208			16,319			34,150			14,774			65,151			61,979
Healthcare	8,810			8,422			9,117			10,290			8,705			9,989			8,524			10,610			10,854			26,349			27,218
Surety	10,389			9,618			9,734			7,918			11,128			7,012			8,091			10,716			12,025			29,741			26,231
Other (2)	19,889			10,864			19,764			15,544			13,398			8,907			14,346			12,441			15,692			50,517			36,651
Total	$	472,986		$	438,263		$	449,291		$	351,841		$	431,361		$	422,837		$	452,924		$	369,704		$	473,676		$	1,360,540		$	1,307,122

Net premiums earned
Property, energy, marine and aviation	$	92,288		$	76,644		$	73,599		$	77,811		$	82,301		$	80,818		$	95,037		$	91,549		$	94,471		$	242,531		$	258,156
Programs	73,561			71,934			67,018			69,462			68,404			68,381			66,159			67,672			69,436			212,513			202,944
Professional liability	64,403			57,767			67,400			63,152			69,900			63,642			67,909			64,987			63,368			189,570			201,451
Executive assurance	56,783			60,488			54,570			55,270			51,675			54,958			56,232			56,764			56,094			171,841			162,865
National accounts casualty	19,642			18,166			21,162			17,360			18,595			16,810			21,773			19,606			19,969			58,970			57,178
Construction	28,590			27,214			28,391			26,837			25,664			27,982			28,911			31,491			36,667			84,195			82,557
Casualty	30,305			24,829			28,427			25,893			27,503			28,148			28,069			27,198			30,004			83,561			83,720
Travel and accident	19,051			19,455			15,599			15,705			17,418			17,590			16,078			16,580			18,193			54,105			51,086
Lenders products	18,293			19,966			18,236			19,617			17,593			17,153			16,807			17,201			15,353			56,495			51,553
Healthcare	9,340			9,089			8,652			9,701			9,738			10,340			9,943			9,886			12,303			27,081			30,021
Surety	10,091			9,402			9,779			9,810			9,876			8,023			10,258			11,448			12,239			29,272			28,157
Other (2)	15,623			15,865			14,758			13,657			13,214			11,628			12,301			12,268			15,222			46,246			37,143
Total	$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	443,319		$	1,256,380		$	1,246,831

(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						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Casualty (1)	$	34,873	16.0	$	38,276	18.7	$	146,989	18.3	$	154,500	21.4
Property excluding property catastrophe (2)	64,495		29.5	70,149		34.3	189,583		23.6	202,956		28.1
Other specialty	40,882		18.7	30,468		14.9	162,464		20.3	104,150		14.4
Property catastrophe	59,961		27.5	40,255		19.7	235,157		29.3	199,460		27.7
Marine and aviation	17,037		7.8	24,913		12.2	61,179		7.6	55,760		7.7
Other	1,147		0.5	695		0.2	6,290		0.9	4,181		0.7
Total	$	218,395	100.0	$	204,756	100.0	$	801,662	100.0	$	721,007	100.0

Net premiums earned
Casualty (1)	$	49,066	20.1	$	52,792	24.5	$	149,053	21.2	$	182,729	27.1
Property excluding property catastrophe (2)	62,565		25.6	66,438		30.8	183,095		26.1	211,419		31.4
Other specialty	48,722		20.0	25,254		11.7	128,202		18.3	65,315		9.7
Property catastrophe	64,910		26.6	54,206		25.2	176,340		25.1	160,380		23.8
Marine and aviation	17,739		7.3	16,106		7.5	60,458		8.6	50,441		7.5
Other	1,077		0.4	732		0.3	5,095		0.7	3,222		0.5
Total	$	244,079	100.0	$	215,528	100.0	$	702,243	100.0	$	673,506	100.0

Net premiums written
Pro rata	$	99,884	45.7	$	105,844	51.7	$	310,412	38.7	$	308,838	42.8
Excess of loss	118,511		54.3	98,912		48.3	491,250		61.3	412,169		57.2
Total	$	218,395	100.0	$	204,756	100.0	$	801,662	100.0	$	721,007	100.0

Net premiums earned
Pro rata	$	110,091	45.1	$	103,698	48.1	$	320,711	45.7	$	336,943	50.0
Excess of loss	133,988		54.9	111,830		51.9	381,532		54.3	336,563		50.0
Total	$	244,079	100.0	$	215,528	100.0	$	702,243	100.0	$	673,506	100.0

Net premiums written by client location
United States	$	115,128	52.7	$	126,882	62.0	$	451,459	56.3	$	433,257	60.1
Europe	39,892		18.3	25,050		12.2	215,974		26.9	165,570		23.0
Bermuda	17,027		7.8	16,330		8.0	44,192		5.5	62,027		8.6
Other	46,348		21.2	36,494		17.8	90,037		11.3	60,153		8.3
Total	$	218,395	100.0	$	204,756	100.0	$	801,662	100.0	$	721,007	100.0

Net premiums written by underwriting location
Bermuda	$	127,553	58.4	$	116,433	56.9	$	449,167	56.0	$	397,935	55.2
United States	77,972		35.7	76,183		37.2	268,337		33.5	250,204		34.7
Other	12,870		5.9	12,140		5.9	84,158		10.5	72,868		10.1
Total	$	218,395	100.0	$	204,756	100.0	$	801,662	100.0	$	721,007	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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			2009			2009			2011			2010

Gross premiums written	$	227,837		$	277,766		$	331,013		$	139,015		$	208,770		$	203,695		$	323,477		$	159,229		$	266,193		$	836,616		$	735,942
Net premiums written	218,395			268,280			314,987			131,070			204,756			201,421			314,830			149,383			253,632			801,662			721,007

Net premiums earned	$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	291,066		$	702,243		$	673,506
Fee income	187			82			37			2,053			10			9			41			11			12			306			60
Losses and loss adjustment expenses	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(87,851		)	(116,040		)	(131,614		)	(141,610		)	(459,513		)	(297,673		)
Acquisition expenses, net	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(42,116		)	(50,193		)	(59,623		)	(61,775		)	(134,877		)	(136,279		)
Other operating expenses	(22,740		)	(22,401		)	(20,657		)	(31,575		)	(20,247		)	(19,303		)	(20,398		)	(24,161		)	(21,271		)	(65,798		)	(59,948		)
Underwriting income (loss)	$	44,708		$	35,665		$	(38,012	)	$	54,149		$	57,539		$	68,277		$	53,850		$	66,502		$	66,422		$	42,361		$	179,666

Underwriting Ratios
Loss ratio	54.6		%	56.0		%	86.8		%	45.0		%	43.5		%	40.4		%	48.3		%	46.7		%	48.7		%	65.4		%	44.2		%
Acquisition expense ratio	17.8		%	19.0		%	20.9		%	18.3		%	20.4		%	19.4		%	20.9		%	21.2		%	21.2		%	19.2		%	20.2		%
Other operating expense ratio	9.3		%	9.7		%	9.1		%	13.9		%	9.4		%	8.9		%	8.5		%	8.6		%	7.3		%	9.4		%	8.9		%
Combined ratio	81.7		%	84.7		%	116.8		%	77.2		%	73.3		%	68.7		%	77.7		%	76.5		%	77.2		%	94.0		%	73.3		%

Net premiums written
Casualty (1)	$	34,873		$	40,755		$	71,361		$	32,274		$	38,276		$	43,642		$	72,582		$	68,693		$	85,084		$	146,989		$	154,500
Property excluding property catastrophe (2)	64,495			53,938			71,150			46,835			70,149			57,880			74,927			49,413			90,845			189,583			202,956
Other specialty	40,882			43,937			77,645			27,008			30,468			18,920			54,762			10,578			10,595			162,464			104,150
Property catastrophe	59,961			108,235			66,961			3,529			40,255			70,403			88,802			3,022			50,539			235,157			199,460
Marine and aviation	17,037			19,978			24,164			21,303			24,913			9,609			21,238			17,576			16,187			61,179			55,760
Other	1,147			1,437			3,706			121			695			967			2,519			101			382			6,290			4,181
Total	$	218,395		$	268,280		$	314,987		$	131,070		$	204,756		$	201,421		$	314,830		$	149,383		$	253,632		$	801,662		$	721,007

Net premiums earned
Casualty (1)	$	49,066		$	51,493		$	48,494		$	48,609		$	52,792		$	59,501		$	70,436		$	86,193		$	88,721		$	149,053		$	182,729
Property excluding property catastrophe (2)	62,565			57,524			63,006			70,744			66,438			65,742			79,239			94,716			94,837			183,095			211,419
Other specialty	48,722			40,511			38,969			30,296			25,254			22,292			17,769			24,085			23,251			128,202			65,315
Property catastrophe	64,910			59,788			51,642			54,768			54,206			52,301			53,873			56,937			61,772			176,340			160,380
Marine and aviation	17,739			21,093			21,626			22,445			16,106			16,263			18,072			18,882			21,666			60,458			50,441
Other	1,077			1,651			2,367			1,009			732			1,439			1,051			1,076			819			5,095			3,222
Total	$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	291,066		$	702,243		$	673,506

(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)

	September 30,					June 30,					March 31,					December 31,					September 30,
	2011					2011					2011					2010					2010
Investable assets:
Fixed maturities available for sale, at fair value	$	9,529,834		78	%	$	9,247,002		77	%	$	8,916,017		76	%	$	8,957,859		76	%	$	9,692,852		80	%
Fixed maturities, at fair value (1)	122,866			1	%	102,897			1	%	117,391			1	%	124,969			1	%	117,250			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	72,399			1	%	150,501			1	%	161,888			1	%	75,575			1	%	184,226			2	%
Total fixed maturities	9,725,099			80	%	9,500,400			79	%	9,195,296			78	%	9,158,403			78	%	9,994,328			83	%
Short-term investments available for sale, at fair value	799,662			6	%	704,495			6	%	1,130,142			10	%	915,841			8	%	780,671			6	%
Short-term investments pledged under securities lending agreements, at fair value (2)	—			0	%	—			0	%	36,530			0	%	—			0	%	18,995			0	%
Cash	369,895			3	%	411,001			3	%	406,877			3	%	362,740			3	%	365,997			3	%
Equity securities available for sale, at fair value	273,213			2	%	320,434			3	%	361,639			3	%	310,194			3	%	79,805			1	%
Equity securities, at fair value (1)	100,719			1	%	152,844			1	%	100,117			1	%	94,204			1	%	58,591			0	%
Other investments available for sale, at fair value	229,974			2	%	299,845			2	%	293,073			2	%	275,538			2	%	229,488			3	%
Other investments, at fair value (1)	95,796			1	%	66,049			1	%	39,106			0	%	—			—		—			—
TALF investments, at fair value (3)	392,455			3	%	399,341			3	%	400,970			3	%	402,449			3	%	410,881			3	%
Investments accounted for using the equity method	383,543			3	%	399,968			3	%	449,206			4	%	508,334			4	%	500,737			4	%
Securities sold but not yet purchased	(46,526		)	0	%	(51,626		)	0	%	(41,863		)	0	%	(41,143		)	(1	)%	(17,792		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(94,403		)	(1	)%	(104,856		)	(1	)%	(516,682		)	(4	)%	(144,047		)	(1	)%	(319,954		)	(3	)%
Total investable assets (2)	$	12,229,427		100	%	$	12,097,895		100	%	$	11,854,411		100	%	$	11,842,513		100	%	$	12,101,747		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	3.17					2.87					2.73					2.83					3.11
Average credit quality	AA+					AA+					AA+					AA+					AA+
Imbedded book yield (before investment expenses)	3.09		%			3.23		%			3.36		%			3.52		%			3.53		%

Credit quality distribution of total fixed maturities (2) (4):
AAA	$	6,421,366		66	%	$	6,503,536		68	%	$	6,435,249		70	%	$	6,531,757		71	%	$	7,503,390		75	%
AA	1,531,869			16	%	1,194,430			13	%	1,043,463			11	%	1,053,666			12	%	993,018			10	%
A	754,421			8	%	765,831			7	%	697,002			7	%	605,483			7	%	573,298			6	%
BBB	555,023			6	%	472,491			5	%	425,913			5	%	388,564			4	%	347,810			4	%
BB	151,665			1	%	158,517			2	%	154,537			2	%	133,673			1	%	132,618			1	%
B	140,571			1	%	241,538			3	%	250,318			3	%	242,479			3	%	223,582			2	%
Lower than B	106,775			1	%	97,748			1	%	100,409			1	%	109,596			1	%	115,686			1	%
Not rated	63,409			1	%	66,309			1	%	88,405			1	%	93,185			1	%	104,926			1	%
Total fixed maturities, at fair value	$	9,725,099		100	%	$	9,500,400		100	%	$	9,195,296		100	%	$	9,158,403		100	%	$	9,994,328		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 September 30, 2011:

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

Corporates	$	2,533,643	$	81,629	$	(40,895	)	$	40,734		$	2,492,909	101.6	%
Non-U.S. government-backed corporates	256,865		10,470		(1,335		)	9,135			247,730		103.7	%
FDIC guaranteed corporates	83,358		1,319		—			1,319			82,039		101.6	%
U.S. government and government agencies	1,263,665		39,866		(536		)	39,330			1,224,335		103.2	%
Agency mortgage-backed securities	1,319,052		28,973		(1,730		)	27,243			1,291,809		102.1	%
Non-agency mortgage-backed securities	226,269		3,530		(19,380		)	(15,850		)	242,119		93.5	%
Agency commercial mortgage-backed securities	385,533		13,919		(637		)	13,282			372,251		103.6	%
Non-agency commercial mortgage-backed securities	733,372		13,062		(3,593		)	9,469			723,903		101.3	%
Municipal bonds	1,422,943		66,880		(2,322		)	64,558			1,358,385		104.8	%
Non-U.S. government securities	852,694		42,570		(15,610		)	26,960			825,734		103.3	%
Asset-backed securities	647,705		19,529		(8,572		)	10,957			636,748		101.7	%
Total	$	9,725,099	$	321,747	$	(94,610	)	$	227,137		$	9,497,962	102.4	%

Corporates (Excluding Guaranteed Amounts)

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

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Financials	$	1,206,565	47.6	%	9.9	%
Industrials	842,348		33.2	%	6.9	%
Utilities	93,766		3.7	%	0.8	%
Foreign agencies	74,197		2.9	%	0.6	%
All other (1)	316,767		12.6	%	2.6	%
Total	$	2,533,643	100.0	%	20.7	%

Credit quality distribution (2):
AAA	$	610,330	24.1	%	5.0	%
AA	497,114		19.6	%	4.1	%
A	588,463		23.2	%	4.8	%
BBB	493,148		19.5	%	4.0	%
BB	147,840		5.8	%	1.2	%
B	112,066		4.4	%	0.9	%
Lower than B	11,069		0.4	%	0.1	%
Not rated	73,613		3.0	%	0.6	%
Total	$	2,533,643	100.0	%	20.7	%

(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 September 30, 2011, excluding guaranteed amounts and covered bonds:

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

JPMorgan Chase & Co	$	57,539	2.3	%	0.5	%	Aa3
General Electric Co	56,358		2.2	%	0.5	%	Aa2
Royal Bank of Canada	31,940		1.3	%	0.3	%	Aa1
Abbey National Treasury Svcs	30,397		1.2	%	0.2	%	Aa3
National Australia Bank Limited	29,229		1.2	%	0.2	%	Aa2
Total SA	29,038		1.1	%	0.2	%	Aa1
Royal Dutch Shell PLC	27,832		1.1	%	0.2	%	Aa1
Bank of America Corp	26,766		1.1	%	0.2	%	Baa1
Australia & New Zealand Banking Group Ltd	25,271		1.0	%	0.2	%	Aa3
Crown Castle Int’l Corp	25,159		1.0	%	0.2	%	A2
Total	$	339,529	13.4	%	2.8	%

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 September 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	$	2,547	AAA	$	2,482	97.4	%	0.0	%
	2004	15,950		BBB+	14,428		90.5	%	0.1	%
	2005	52,187		B+	46,412		88.9	%	0.4	%
	2006	32,009		CCC+	27,122		84.7	%	0.2	%
	2007	44,785		CCC	41,144		91.9	%	0.3	%
	2008	7,902		CCC	7,091		89.7	%	0.1	%
	2009 (6)	46,621		AAA	48,740		104.5	%	0.4	%
	2010 (6)	40,118		AAA	38,850		96.8	%	0.3	%
Total non-agency MBS		$	242,119	BBB-	$	226,269	93.5	%	1.9	%

Non-agency CMBS:	1998	$	3,536	AAA	$	3,606	102.0	%	0.0	%
	2002	35,360		AAA	35,509		100.4	%	0.3	%
	2003	44,363		AAA	45,870		103.4	%	0.4	%
	2004	36,615		AAA	36,471		99.6	%	0.3	%
	2005	50,112		AAA	49,673		99.1	%	0.4	%
	2006	6,688		A	6,383		95.4	%	0.1	%
	2007	92,546		AA-	96,829		104.6	%	0.8	%
	2008	192		AA+	193		100.5	%	0.0	%
	2010	246,180		AAA	248,777		101.1	%	2.0	%
	2011	208,311		AAA	210,061		100.8	%	1.7	%
Total non-agency CMBS		$	723,903	AAA	$	733,372	101.3	%	6.0	%

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

Wtd. average loan age (months)	64		68		45
Wtd. average life (months) (2)	23		65		41
Wtd. average loan-to-value % (3)	70.3	%	68.4	%	68.6	%
Total delinquencies (4)	18.3	%	23.3	%	4.7	%
Current credit support % (5)	37.9	%	10.7	%	27.7	%

(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 September 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 32% to 87%, while the range of loan-to-values on CMBS is 31% to 96%.

(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) September 30, 2011:

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

Sector:
Credit cards (1)	$	244,849	AAA	$	251,417	102.7	%	2.1	%
Autos (2)	142,453		AAA	143,377		100.6	%	1.2	%
U.K. securitized (3)	40,111		AAA	39,865		99.4	%	0.3	%
Student loans (4)	29,007		AAA	29,569		101.9	%	0.2	%
Rate reduction bonds (5)	80,106		AAA	84,468		105.4	%	0.7	%
Other	85,797		AA+	85,749		99.9	%	0.7	%
	622,323		AAA	634,445		101.9	%	5.2	%

Home equity (6)	$	3,124	AAA	$	2,677	85.7	%	0.0	%
	72		A	71		98.6	%	0.0	%
	7,662		BBB to B	5,573		72.7	%	0.0	%
	3,385		CCC to C	4,875		144.0	%	0.0	%
	182		D	64		35.2	%	0.0	%
	14,425		BB-	13,260		91.9	%	0.1	%
Total ABS	$	636,748	AAA	$	647,705	101.7	%	5.3	%

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

(1) The weighted average credit support % on credit cards is 18.9%.

(2) The weighted average credit support % on autos is 43.7%.

(3) The weighted average credit support % on U.K. securitized is 17.7%.

(4) The weighted average credit support % on student loans is 10.0%.

(5) The weighted average credit support % on rate reduction bonds is 10.4%.

(6) The weighted average credit support % on home equity is 22.6%.

The Company’s investment portfolio included $42.3 million par in sub-prime securities at September 30, 2011, with an estimated market value of $16.7 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 $8.5 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 September 30, 2011:

	Carrying		% of Asset		% of Investable
	Value		Class		Assets

Investment funds accounted for using the equity method	$	131,703	43.9	%	1.1	%
Corporate bonds	90,092		30.0	%	0.7	%
Other investments	78,510		26.1	%	0.6	%
Total	$	300,305	100.0	%	2.5	%

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

	Carrying		% of Asset		% of Investable
	Value		Class		Assets

U.S.-denominated	$	208,981	69.6	%	1.7	%
Euro-denominated	91,324		30.4	%	0.7	%
Total	$	300,305	100.0	%	2.5	%

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

	Carrying		% of Asset		% of Investable
	Value		Class		Assets
Sector:
Consumer cyclical	$	67,741	22.6	%	0.6	%
Media	41,762		13.9	%	0.3	%
Industrials	39,786		13.2	%	0.3	%
Basic materials	27,034		9.0	%	0.2	%
Consumer non-cyclical	21,051		7.0	%	0.2	%
Utilities	18,476		6.2	%	0.2	%
All other	84,455		28.1	%	0.7	%
Total	$	300,305	100.0	%	2.5	%

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 recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, 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 recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of net impairment losses recognized 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 recognized 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 recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses 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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			2009			2009			2011			2010

After-tax operating income available to common shareholders	$	107,409		$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		$	160,332		$	176,746		$	361,585
Net realized gains (losses), net of tax	28,458			44,799			21,585			71,821			68,611			61,119			45,503			88,592			69,190			94,842			175,233
Net impairment losses recognized in earnings, net of tax	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(4,643		)	(7,103		)	(8,091		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			69,119			5,097			38,410
Net foreign exchange (losses) gains, net of tax	59,948			(18,685		)	(37,142		)	6,581			(65,346		)	48,447			38,855			8,775			(19,591		)	4,121			21,956
Net income available to common shareholders	$	162,527		$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	274,407		$	273,703		$	589,093

Diluted per common share results:
After-tax operating income available to common shareholders	$	0.78		$	0.45		$	0.06		$	0.86		$	0.85		$	0.83		$	0.59		$	0.89		$	0.85		$	1.28		$	2.26
Net realized gains (losses), net of tax	0.21			0.32			0.15			0.48			0.45			0.38			0.27			0.49			0.37			0.68			1.09
Net impairment losses recognized in earnings, net of tax	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.03		)	(0.01		)	(0.03		)	(0.03		)	(0.05		)	(0.05		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(0.22		)	0.04			0.21			0.15			0.06			0.00			0.18			0.18			0.37			0.04			0.24
Net foreign exchange (losses) gains, net of tax	0.44			(0.13		)	(0.26		)	0.04			(0.43		)	0.30			0.23			0.05			(0.10		)	0.03			0.14
Net income available to common shareholders	$	1.19		$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	1.46		$	1.98		$	3.68

Weighted average common shares and common share equivalents outstanding — diluted	137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			187,601,448			138,542,558			159,951,594

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
	September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		March 31,		December 31,		September 30,		September 30,
	2011		2011		2011		2010		2010		2010		2010		2009		2009		2011

Effect of share repurchases:
Aggregate cost of shares repurchased	$	20,833	$	29,552	$	237,173	$	258,151	$	53,398	$	269,054	$	181,272	$	358,655	$	98,194	$	2,558,030
Shares repurchased	655,772		881,961		8,062,383		8,679,051		2,043,195		10,932,681		7,589,739		15,444,813		4,599,741		104,758,118
Average price per share repurchased	$	31.77	$	33.51	$	29.42	$	29.74	$	26.13	$	24.61	$	23.88	$	23.22	$	21.35	$	24.42

Average book value per common share (1)	$	31.10	$	30.67	$	30.17	$	29.87	$	28.55	$	26.50	$	24.99	$	23.75	$	21.71

Average repurchase price-to-book multiple	1.02x		1.09x		0.98x		1.00x		0.92x		0.93x		0.96x		0.98x		0.98x

Remaining share repurchase authorization (2)	$	941,970

(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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2011			2011			2011			2010			2010			2010			2010			2009			2009			2011			2010

After-tax operating income available to common shareholders	$	107,409		$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		$	160,332		$	176,746		$	361,585
Annualized after-tax operating income available to common shareholders (a)	$	429,636		$	245,912		$	31,436		$	517,956		$	522,688		$	528,728		$	394,924		$	637,724		$	641,328		$	235,661		$	482,113

Beginning 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		$	4,188,003		$	3,998,349
Ending common shareholders’ equity	4,149,371			4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349			4,135,822			4,149,371			4,392,910
Average common shareholders’ equity (b)	$	4,132,820		$	4,058,402		$	4,094,269		$	4,290,457		$	4,232,957		$	4,063,380		$	4,026,053		$	4,067,086		$	3,920,395		$	4,168,687		$	4,195,630

Annualized operating return on average common equity (a)/(b)	10.4		%	6.1		%	0.8		%	12.1		%	12.3		%	13.0		%	9.8		%	15.7		%	16.4		%	5.7		%	11.5		%

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:

	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,
	2011			2011			2011			2010			2010			2010			2010			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 18, 2014 (variable)	100,000			100,000			100,000			100,000			125,000			125,000			100,000			100,000			100,000
Total debt	$	400,000		$	400,000		$	400,000		$	400,000		$	425,000		$	425,000		$	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)	4,149,371			4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349			4,135,822
Total shareholders’ equity	$	4,474,371		$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349		$	4,460,822

Total capital	$	4,874,371		$	4,841,269		$	4,725,535		$	4,913,003		$	5,142,910		$	4,823,003		$	4,778,757		$	4,723,349		$	4,860,822

TALF non-recourse borrowings, at market value, due between 2012 to 2015 (various) (3)	314,137			318,441			322,222			325,770			331,797			336,213			346,746			217,565			219,843

Total capital and TALF non-recourse borrowings	$	5,188,508		$	5,159,710		$	5,047,757		$	5,238,773		$	5,474,707		$	5,159,216		$	5,125,503		$	4,940,914		$	5,080,665

Common shares outstanding, net of treasury shares (b)	133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802			164,285,034			178,572,927

Book value per common share (4) (a)/(b)	$	31.20		$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64		$	24.34		$	23.16

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

(1)	8,000,000 shares. ACGL has the right to redeem all or a portion of the shares at a redemption price of $25 per share.
(2)	5,000,000 shares. ACGL has the right to redeem all or a portion of the shares at a redemption price of $25 per share.
(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 13.8% and the ratio of debt and preferred to total capital would have been 20.0% at September 30, 2011.
(4)	Excludes the effects of stock options and restricted stock units outstanding.

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ARCH CAPITAL GROUP LTD. Reports