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

Attached files

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a12-4757_18k.htm
EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a12-4757_1ex99d1.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 December 31, 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
	e.	Eurozone Investments	18

V.	Other
	a.	Comments on Regulation G	19
	b.	Operating Income Reconciliation	20
	c.	Share Repurchase Activity	21
	d.	Annualized Operating Return on Average Common Equity	22
	e.	Capital Structure	23

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						Year Ended
	December 31,						December 31,
	2011		2010		Change		2011		2010		Change

Gross premiums written	$	699,662	$	664,212	5.3	%	$	3,436,456	$	3,266,787	5.2	%

Net premiums written	$	511,124	$	482,911	5.8	%	$	2,673,326	$	2,511,040	6.5	%

Net premiums earned	$	673,192	$	632,146	6.5	%	$	2,631,815	$	2,552,483	3.1	%

Underwriting income	$	67,046	$	48,356	38.7	%	$	44,654	$	195,004	(77.1	)%

Net investment income	$	80,467	$	90,601	(11.2	)%	$	338,198	$	364,878	(7.3	)%
Per diluted share	$	0.59	$	0.60	(1.7	)%	$	2.45	$	2.32	5.6	%

Net income available to common shareholders	$	136,811	$	227,651	(39.9	)%	$	410,514	$	816,744	(49.7	)%
Per diluted share	$	1.00	$	1.51	(33.8	)%	$	2.97	$	5.18	(42.7	)%

After-tax operating income available to common shareholders (1)	$	126,831	$	129,489	(2.1	)%	$	303,577	$	491,074	(38.2	)%
Per diluted share	$	0.92	$	0.86	7.0	%	$	2.20	$	3.12	(29.5	)%

Comprehensive income	$	150,619	$	50,245	199.8	%	$	385,778	$	908,565	(57.5	)%

Cash flow from operations	$	109,641	$	144,513	(24.1	)%	$	866,112	$	802,074	8.0	%

Diluted weighted average common shares and common share equivalents outstanding	137,473,670		150,306,429		(8.5	)%	138,289,702		157,565,157		(12.2	)%

					% Point						% Point
					Change						Change
Underwriting ratios:
Loss ratio	56.2	%	58.1	%	(1.9	)	65.6	%	59.5	%	6.1
Acquisition expense ratio	18.2	%	16.5	%	1.7		17.5	%	17.2	%	0.3
Other operating expense ratio	15.7	%	18.1	%	(2.4	)	15.2	%	15.8	%	(0.6	)
Combined ratio	90.1	%	92.7	%	(2.6	)	98.3	%	92.5	%	5.8

Financial measures:

Growth in book value per common share	2.7	%	0.8	%	1.9		6.8	%	23.2	%	(16.4	)

Annualized operating return on average common equity	12.0	%	12.1	%	(0.1	)	7.2	%	12.0	%	(4.8	)

Total return on investments (2)
Including effects of foreign exchange	0.82	%	(0.07	)%	89 bps		3.81	%	7.00	%	-319 bps
Excluding effects of foreign exchange	0.95	%	(0.04	)%	99 bps		4.10	%	7.26	%	-316 bps

(1) See page 19, 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.

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

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

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

Gross premiums written	$	699,662		$	860,289		$	911,939		$	964,566		$	664,212		$	831,788		$	817,100		$	953,687		$	718,712		$	3,436,456		$	3,266,787
Net premiums written	511,124			691,381			706,543			764,278			482,911			636,117			624,258			767,754			519,087			2,673,326			2,511,040

Net premiums earned	673,192			$	682,049		$	642,879		$	633,695		$	632,146		$	627,409		$	623,011		$	669,917		$	708,538		$	2,631,815		$	2,552,483
Fee income	982			848			784			815			2,814			874			883			794			894			3,429			5,365
Losses and loss adjustment expenses	(378,067		)	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(363,145		)	(428,051		)	(410,360		)	(1,727,553		)	(1,517,715		)
Acquisition expenses, net	(123,339		)	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(107,475		)	(117,624		)	(120,549		)	(462,937		)	(441,202		)
Other operating expenses	(105,722		)	(99,818		)	(99,166		)	(95,394		)	(114,454		)	(97,325		)	(91,030		)	(101,118		)	(99,305		)	(400,100		)	(403,927		)
Underwriting income (loss)	67,046			38,890			2,236			(63,518		)	48,356			60,486			62,244			23,918			79,218			44,654			195,004

Net investment income	80,467			82,753			86,671			88,307			90,601			90,768			90,537			92,972			93,551			338,198			364,878
Net realized gains	14,542			30,199			45,210			20,695			74,027			68,828			62,114			47,782			89,901			110,646			252,751
Net impairment losses recognized in earnings	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(9,062		)	(11,321		)
Equity in net income (loss) of investment funds accounted for using the equity method	(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			(9,605		)	61,400
Other income (loss)	(4,848		)	2,432			(4,265		)	4,567			6,165			1,840			4,528			5,978			5,428			(2,114		)	18,511
Other expenses	(6,777		)	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(10,503		)	(5,688		)	(6,680		)	(31,380		)	(28,868		)
Interest expense	(8,087		)	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(7,916		)	(7,260		)	(7,015		)	(31,691		)	(30,007		)
Net foreign exchange gains (losses)	12,613			60,040			(18,375		)	(36,912		)	6,039			(65,157		)	48,625			38,601			9,051			17,366			28,108
Income before income taxes	138,295			166,721			96,611			25,385			230,607			151,231			244,871			223,747			291,352			427,012			850,456
Income tax benefit (expense)	4,977			2,267			1,731			371			3,505			(3,200		)	(1,420		)	(6,753		)	(195		)	9,346			(7,868		)

Net income	143,272			168,988			98,342			25,756			234,112			148,031			243,451			216,994			291,157			436,358			842,588
Preferred dividends	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(25,844		)	(25,844		)
Net income available to common shareholders	$	136,811		$	162,527		$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	410,514		$	816,744

Underwriting Ratios
Loss ratio	56.2		%	62.2		%	67.1		%	77.9		%	58.1		%	57.3		%	58.3		%	63.9		%	57.9		%	65.6		%	59.5		%
Acquisition expense ratio	18.2		%	17.5		%	17.1		%	17.0		%	16.5		%	17.6		%	17.1		%	17.4		%	16.9		%	17.5		%	17.2		%
Other operating expense ratio	15.7		%	14.6		%	15.4		%	15.1		%	18.1		%	15.5		%	14.6		%	15.1		%	14.0		%	15.2		%	15.8		%
Combined ratio	90.1		%	94.3		%	99.6		%	110.0		%	92.7		%	90.4		%	90.0		%	96.4		%	88.8		%	98.3		%	92.5		%

Net premiums written to gross premiums written	73.1		%	80.4		%	77.5		%	79.2		%	72.7		%	76.5		%	76.4		%	80.5		%	72.2		%	77.8		%	76.9		%

Net income per common share
Basic	$	1.03		$	1.24		$	0.70		$	0.14		$	1.59		$	0.96		$	1.55		$	1.32		$	1.65		$	3.10		$	5.43
Diluted	$	1.00		$	1.19		$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	2.97		$	5.18

Weighted average common shares and common share equivalents outstanding
Basic	132,612,528			131,560,851			131,232,269			133,499,241			143,320,146			146,993,373			152,962,620			159,117,078			172,139,922			132,221,970			150,545,148
Diluted	137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			138,289,702			157,565,157

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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

	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,		December 31,
	2011			2011			2011			2011			2010			2010			2010			2010		2009
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,375,604		$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852		$	9,326,574		$	9,202,122	$	9,306,482
Short-term investments available for sale, at fair value	904,219			799,662			704,495			1,130,142			915,841			780,671			554,304			669,798		571,489
Investment of funds received under securities lending, at fair value (1)	48,419			44,553			145,224			9,951			69,660			200,020			209,635			177,954		91,160
Equity securities available for sale, at fair value	299,584			273,213			320,434			361,639			310,194			79,805			38,879			41,537		249
Other investments available for sale, at fair value	238,111			229,974			299,845			293,073			275,538			229,488			211,241			125,262		58,751
Investments accounted for using the fair value option	366,903			319,381			321,790			256,614			219,173			175,841			140,541			147,471		139,787
TALF investments, at fair value	387,702			392,455			399,341			400,970			402,449			410,881			407,469			406,997		250,265
Investments accounted for using the equity method	380,507			383,543			399,968			449,206			508,334			500,737			474,971			467,597		468,667
Total investments	12,001,049			11,972,615			11,838,099			11,817,612			11,659,048			12,070,295			11,363,614			11,238,738		10,886,850

Cash	351,699			369,895			411,001			406,877			362,740			365,997			341,469			338,708		334,571
Accrued investment income	70,739			71,264			71,083			69,057			74,837			79,180			72,102			74,214		70,673
Investment in joint venture	107,576			107,642			105,982			105,495			105,698			104,347			103,540			102,946		102,855
Fixed maturities and short-term investments pledged under securities lending, at fair value	56,393			72,399			150,501			198,418			75,575			203,221			214,564			184,221		212,820
Securities purchased under agreements to resell using funds received under securities lending (1)	—			20,032			—			185,176			—			—			—			—		115,839
Premiums receivable	501,563			606,963			712,397			633,144			503,434			662,634			706,503			699,385		595,030
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,851,584			1,840,191			1,855,342			1,772,130			1,763,985			1,715,122			1,721,059			1,711,307		1,720,270
Contractholder receivables	748,231			732,270			702,423			672,296			660,546			635,682			609,476			579,238		543,144
Prepaid reinsurance premiums	265,696			267,846			278,587			259,624			263,448			267,240			256,952			250,841		277,985
Deferred acquisition costs, net	279,109			306,810			310,616			302,271			277,861			297,250			293,982			298,371		280,372
Receivable for securities sold	462,891			1,067,188			733,931			749,708			56,145			1,329,508			1,084,122			1,427,085		187,171
Other assets	445,239			475,553			505,816			506,747			475,911			446,669			465,553			478,176		469,844
Total Assets	$	17,141,769		$	17,910,668		$	17,675,778		$	17,678,555		$	16,279,228		$	18,177,145		$	17,232,936		$	17,383,230	$	15,797,424

Liabilities
Reserve for losses and loss adjustment expenses	$	8,456,210		$	8,523,522		$	8,564,908		$	8,319,324		$	8,098,454		$	8,054,677		$	7,940,104		$	7,898,162	$	7,873,412
Unearned premiums	1,411,872			1,578,419			1,589,497			1,504,162			1,370,075			1,524,100			1,492,550			1,495,265		1,433,331
Reinsurance balances payable	133,866			123,815			154,860			131,512			132,452			130,274			128,723			114,254		156,500
Contractholder payables	748,231			732,270			702,423			672,296			660,546			635,682			609,476			579,238		543,144
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			100,000			125,000			125,000			100,000		100,000
TALF borrowings, at fair value	310,486			314,137			318,441			322,222			325,770			331,797			336,213			346,746		217,565
Securities lending payable	58,546			74,696			155,072			203,925			78,021			209,411			219,796			189,024		219,116
Payable for securities purchased	480,230			1,161,591			838,787			1,266,390			200,192			1,649,462			1,192,181			1,429,529		136,381
Other liabilities	513,842			527,847			510,521			533,189			500,715			498,832			490,890			552,255		494,626
Total Liabilities	12,513,283			13,436,297			13,234,509			13,353,020			11,766,225			13,459,235			12,834,933			13,004,473		11,474,075

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	549			544			541			535			534			531			529			527		548
Additional paid-in capital	161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926		253,466
Retained earnings	4,833,067			4,696,256			4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342		3,605,809
Accumulated other comprehensive income, net of deferred income tax	153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962		138,526
Common shares held in treasury, at cost	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—		—
Total Shareholders’ Equity	4,628,486			4,474,371			4,441,269			4,325,535			4,513,003			4,717,910			4,398,003			4,378,757		4,323,349
Total Liabilities and Shareholders’ Equity	$	17,141,769		$	17,910,668		$	17,675,778		$	17,678,555		$	16,279,228		$	18,177,145		$	17,232,936		$	17,383,230	$	15,797,424

Common shares outstanding, net of treasury shares (2)	134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802		164,285,034

Book value per common share	$	32.03		$	31.20		$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64	$	24.34

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

Comprehensive Income
Net income	$	143,272		$	168,988		$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	436,358		$	842,588
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	40,476			(71,861		)	84,862			40,370			(141,807		)	264,609			71,087			42,847			(8,954		)	93,847			236,736
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(4,788		)	(1,752		)
Reclassification of net realized gains, net of income taxes, included in net income	(29,785		)	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(32,611		)	(37,607		)	(74,886		)	(128,350		)	(169,931		)
Foreign currency translation adjustments	(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			(11,289		)	924
Other comprehensive income (loss)	7,347			(117,008		)	38,179			20,902			(183,867		)	215,139			32,269			2,436			(83,254		)	(50,580		)	65,977
Comprehensive Income	$	150,619		$	51,980		$	136,521		$	46,658		$	50,245		$	363,170		$	275,720		$	219,430		$	207,903		$	385,778		$	908,565

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2011			2011			2011			2011			2010			2010			2010			2010			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	544			541			535			534			531			529			527			548			595			534			548
Common shares issued, net	5			3			6			1			3			2			7			4			4			15			16
Purchases of common shares under share repurchase program	—			—			—			—			—			—			(5		)	(25		)	(51		)	—			(30		)
Balance at end of period	549			544			541			535			534			531			529			527			548			549			534

Additional Paid-in Capital
Balance at beginning of period	150,882			142,001			120,109			110,325			100,640			83,828			95,926			253,466			592,334			110,325			253,466
Common shares issued, net	1,857			(2		)	3,904			8			1,334			283			3,275			14			1,173			5,767			4,906
Exercise of stock options	2,926			3,007			2,245			4,127			2,716			10,486			7,964			16,700			12,380			12,305			37,866
Common shares retired	0			—			—			—			—			—			(36,212		)	(181,350		)	(358,611		)	—			(217,562		)
Amortization of share-based compensation	5,700			5,781			13,877			5,628			5,615			6,074			12,280			7,096			6,199			30,986			31,065
Other	54			95			1,866			21			20			(31		)	595			—			(9		)	2,036			584
Balance at end of period	161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926			253,466			161,419			110,325

Retained Earnings
Balance at beginning 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			4,422,553			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		)	(25,844		)	(25,844		)
Net income	143,272			168,988			98,342			25,756			234,112			148,031			243,451			216,994			291,157			436,358			842,588
Balance at end of period	4,833,067			4,696,256			4,533,729			4,441,848			4,422,553			4,194,902			4,053,332			3,816,342			3,605,809			4,833,067			4,422,553

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	146,576			263,584			225,405			204,503			388,370			173,231			140,962			138,526			221,780			204,503			138,526
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	10,691			(102,568		)	37,180			20,194			(185,221		)	208,310			38,476			5,240			(83,840		)	(34,503		)	66,805
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)	(353		)	(4,788		)	(1,752		)
Foreign currency translation adjustments, net of deferred income tax	(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)	939			(11,289		)	924
Balance at end of period	153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962			138,526			153,923			204,503

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			—			(549,912		)	—
Shares repurchased for treasury	(585		)	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(237,917		)	—			—			(295,560		)	(549,912		)
Balance at end of period	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—			(845,472		)	(549,912		)

Total Shareholders’ Equity	$	4,628,486		$	4,474,371		$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349		$	4,628,486		$	4,513,003

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

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

Operating Activities
Net income	$	143,272		$	168,988		$	98,342		$	25,756		$	234,112		$	148,031		$	243,451		$	216,994		$	291,157		$	436,358		$	842,588
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gains	(12,940		)	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(62,406		)	(49,483		)	(70,680		)	(113,922		)	(262,684		)
Net impairment losses included in earnings	1,959			2,739			1,684			2,680			3,230			2,075			4,410			1,606			4,493			9,062			11,321
Equity in net income or loss of investment funds accounted for using the equity method and other income	20,776			31,734			18,945			(355		)	(26,110		)	(11,545		)	(3,368		)	(15,012		)	(37,819		)	71,100			(56,035		)
Share-based compensation	5,700			5,781			13,877			5,628			5,615			6,074			12,280			7,096			6,199			30,986			31,065
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	(59,998		)	48,397			130,746			155,477			3,546			49,420			71,357			91,247			50,992			274,622			215,570
Unearned premiums, net of prepaid reinsurance premiums	(162,490		)	9,919			63,987			130,136			(149,242		)	9,024			236			96,645			(188,951		)	41,552			(43,337		)
Premiums receivable	106,818			82,200			(77,556		)	(118,688		)	157,034			63,197			(20,280		)	(116,571		)	99,023			(7,226		)	83,380
Deferred acquisition costs, net	27,245			1,115			(7,743		)	(22,518		)	18,910			47			2,038			(19,655		)	23,636			(1,901		)	1,340
Reinsurance balances payable	8,896			(19,368		)	23,109			(7,122		)	3,277			(4,853		)	19,267			(36,669		)	(1,467		)	5,515			(18,978		)
Other liabilities	30,620			5,925			(26,613		)	33,366			(47,339		)	23,914			(57,219		)	41,448			(26,439		)	43,298			(39,196		)
Other items, net	(217		)	2,109			32,075			42,701			19,741			54,574			(4,252		)	(33,023		)	33,839			76,668			37,040
Net Cash Provided By Operating Activities	109,641			309,924			221,967			224,580			144,513			267,424			205,514			184,623			183,983			866,112			802,074

Investing Activities
Purchases of:
Fixed maturity investments	(3,758,854		)	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(5,018,619		)	(4,885,606		)	(4,597,713		)	(5,221,819		)	(13,875,635		)	(16,936,257		)
Equity securities	(69,962		)	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(21,727		)	(52,283		)	(35,470		)	(413,024		)	(365,842		)
Other investments	(220,048		)	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(150,631		)	(132,819		)	(184,598		)	(593,862		)	(523,532		)
Proceeds from the sales of:
Fixed maturity investments	3,542,629			2,299,627			3,323,456			3,232,541			2,670,332			4,872,668			4,668,666			4,443,108			5,054,102			12,398,253			16,654,774
Equity securities	58,386			111,467			147,334			52,316			14,522			19,151			25,043			11,725			35,097			369,503			70,441
Other investments	147,243			191,767			119,780			84,967			133,211			68,843			87,536			89,510			200,912			543,757			379,100
Proceeds from redemptions and maturities of fixed maturities	296,408			200,671			283,512			253,898			266,044			226,889			244,312			212,625			146,480			1,034,489			949,870
Net (purchases) sales of short-term investments	(114,854		)	(123,211		)	459,091			(223,415		)	(129,794		)	(205,411		)	96,239			(102,921		)	129,070			(2,389		)	(341,887		)
Change in investment of securities lending collateral	16,150			80,376			48,853			(125,904		)	131,389			10,385			(30,772		)	30,092			406,590			19,475			141,094
Purchases of furniture, equipment and other	(3,461		)	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(6,057		)	(1,803		)	(3,897		)	(18,987		)	(11,664		)
Net Cash Provided By (Used For) Investing Activities	(106,363		)	(232,919		)	(131,125		)	(68,013		)	276,028			(186,455		)	27,003			(100,479		)	526,467			(538,420		)	16,097

Financing Activities
Purchases of common shares under share repurchase program	(3		)	(20,833		)	(29,552		)	(237,173		)	(258,150		)	(53,398		)	(269,054		)	(181,272		)	(358,656		)	(287,561		)	(761,874		)
Proceeds from common shares issued, net	3,245			1,609			(1,397		)	2,875			4,693			8,586			3,779			10,591			9,194			6,332			27,649
Proceeds from borrowings	—			—			—			—			—			—			50,000			214,526			—			—			264,526
Repayments of borrowings	(3,513		)	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(34,022		)	(86,317		)	(1,103		)	(15,352		)	(157,057		)
Change in securities lending collateral	(16,150		)	(80,376		)	(48,853		)	125,904			(131,389		)	(10,385		)	30,772			(30,092		)	(406,590		)	(19,475		)	(141,094		)
Other	766			818			2,467			714			(893		)	1,593			2,296			5,061			4,816			4,765			8,057
Preferred dividends paid	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(25,844		)	(25,844		)
Net Cash Used For Financing Activities	(22,116		)	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(222,690		)	(73,964		)	(758,800		)	(337,135		)	(785,637		)

Effects of exchange rate changes on foreign currency cash	642			(8,643		)	997			5,406			(526		)	9,270			(7,066		)	(6,043		)	(2,228		)	(1,598		)	(4,365		)

Increase (decrease) in cash	(18,196		)	(41,106		)	4,124			44,137			(3,257		)	24,528			2,761			4,137			(50,578		)	(11,041		)	28,169
Cash beginning of period	369,895			411,001			406,877			362,740			365,997			341,469			338,708			334,571			385,149			362,740			334,571
Cash end of period	$	351,699		$	369,895		$	411,001		$	406,877		$	362,740		$	365,997		341,469			$	338,708		$	334,571		$	351,699		$	362,740

Income taxes paid (received), net	$	(7,724	)	$	3,662		$	2,296		$	3,670		$	3,140		$	1,928		$	1,430		$	704		$	5,021		$	1,904		$	7,202
Interest paid	$	13,047		$	2,177		$	13,084		$	2,191		$	12,831		$	1,832		$	13,437		$	1,785		$	12,556		$	30,499		$	29,885

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 December 31, 2011 and 2010

(U.S. dollars in thousands)

	Three Months Ended									Three Months Ended
	December 31, 2011									December 31, 2010
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	540,617		$	161,904		$	699,662		$	527,783		$	139,015		$	664,212
Net premiums written	360,739			150,385			511,124			351,841			131,070			482,911

Net premiums earned	$	422,667		$	250,525		$	673,192		$	404,275		$	227,871		$	632,146
Fee income	729			253			982			761			2,053			2,814
Losses and loss adjustment expenses	(282,769		)	(95,298		)	(378,067		)	(264,848		)	(102,478		)	(367,326		)
Acquisition expenses, net	(73,975		)	(49,364		)	(123,339		)	(63,102		)	(41,722		)	(104,824		)
Other operating expenses	(78,221		)	(27,501		)	(105,722		)	(82,879		)	(31,575		)	(114,454		)
Underwriting income (loss)	$	(11,569	)	$	78,615		67,046			$	(5,793	)	$	54,149		48,356

Net investment income							80,467									90,601
Net realized gains							14,542									74,027
Net impairment losses recognized in earnings							(1,959		)							(3,230		)
Equity in net income (loss) of investment funds accounted for using the equity method							(14,702		)							22,990
Other income (loss)							(4,848		)							6,165
Other expenses							(6,777		)							(6,881		)
Interest expense							(8,087		)							(7,460		)
Net foreign exchange gains							12,613									6,039
Income before income taxes							138,295									230,607
Income tax benefit							4,977									3,505

Net income							143,272									234,112
Preferred dividends							(6,461		)							(6,461		)
Net income available to common shareholders							$	136,811								$	227,651

Underwriting Ratios
Loss ratio	66.9		%	38.0		%	56.2		%	65.5		%	45.0		%	58.1		%
Acquisition expense ratio (2)	17.3		%	19.7		%	18.2		%	15.4		%	18.3		%	16.5		%
Other operating expense ratio	18.5		%	11.0		%	15.7		%	20.5		%	13.9		%	18.1		%
Combined ratio	102.7		%	68.7		%	90.1		%	101.4		%	77.2		%	92.7		%

Net premiums written to gross premiums written	66.7		%	92.9		%	73.1		%	66.7		%	94.3		%	72.7		%

(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 — Year Ended December 31, 2011 and 2010

(U.S. dollars in thousands)

	Year Ended									Year Ended
	December 31, 2011									December 31, 2010
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	2,444,485		$	998,520		$	3,436,456		$	2,402,202		$	874,957		$	3,266,787
Net premiums written	1,721,279			952,047			2,673,326			1,658,963			852,077			2,511,040

Net premiums earned	$	1,679,047		$	952,768		$	2,631,815		$	1,651,106		$	901,377		$	2,552,483
Fee income	2,870			559			3,429			3,252			2,113			5,365
Losses and loss adjustment expenses	(1,172,742		)	(554,811		)	(1,727,553		)	(1,117,564		)	(400,151		)	(1,517,715		)
Acquisition expenses, net	(278,696		)	(184,241		)	(462,937		)	(263,201		)	(178,001		)	(441,202		)
Other operating expenses	(306,801		)	(93,299		)	(400,100		)	(312,404		)	(91,523		)	(403,927		)
Underwriting income (loss)	$	(76,322	)	$	120,976		44,654			$	(38,811	)	$	233,815		195,004

Net investment income							338,198									364,878
Net realized gains							110,646									252,751
Net impairment losses recognized in earnings							(9,062		)							(11,321		)
Equity in net income (loss) of investment funds accounted for using the equity method							(9,605		)							61,400
Other income (loss)							(2,114		)							18,511
Other expenses							(31,380		)							(28,868		)
Interest expense							(31,691		)							(30,007		)
Net foreign exchange gains							17,366									28,108
Income before income taxes							427,012									850,456
Income tax benefit (expense)							9,346									(7,868		)

Net income							436,358									842,588
Preferred dividends							(25,844		)							(25,844		)
Net income available to common shareholders							$	410,514								$	816,744

Underwriting Ratios
Loss ratio	69.8		%	58.2		%	65.6		%	67.7		%	44.4		%	59.5		%
Acquisition expense ratio (2)	16.4		%	19.3		%	17.5		%	15.7		%	19.7		%	17.2		%
Other operating expense ratio	18.3		%	9.8		%	15.2		%	18.9		%	10.2		%	15.8		%
Combined ratio	104.5		%	87.3		%	98.3		%	102.3		%	74.3		%	92.5		%

Net premiums written to gross premiums written	70.4		%	95.3		%	77.8		%	69.1		%	97.4		%	76.9		%

(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 — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended						Year Ended
	December 31,						December 31,
	2011			2010			2011			2010
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Property, energy, marine and aviation	$	41,244	11.4	$	44,258	12.6	$	335,589	19.5	$	321,529	19.4
Programs	62,874		17.4	60,969		17.3	297,985		17.3	273,076		16.5
Professional liability	54,085		15.0	51,559		14.7	237,860		13.8	268,176		16.2
Executive assurance	59,035		16.4	54,448		15.5	231,405		13.4	219,458		13.2
National accounts	19,110		5.3	14,024		4.0	80,973		4.7	67,925		4.1
Construction	22,912		6.4	20,014		5.7	120,405		7.0	112,827		6.8
Casualty	28,599		7.9	27,389		7.8	114,235		6.6	107,962		6.5
Travel and accident	13,751		3.8	14,486		4.1	71,940		4.2	71,237		4.3
Lenders products	21,543		6.0	30,942		8.8	86,694		5.0	92,921		5.6
Healthcare	9,303		2.6	10,290		2.9	35,652		2.1	37,508		2.3
Surety	12,734		3.5	7,918		2.3	42,475		2.5	34,149		2.1
Other (1)	15,549		4.3	15,544		4.3	66,066		3.9	52,195		3.0
Total	$	360,739	100.0	$	351,841	100.0	$	1,721,279	100.0	$	1,658,963	100.0

Net premiums earned
Property, energy, marine and aviation	$	79,979	18.9	$	77,811	19.2	$	322,510	19.2	$	335,967	20.3
Programs	75,085		17.8	69,462		17.2	287,598		17.1	272,406		16.5
Professional liability	62,467		14.8	63,152		15.6	252,037		15.0	264,603		16.0
Executive assurance	56,782		13.4	55,270		13.7	228,623		13.6	218,135		13.2
National accounts	20,572		4.9	17,360		4.3	79,542		4.7	74,538		4.5
Construction	28,569		6.8	26,837		6.6	112,764		6.7	109,394		6.6
Casualty	28,093		6.6	25,893		6.4	111,654		6.6	109,613		6.6
Travel and accident	15,840		3.7	15,705		3.9	69,945		4.2	66,791		4.0
Lenders products	18,796		4.4	19,617		4.9	75,291		4.5	71,170		4.3
Healthcare	8,825		2.1	9,701		2.4	35,906		2.1	39,722		2.4
Surety	11,847		2.8	9,810		2.4	41,119		2.4	37,967		2.3
Other (1)	15,812		3.8	13,657		3.4	62,058		3.9	50,800		3.3
Total	$	422,667	100.0	$	404,275	100.0	$	1,679,047	100.0	$	1,651,106	100.0

Net premiums written by client location
United States	$	265,586	73.6	$	260,226	74.0	$	1,208,007	70.2	$	1,183,238	71.3
Europe	48,820		13.5	44,565		12.7	273,578		15.9	272,348		16.4
Other	46,333		12.9	47,050		13.3	239,694		13.9	203,377		12.3
Total	$	360,739	100.0	$	351,841	100.0	$	1,721,279	100.0	$	1,658,963	100.0

Net premiums written by underwriting location
United States	$	254,463	70.5	$	248,197	70.5	$	1,153,835	67.0	$	1,133,173	68.3
Europe	78,323		21.7	78,732		22.4	463,855		26.9	436,483		26.3
Other	27,953		7.8	24,912		7.1	103,589		6.1	89,307		5.4
Total	$	360,739	100.0	$	351,841	100.0	$	1,721,279	100.0	$	1,658,963	100.0

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

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

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

Gross premiums written	$	540,617		$	634,280		$	635,005		$	634,583		$	527,783		$	624,490		$	616,353		$	633,576		$	563,087		$	2,444,485		$	2,402,202
Net premiums written	360,739			472,986			438,263			449,291			351,841			431,361			422,837			452,924			369,704			1,721,279			1,658,963

Net premiums earned	$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	1,679,047		$	1,651,106
Fee income	729			661			702			778			761			864			874			753			883			2,870			3,252
Losses and loss adjustment expenses	(282,769		)	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(275,294		)	(312,011		)	(278,746		)	(1,172,742		)	(1,117,564		)
Acquisition expenses, net	(73,975		)	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(65,359		)	(67,431		)	(60,926		)	(278,696		)	(263,201		)
Other operating expenses	(78,221		)	(77,078		)	(76,765		)	(74,737		)	(82,879		)	(77,078		)	(71,727		)	(80,720		)	(75,144		)	(306,801		)	(312,404		)
Underwriting income (loss)	$	(11,569	)	$	(5,818	)	$	(33,429	)	$	(25,506	)	$	(5,793	)	$	2,947		$	(6,033	)	$	(29,932	)	$	12,716		$	(76,322	)	$	(38,811	)

Underwriting Ratios
Loss ratio	66.9		%	66.4		%	73.4		%	73.0		%	65.5		%	64.4		%	67.9		%	72.6		%	65.3		%	69.8		%	67.7		%
Acquisition expense ratio (1)	17.3		%	17.4		%	16.0		%	14.9		%	15.4		%	16.1		%	15.9		%	15.5		%	14.1		%	16.4		%	15.7		%
Other operating expense ratio	18.5		%	17.6		%	18.7		%	18.3		%	20.5		%	18.7		%	17.7		%	18.8		%	17.6		%	18.3		%	18.9		%
Combined ratio	102.7		%	101.4		%	108.1		%	106.2		%	101.4		%	99.2		%	101.5		%	106.9		%	97.0		%	104.5		%	102.3		%

Net premiums written
Property, energy, marine and aviation	$	41,244		$	114,631		$	103,296		$	76,418		$	44,258		$	88,412		$	88,194		$	100,665		$	42,811		$	335,589		$	321,529
Programs	62,874			79,086			81,629			74,396			60,969			68,264			73,345			70,498			60,685			297,985			273,076
Professional liability	54,085			66,484			57,906			59,385			51,559			78,873			70,626			67,118			64,385			237,860			268,176
Executive assurance	59,035			62,328			53,974			56,068			54,448			51,503			52,514			60,993			58,561			231,405			219,458
National accounts	19,110			17,275			4,397			40,191			14,024			19,215			3,877			30,809			16,553			80,973			67,925
Construction	22,912			23,576			42,408			31,509			20,014			20,245			44,276			28,292			20,227			120,405			112,827
Casualty	28,599			30,563			24,939			30,134			27,389			28,493			26,617			25,463			23,037			114,235			107,962
Travel and accident	13,751			17,404			19,284			21,501			14,486			19,673			15,272			21,806			15,528			71,940			71,237
Lenders products	21,543			22,551			21,526			21,074			30,942			23,452			22,208			16,319			34,150			86,694			92,921
Healthcare	9,303			8,810			8,422			9,117			10,290			8,705			9,989			8,524			10,610			35,652			37,508
Surety	12,734			10,389			9,618			9,734			7,918			11,128			7,012			8,091			10,716			42,475			34,149
Other (2)	15,549			19,889			10,864			19,764			15,544			13,398			8,907			14,346			12,441			66,066			52,195
Total	$	360,739		$	472,986		$	438,263		$	449,291		$	351,841		$	431,361		$	422,837		$	452,924		$	369,704		$	1,721,279		$	1,658,963

Net premiums earned
Property, energy, marine and aviation	$	79,979		$	92,288		$	76,644		$	73,599		$	77,811		$	82,301		$	80,818		$	95,037		$	91,549		$	322,510		$	335,967
Programs	75,085			73,561			71,934			67,018			69,462			68,404			68,381			66,159			67,672			287,598			272,406
Professional liability	62,467			64,403			57,767			67,400			63,152			69,900			63,642			67,909			64,987			252,037			264,603
Executive assurance	56,782			56,783			60,488			54,570			55,270			51,675			54,958			56,232			56,764			228,623			218,135
National accounts	20,572			19,642			18,166			21,162			17,360			18,595			16,810			21,773			19,606			79,542			74,538
Construction	28,569			28,590			27,214			28,391			26,837			25,664			27,982			28,911			31,491			112,764			109,394
Casualty	28,093			30,305			24,829			28,427			25,893			27,503			28,148			28,069			27,198			111,654			109,613
Travel and accident	15,840			19,051			19,455			15,599			15,705			17,418			17,590			16,078			16,580			69,945			66,791
Lenders products	18,796			18,293			19,966			18,236			19,617			17,593			17,153			16,807			17,201			75,291			71,170
Healthcare	8,825			9,340			9,089			8,652			9,701			9,738			10,340			9,943			9,886			35,906			39,722
Surety	11,847			10,091			9,402			9,779			9,810			9,876			8,023			10,258			11,448			41,119			37,967
Other (2)	15,812			15,623			15,865			14,758			13,657			13,214			11,628			12,301			12,268			62,058			50,800
Total	$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477		$	426,649		$	1,679,047		$	1,651,106

(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						Year Ended
	December 31,						December 31,
	2011			2010			2011			2010
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Casualty (1)	$	34,968	23.3	$	32,274	24.6	$	181,957	19.1	$	186,774	21.9
Property excluding property catastrophe (2)	36,430		24.2	46,835		35.7	226,013		23.7	249,791		29.3
Other specialty	48,555		32.3	27,008		20.6	211,019		22.2	131,158		15.4
Property catastrophe	11,636		7.7	3,529		2.7	246,793		25.9	202,989		23.8
Marine and aviation	16,130		10.7	21,303		16.3	77,309		8.1	77,063		9.0
Other	2,666		1.8	121		0.1	8,956		1.0	4,302		0.6
Total	$	150,385	100.0	$	131,070	100.0	$	952,047	100.0	$	852,077	100.0

Net premiums earned
Casualty (1)	$	47,317	18.9	$	48,609	21.3	$	196,370	20.6	$	231,338	25.7
Property excluding property catastrophe (2)	60,607		24.2	70,744		31.0	243,702		25.6	282,163		31.3
Other specialty	60,891		24.3	30,296		13.3	189,093		19.8	95,611		10.6
Property catastrophe	62,408		24.9	54,768		24.0	238,748		25.1	215,148		23.9
Marine and aviation	17,361		6.9	22,445		9.8	77,819		8.2	72,886		8.1
Other	1,941		0.8	1,009		0.6	7,036		0.7	4,231		0.4
Total	$	250,525	100.0	$	227,871	100.0	$	952,768	100.0	$	901,377	100.0

Net premiums written
Pro rata	$	105,909	70.4	$	103,124	78.7	$	416,321	43.7	$	411,962	48.3
Excess of loss	44,476		29.6	27,946		21.3	535,726		56.3	440,115		51.7
Total	$	150,385	100.0	$	131,070	100.0	$	952,047	100.0	$	852,077	100.0

Net premiums earned
Pro rata	$	114,600	45.7	$	112,589	49.4	$	435,311	45.7	$	449,532	49.9
Excess of loss	135,925		54.3	115,282		50.6	517,457		54.3	451,845		50.1
Total	$	250,525	100.0	$	227,871	100.0	$	952,768	100.0	$	901,377	100.0

Net premiums written by client location
United States	$	60,860	40.5	$	63,690	48.6	$	512,319	53.8	$	496,947	58.3
Europe	34,835		23.2	29,436		22.5	250,809		26.3	195,006		22.9
Bermuda	16,054		10.7	13,490		10.3	60,246		6.3	75,517		8.9
Other	38,636		25.6	24,454		18.6	128,673		13.6	84,607		9.9
Total	$	150,385	100.0	$	131,070	100.0	$	952,047	100.0	$	852,077	100.0

Net premiums written by underwriting location
Bermuda	$	82,087	54.6	$	63,955	48.8	$	531,254	55.8	$	461,890	54.2
United States	55,394		36.8	57,435		43.8	323,731		34.0	307,639		36.1
Other	12,904		8.6	9,680		7.4	97,062		10.2	82,548		9.7
Total	$	150,385	100.0	$	131,070	100.0	$	952,047	100.0	$	852,077	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																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2011			2011			2011			2011			2010			2010			2010			2010			2009			2011			2010

Gross premiums written	$	161,904		$	227,837		$	277,766		$	331,013		$	139,015		$	208,770		$	203,695		$	323,477		$	159,229		$	998,520		$	874,957
Net premiums written	150,385			218,395			268,280			314,987			131,070			204,756			201,421			314,830			149,383			952,047			852,077

Net premiums earned	$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	952,768		$	901,377
Fee income	253			187			82			37			2,053			10			9			41			11			559			2,113
Losses and loss adjustment expenses	(95,298		)	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(87,851		)	(116,040		)	(131,614		)	(554,811		)	(400,151		)
Acquisition expenses, net	(49,364		)	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(42,116		)	(50,193		)	(59,623		)	(184,241		)	(178,001		)
Other operating expenses	(27,501		)	(22,740		)	(22,401		)	(20,657		)	(31,575		)	(20,247		)	(19,303		)	(20,398		)	(24,161		)	(93,299		)	(91,523		)
Underwriting income (loss)	$	78,615		$	44,708		$	35,665		$	(38,012	)	$	54,149		$	57,539		$	68,277		$	53,850		$	66,502		$	120,976		$	233,815

Underwriting Ratios
Loss ratio	38.0		%	54.6		%	56.0		%	86.8		%	45.0		%	43.5		%	40.4		%	48.3		%	46.7		%	58.2		%	44.4		%
Acquisition expense ratio	19.7		%	17.8		%	19.0		%	20.9		%	18.3		%	20.4		%	19.4		%	20.9		%	21.2		%	19.3		%	19.7		%
Other operating expense ratio	11.0		%	9.3		%	9.7		%	9.1		%	13.9		%	9.4		%	8.9		%	8.5		%	8.6		%	9.8		%	10.2		%
Combined ratio	68.7		%	81.7		%	84.7		%	116.8		%	77.2		%	73.3		%	68.7		%	77.7		%	76.5		%	87.3		%	74.3		%

Net premiums written
Casualty (1)	$	34,968		$	34,873		$	40,755		$	71,361		$	32,274		$	38,276		$	43,642		$	72,582		$	68,693		$	181,957		$	186,774
Property excluding property catastrophe (2)	36,430			64,495			53,938			71,150			46,835			70,149			57,880			74,927			49,413			226,013			249,791
Other specialty	48,555			40,882			43,937			77,645			27,008			30,468			18,920			54,762			10,578			211,019			131,158
Property catastrophe	11,636			59,961			108,235			66,961			3,529			40,255			70,403			88,802			3,022			246,793			202,989
Marine and aviation	16,130			17,037			19,978			24,164			21,303			24,913			9,609			21,238			17,576			77,309			77,063
Other	2,666			1,147			1,437			3,706			121			695			967			2,519			101			8,956			4,302
Total	$	150,385		$	218,395		$	268,280		$	314,987		$	131,070		$	204,756		$	201,421		$	314,830		$	149,383		$	952,047		$	852,077

Net premiums earned
Casualty (1)	$	47,317		$	49,066		$	51,493		$	48,494		$	48,609		$	52,792		$	59,501		$	70,436		$	86,193		$	196,370		$	231,338
Property excluding property catastrophe (2)	60,607			62,565			57,524			63,006			70,744			66,438			65,742			79,239			94,716			243,702			282,163
Other specialty	60,891			48,722			40,511			38,969			30,296			25,254			22,292			17,769			24,085			189,093			95,611
Property catastrophe	62,408			64,910			59,788			51,642			54,768			54,206			52,301			53,873			56,937			238,748			215,148
Marine and aviation	17,361			17,739			21,093			21,626			22,445			16,106			16,263			18,072			18,882			77,819			72,886
Other	1,941			1,077			1,651			2,367			1,009			732			1,439			1,051			1,076			7,036			4,231
Total	$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440		$	281,889		$	952,768		$	901,377

(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)

	December 31,					September 30,					June 30,					March 31,					December 31,
	2011					2011					2011					2011					2010
Investable assets:
Fixed maturities available for sale, at fair value	$	9,375,604		76	%	$	9,529,834		78	%	$	9,247,002		77	%	$	8,916,017		76	%	$	8,957,859		76	%
Fixed maturities, at fair value (1)	147,779			1	%	122,866			1	%	102,897			1	%	117,391			1	%	124,969			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	56,393			1	%	72,399			1	%	150,501			1	%	161,888			1	%	75,575			1	%
Total fixed maturities	9,579,776			78	%	9,725,099			80	%	9,500,400			79	%	9,195,296			78	%	9,158,403			78	%
Short-term investments available for sale, at fair value	904,219			7	%	799,662			6	%	704,495			6	%	1,130,142			10	%	915,841			8	%
Short-term investments pledged under securities lending agreements, at fair value (2)	—			0	%	—			0	%	—			0	%	36,530			0	%	—			0	%
Cash	351,699			3	%	369,895			3	%	411,001			3	%	406,877			3	%	362,740			3	%
Equity securities available for sale, at fair value	299,584			2	%	273,213			2	%	320,434			3	%	361,639			3	%	310,194			3	%
Equity securities, at fair value (1)	87,403			1	%	100,719			1	%	152,844			1	%	100,117			1	%	94,204			1	%
Other investments available for sale, at fair value	238,111			2	%	229,974			2	%	299,845			2	%	293,073			2	%	275,538			2	%
Other investments, at fair value (1)	131,721			1	%	95,796			1	%	66,049			1	%	39,106			0	%	—			—
TALF investments, at fair value (3)	387,702			3	%	392,455			3	%	399,341			3	%	400,970			3	%	402,449			3	%
Investments accounted for using the equity method	380,507			3	%	383,543			3	%	399,968			3	%	449,206			4	%	508,334			4	%
Securities sold but not yet purchased	(27,178		)	0	%	(46,526		)	0	%	(51,626		)	0	%	(41,863		)	0	%	(41,143		)	(1	)%
Securities transactions entered into but not settled at the balance sheet date	(17,339		)	0	%	(94,403		)	(1	)%	(104,856		)	(1	)%	(516,682		)	(4	)%	(144,047		)	(1	)%
Total investable assets	$	12,316,205		100	%	$	12,229,427		100	%	$	12,097,895		100	%	$	11,854,411		100	%	$	11,842,513		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	2.99					3.17					2.87					2.73					2.83
Average S&P/Moody’s credit ratings (4)	AA/Aa1					AA+/Aa1					AA+/Aa1					AA+/Aa1					AA+/Aa1
Imbedded book yield (before investment expenses)	2.98		%			3.09		%			3.23		%			3.36		%			3.52		%

Credit quality distribution of total fixed maturities (5):
U.S. government and government agencies (6)	$	3,154,480		33	%	$	2,968,250		30	%	$	2,880,650		30	%	$	2,628,362		29	%	$	2,712,187		29	%
AAA	3,229,161			34	%	3,453,116			36	%	3,622,886			38	%	3,806,887			41	%	3,819,570			42	%
AA	1,425,249			15	%	1,531,869			16	%	1,194,430			13	%	1,043,463			11	%	1,053,666			12	%
A	884,957			9	%	754,421			8	%	765,831			8	%	697,002			7	%	605,483			7	%
BBB	412,566			4	%	555,023			6	%	472,491			5	%	425,913			5	%	388,564			4	%
BB	140,029			1	%	151,665			1	%	158,517			2	%	154,537			2	%	133,673			1	%
B	165,003			2	%	140,571			1	%	241,538			2	%	250,318			3	%	242,479			3	%
Lower than B	114,672			1	%	106,775			1	%	97,748			1	%	100,409			1	%	109,596			1	%
Not rated	53,659			1	%	63,409			1	%	66,309			1	%	88,405			1	%	93,185			1	%
Total fixed maturities, at fair value	$	9,579,776		100	%	$	9,725,099		100	%	$	9,500,400		100	%	$	9,195,296		100	%	$	9,158,403		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.

(4) Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard and Poors (“S&P”) and Moody’s Investors Service (“Moody’s”).

(5) For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.

(6) Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.

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 December 31, 2011:

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

Corporates	$	2,403,585	$	69,334	$	(28,448	)	$	40,886		$	2,362,699	101.7	%
Non-U.S. government-backed corporates	238,224		9,069		(1,474		)	7,595			230,629		103.3	%
FDIC guaranteed corporates	77,244		1,004		—			1,004			76,240		101.3	%
U.S. government and government agencies	1,451,993		34,811		(3		)	34,808			1,417,185		102.5	%
Agency mortgage-backed securities	1,391,181		24,623		(1,023		)	23,600			1,367,581		101.7	%
Non-agency mortgage-backed securities	201,581		3,010		(22,203		)	(19,193		)	220,774		91.3	%
Agency commercial mortgage-backed securities	311,306		9,055		(1,317		)	7,738			303,568		102.5	%
Non-agency commercial mortgage-backed securities	735,020		19,725		(1,587		)	18,138			716,882		102.5	%
Municipal bonds	1,430,565		77,977		(886		)	77,091			1,353,474		105.7	%
Non-U.S. government securities	762,321		33,486		(17,684		)	15,802			746,519		102.1	%
Asset-backed securities	576,757		14,649		(10,078		)	4,571			572,186		100.8	%
Total	$	9,579,777	$	296,743	$	(84,703	)	$	212,040		$	9,367,737	102.3	%

Corporates (Excluding Guaranteed Amounts)

The following table summarizes the Company’s corporate bonds by sector and by credit quality at December 31, 2011, excluding guaranteed amounts:

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Financials	$	852,944	35.5	%	6.9	%
Industrials	1,089,074		45.3	%	8.8	%
Utilities	92,079		3.8	%	0.7	%
Foreign agencies	51,993		2.2	%	0.4	%
All other (1)	317,495		13.2	%	2.6	%
Total	$	2,403,585	100.0	%	19.5	%

Credit quality distribution (3):
AAA	$	623,473	25.9	%	5.1	%
AA	388,998		16.2	%	3.2	%
A	695,281		28.9	%	5.6	%
BBB	353,786		14.7	%	2.9	%
BB	132,992		5.5	%	1.1	%
B	142,424		5.9	%	1.2	%
Lower than B	18,726		0.8	%	0.2	%
Not rated	47,905		2.1	%	0.4	%
Total	$	2,403,585	100.0	%	19.5	%

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at December 31, 2011, excluding guaranteed amounts and covered bonds:

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

General Electric Co.	$	40,019	1.7	%	0.3	%	AA+/Aa2
Abbey National Treasury Svcs	29,669		1.2	%	0.2	%	AA-/A1
Total SA	29,514		1.2	%	0.2	%	AA-/Aa1
National Australia Bank Limited	29,324		1.2	%	0.2	%	AA-/Aa2
Royal Dutch Shell PLC	28,636		1.2	%	0.2	%	AA/Aa1
Verizon Communications Inc.	26,017		1.1	%	0.2	%	A-/A3
JPMorgan Chase & Co.	25,848		1.1	%	0.2	%	A/Aa3
Berkshire Hathaway Inc.	25,759		1.1	%	0.2	%	A/A2
Australia & New Zealand Banking Group Ltd.	24,703		1.0	%	0.2	%	AA-/Aa3
Svenska Handelsbanken AB	21,130		0.9	%	0.2	%	AA-/Aa2
Total	$	280,619	11.7	%	2.3	%

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

(2) Ratings as assigned by S&P and Moody’s, respectively.

(3) For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.

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 December 31, 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	$	2,475	AAA	$	2,401	97.0	%	0.0	%
	2004	15,219		BBB	13,565		89.1	%	0.1	%
	2005	49,966		B-	42,922		85.9	%	0.3	%
	2006	30,522		CCC+	24,349		79.8	%	0.2	%
	2007	42,344		CCC	37,439		88.4	%	0.3	%
	2008	7,372		CCC	6,765		91.8	%	0.1	%
	2009 (6)	40,322		AAA	42,733		106.0	%	0.3	%
	2010 (6)	32,554		AAA	31,407		96.5	%	0.3	%
Total non-agency MBS		$	220,774	BBB-	$	201,581	91.3	%	1.6	%

Non-agency CMBS:	1998	$	3,509	AAA	$	3,561	101.5	%	0.0	%
	2002	35,186		AAA	35,322		100.4	%	0.3	%
	2003	41,487		AAA	42,674		102.9	%	0.3	%
	2004	29,297		AAA	29,279		99.9	%	0.2	%
	2005	48,934		AAA	48,988		100.1	%	0.4	%
	2006	5,576		A	5,517		98.9	%	0.0	%
	2007	77,536		AA	82,577		106.5	%	0.7	%
	2008	190		AA+	185		97.4	%	0.0	%
	2010	244,556		AAA	249,464		102.0	%	2.0	%
	2011	230,611		AAA	237,453		103.0	%	1.9	%
Total non-agency CMBS		$	716,882	AAA	$	735,020	102.5	%	6.0	%

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

Wtd. average loan age (months)	67		71		46
Wtd. average life (months) (2)	23		65		37
Wtd. average loan-to-value % (3)	70.2	%	68.2	%	66.3	%
Total delinquencies (4)	17.9	%	23.6	%	4.2	%
Current credit support % (5)	41.2	%	10.2	%	28.5	%

(1) Loans defeased with government/agency obligations represented approximately 3% 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 December 31, 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 31% to 87%, while the range of loan-to-values on CMBS is 31% to 100%.

(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) December 31, 2011:

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

Sector:
Credit cards (1)	$	216,439	AAA	$	220,173	101.7	%	1.8	%
Autos (2)	162,059		AAA	161,148		99.4	%	1.3	%
U.K. securitized (3)	18,327		AAA	18,087		98.7	%	0.1	%
Student loans (4)	22,471		AA+	23,070		102.7	%	0.2	%
Rate reduction bonds (5)	67,263		AAA	70,036		104.1	%	0.6	%
Other	71,567		A+	70,881		99.0	%	0.6	%
	558,126		AA+	563,395		100.9	%	4.6	%

Home equity (6)	$	3,026	AAA	$	2,562	84.7	%	0.0	%
	31		A	30		96.8	%	0.0	%
	6,413		BBB to B	5,717		89.1	%	0.0	%
	4,412		CCC to C	4,970		112.6	%	0.0	%
	178		D	83		46.6	%	0.0	%
	14,060		BB-	13,362		95.0	%	0.1	%

Total ABS	$	572,186	AA+	$	576,757	100.8	%	4.7	%

The effective duration of the total ABS was 1.3 years at December 31, 2011.

(1) The weighted average credit support % on credit cards is 20.0%.

(2) The weighted average credit support % on autos is 28.3%.

(3) The weighted average credit support % on U.K. securitized is 18.5%.

(4) The weighted average credit support % on student loans is 7.9%.

(5) The weighted average credit support % on rate reduction bonds is 9.0%.

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

The Company’s investment portfolio included $40.1 million par in sub-prime securities at December 31, 2011, with an estimated market value of $15.4 million and an average credit quality of “BB+/Ba2”. 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 $7.3 million estimated market value of sub-prime securities with an average credit quality of “CCC” from Standard & Poors and “Caa2” from Moody’s.

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Bank Loan Investments

(U.S. dollars in thousands)

Bank Loan Investments

The Company’s investments in bank loans are included in the following categories at December 31, 2011:

	Fair		% of Asset		% of Investable
	Value		Class		Assets
Composition:
Investment funds accounted for using the equity method	$	128,338	39.4	%	1.0	%
Corporate bonds	88,759		27.2	%	0.7	%
Other investments	108,908		33.4	%	0.9	%
Total	$	326,005	100.0	%	2.6	%

Currency:
U.S.-denominated	$	236,138	72.4	%	1.9	%
Euro-denominated	89,867		27.6	%	0.7	%
Total	$	326,005	100.0	%	2.6	%

Sector:
Consumer cyclical	$	71,629	22.0	%	0.6	%
Media	39,359		12.1	%	0.3	%
Industrials	38,245		11.7	%	0.3	%
Basic materials	32,454		10.0	%	0.3	%
Consumer non-cyclical	24,030		7.4	%	0.2	%
Utilities	19,675		6.0	%	0.2	%
All other	100,613		30.8	%	0.8	%
Total	$	326,005	100.0	%	2.6	%

Weighted average rating factor (Moody’s)	B2

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Eurozone Investments

(U.S. dollars in thousands)

Composition of Eurozone Fixed Maturities

The fair value of the Company’s Eurozone fixed maturities are as follows at December 31, 2011:

			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other (5)			Total
Country (1):
Germany	$	170,512	$	1,266	$	4,294	$	7,064	$	18,334	$	252		$	201,722
Netherlands	10,177		32,966		45,440		30,180		5,742		19,940			144,445
France	3,040		3,415		29,683		69,610		4,870		8,836			119,454
Finland	83,772		232		—		—		—		—			84,004
Supranational (6)	83,193		—		—		—		—		—			83,193
Spain	3,220		3,239		193		12,847		6,596		206			26,301
Luxembourg	—		—		19,573		—		2,104		(26		)	21,651
Italy	6,725		—		7,121		3,726		2,293		(143		)	19,722
Belgium	1,936		—		—		—		—		—			1,936
Ireland	—		1,129		781		—		—		—			1,910
Portugal	—		—		614		—		—		—			614
Total	$	362,575	$	42,247	$	107,699	$	123,427	$	39,939	$	29,065		$	704,952

(1) The country allocations set forth in the table are based on various assumptions made by the Company in assessing the country in which the underlying credit risk resides, including a review of the jurisdiction of organization, business operations and other factors. Based on such analysis, the Company does not believe that it has any Eurozone fixed maturities from Austria, Cyprus, Estonia, Greece, Malta, Slovakia or Slovenia at December 31, 2011.

(2) Sovereign includes securities issued and/or guaranteed by Eurozone governments.

(3) Securities issued by Eurozone banks where the security is backed by a separate group of loans.

(4) Included in corporate bonds in the “Bank Loan Investments” table above.

(5) Includes long or (short) net equity positions and other.

(6) Includes World Bank, European Investment Bank, International Finance Corp. and European Bank for Reconstruction and Development.

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

After-tax operating income available to common shareholders	126,831			$	107,409		$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		303,577			$	491,074
Net realized gains, net of tax	13,464			28,458			44,799			21,585			71,821			68,611			61,119			45,503			88,592			108,306			247,054
Net impairment losses recognized in earnings, net of tax	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)	(4,493		)	(9,062		)	(11,321		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050			32,391			(9,605		)	61,400
Net foreign exchange gains (losses), net of tax	13,177			59,948			(18,685		)	(37,142		)	6,581			(65,346		)	48,447			38,855			8,775			17,298			28,537
Net income available to common shareholders	$	136,811		$	162,527		$	91,881		$	19,295		$	227,651		$	141,570		$	236,990		$	210,533		$	284,696		$	410,514		$	816,744

Diluted per common share results:
After-tax operating income available to common shareholders	$	0.92		$	0.78		$	0.45		$	0.06		$	0.86		$	0.85		$	0.83		$	0.59		$	0.89		$	2.20		$	3.12
Net realized gains, net of tax	0.10			0.21			0.32			0.15			0.48			0.45			0.38			0.27			0.49			0.78			1.56
Net impairment losses recognized in earnings, net of tax	(0.01		)	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.03		)	(0.01		)	(0.03		)	(0.07		)	(0.07		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(0.11		)	(0.22		)	0.04			0.21			0.15			0.06			0.00			0.18			0.18			(0.07		)	0.39
Net foreign exchange gains (losses), net of tax	0.10			0.44			(0.13		)	(0.26		)	0.04			(0.43		)	0.30			0.23			0.05			0.13			0.18
Net income available to common shareholders	$	1.00		$	1.19		$	0.67		$	0.14		$	1.51		$	0.92		$	1.48		$	1.26		$	1.58		$	2.97		$	5.18

Weighted average common shares and common share equivalents outstanding — diluted	137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481			179,732,001			138,289,702			157,565,157

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

Effect of share repurchases:
Aggregate cost of shares repurchased	$	3	$	20,833	$	29,552	$	237,173	$	258,151	$	53,398	$	269,054	$	181,272	$	358,655	$	2,558,033
Shares repurchased	100		655,772		881,961		8,062,383		8,679,051		2,043,195		10,932,681		7,589,739		15,444,813		104,758,218
Average price per share repurchased	$	31.51	$	31.77	$	33.51	$	29.42	$	29.74	$	26.13	$	24.61	$	23.88	$	23.22	$	24.42

Average book value per common share (1)	$	31.61	$	31.10	$	30.67	$	30.17	$	29.87	$	28.55	$	26.50	$	24.99	$	23.75

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

Remaining share repurchase authorization (2)	$	941,967

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

After-tax operating income available to common shareholders	$	126,831		$	107,409		$	61,478		$	7,859		$	129,489		$	130,672		$	132,182		$	98,731		$	159,431		$	303,577		$	491,074
Annualized after-tax operating income available to common shareholders (a)	$	507,324		$	429,636		$	245,912		$	31,436		$	517,956		$	522,688		$	528,728		$	394,924		$	637,724		$	303,577		$	491,074

Beginning 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		$	4,188,003		$	3,998,349
Ending common shareholders’ equity	4,303,486			4,149,371			4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349			4,303,486			4,188,003
Average common shareholders’ equity (b)	$	4,226,429		$	4,132,820		$	4,058,402		$	4,094,269		$	4,290,457		$	4,232,957		$	4,063,380		$	4,026,053		$	4,067,086		$	4,245,745		$	4,093,176

Annualized operating return on average common equity (a)/(b)	12.0		%	10.4		%	6.1		%	0.8		%	12.1		%	12.3		%	13.0		%	9.8		%	15.7		%	7.2		%	12.0		%

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:

	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,
	2011			2011			2011			2011			2010			2010			2010			2010			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			100,000			125,000			125,000			100,000			100,000
Total debt	$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	425,000		$	425,000		$	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)	4,303,486			4,149,371			4,116,269			4,000,535			4,188,003			4,392,910			4,073,003			4,053,757			3,998,349
Total shareholders’ equity	$	4,628,486		$	4,474,371		$	4,441,269		$	4,325,535		$	4,513,003		$	4,717,910		$	4,398,003		$	4,378,757		$	4,323,349

Total capital	$	5,028,486		$	4,874,371		$	4,841,269		$	4,725,535		$	4,913,003		$	5,142,910		$	4,823,003		$	4,778,757		$	4,723,349

TALF non-recourse borrowings, at market value, due between 2012 to 2015 (various) (3)	310,486			314,137			318,441			322,222			325,770			331,797			336,213			346,746			217,565

Total capital and TALF non-recourse borrowings	$	5,338,972		$	5,188,508		$	5,159,710		$	5,047,757		$	5,238,773		$	5,474,707		$	5,159,216		$	5,125,503		$	4,940,914

Common shares outstanding, net of treasury shares (b)	134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802			164,285,034

Book value per common share (4) (a)/(b)	$	32.03		$	31.20		$	31.00		$	30.34		$	29.99		$	29.75		$	27.36		$	25.64		$	24.34

Leverage ratios:
Senior notes/total capital	6.0		%	6.2		%	6.2		%	6.3		%	6.1		%	5.8		%	6.2		%	6.3		%	6.4		%
Revolving credit agreement borrowings/total capital	2.0		%	2.1		%	2.1		%	2.1		%	2.0		%	2.4		%	2.6		%	2.1		%	2.1		%
Debt/total capital	8.0		%	8.2		%	8.3		%	8.5		%	8.1		%	8.3		%	8.8		%	8.4		%	8.5		%
Preferred/total capital	6.5		%	6.7		%	6.7		%	6.9		%	6.6		%	6.3		%	6.7		%	6.8		%	6.9		%
Debt and preferred/total capital	14.4		%	14.9		%	15.0		%	15.3		%	14.8		%	14.6		%	15.6		%	15.2		%	15.3		%

(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 13.3% and the ratio of debt and preferred to total capital would have been 19.4% at December 31, 2011.

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

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