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

Attached files

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a12-10145_18k.htm
EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a12-10145_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 March 31, 2012

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. The adoption of new accounting guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts was adopted retrospectively and has been applied to all prior period financial information in this financial supplement.

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
	c.	Insurance Segment Underwriting Results	9-10
	d.	Reinsurance Segment Underwriting Results	11-12

IV.	Investment Information
	a.	Investable Asset Summary, Investment Portfolio Metrics and Credit Quality Distribution	13
	b.	Composition of Fixed Maturities and Analysis of Corporate Exposures	14
	c.	Mortgage Backed, Commercial Mortgage Backed and Asset Backed Securities	15
	d.	Bank Loan Investments	16
	e.	Eurozone 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
	March 31,
	2012		2011			Change

Gross premiums written	$	1,066,656	$	964,566		10.6	%

Net premiums written	$	863,611	$	764,278		13.0	%

Net premiums earned	$	680,312	$	633,695		7.4	%

Underwriting income (loss)	$	67,193	$	(63,980	)	N/M

Net investment income	$	74,297	$	88,307		(15.9	)%
Per diluted share	$	0.54	$	0.63		(14.3	)%

Net income available to common shareholders	$	157,795	$	19,012		730.0	%
Per diluted share	$	1.14	$	0.14		714.3	%

After-tax operating income available to common shareholders (1)	$	113,660	$	7,576		1,400.3	%
Per diluted share	$	0.82	$	0.06		1,266.7	%

Comprehensive income	$	244,801	$	46,375		427.9	%

Cash flow from operations	$	144,821	$	224,580		(35.5	)%

Diluted weighted average common shares and common share equivalents outstanding	137,814,906		140,460,516			(1.9	)%

					% Point
					Change
Underwriting ratios:
Loss ratio	58.1	%	77.9	%	(19.8	)
Acquisition expense ratio	17.4	%	17.0	%	0.4
Other operating expense ratio	14.6	%	15.1	%	(0.5	)
Combined ratio	90.1	%	110.0	%	(19.9	)

Financial measures:

Growth in book value per common share	4.9	%	1.1	%	3.8

Annualized operating return on average common equity	10.4	%	0.7	%	9.7

Total return on investments (2)
Including effects of foreign exchange	1.87	%	1.50	%	37 bps
Excluding effects of foreign exchange	1.60	%	1.14	%	46 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.

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

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

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

Gross premiums written	$	1,066,656		$	699,662		$	860,289		$	911,939		$	964,566		$	664,212		$	831,788		$	817,100		$	953,687
Net premiums written	863,611			511,124			691,381			706,543			764,278			482,911			636,117			624,258			767,754

Net premiums earned	680,312			$	673,192		$	682,049		$	642,879		$	633,695		$	632,146		$	627,409		$	623,011		$	669,917
Fee income	543			982			848			784			815			2,814			874			883			794
Losses and loss adjustment expenses	(395,207		)	(378,067		)	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(363,145		)	(428,051		)
Acquisition expenses, net	(118,962		)	(123,339		)	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(107,475		)	(117,624		)
Other operating expenses	(99,493		)	(103,300		)	(100,141		)	(101,445		)	(95,856		)	(112,228		)	(97,247		)	(92,748		)	(101,759		)
Underwriting income (loss)	67,193			69,468			38,567			(43		)	(63,980		)	50,582			60,564			60,526			23,277

Net investment income	74,297			80,467			82,753			86,671			88,307			90,601			90,768			90,537			92,972
Net realized gains	44,121			14,542			30,199			45,210			20,695			74,027			68,828			62,114			47,782
Net impairment losses recognized in earnings	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)
Equity in net income (loss) of investment funds accounted for using the equity method	24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050
Other income (loss)	(8,068		)	(4,848		)	2,432			(4,265		)	4,567			6,165			1,840			4,528			5,978
Other expenses	(6,979		)	(6,777		)	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(10,503		)	(5,688		)
Interest expense	(7,521		)	(8,087		)	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(7,916		)	(7,260		)
Net foreign exchange gains (losses)	(20,688		)	12,613			60,040			(18,375		)	(36,912		)	6,039			(65,157		)	48,625			38,601
Income before income taxes	166,158			140,717			166,398			94,332			24,923			232,833			151,309			243,153			223,106
Income tax (expense) benefit	(1,902		)	4,615			2,357			2,271			550			3,067			(3,291		)	(1,011		)	(6,494		)

Net income	164,256			145,332			168,755			96,603			25,473			235,900			148,018			242,142			216,612
Preferred dividends	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)
Net income available to common shareholders	$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	235,681		$	210,151

Underwriting Ratios
Loss ratio	58.1		%	56.2		%	62.2		%	67.1		%	77.9		%	58.1		%	57.3		%	58.3		%	63.9		%
Acquisition expense ratio	17.4		%	18.2		%	17.5		%	17.1		%	17.0		%	16.5		%	17.6		%	17.1		%	17.4		%
Other operating expense ratio	14.6		%	15.3		%	14.7		%	15.8		%	15.1		%	17.8		%	15.5		%	14.9		%	15.2		%
Combined ratio	90.1		%	89.7		%	94.4		%	100.0		%	110.0		%	92.4		%	90.4		%	90.3		%	96.5		%

Net premiums written to gross premiums written	81.0		%	73.1		%	80.4		%	77.5		%	79.2		%	72.7		%	76.5		%	76.4		%	80.5		%

Net income per common share
Basic	$	1.18		$	1.05		$	1.23		$	0.69		$	0.14		$	1.60		$	0.96		$	1.54		$	1.32
Diluted	$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	1.47		$	1.26

Weighted average common shares and common share equivalents outstanding
Basic	133,954,623			132,612,528			131,560,851			131,232,269			133,499,241			143,320,146			146,993,373			152,962,620			159,117,078
Diluted	137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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

	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,221,145		$	9,375,604		$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852		$	9,326,574		$	9,202,122
Short-term investments available for sale, at fair value	1,112,249			904,219			799,662			704,495			1,130,142			915,841			780,671			554,304			669,798
Investment of funds received under securities lending, at fair value	41,867			48,419			44,553			145,224			9,951			69,660			200,020			209,635			177,954
Equity securities available for sale, at fair value	318,181			299,584			273,213			320,434			361,639			310,194			79,805			38,879			41,537
Other investments available for sale, at fair value	357,992			238,111			229,974			299,845			293,073			275,538			229,488			211,241			125,262
Investments accounted for using the fair value option	500,283			366,903			319,381			321,790			256,614			219,173			175,841			140,541			147,471
TALF investments, at fair value	313,187			387,702			392,455			399,341			400,970			402,449			410,881			407,469			406,997
Investments accounted for using the equity method	347,273			380,507			383,543			399,968			449,206			508,334			500,737			474,971			467,597
Total investments	12,212,177			12,001,049			11,972,615			11,838,099			11,817,612			11,659,048			12,070,295			11,363,614			11,238,738

Cash	422,806			351,699			369,895			411,001			406,877			362,740			365,997			341,469			338,708
Accrued investment income	65,643			70,739			71,264			71,083			69,057			74,837			79,180			72,102			74,214
Investment in joint venture	107,866			107,576			107,642			105,982			105,495			105,698			104,347			103,540			102,946
Fixed maturities and short-term investments pledged under securities lending, at fair value	50,813			56,393			72,399			150,501			198,418			75,575			203,221			214,564			184,221
Securities purchased under agreements to resell using funds received under securities lending	—			—			20,032			—			185,176			—			—			—			—
Premiums receivable	700,137			501,563			606,963			712,397			633,144			503,434			662,634			706,503			699,385
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,603			1,851,584			1,840,191			1,855,342			1,772,130			1,763,985			1,715,122			1,721,059			1,711,307
Contractholder receivables	762,031			748,231			732,270			702,423			672,296			660,546			635,682			609,476			579,238
Prepaid reinsurance premiums	261,619			265,696			267,846			278,587			259,624			263,448			267,240			256,952			250,841
Deferred acquisition costs, net (1)	261,467			227,884			253,163			257,292			251,226			227,278			244,441			241,095			247,202
Receivable for securities sold	621,560			462,891			1,067,188			733,931			749,708			56,145			1,329,508			1,084,122			1,427,085
Other assets (1)	497,061			460,052			490,728			520,901			521,292			490,277			461,473			480,448			492,662
Total Assets	$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140		$	17,194,944		$	17,346,547

Liabilities
Reserve for losses and loss adjustment expenses	$	8,511,323		$	8,456,210		$	8,523,522		$	8,564,908		$	8,319,324		$	8,098,454		$	8,054,677		$	7,940,104		$	7,898,162
Unearned premiums	1,595,712			1,411,872			1,578,419			1,589,497			1,504,162			1,370,075			1,524,100			1,492,550			1,495,265
Reinsurance balances payable	137,791			133,866			123,815			154,860			131,512			132,452			130,274			128,723			114,254
Contractholder payables	762,031			748,231			732,270			702,423			672,296			660,546			635,682			609,476			579,238
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			100,000			125,000			125,000			100,000
TALF borrowings, at fair value	239,551			310,486			314,137			318,441			322,222			325,770			331,797			336,213			346,746
Securities lending payable	52,224			58,546			74,696			155,072			203,925			78,021			209,411			219,796			189,024
Payable for securities purchased	742,995			480,230			1,161,591			838,787			1,266,390			200,192			1,649,462			1,192,181			1,429,529
Other liabilities	531,700			513,842			527,847			510,521			533,189			500,715			498,832			490,890			552,255
Total Liabilities	12,973,327			12,513,283			13,436,297			13,234,509			13,353,020			11,766,225			13,459,235			12,834,933			13,004,473

Commitments and Contingencies

Shareholders’ Equity
Non-cumulative preferred shares	325,000			325,000			325,000			325,000			325,000			325,000			325,000			325,000			325,000
Common shares	552			549			544			541			535			534			531			529			527
Additional paid-in capital	170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926
Retained earnings (1)	4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340			3,779,659
Accumulated other comprehensive income, net of deferred income tax	234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962
Common shares held in treasury, at cost	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—
Total Shareholders’ Equity	4,839,456			4,592,074			4,435,899			4,403,030			4,289,035			4,476,786			4,679,905			4,360,011			4,342,074
Total Liabilities and Shareholders’ Equity	$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140		$	17,194,944		$	17,346,547

Common shares outstanding, net of treasury shares	135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802

Book value per common share (1) (2)	$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49		$	27.10		$	25.40

(1) Reflects the adoption of new accounting guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts retrospectively applied to all periods.

(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
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010
Comprehensive Income
Net income	$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	242,142		$	216,612
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	94,863			40,476			(71,861		)	84,862			40,370			(141,807		)	264,609			71,087			42,847
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)
Reclassification of net realized gains, net of income taxes, included in net income	(27,511		)	(29,785		)	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(32,611		)	(37,607		)
Foreign currency translation adjustments	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)
Other comprehensive income (loss)	80,545			7,347			(117,008		)	38,179			20,902			(183,867		)	215,139			32,269			2,436
Comprehensive Income	$	244,801		$	152,679		$	51,747		$	134,782		$	46,375		$	52,033		$	363,157		$	274,411		$	219,048

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

Non-Cumulative Preferred Shares
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

Common Shares
Balance at beginning of period	549			544			541			535			534			531			529			527			548
Common shares issued, net	3			5			3			6			1			3			2			7			4
Purchases of common shares under share repurchase program	—			—			—			—			—			—			—			(5		)	(25		)
Balance at end of period	552			549			544			541			535			534			531			529			527

Additional Paid-in Capital
Balance at beginning of period	161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926			253,466
Common shares issued, net	(3		)	1,857			(2		)	3,904			8			1,334			283			3,275			14
Exercise of stock options	1,851			2,926			3,007			2,245			4,127			2,716			10,486			7,964			16,700
Common shares retired	—			—			—			—			—			—			—			(36,212		)	(181,350		)
Amortization of share-based compensation	7,411			5,700			5,781			13,877			5,628			5,615			6,074			12,280			7,096
Other	16			54			95			1,866			21			20			(31		)	595			—
Balance at end of period	170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926

Retained Earnings
Balance at beginning of period	4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340			3,779,659			3,605,809
Cumulative effect of adjustment resulting from adoption of new accounting guidance (1)	—			—			—			—			—			—			—			—			(36,301		)
Balance at beginning of period, as adjusted	4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340			3,779,659			3,569,508
Dividends declared on preferred shares	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)
Net income	164,256			145,332			168,755			96,603			25,473			235,900			148,018			242,142			216,612
Balance at end of period	4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340			3,779,659

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962			138,526
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	67,352			10,691			(102,568		)	37,180			20,194			(185,221		)	208,310			38,476			5,240
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(730		)
Foreign currency translation adjustments, net of deferred income tax	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(2,074		)
Balance at end of period	234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			—
Shares repurchased for treasury	(236		)	(585		)	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(237,917		)	—
Balance at end of period	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—

Total Shareholders’ Equity	$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905		$	4,360,011		$	4,342,074

(1) Reflects the adoption of new accounting guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts retrospectively applied to all periods.

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)


	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010
Operating Activities
Net income	$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	242,142		$	216,612
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(44,072		)	(12,940		)	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(62,406		)	(49,483		)
Net impairment losses included in earnings	1,023			1,959			2,739			1,684			2,680			3,230			2,075			4,410			1,606
Equity in net income or loss of investment funds accounted for using the equity method and other income	(12,030		)	20,776			31,734			18,945			(355		)	(26,110		)	(11,545		)	(3,368		)	(15,012		)
Share-based compensation	7,411			5,700			5,781			13,877			5,628			5,615			6,074			12,280			7,096
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	39,343			(59,998		)	48,397			130,746			155,477			3,546			49,420			71,357			91,247
Unearned premiums, net of prepaid reinsurance premiums	181,735			(162,490		)	9,919			63,987			130,136			(149,242		)	9,024			236			96,645
Premiums receivable	(190,102		)	106,818			82,200			(77,556		)	(118,688		)	157,034			63,197			(20,280		)	(116,571		)
Deferred acquisition costs, net	(32,269		)	24,823			1,438			(5,464		)	(22,056		)	16,684			(31		)	3,756			(19,014		)
Reinsurance balances payable	(3,181		)	8,896			(19,368		)	23,109			(7,122		)	3,277			(4,853		)	19,267			(36,669		)
Other liabilities	10,134			30,620			5,925			(26,613		)	33,366			(47,339		)	23,914			(57,219		)	41,448
Other items, net	22,573			145			2,019			31,535			42,522			20,179			54,665			(4,661		)	(33,282		)
Net Cash Provided By Operating Activities	144,821			109,641			309,924			221,967			224,580			144,513			267,424			205,514			184,623

Investing Activities
Purchases of:
Fixed maturity investments	(3,593,630		)	(3,758,854		)	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(5,018,619		)	(4,885,606		)	(4,597,713		)
Equity securities	(33,803		)	(69,962		)	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(21,727		)	(52,283		)
Other investments	(239,167		)	(220,048		)	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(150,631		)	(132,819		)
Proceeds from the sales of:
Fixed maturity investments	3,628,932			3,542,629			2,299,627			3,323,456			3,232,541			2,670,332			4,872,668			4,668,666			4,443,108
Equity securities	75,860			58,386			111,467			147,334			52,316			14,522			19,151			25,043			11,725
Other investments	111,149			147,243			191,767			119,780			84,967			133,211			68,843			87,536			89,510
Proceeds from redemptions and maturities of fixed maturities	261,660			296,408			200,671			283,512			253,898			266,044			226,889			244,312			212,625
Net (purchases) sales of short-term investments	(207,444		)	(114,854		)	(123,211		)	459,091			(223,415		)	(129,794		)	(205,411		)	96,239			(102,921		)
Change in investment of securities lending collateral	6,322			16,150			80,376			48,853			(125,904		)	131,389			10,385			(30,772		)	30,092
Purchases of furniture, equipment and other	(6,498		)	(3,461		)	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(6,057		)	(1,803		)
Net Cash Provided By (Used For) Investing Activities	3,381			(106,363		)	(232,919		)	(131,125		)	(68,013		)	276,028			(186,455		)	27,003			(100,479		)

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		)
Proceeds from common shares issued, net	780			3,245			1,609			(1,397		)	2,875			4,693			8,586			3,779			10,591
Proceeds from borrowings	—			—			—			—			—			—			—			50,000			214,526
Repayments of borrowings	(69,863		)	(3,513		)	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(34,022		)	(86,317		)
Change in securities lending collateral	(6,322		)	(16,150		)	(80,376		)	(48,853		)	125,904			(131,389		)	(10,385		)	30,772			(30,092		)
Other	588			766			818			2,467			714			(893		)	1,593			2,296			5,061
Preferred dividends paid	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)
Net Cash Used For Financing Activities	(81,278		)	(22,116		)	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(222,690		)	(73,964		)

Effects of exchange rate changes on foreign currency cash	4,183			642			(8,643		)	997			5,406			(526		)	9,270			(7,066		)	(6,043		)

Increase (decrease) in cash	71,107			(18,196		)	(41,106		)	4,124			44,137			(3,257		)	24,528			2,761			4,137
Cash beginning of period	351,699			369,895			411,001			406,877			362,740			365,997			341,469			338,708			334,571
Cash end of period	$	422,806		$	351,699		$	369,895		$	411,001		$	406,877		$	362,740		$	365,997		341,469			$	338,708

Income taxes paid (received), net	$	2,788		$	(7,724	)	$	3,662		$	2,296		$	3,670		$	3,140		$	1,928		$	1,430		$	704
Interest paid	$	2,206		$	13,047		$	2,177		$	13,084		$	2,191		$	12,831		$	1,832		$	13,437		$	1,785

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 March 31, 2012 and 2011

(U.S. dollars in thousands)

	Three Months Ended									Three Months Ended
	March 31, 2012									March 31, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	688,113		$	379,976		$	1,066,656		$	634,583		$	331,013		$	964,566
Net premiums written	490,680			372,931			863,611			449,291			314,987			764,278

Net premiums earned	$	441,740		$	238,572		$	680,312		$	407,591		$	226,104		$	633,695
Fee income	530			13			543			778			37			815
Losses and loss adjustment expenses	(303,164		)	(92,043		)	(395,207		)	(297,723		)	(196,157		)	(493,880		)
Acquisition expenses, net	(73,870		)	(45,092		)	(118,962		)	(61,415		)	(47,339		)	(108,754		)
Other operating expenses	(73,370		)	(26,123		)	(99,493		)	(74,629		)	(21,227		)	(95,856		)
Underwriting income (loss)	$	(8,134	)	$	75,327		67,193			$	(25,398	)	$	(38,582	)	(63,980		)

Net investment income							74,297									88,307
Net realized gains							44,121									20,695
Net impairment losses recognized in earnings							(1,023		)							(2,680		)
Equity in net income (loss) of investment funds accounted for using the equity method							24,826									29,673
Other income (loss)							(8,068		)							4,567
Other expenses							(6,979		)							(7,026		)
Interest expense							(7,521		)							(7,721		)
Net foreign exchange losses							(20,688		)							(36,912		)
Income before income taxes							166,158									24,923
Income tax (expense) benefit							(1,902		)							550

Net income							164,256									25,473
Preferred dividends							(6,461		)							(6,461		)
Net income available to common shareholders							$	157,795								$	19,012

Underwriting Ratios
Loss ratio	68.6		%	38.6		%	58.1		%	73.0		%	86.8		%	77.9		%
Acquisition expense ratio (2)	16.6		%	18.9		%	17.4		%	14.9		%	20.9		%	17.0		%
Other operating expense ratio	16.6		%	10.9		%	14.6		%	18.3		%	9.4		%	15.1		%
Combined ratio	101.8		%	68.4		%	90.1		%	106.2		%	117.1		%	110.0		%

Net premiums written to gross premiums written	71.3		%	98.1		%	81.0		%	70.8		%	95.2		%	79.2		%

(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 March 31,
	2012			2011
	Amount		% of Total	Amount		% of Total

Net premiums written
Property, energy, marine and aviation	$	79,819	16.3	$	76,418	17.0
Programs	81,616		16.6	74,396		16.6
Professional liability	70,561		14.4	59,385		13.2
Executive assurance	68,378		13.9	56,068		12.5
National accounts	35,438		7.2	40,191		8.9
Construction	33,653		6.9	31,509		7.0
Casualty	26,973		5.5	30,134		6.7
Travel and accident	22,836		4.7	21,501		4.8
Lenders products	22,415		4.6	21,074		4.7
Healthcare	10,635		2.2	9,117		2.0
Surety	12,134		2.5	9,734		2.2
Other (1)	26,222		5.2	19,764		4.4
Total	$	490,680	100.0	$	449,291	100.0

Net premiums earned
Property, energy, marine and aviation	$	78,494	17.8	$	73,599	18.1
Programs	73,998		16.8	67,018		16.4
Professional liability	63,256		14.3	67,400		16.5
Executive assurance	58,766		13.3	54,570		13.4
National accounts	19,136		4.3	21,162		5.2
Construction	31,808		7.2	28,391		7.0
Casualty	29,065		6.6	28,427		7.0
Travel and accident	16,713		3.8	15,599		3.8
Lenders products	32,153		7.3	18,236		4.5
Healthcare	8,898		2.0	8,652		2.1
Surety	10,560		2.4	9,779		2.4
Other (1)	18,893		4.2	14,758		3.6
Total	$	441,740	100.0	$	407,591	100.0

Net premiums written by client location
United States	$	334,553	68.2	$	305,216	67.9
Europe	107,631		21.9	100,091		22.3
Other	48,496		9.9	43,984		9.8
Total	$	490,680	100.0	$	449,291	100.0

Net premiums written by underwriting location
United States	$	321,559	65.5	$	295,043	65.7
Europe	152,615		31.1	135,536		30.2
Other	16,506		3.4	18,712		4.1
Total	$	490,680	100.0	$	449,291	100.0

(1) Includes excess workers’ compensation, employer’s liability, alternative markets and accident and health business.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

Gross premiums written	$	688,113		$	540,617		$	634,280		$	635,005		$	634,583		$	527,783		$	624,490		$	616,353		$	633,576
Net premiums written	490,680			360,739			472,986			438,263			449,291			351,841			431,361			422,837			452,924

Net premiums earned	$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477
Fee income	530			729			661			702			778			761			864			874			753
Losses and loss adjustment expenses	(303,164		)	(282,769		)	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(275,294		)	(312,011		)
Acquisition expenses, net	(73,870		)	(73,975		)	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(65,359		)	(67,431		)
Other operating expenses	(73,370		)	(77,593		)	(77,801		)	(77,774		)	(74,629		)	(82,535		)	(76,892		)	(72,533		)	(80,772		)
Underwriting income (loss)	$	(8,134	)	$	(10,941	)	$	(6,541	)	$	(34,438	)	$	(25,398	)	$	(5,449	)	$	3,133		$	(6,839	)	$	(29,984	)

Underwriting Ratios
Loss ratio	68.6		%	66.9		%	66.4		%	73.4		%	73.0		%	65.5		%	64.4		%	67.9		%	72.6		%
Acquisition expense ratio (1)	16.6		%	17.3		%	17.4		%	16.0		%	14.9		%	15.4		%	16.1		%	15.9		%	15.5		%
Other operating expense ratio	16.6		%	18.4		%	17.8		%	18.9		%	18.3		%	20.4		%	18.7		%	17.9		%	18.8		%
Combined ratio	101.8		%	102.6		%	101.6		%	108.3		%	106.2		%	101.3		%	99.2		%	101.7		%	106.9		%

Net premiums written
Property, energy, marine and aviation	$	79,819		$	41,244		$	114,631		$	103,296		$	76,418		$	44,258		$	88,412		$	88,194		$	100,665
Programs	81,616			62,874			79,086			81,629			74,396			60,969			68,264			73,345			70,498
Professional liability	70,561			54,085			66,484			57,906			59,385			51,559			78,873			70,626			67,118
Executive assurance	68,378			59,035			62,328			53,974			56,068			54,448			51,503			52,514			60,993
National accounts	35,438			19,110			17,275			4,397			40,191			14,024			19,215			3,877			30,809
Construction	33,653			22,912			23,576			42,408			31,509			20,014			20,245			44,276			28,292
Casualty	26,973			28,599			30,563			24,939			30,134			27,389			28,493			26,617			25,463
Travel and accident	22,836			13,751			17,404			19,284			21,501			14,486			19,673			15,272			21,806
Lenders products	22,415			21,543			22,551			21,526			21,074			30,942			23,452			22,208			16,319
Healthcare	10,635			9,303			8,810			8,422			9,117			10,290			8,705			9,989			8,524
Surety	12,134			12,734			10,389			9,618			9,734			7,918			11,128			7,012			8,091
Other (2)	26,222			15,549			19,889			10,864			19,764			15,544			13,398			8,907			14,346
Total	$	490,680		$	360,739		$	472,986		$	438,263		$	449,291		$	351,841		$	431,361		$	422,837		$	452,924

Net premiums earned
Property, energy, marine and aviation	$	78,494		$	79,979		$	92,288		$	76,644		$	73,599		$	77,811		$	82,301		$	80,818		$	95,037
Programs	73,998			75,085			73,561			71,934			67,018			69,462			68,404			68,381			66,159
Professional liability	63,256			62,467			64,403			57,767			67,400			63,152			69,900			63,642			67,909
Executive assurance	58,766			56,782			56,783			60,488			54,570			55,270			51,675			54,958			56,232
National accounts	19,136			20,572			19,642			18,166			21,162			17,360			18,595			16,810			21,773
Construction	31,808			28,569			28,590			27,214			28,391			26,837			25,664			27,982			28,911
Casualty	29,065			28,093			30,305			24,829			28,427			25,893			27,503			28,148			28,069
Travel and accident	16,713			15,840			19,051			19,455			15,599			15,705			17,418			17,590			16,078
Lenders products	32,153			18,796			18,293			19,966			18,236			19,617			17,593			17,153			16,807
Healthcare	8,898			8,825			9,340			9,089			8,652			9,701			9,738			10,340			9,943
Surety	10,560			11,847			10,091			9,402			9,779			9,810			9,876			8,023			10,258
Other (2)	18,893			15,812			15,623			15,865			14,758			13,657			13,214			11,628			12,301
Total	$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	429,477

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

(2) Includes excess workers’ compensation, employer’s liability, alternative markets and accident and health business.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

	Three Months Ended March 31,
	2012			2011
	Amount		% of Total	Amount		% of Total

Net premiums written
Casualty (1)	$	83,960	22.5	$	71,361	22.7
Property excluding property catastrophe (2)	75,493		20.2	71,150		22.6
Other specialty	95,462		25.6	77,645		24.7
Property catastrophe	86,574		23.2	66,961		21.3
Marine and aviation	25,617		6.9	24,164		7.7
Other	5,825		1.6	3,706		1.0
Total	$	372,931	100.0	$	314,987	100.0

Net premiums earned
Casualty (1)	$	45,943	19.3	$	48,494	21.4
Property excluding property catastrophe (2)	61,632		25.8	63,006		27.9
Other specialty	46,148		19.3	38,969		17.2
Property catastrophe	61,863		25.9	51,642		22.8
Marine and aviation	21,449		9.0	21,626		9.6
Other	1,537		0.7	2,367		1.1
Total	$	238,572	100.0	$	226,104	100.0

Net premiums written
Pro rata	$	124,746	33.5	$	105,492	33.5
Excess of loss	248,185		66.5	209,495		66.5
Total	$	372,931	100.0	$	314,987	100.0

Net premiums earned
Pro rata	$	99,925	41.9	$	106,653	47.2
Excess of loss	138,647		58.1	119,451		52.8
Total	$	238,572	100.0	$	226,104	100.0

Net premiums written by client location
United States	$	174,000	46.7	$	167,215	53.1
Europe	140,358		37.6	125,700		39.9
Bermuda	29,600		7.9	4,379		1.4
Other	28,973		7.8	17,693		5.6
Total	$	372,931	100.0	$	314,987	100.0

Net premiums written by underwriting location
Bermuda	$	155,956	41.8	$	146,596	46.5
United States	129,459		34.7	113,756		36.1
Other	87,516		23.5	54,635		17.4
Total	$	372,931	100.0	$	314,987	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
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

Gross premiums written	$	379,976		$	161,904		$	227,837		$	277,766		$	331,013		$	139,015		$	208,770		$	203,695		$	323,477
Net premiums written	372,931			150,385			218,395			268,280			314,987			131,070			204,756			201,421			314,830

Net premiums earned	$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440
Fee income	13			253			187			82			37			2,053			10			9			41
Losses and loss adjustment expenses	(92,043		)	(95,298		)	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(87,851		)	(116,040		)
Acquisition expenses, net	(45,092		)	(49,364		)	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(42,116		)	(50,193		)
Other operating expenses	(26,123		)	(25,707		)	(22,340		)	(23,671		)	(21,227		)	(29,693		)	(20,355		)	(20,215		)	(20,987		)
Underwriting income (loss)	$	75,327		$	80,409		$	45,108		$	34,395		$	(38,582	)	$	56,031		$	57,431		$	67,365		$	53,261

Underwriting Ratios
Loss ratio	38.6		%	38.0		%	54.6		%	56.0		%	86.8		%	45.0		%	43.5		%	40.4		%	48.3		%
Acquisition expense ratio	18.9		%	19.7		%	17.8		%	19.0		%	20.9		%	18.3		%	20.4		%	19.4		%	20.9		%
Other operating expense ratio	10.9		%	10.3		%	9.2		%	10.2		%	9.4		%	13.0		%	9.4		%	9.3		%	8.7		%
Combined ratio	68.4		%	68.0		%	81.6		%	85.2		%	117.1		%	76.3		%	73.3		%	69.1		%	77.9		%

Net premiums written
Casualty (1)	$	83,960		$	34,968		$	34,873		$	40,755		$	71,361		$	32,274		$	38,276		$	43,642		$	72,582
Property excluding property catastrophe (2)	75,493			36,430			64,495			53,938			71,150			46,835			70,149			57,880			74,927
Other specialty	95,462			48,555			40,882			43,937			77,645			27,008			30,468			18,920			54,762
Property catastrophe	86,574			11,636			59,961			108,235			66,961			3,529			40,255			70,403			88,802
Marine and aviation	25,617			16,130			17,037			19,978			24,164			21,303			24,913			9,609			21,238
Other	5,825			2,666			1,147			1,437			3,706			121			695			967			2,519
Total	$	372,931		$	150,385		$	218,395		$	268,280		$	314,987		$	131,070		$	204,756		$	201,421		$	314,830

Net premiums earned
Casualty (1)	$	45,943		$	47,317		$	49,066		$	51,493		$	48,494		$	48,609		$	52,792		$	59,501		$	70,436
Property excluding property catastrophe (2)	61,632			60,607			62,565			57,524			63,006			70,744			66,438			65,742			79,239
Other specialty	46,148			60,891			48,722			40,511			38,969			30,296			25,254			22,292			17,769
Property catastrophe	61,863			62,408			64,910			59,788			51,642			54,768			54,206			52,301			53,873
Marine and aviation	21,449			17,361			17,739			21,093			21,626			22,445			16,106			16,263			18,072
Other	1,537			1,941			1,077			1,651			2,367			1,009			732			1,439			1,051
Total	$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	240,440

(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)

	March 31,					December 31,					September 30,					June 30,					March 31,
	2012					2011					2011					2011					2011
Investable assets:
Fixed maturities available for sale, at fair value	9,221,145			74	%	$	9,375,604		76	%	$	9,529,834		78	%	$	9,247,002		77	%	$	8,916,017		76	%
Fixed maturities, at fair value (1)	250,805			2	%	147,779			1	%	122,866			1	%	102,897			1	%	117,391			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	50,813			0	%	56,393			1	%	72,399			1	%	150,501			1	%	161,888			1	%
Total fixed maturities	9,522,763			76	%	9,579,776			78	%	9,725,099			80	%	9,500,400			79	%	9,195,296			78	%
Short-term investments available for sale, at fair value	1,112,249			9	%	904,219			7	%	799,662			6	%	704,495			6	%	1,130,142			10	%
Short-term investments pledged under securities lending agreements, at fair value (2)	—			0	%	—			0	%	—			0	%	—			0	%	36,530			0	%
Cash	422,806			3	%	351,699			3	%	369,895			3	%	411,001			3	%	406,877			3	%
Equity securities available for sale, at fair value	318,181			3	%	299,584			2	%	273,213			2	%	320,434			3	%	361,639			3	%
Equity securities, at fair value (1)	52,766			0	%	87,403			1	%	100,719			1	%	152,844			1	%	100,117			1	%
Other investments available for sale, at fair value	357,992			3	%	238,111			2	%	229,974			2	%	299,845			2	%	293,073			2	%
Other investments, at fair value (1)	196,712			2	%	131,721			1	%	95,796			1	%	66,049			1	%	39,106			0	%
TALF investments, at fair value (3)	313,187			2	%	387,702			3	%	392,455			3	%	399,341			3	%	400,970			3	%
Investments accounted for using the equity method	347,273			3	%	380,507			3	%	383,543			3	%	399,968			3	%	449,206			4	%
Securities sold but not yet purchased	(18,831		)	0	%	(27,178		)	0	%	(46,526		)	0	%	(51,626		)	0	%	(41,863		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(121,435		)	(1	)%	(17,339		)	0	%	(94,403		)	(1	)%	(104,856		)	(1	)%	(516,682		)	(4	)%
Total investable assets	$	12,503,663		100	%	$	12,316,205		100	%	$	12,229,427		100	%	$	12,097,895		100	%	$	11,854,411		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	2.75					2.99					3.17					2.87					2.73
Average S&P/Moody’s credit ratings (4)	AA/Aa2					AA/Aa1					AA+/Aa1					AA+/Aa1					AA+/Aa1
Imbedded book yield (before investment expenses)	2.76		%			2.98		%			3.09		%			3.23		%			3.36		%

Credit quality distribution of total fixed maturities (5):
U.S. government and government agencies (6)	$	2,850,031		30	%	$	3,154,480		33	%	$	2,968,250		30	%	$	2,880,650		30	%	$	2,628,362		29	%
AAA	3,420,490			36	%	3,229,161			34	%	3,453,116			36	%	3,622,886			38	%	3,806,887			41	%
AA	1,383,663			14	%	1,425,249			15	%	1,531,869			16	%	1,194,430			13	%	1,043,463			11	%
A	917,925			10	%	884,957			9	%	754,421			8	%	765,831			8	%	697,002			7	%
BBB	398,645			4	%	412,566			4	%	555,023			6	%	472,491			5	%	425,913			5	%
BB	157,427			2	%	140,029			1	%	151,665			1	%	158,517			2	%	154,537			2	%
B	172,360			2	%	165,003			2	%	140,571			1	%	241,538			2	%	250,318			3	%
Lower than B	125,134			1	%	114,672			1	%	106,775			1	%	97,748			1	%	100,409			1	%
Not rated	97,088			1	%	53,659			1	%	63,409			1	%	66,309			1	%	88,405			1	%
Total fixed maturities, at fair value	$	9,522,763		100	%	$	9,579,776		100	%	$	9,725,099		100	%	$	9,500,400		100	%	$	9,195,296		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)	Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“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 March 31, 2012:

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

Corporates	$	2,529,559	$	81,713	$	(10,875	)	$	70,838		$	2,458,721	102.9	%
Non-U.S. government-backed corporates	205,172		8,465		(388		)	8,077			197,095		104.1	%
FDIC guaranteed corporates	76,815		615		—			615			76,200		100.8	%
U.S. government and government agencies	1,254,434		19,500		(4,295		)	15,205			1,239,229		101.2	%
Agency mortgage-backed securities	1,213,144		22,232		(779		)	21,453			1,191,691		101.8	%
Non-agency mortgage-backed securities	281,824		4,515		(13,998		)	(9,483		)	291,307		96.7	%
Agency commercial mortgage-backed securities	382,453		8,984		(1,150		)	7,834			374,619		102.1	%
Non-agency commercial mortgage-backed securities	742,214		26,737		(1,501		)	25,236			716,978		103.5	%
Municipal bonds	1,301,255		64,044		(1,381		)	62,663			1,238,592		105.1	%
Non-U.S. government securities	912,020		30,517		(9,552		)	20,965			891,055		102.4	%
Asset-backed securities	623,873		16,033		(6,132		)	9,901			613,972		101.6	%
Total	$	9,522,763	$	283,355	$	(50,051	)	$	233,304		$	9,289,459	102.5	%

Corporates (Excluding Guaranteed Amounts)

The following table summarizes the Company’s corporate bonds by sector and by credit quality at March 31, 2012, excluding guaranteed amounts:

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Financials	$	951,924	37.6	%	7.6	%
Industrials	1,171,754		46.3	%	9.4	%
Utilities	96,544		3.8	%	0.8	%
Foreign agencies	51,263		2.0	%	0.4	%
All other (1)	258,074		10.3	%	2.1	%
Total	$	2,529,559	100.0	%	20.2	%

Credit quality distribution (3):
AAA	$	697,660	27.6	%	5.6	%
AA	357,925		14.1	%	2.9	%
A	729,460		28.8	%	5.8	%
BBB	351,605		13.9	%	2.8	%
BB	128,103		5.1	%	1.0	%
B	146,256		5.8	%	1.2	%
Lower than B	21,470		0.8	%	0.2	%
Not rated	97,080		3.9	%	0.8	%
Total	$	2,529,559	100.0	%	20.2	%

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at March 31, 2012, excluding guaranteed amounts and covered bonds:

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

General Electric Co	$	45,315	1.8	%	0.4	%	AA+/Aa2
Abbey National Treasury Svcs	31,335		1.2	%	0.3	%	A+/A1
Caterpillar Inc	31,290		1.2	%	0.3	%	A/A2
Total SA	29,032		1.1	%	0.2	%	Aa-/Aa1
Royal Dutch Shell PLC	28,213		1.1	%	0.2	%	AA/Aa1
National Australia Bank Ltd	27,879		1.1	%	0.2	%	Aa-/Aa2
Coca-Cola Company	26,579		1.1	%	0.2	%	A+/Aa3
Verizon Communications Inc	26,078		1.0	%	0.2	%	A-/A3
HSBC Holdings PLC	25,925		1.0	%	0.2	%	A/A3
Berkshire Hathaway Inc	25,281		1.0	%	0.2	%	A/A2
Total	$	296,927	11.7	%	2.4	%

(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 March 31, 2012, excluding amounts guaranteed by the U.S. government:

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

Non-agency MBS:	2003	$	2,378	AAA	$	2,402	101.0	%	0.0	%
	2004	14,472		BBB	13,455		93.0	%	0.1	%
	2005	46,202		B	42,140		91.2	%	0.3	%
	2006	57,247		BBB	52,964		92.5	%	0.4	%
	2007	47,338		CCC-	45,215		95.5	%	0.4	%
	2008	6,911		CCC-	6,781		98.1	%	0.1	%
	2009 (6)	32,481		AAA	35,086		108.0	%	0.3	%
	2010 (6)	30,612		AAA	29,732		97.1	%	0.2	%
	2012 (6)	53,666		AAA	54,049		100.7	%	0.4	%
Total non-agency MBS		$	291,307	BBB+	$	281,824	96.7	%	2.3	%

Non-agency CMBS:	1998	$	3,479	AAA	$	3,536	101.6	%	0.0	%
	2002	9,245		AAA	9,228		99.8	%	0.1	%
	2003	38,287		AAA	39,293		102.6	%	0.3	%
	2004	27,757		AAA	27,775		100.1	%	0.2	%
	2005	49,205		AAA	49,507		100.6	%	0.4	%
	2006	4,255		BBB+	4,131		97.1	%	0.0	%
	2007	74,617		AA	80,269		107.6	%	0.6	%
	2008	24,925		AA+	24,692		99.1	%	0.2	%
	2010	255,803		AAA	263,230		102.9	%	2.1	%
	2011	197,548		AAA	208,547		105.6	%	1.7	%
	2012	31,857		AAA	32,006		100.5	%	0.3	%
Total non-agency CMBS		$	716,978	AAA	$	742,214	103.5	%	5.9	%

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

Wtd. average loan age (months)	69		68		46
Wtd. average life (months) (2)	30		61		36
Wtd. average loan-to-value % (3)	70.1	%	67.9	%	64.4	%
Total delinquencies (4)	20.5	%	19.4	%	4.0	%
Current credit support % (5)	42.6	%	11.4	%	28.7	%

(1)	Loans defeased with government/agency obligations represented approximately 2.7% 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 March 31, 2012. 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 95%.
(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 with an average credit quality of “AAA” from Fitch Ratings.

The following table provides information on the Company’s asset-backed securities (ABS) March 31, 2012:

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

Sector:
Credit cards (1)	$	238,068	AAA	$	244,377	102.7	%	2.0	%
Autos (2)	174,409		AAA	174,100		99.8	%	1.4	%
Rate reduction bonds (3)	65,731		AAA	68,478		104.2	%	0.5	%
U.K. securitized (4)	29,320		AAA	29,335		100.1	%	0.2	%
Student loans (5)	1,934		AA+	1,948		100.7	%	0.0	%
Other	86,972		AA-	88,036		101.2	%	0.7	%
	596,434		AA+	606,274		101.6	%	4.8	%

Home equity (6)	$	2,895	AAA	$	2,552	88.2	%	0.0	%
	1,279		BBB	1,169		91.4	%	0.0	%
	8,828		BB to B	8,499		96.3	%	0.1	%
	4,362		CCC to C	5,296		121.4	%	0.0	%
	174		D	83		47.7	%	0.0	%
	17,538		B+	17,599		100.3	%	0.1	%

Total ABS	$	613,972	AA+	$	623,873	101.6	%	5.0	%

The effective duration of the total ABS was 1.71 years at March 31, 2012.

(1)		The weighted average credit support % on credit cards is 18.6%.
(2)		The weighted average credit support % on autos is 26.6%.
(3)		The weighted average credit support % on rate reduction bonds is 7.7%.
(4)		The weighted average credit support % on U.K. securitized is 18.6%.
(5)		The weighted average credit support % on student loans is 11.3%.
(6)		The weighted average credit support % on home equity is 24.7%.

		The Company’s investment portfolio included $44 million par in sub-prime securities at March 31, 2012, with an estimated fair value of $20.7 million and an average credit quality of “BB/Ba3.” 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 $6.2 million estimated fair value of sub-prime securities with an average credit quality of “CCC/Caa2.”

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 March 31, 2012:

	Fair		% of Asset		% of Investable
	Value		Class		Assets
Composition:
Investment funds accounted for using the equity method	$	121,284	35.9	%	1.0	%
Corporate bonds	93,550		27.7	%	0.7	%
Other investments	122,695		36.4	%	1.0	%
Total	$	337,529	100.0	%	2.7	%

Currency:
U.S.-denominated	$	243,036	72.0	%	1.9	%
Euro-denominated	94,493		28.0	%	0.8	%
Total	$	337,529	100.0	%	2.7	%

Sector:
Consumer cyclical	$	60,257	17.9	%	0.5	%
Media	42,439		12.6	%	0.3	%
Consumer non-cyclical	39,409		11.7	%	0.3	%
Basic materials	31,826		9.4	%	0.3	%
Industrials	26,502		7.9	%	0.2	%
Utilities	12,180		3.6	%	0.1	%
All other	124,916		36.9	%	1.0	%
Total	$	337,529	100.0	%	2.7	%

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 March 31, 2012:

			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other (5)			Total
Country (1):
Germany	$	194,372	$	19,982	$	2,353	$	0	$	25,076	$	1,056		$	242,839
Netherlands	3,114		38,878		45,254		30,469		7,596		18,969			144,280
France	—		—		30,070		40,407		4,853		10,388			85,718
Finland	98,497		250		—		—		—		—			98,747
Supranational (6)	83,286		—		—		—		—		—			83,286
Spain	—		—		784		13,436		5,750		224			20,194
Luxembourg	—		—		22,741		—		2,535		27			25,303
Italy	947		—		3,773		—		1,245		(188		)	5,777
Belgium	—		1,972		—		—		—		—			1,972
Ireland	—		—		1,424		—		—		—			1,424
Portugal	—		—		653		—		—		—			653
Total	$	380,216	$	61,082	$	107,052	$	84,312	$	47,055	$	30,476		$	710,193

(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 March 31, 2012.

(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 on page 16.

(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
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

After-tax operating income available to common shareholders	$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	130,873		$	98,349
Net realized gains, net of tax	40,873			13,464			28,458			44,799			21,585			71,821			68,611			61,119			45,503
Net impairment losses recognized in earnings, net of tax	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(1,606		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	29,050
Net foreign exchange gains (losses), net of tax	(20,541		)	13,177			59,948			(18,685		)	(37,142		)	6,581			(65,346		)	48,447			38,855
Net income available to common shareholders	$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	235,681		$	210,151

Diluted per common share results:
After-tax operating income available to common shareholders	$	0.82		$	0.94		$	0.78		$	0.43		$	0.06		$	0.87		$	0.85		$	0.82		$	0.59
Net realized gains, net of tax	0.30			0.10			0.21			0.32			0.15			0.48			0.45			0.38			0.27
Net impairment losses recognized in earnings, net of tax	(0.01		)	(0.01		)	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.03		)	(0.01		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	0.18			(0.11		)	(0.22		)	0.04			0.21			0.15			0.06			0.00			0.18
Net foreign exchange gains (losses), net of tax	(0.15		)	0.09			0.43			(0.13		)	(0.26		)	0.05			(0.43		)	0.30			0.23
Net income available to common shareholders	$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	1.47		$	1.26

Weighted average common shares and common share equivalents outstanding — diluted	137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			166,541,481

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
	March 31,		December 31,		September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		March 31,		March 31,
	2012		2011		2011		2011		2011		2010		2010		2010		2010		2012

Effect of share repurchases:
Aggregate cost of shares repurchased	$	0	$	3	$	20,833	$	29,552	$	237,173	$	258,151	$	53,398	$	269,054	$	181,272	$	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		104,758,218
Average price per share repurchased	—		$	31.51	$	31.77	$	33.51	$	29.42	$	29.74	$	26.13	$	24.61	$	23.88	$	24.42

Average book value per common share (1)	$	32.55	$	31.34	$	30.81	$	30.39	$	29.90	$	29.61	$	28.30	$	26.25	$	24.76

Average repurchase price-to-book multiple	—		1.01x		1.03x		1.10x		0.98x		1.00x		0.92x		0.94x		0.96x

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
	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010

After-tax operating income available to common shareholders	$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	130,873		$	98,349
Annualized after-tax operating income available to common shareholders (a)	$	454,640		$	515,564		$	428,704		$	238,956		$	30,304		$	525,108		$	522,636		$	523,492		$	393,396

Beginning common shareholders’ equity	$	4,267,074		$	4,110,899		$	4,078,030		$	3,964,035		$	4,151,786		$	4,354,905		$	4,035,011		$	4,017,074		$	3,962,048
Ending common shareholders’ equity	4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905			4,035,011			4,017,074
Average common shareholders’ equity (b)	$	4,390,765		$	4,188,987		$	4,094,465		$	4,021,033		$	4,057,911		$	4,253,346		$	4,194,958		$	4,026,043		$	3,989,561

Annualized operating return on average common equity (a)/(b)	10.4		%	12.3		%	10.5		%	5.9		%	0.7		%	12.3		%	12.5		%	13.0		%	9.9		%

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:

	March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2012			2011			2011			2011			2011			2010			2010			2010			2010
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			100,000			125,000			125,000			100,000
Total debt	$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	425,000		$	425,000		$	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%) (1)	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)	4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905			4,035,011			4,017,074
Total shareholders’ equity	$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905		$	4,360,011		$	4,342,074

Total capital	$	5,239,456		$	4,992,074		$	4,835,899		$	4,803,030		$	4,689,035		$	4,876,786		$	5,104,905		$	4,785,011		$	4,742,074

TALF non-recourse borrowings, at market value, due between 2012 to 2015 (various) (2)	239,551			310,486			314,137			318,441			322,222			325,770			331,797			336,213			346,746

Total capital and TALF non-recourse borrowings	$	5,479,007		$	5,302,560		$	5,150,036		$	5,121,471		$	5,011,257		$	5,202,556		$	5,436,702		$	5,121,224		$	5,088,820

Common shares outstanding, net of treasury shares (b)	135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710			158,129,802

Book value per common share (3) (a)/(b)	$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49		$	27.10		$	25.40

Leverage ratios:
Senior notes/total capital	5.7		%	6.0		%	6.2		%	6.2		%	6.4		%	6.2		%	5.9		%	6.3		%	6.3		%
Revolving credit agreement borrowings/total capital	1.9		%	2.0		%	2.1		%	2.1		%	2.1		%	2.1		%	2.4		%	2.6		%	2.1		%
Debt/total capital	7.6		%	8.0		%	8.3		%	8.3		%	8.5		%	8.2		%	8.3		%	8.9		%	8.4		%
Preferred/total capital	6.2		%	6.5		%	6.7		%	6.8		%	6.9		%	6.7		%	6.4		%	6.8		%	6.9		%
Debt and preferred/total capital	13.8		%	14.5		%	15.0		%	15.1		%	15.5		%	14.9		%	14.7		%	15.7		%	15.3		%

(1)		On April 2, 2012, ACGL closed an underwritten public offering of $325 million of its Series C non-cumulative preferred shares (6.75%), with a liquidation preference of $25 per share. All of ACGL’s Series A and Series B shares will be redeemed on May 2, 2012 at a redemption price of $25 per share.
(2)		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 11.7% and the ratio of debt and preferred to total capital would have been 17.6% at March 31, 2012.
(3)		Excludes the effects of stock options and restricted stock units outstanding. Amounts reflect the adoption of new accounting guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts.

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