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

Attached files

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a12-16698_18k.htm
EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a12-16698_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 June 30, 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	8-9
	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								Six Months Ended
	June 30,								June 30,
	2012			2011			Change		2012			2011			Change

Gross premiums written	$	1,051,813		$	911,939		15.3	%	$	2,118,469		$	1,876,505		12.9	%

Net premiums written	$	820,233		$	706,543		16.1	%	$	1,683,844		$	1,470,821		14.5	%

Net premiums earned	$	726,656		$	642,879		13.0	%	$	1,406,968		$	1,276,574		10.2	%

Underwriting income (loss)	$	93,723		$	(43	)	N/M		$	160,916		$	(64,023	)	N/M

Net investment income	$	73,608		$	86,671		(15.1	)%	$	147,905		$	174,978		(15.5	)%
Per diluted share	$	0.53		$	0.63		(15.9	)%	$	1.07		$	1.26		(15.1	)%

Net income available to common shareholders	$	212,619		$	90,142		135.9	%	$	370,414		$	109,154		239.3	%
Per diluted share	$	1.54		$	0.65		136.9	%	$	2.68		$	0.78		243.6	%

After-tax operating income available to common shareholders (1)	$	141,400		$	59,739		136.7	%	$	255,060		$	67,315		278.9	%
Per diluted share	$	1.02		$	0.43		137.2	%	$	1.85		$	0.48		285.4	%

Comprehensive income	$	178,897		$	134,782		32.7	%	$	423,698		$	181,157		133.9	%

Cash flow from operations	$	252,447		$	221,967		13.7	%	$	397,268		$	446,547		(11.0	)%

Diluted weighted average common shares and common share equivalents outstanding	138,211,736			137,975,599			0.2	%	138,017,490			139,234,931			(0.9	)%

							% Point								% Point
							Change								Change
Underwriting ratios:
Loss ratio	55.0		%	67.1		%	(12.1	)	56.5		%	72.5		%	(16.0	)
Acquisition expense ratio	17.6		%	17.1		%	0.5		17.5		%	17.1		%	0.4
Other operating expense ratio	14.6		%	15.8		%	(1.2	)	14.6		%	15.5		%	(0.9	)
Combined ratio	87.2		%	100.0		%	(12.8	)	88.6		%	105.1		%	(16.5	)

Financial measures:

Growth in book value per common share	3.4		%	2.2		%	1.2		8.5		%	3.3		%	5.2

Annualized operating return on average common equity	12.3		%	5.9		%	6.4		11.4		%	3.3		%	8.1

Total return on investments (2)
Including effects of foreign exchange	0.63		%	1.65		%	-102 bps		2.53		%	3.17		%	-64 bps
Excluding effects of foreign exchange	1.04		%	1.54		%	-50 bps		2.66		%	2.69		%	-3 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																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011

Gross premiums written	$	1,051,813		$	1,066,656		$	699,662		$	860,289		$	911,939		$	964,566		$	664,212		$	831,788		$	817,100		$	2,118,469		$	1,876,505
Net premiums written	820,233			863,611			511,124			691,381			706,543			764,278			482,911			636,117			624,258			1,683,844			1,470,821

Net premiums earned	$	726,656		$	680,312		$	673,192		$	682,049		$	642,879		$	633,695		$	632,146		$	627,409		$	623,011		$	1,406,968		$	1,276,574
Fee income	806			543			982			848			784			815			2,814			874			883			1,349			1,599
Losses and loss adjustment expenses	(399,693		)	(395,207		)	(378,067		)	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(363,145		)	(794,900		)	(925,502		)
Acquisition expenses, net	(128,289		)	(118,962		)	(123,339		)	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(107,475		)	(247,251		)	(219,393		)
Other operating expenses	(105,757		)	(99,493		)	(103,300		)	(100,141		)	(101,445		)	(95,856		)	(112,228		)	(97,247		)	(92,748		)	(205,250		)	(197,301		)
Underwriting income (loss)	93,723			67,193			69,468			38,567			(43		)	(63,980		)	50,582			60,564			60,526			160,916			(64,023		)

Net investment income	73,608			74,297			80,467			82,753			86,671			88,307			90,601			90,768			90,537			147,905			174,978
Net realized gains	34,867			44,121			14,542			30,199			45,210			20,695			74,027			68,828			62,114			78,988			65,905
Net impairment losses recognized in earnings	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(2,974		)	(4,364		)
Equity in net income (loss) of investment funds accounted for using the equity method	7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	32,613			35,646
Other income (loss)	695			(8,068		)	(4,848		)	2,432			(4,265		)	4,567			6,165			1,840			4,528			(7,373		)	302
Other expenses	(11,944		)	(6,979		)	(6,777		)	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(10,503		)	(18,923		)	(18,423		)
Interest expense	(7,439		)	(7,521		)	(8,087		)	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(7,916		)	(14,960		)	(15,479		)
Net foreign exchange gains (losses)	31,689			(20,688		)	12,613			60,040			(18,375		)	(36,912		)	6,039			(65,157		)	48,625			11,001			(55,287		)
Income before income taxes	221,035			166,158			140,717			166,398			94,332			24,923			232,833			151,309			243,153			387,193			119,255
Income tax (expense) benefit	(767		)	(1,902		)	4,615			2,357			2,271			550			3,067			(3,291		)	(1,011		)	(2,669		)	2,821

Net income	220,268			164,256			145,332			168,755			96,603			25,473			235,900			148,018			242,142			384,524			122,076
Preferred dividends	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(14,110		)	(12,922		)
Net income available to common shareholders	$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	235,681		$	370,414		$	109,154

Underwriting Ratios
Loss ratio	55.0		%	58.1		%	56.2		%	62.2		%	67.1		%	77.9		%	58.1		%	57.3		%	58.3		%	56.5		%	72.5		%
Acquisition expense ratio	17.6		%	17.4		%	18.2		%	17.5		%	17.1		%	17.0		%	16.5		%	17.6		%	17.1		%	17.5		%	17.1		%
Other operating expense ratio	14.6		%	14.6		%	15.3		%	14.7		%	15.8		%	15.1		%	17.8		%	15.5		%	14.9		%	14.6		%	15.5		%
Combined ratio	87.2		%	90.1		%	89.7		%	94.4		%	100.0		%	110.0		%	92.4		%	90.4		%	90.3		%	88.6		%	105.1		%

Net premiums written to gross premiums written	78.0		%	81.0		%	73.1		%	80.4		%	77.5		%	79.2		%	72.7		%	76.5		%	76.4		%	79.5		%	78.4		%

Net income per common share
Basic	$	1.58		$	1.18		$	1.05		$	1.23		$	0.69		$	0.14		$	1.60		$	0.96		$	1.54		$	2.76		$	0.82
Diluted	$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	1.47		$	2.68		$	0.78

Weighted average common shares and common share equivalents outstanding
Basic	134,529,129			133,954,623			132,612,528			131,560,851			131,232,269			133,499,241			143,320,146			146,993,373			152,962,620			134,241,876			132,359,493
Diluted	138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			138,017,490			139,234,931

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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


	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,556,326		$	9,221,145		$	9,375,604		$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852		$	9,326,574
Short-term investments available for sale, at fair value	1,087,910			1,112,249			904,219			799,662			704,495			1,130,142			915,841			780,671			554,304
Investment of funds received under securities lending, at fair value	66,424			41,867			48,419			44,553			145,224			9,951			69,660			200,020			209,635
Equity securities available for sale, at fair value	260,864			318,181			299,584			273,213			320,434			361,639			310,194			79,805			38,879
Other investments available for sale, at fair value	381,576			357,992			238,111			229,974			299,845			293,073			275,538			229,488			211,241
Investments accounted for using the fair value option	496,843			500,283			366,903			319,381			321,790			256,614			219,173			175,841			140,541
TALF investments, at fair value	307,453			313,187			387,702			392,455			399,341			400,970			402,449			410,881			407,469
Investments accounted for using the equity method	331,601			347,273			380,507			383,543			399,968			449,206			508,334			500,737			474,971
Total investments	12,488,997			12,212,177			12,001,049			11,972,615			11,838,099			11,817,612			11,659,048			12,070,295			11,363,614

Cash	355,392			422,806			351,699			369,895			411,001			406,877			362,740			365,997			341,469
Accrued investment income	72,095			65,643			70,739			71,264			71,083			69,057			74,837			79,180			72,102
Investment in joint venture	109,240			107,866			107,576			107,642			105,982			105,495			105,698			104,347			103,540
Fixed maturities and short-term investments pledged under securities lending, at fair value	74,032			50,813			56,393			72,399			150,501			198,418			75,575			203,221			214,564
Securities purchased under agreements to resell using funds received under securities lending	—			—			—			20,032			—			185,176			—			—			—
Premiums receivable	834,116			700,137			501,563			606,963			712,397			633,144			503,434			662,634			706,503
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,191			1,849,603			1,851,584			1,840,191			1,855,342			1,772,130			1,763,985			1,715,122			1,721,059
Contractholder receivables	787,389			762,031			748,231			732,270			702,423			672,296			660,546			635,682			609,476
Prepaid reinsurance premiums	313,264			261,619			265,696			267,846			278,587			259,624			263,448			267,240			256,952
Deferred acquisition costs, net	272,736			261,467			227,884			253,163			257,292			251,226			227,278			244,441			241,095
Receivable for securities sold	821,527			621,560			462,891			1,067,188			733,931			749,708			56,145			1,329,508			1,084,122
Other assets	518,744			497,061			460,052			490,728			520,901			521,292			490,277			461,473			480,448
Total Assets	$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140		$	17,194,944

Liabilities
Reserve for losses and loss adjustment expenses	$	8,546,350		$	8,511,323		$	8,456,210		$	8,523,522		$	8,564,908		$	8,319,324		$	8,098,454		$	8,054,677		$	7,940,104
Unearned premiums	1,815,135			1,595,712			1,411,872			1,578,419			1,589,497			1,504,162			1,370,075			1,524,100			1,492,550
Reinsurance balances payable	184,763			137,791			133,866			123,815			154,860			131,512			132,452			130,274			128,723
Contractholder payables	787,389			762,031			748,231			732,270			702,423			672,296			660,546			635,682			609,476
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			100,000			125,000			125,000
TALF borrowings, at fair value	235,818			239,551			310,486			314,137			318,441			322,222			325,770			331,797			336,213
Securities lending payable	76,383			52,224			58,546			74,696			155,072			203,925			78,021			209,411			219,796
Payable for securities purchased	927,962			742,995			480,230			1,161,591			838,787			1,266,390			200,192			1,649,462			1,192,181
Other liabilities	502,607			531,700			513,842			527,847			510,521			533,189			500,715			498,832			490,890
Total Liabilities	13,476,407			12,973,327			12,513,283			13,436,297			13,234,509			13,353,020			11,766,225			13,459,235			12,834,933

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	556			552			549			544			541			535			534			531			529
Additional paid-in capital	187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828
Retained earnings	5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340
Accumulated other comprehensive income, net of deferred income tax	193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231
Common shares held in treasury, at cost	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)
Total Shareholders’ Equity	5,020,316			4,839,456			4,592,074			4,435,899			4,403,030			4,289,035			4,476,786			4,679,905			4,360,011
Total Liabilities and Shareholders’ Equity	$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140		$	17,194,944

Common shares outstanding, net of treasury shares	136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710

Book value per common share (1)	$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49		$	27.10

(1) 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																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011

Comprehensive Income
Net income	$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	242,142		$	384,524		$	122,076
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	18,060			94,863			40,476			(71,861		)	84,862			40,370			(141,807		)	264,609			71,087			112,923			125,232
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(511		)	(863		)
Reclassification of net realized gains, net of income taxes, included in net income	(43,792		)	(27,511		)	(29,785		)	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(32,611		)	(71,303		)	(67,858		)
Foreign currency translation adjustments	(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(1,935		)	2,570
Other comprehensive income (loss)	(41,371		)	80,545			7,347			(117,008		)	38,179			20,902			(183,867		)	215,139			32,269			39,174			59,081
Comprehensive Income	$	178,897		$	244,801		$	152,679		$	51,747		$	134,782		$	46,375		$	52,033		$	363,157		$	274,411		$	423,698		$	181,157

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)


	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011
Non-Cumulative Preferred Shares
Balance at beginning of period	$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000		$	325,000
Shares issued - Series C	325,000			—			—			—			—			—			—			—			—			325,000			—
Shares repurchased - Series A and B	(325,000		)	—			—			—			—			—			—			—			—			(325,000		)	—
Balance at 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	552			549			544			541			535			534			531			529			527			549			534
Common shares issued, net	4			3			5			3			6			1			3			2			7			7			7
Purchases of common shares under share repurchase program.	—			—			—			—			—			—			—			—			(5		)	—			—
Balance at end of period	556			552			549			544			541			535			534			531			529			556			541

Additional Paid-in Capital
Balance at beginning of period	170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828			95,926			161,419			110,325
Common shares issued, net	4,556			(3		)	1,857			(2		)	3,904			8			1,334			283			3,275			4,553			3,912
Issue costs on Series C preferred shares	(9,397		)	—			—			—			—			—			—			—			—			(9,397		)	—
Exercise of stock options	2,971			1,851			2,926			3,007			2,245			4,127			2,716			10,486			7,964			4,822			6,372
Common shares retired	—			—			—			—			—			—			—			—			(36,212		)	—			—
Amortization of share-based compensation	16,519			7,411			5,700			5,781			13,877			5,628			5,615			6,074			12,280			23,930			19,505
Other	1,670			16			54			95			1,866			21			20			(31		)	595			1,686			1,887
Balance at end of period	187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828			187,013			142,001

Retained Earnings
Balance at beginning 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			4,796,655			4,386,336
Dividends declared on preferred shares	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(14,110		)	(12,922		)
Net income	220,268			164,256			145,332			168,755			96,603			25,473			235,900			148,018			242,142			384,524			122,076
Balance at end of period	5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			4,015,340			5,167,069			4,495,490

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231			140,962			153,923			204,503
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(25,732		)	67,352			10,691			(102,568		)	37,180			20,194			(185,221		)	208,310			38,476			41,620			57,374
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(308		)	(511		)	(863		)
Foreign currency translation adjustments, net of deferred income tax	(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			(5,899		)	(1,935		)	2,570
Balance at end of period	193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231			193,097			263,584

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	—			(845,472		)	(549,912		)
Shares repurchased for treasury	(6,711		)	(236		)	(585		)	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(237,917		)	(6,947		)	(273,674		)
Balance at end of period	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	(852,419		)	(823,586		)
Total Shareholders’ Equity	$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905		$	4,360,011		$	5,020,316		$	4,403,030

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)


	Three Months Ended																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011
Operating Activities
Net income	$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	242,142		$	384,524		$	122,076
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(36,681		)	(44,072		)	(12,940		)	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(62,406		)	(80,753		)	(71,367		)
Net impairment losses included in earnings	1,951			1,023			1,959			2,739			1,684			2,680			3,230			2,075			4,410			2,974			4,364
Equity in net income or loss of investment funds accounted for using the equity method and other income	(6,111		)	(12,030		)	20,776			31,734			18,945			(355		)	(26,110		)	(11,545		)	(3,368		)	(18,141		)	18,590
Share-based compensation	16,519			7,411			5,700			5,781			13,877			5,628			5,615			6,074			12,280			23,930			19,505
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	68,327			39,343			(59,998		)	48,397			130,746			155,477			3,546			49,420			71,357			107,670			286,223
Unearned premiums, net of prepaid reinsurance premiums	95,142			181,735			(162,490		)	9,919			63,987			130,136			(149,242		)	9,024			236			276,877			194,123
Premiums receivable	(83,633		)	(190,102		)	106,818			82,200			(77,556		)	(118,688		)	157,034			63,197			(20,280		)	(273,735		)	(196,244		)
Deferred acquisition costs, net	(13,121		)	(32,269		)	24,823			1,438			(5,464		)	(22,056		)	16,684			(31		)	3,756			(45,390		)	(27,520		)
Reinsurance balances payable	40,310			(3,181		)	8,896			(19,368		)	23,109			(7,122		)	3,277			(4,853		)	19,267			37,129			15,987
Other liabilities	(12,660		)	10,134			30,620			5,925			(26,613		)	33,366			(47,339		)	23,914			(57,219		)	(2,526		)	6,753
Other items, net	(37,864		)	22,573			145			2,019			31,535			42,522			20,179			54,665			(4,661		)	(15,291		)	74,057
Net Cash Provided By Operating Activities	252,447			144,821			109,641			309,924			221,967			224,580			144,513			267,424			205,514			397,268			446,547

Investing Activities
Purchases of:
Fixed maturity investments	(3,952,868		)	(3,593,630		)	(3,758,854		)	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(5,018,619		)	(4,885,606		)	(7,546,498		)	(7,386,907		)
Equity securities	(76,500		)	(33,803		)	(69,962		)	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(21,727		)	(110,303		)	(248,947		)
Other investments	(147,076		)	(239,167		)	(220,048		)	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(150,631		)	(386,243		)	(207,365		)
Proceeds from the sales of:
Fixed maturity investments	3,258,254			3,628,932			3,542,629			2,299,627			3,323,456			3,232,541			2,670,332			4,872,668			4,668,666			6,887,186			6,555,997
Equity securities	122,625			75,860			58,386			111,467			147,334			52,316			14,522			19,151			25,043			198,485			199,650
Other investments	105,815			111,149			147,243			191,767			119,780			84,967			133,211			68,843			87,536			216,964			204,747
Proceeds from redemptions and maturities of fixed maturities	337,132			261,660			296,408			200,671			283,512			253,898			266,044			226,889			244,312			598,792			537,410
Net (purchases) sales of short-term investments	32,837			(207,444		)	(114,854		)	(123,211		)	459,091			(223,415		)	(129,794		)	(205,411		)	96,239			(174,607		)	235,676
Change in investment of securities lending collateral	(24,159		)	6,322			16,150			80,376			48,853			(125,904		)	131,389			10,385			(30,772		)	(17,837		)	(77,051		)
Purchase of business, net of cash acquired	28,948			—			—			—			—			—			—			—			—			28,948			—
Purchases of furniture, equipment and other	(3,710		)	(6,498		)	(3,461		)	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(6,057		)	(10,208		)	(12,348		)
Net Cash Provided By (Used For) Investing Activities	(318,702		)	3,381			(106,363		)	(232,919		)	(131,125		)	(68,013		)	276,028			(186,455		)	27,003			(315,321		)	(199,138		)

Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,789			—			—			—			—			—			—			—			—			315,789			—
Repurchase of Series A and B preferred shares	(325,000		)	—			—			—			—			—			—			—			—			(325,000		)	—
Purchases of common shares under share repurchase program	—			—			(3		)	(20,833		)	(29,552		)	(237,173		)	(258,150		)	(53,398		)	(269,054		)	—			(266,725		)
Proceeds from common shares issued, net	(432		)	780			3,245			1,609			(1,397		)	2,875			4,693			8,586			3,779			348			1,478
Proceeds from borrowings	—			—			—			—			—			—			—			—			50,000			—			—
Repayments of borrowings	(3,910		)	(69,863		)	(3,513		)	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(34,022		)	(73,773		)	(7,614		)
Change in securities lending collateral	24,159			(6,322		)	(16,150		)	(80,376		)	(48,853		)	125,904			(131,389		)	(10,385		)	30,772			17,837			77,051
Other	2,876			588			766			818			2,467			714			(893		)	1,593			2,296			3,464			3,181
Preferred dividends paid	(10,951		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(17,412		)	(12,922		)
Net Cash Used For Financing Activities	2,531			(81,278		)	(22,116		)	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(222,690		)	(78,747		)	(205,551		)

Effects of exchange rate changes on foreign currency cash	(3,690		)	4,183			642			(8,643		)	997			5,406			(526		)	9,270			(7,066		)	493			6,403

Increase (decrease) in cash	(67,414		)	71,107			(18,196		)	(41,106		)	4,124			44,137			(3,257		)	24,528			2,761			3,693			48,261
Cash beginning of period	422,806			351,699			369,895			411,001			406,877			362,740			365,997			341,469			338,708			351,699			362,740
Cash end of period	$	355,392		$	422,806		$	351,699		$	369,895		$	411,001		$	406,877		$	362,740		$	365,997		341,469			$	355,392		$	411,001

Income taxes paid (received), net	$	1,548		$	2,788		$	(7,724	)	$	3,662		$	2,296		$	3,670		$	3,140		$	1,928		$	1,430		$	4,336		$	5,966
Interest paid	$	12,843		$	2,206		$	13,047		$	2,177		$	13,084		$	2,191		$	12,831		$	1,832		$	13,437		$	15,049		$	15,275

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

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

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. Specialty product lines include: casualty; construction; executive assurance; healthcare; national accounts casualty; professional liability; programs; property, energy, marine and aviation; surety; travel and accident; and other (consisting of excess workers’ compensation, employers’ liability and collateral protection business).

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

Corporate and other (non-underwriting) includes net investment income, other income (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net impairment losses included in earnings, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, income taxes and dividends on the Company’s non-cumulative preferred shares.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Three Months Ended June 30, 2012 and 2011

(U.S. dollars in thousands)

	Three Months Ended									Three Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	676,090		$	376,981		$	1,051,813		$	635,005		$	277,766		$	911,939
Net premiums written	464,584			355,649			820,233			438,263			268,280			706,543

Net premiums earned	$	446,594		$	280,062		$	726,656		$	410,819		$	232,060		$	642,879
Fee income	628			178			806			702			82			784
Losses and loss adjustment expenses	(290,416		)	(109,277		)	(399,693		)	(301,642		)	(129,980		)	(431,622		)
Acquisition expenses, net	(76,058		)	(52,231		)	(128,289		)	(66,543		)	(44,096		)	(110,639		)
Other operating expenses	(76,617		)	(29,140		)	(105,757		)	(77,774		)	(23,671		)	(101,445		)
Underwriting income (loss)	$	4,131		$	89,592		93,723			$	(34,438	)	$	34,395		(43		)

Net investment income							73,608									86,671
Net realized gains							34,867									45,210
Net impairment losses recognized in earnings							(1,951		)							(1,684		)
Equity in net income (loss) of investment funds accounted for using the equity method							7,787									5,973
Other income (loss)							695									(4,265		)
Other expenses							(11,944		)							(11,397		)
Interest expense							(7,439		)							(7,758		)
Net foreign exchange gains (losses)							31,689									(18,375		)
Income before income taxes							221,035									94,332
Income tax (expense) benefit							(767		)							2,271

Net income							220,268									96,603
Preferred dividends							(7,649		)							(6,461		)
Net income available to common shareholders							$	212,619								$	90,142

Underwriting Ratios
Loss ratio	65.0		%	39.0		%	55.0		%	73.4		%	56.0		%	67.1		%
Acquisition expense ratio (2)	16.9		%	18.6		%	17.6		%	16.0		%	19.0		%	17.1		%
Other operating expense ratio	17.2		%	10.4		%	14.6		%	18.9		%	10.2		%	15.8		%
Combined ratio	99.1		%	68.0		%	87.2		%	108.3		%	85.2		%	100.0		%

Net premiums written to gross premiums written	68.7		%	94.3		%	78.0		%	69.0		%	96.6		%	77.5		%

(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)	The acquisition expense ratio is adjusted to include certain fee income.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Six Months Ended June 30, 2012 and 2011

(U.S. dollars in thousands)

	Six Months Ended									Six Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,364,203		$	756,957		$	2,118,469		$	1,269,588		$	608,779		$	1,876,505
Net premiums written	955,264			728,580			1,683,844			887,554			583,267			1,470,821

Net premiums earned	$	888,334		$	518,634		$	1,406,968		$	818,410		$	458,164		$	1,276,574
Fee income	1,158			191			1,349			1,480			119			1,599
Losses and loss adjustment expenses	(593,580		)	(201,320		)	(794,900		)	(599,365		)	(326,137		)	(925,502		)
Acquisition expenses, net	(149,928		)	(97,323		)	(247,251		)	(127,958		)	(91,435		)	(219,393		)
Other operating expenses	(149,987		)	(55,263		)	(205,250		)	(152,403		)	(44,898		)	(197,301		)
Underwriting income (loss)	$	(4,003	)	$	164,919		160,916			$	(59,836	)	$	(4,187	)	(64,023		)

Net investment income							147,905									174,978
Net realized gains							78,988									65,905
Net impairment losses recognized in earnings							(2,974		)							(4,364		)
Equity in net income (loss) of investment funds accounted for using the equity method							32,613									35,646
Other income (loss)							(7,373		)							302
Other expenses							(18,923		)							(18,423		)
Interest expense							(14,960		)							(15,479		)
Net foreign exchange gains (losses)							11,001									(55,287		)
Income before income taxes							387,193									119,255
Income tax (expense) benefit							(2,669		)							2,821

Net income							384,524									122,076
Preferred dividends							(14,110		)							(12,922		)
Net income available to common shareholders							$	370,414								$	109,154

Underwriting Ratios
Loss ratio	66.8		%	38.8		%	56.5		%	73.2		%	71.2		%	72.5		%
Acquisition expense ratio (2)	16.7		%	18.8		%	17.5		%	15.5		%	20.0		%	17.1		%
Other operating expense ratio	16.9		%	10.7		%	14.6		%	18.6		%	9.8		%	15.5		%
Combined ratio	100.4		%	68.3		%	88.6		%	107.3		%	101.0		%	105.1		%

Net premiums written to gross premiums written	70.0		%	96.3		%	79.5		%	69.9		%	95.8		%	78.4		%

(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)	The acquisition expense ratio is adjusted to include certain fee income.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Property, energy, marine and aviation	$	86,390	18.6	$	103,296	23.6	$	166,209	17.4	$	179,714	20.2
Programs	92,998		20.0	81,629		18.6	174,614		18.3	156,025		17.6
Professional liability	65,198		14.0	57,906		13.2	135,759		14.2	117,291		13.2
Executive assurance	60,205		13.0	53,974		12.3	128,583		13.5	110,042		12.4
National accounts	4,961		1.1	4,397		1.0	40,399		4.2	44,588		5.0
Construction	49,784		10.7	42,408		9.7	83,437		8.7	73,917		8.3
Casualty	30,638		6.6	24,939		5.7	57,611		6.0	55,073		6.2
Travel and accident	20,294		4.4	19,284		4.4	43,130		4.5	40,785		4.6
Lenders products	20,477		4.4	21,526		4.9	42,892		4.5	42,600		4.8
Healthcare	7,959		1.7	8,422		1.9	18,594		1.9	17,539		2.0
Surety	12,723		2.7	9,618		2.2	24,857		2.6	19,352		2.2
Other (1)	12,957		2.8	10,864		2.5	39,179		4.2	30,628		3.5
Total	$	464,584	100.0	$	438,263	100.0	$	955,264	100.0	$	887,554	100.0

Net premiums earned
Property, energy, marine and aviation	$	77,590	17.4	$	76,644	18.7	$	156,084	17.6	$	150,243	18.4
Programs	80,589		18.0	71,934		17.5	154,587		17.4	138,952		17.0
Professional liability	68,017		15.2	57,767		14.1	131,273		14.8	125,167		15.3
Executive assurance	60,856		13.6	60,488		14.7	119,622		13.5	115,058		14.1
National accounts	18,415		4.1	18,166		4.4	37,551		4.2	39,328		4.8
Construction	31,692		7.1	27,214		6.6	63,500		7.1	55,605		6.8
Casualty	28,102		6.3	24,829		6.0	57,167		6.4	53,256		6.5
Travel and accident	20,661		4.6	19,455		4.7	37,374		4.2	35,054		4.3
Lenders products	21,411		4.8	19,966		4.9	53,564		6.0	38,202		4.7
Healthcare	9,077		2.0	9,089		2.2	17,975		2.0	17,741		2.2
Surety	10,798		2.4	9,402		2.3	21,358		2.4	19,181		2.3
Other (1)	19,386		4.5	15,865		3.9	38,279		4.4	30,623		3.6
Total	$	446,594	100.0	$	410,819	100.0	$	888,334	100.0	$	818,410	100.0

Net premiums written by client location
United States	$	345,730	74.4	$	324,177	74.0	$	680,283	71.2	$	629,393	70.9
Europe	55,586		12.0	59,797		13.6	163,217		17.1	159,888		18.0
Other	63,268		13.6	54,289		12.4	111,764		11.7	98,273		11.1
Total	$	464,584	100.0	$	438,263	100.0	$	955,264	100.0	$	887,554	100.0

Net premiums written by underwriting location
United States	$	324,438	69.8	$	301,782	68.9	$	645,997	67.6	$	596,825	67.2
Europe	108,888		23.4	104,884		23.9	261,503		27.4	240,420		27.1
Other	31,258		6.8	31,597		7.2	47,764		5.0	50,309		5.7
Total	$	464,584	100.0	$	438,263	100.0	$	955,264	100.0	$	887,554	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																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011

Gross premiums written	$	676,090		$	688,113		$	540,617		$	634,280		$	635,005		$	634,583		$	527,783		$	624,490		$	616,353		$	1,364,203		$	1,269,588
Net premiums written	464,584			490,680			360,739			472,986			438,263			449,291			351,841			431,361			422,837			955,264			887,554

Net premiums earned	$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	888,334		$	818,410
Fee income	628			530			729			661			702			778			761			864			874			1,158			1,480
Losses and loss adjustment expenses	(290,416		)	(303,164		)	(282,769		)	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(275,294		)	(593,580		)	(599,365		)
Acquisition expenses, net	(76,058		)	(73,870		)	(73,975		)	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(65,359		)	(149,928		)	(127,958		)
Other operating expenses	(76,617		)	(73,370		)	(77,593		)	(77,801		)	(77,774		)	(74,629		)	(82,535		)	(76,892		)	(72,533		)	(149,987		)	(152,403		)
Underwriting income (loss)	$	4,131		$	(8,134	)	$	(10,941	)	$	(6,541	)	$	(34,438	)	$	(25,398	)	$	(5,449	)	$	3,133		$	(6,839	)	$	(4,003	)	$	(59,836	)

Underwriting Ratios
Loss ratio	65.0		%	68.6		%	66.9		%	66.4		%	73.4		%	73.0		%	65.5		%	64.4		%	67.9		%	66.8		%	73.2		%
Acquisition expense ratio (1)	16.9		%	16.6		%	17.3		%	17.4		%	16.0		%	14.9		%	15.4		%	16.1		%	15.9		%	16.7		%	15.5		%
Other operating expense ratio	17.2		%	16.6		%	18.4		%	17.8		%	18.9		%	18.3		%	20.4		%	18.7		%	17.9		%	16.9		%	18.6		%
Combined ratio	99.1		%	101.8		%	102.6		%	101.6		%	108.3		%	106.2		%	101.3		%	99.2		%	101.7		%	100.4		%	107.3		%

Net premiums written
Property, energy, marine and aviation	$	86,390		$	79,819		$	41,244		$	114,631		$	103,296		$	76,418		$	44,258		$	88,412		$	88,194		$	166,209		$	179,714
Programs	92,998			81,616			62,874			79,086			81,629			74,396			60,969			68,264			73,345			174,614			156,025
Professional liability	65,198			70,561			54,085			66,484			57,906			59,385			51,559			78,873			70,626			135,759			117,291
Executive assurance	60,205			68,378			59,035			62,328			53,974			56,068			54,448			51,503			52,514			128,583			110,042
National accounts	4,961			35,438			19,110			17,275			4,397			40,191			14,024			19,215			3,877			40,399			44,588
Construction	49,784			33,653			22,912			23,576			42,408			31,509			20,014			20,245			44,276			83,437			73,917
Casualty	30,638			26,973			28,599			30,563			24,939			30,134			27,389			28,493			26,617			57,611			55,073
Travel and accident	20,294			22,836			13,751			17,404			19,284			21,501			14,486			19,673			15,272			43,130			40,785
Lenders products	20,477			22,415			21,543			22,551			21,526			21,074			30,942			23,452			22,208			42,892			42,600
Healthcare	7,959			10,635			9,303			8,810			8,422			9,117			10,290			8,705			9,989			18,594			17,539
Surety	12,723			12,134			12,734			10,389			9,618			9,734			7,918			11,128			7,012			24,857			19,352
Other (2)	12,957			26,222			15,549			19,889			10,864			19,764			15,544			13,398			8,907			39,179			30,628
Total	$	464,584		$	490,680		$	360,739		$	472,986		$	438,263		$	449,291		$	351,841		$	431,361		$	422,837		$	955,264		$	887,554

Net premiums earned
Property, energy, marine and aviation	$	77,590		$	78,494		$	79,979		$	92,288		$	76,644		$	73,599		$	77,811		$	82,301		$	80,818		$	156,084		$	150,243
Programs	80,589			73,998			75,085			73,561			71,934			67,018			69,462			68,404			68,381			154,587			138,952
Professional liability	68,017			63,256			62,467			64,403			57,767			67,400			63,152			69,900			63,642			131,273			125,167
Executive assurance	60,856			58,766			56,782			56,783			60,488			54,570			55,270			51,675			54,958			119,622			115,058
National accounts	18,415			19,136			20,572			19,642			18,166			21,162			17,360			18,595			16,810			37,551			39,328
Construction	31,692			31,808			28,569			28,590			27,214			28,391			26,837			25,664			27,982			63,500			55,605
Casualty	28,102			29,065			28,093			30,305			24,829			28,427			25,893			27,503			28,148			57,167			53,256
Travel and accident	20,661			16,713			15,840			19,051			19,455			15,599			15,705			17,418			17,590			37,374			35,054
Lenders products	21,411			32,153			18,796			18,293			19,966			18,236			19,617			17,593			17,153			53,564			38,202
Healthcare	9,077			8,898			8,825			9,340			9,089			8,652			9,701			9,738			10,340			17,975			17,741
Surety	10,798			10,560			11,847			10,091			9,402			9,779			9,810			9,876			8,023			21,358			19,181
Other (2)	19,386			18,893			15,812			15,623			15,865			14,758			13,657			13,214			11,628			38,279			30,623
Total	$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	405,473		$	888,334		$	818,410

(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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Casualty (1)	$	43,702	12.3	$	40,755	15.2	$	127,662	17.5	$	112,116	19.2
Property excluding property catastrophe (2)	65,734		18.5	53,938		20.1	141,227		19.4	125,088		21.4
Other specialty (3)	72,261		20.3	43,937		16.4	167,723		23.0	121,582		20.8
Property catastrophe	129,224		36.3	108,235		40.3	215,798		29.6	175,196		30.0
Marine and aviation	18,842		5.3	19,978		7.4	44,459		6.1	44,142		7.6
Other	25,886		7.3	1,437		0.6	31,711		4.4	5,143		1.0
Total	$	355,649	100.0	$	268,280	100.0	$	728,580	100.0	$	583,267	100.0

Net premiums earned
Casualty (1)	$	48,565	17.3	$	51,493	22.2	$	94,508	18.2	$	99,987	21.8
Property excluding property catastrophe (2)	58,720		21.0	57,524		24.8	120,352		23.2	120,530		26.3
Other specialty (3)	78,207		27.9	40,511		17.5	124,355		24.0	79,480		17.3
Property catastrophe	68,992		24.6	59,788		25.8	130,855		25.2	111,430		24.3
Marine and aviation	19,200		6.9	21,093		9.1	40,649		7.8	42,719		9.3
Other	6,378		2.3	1,651		0.6	7,915		1.6	4,018		1.0
Total	$	280,062	100.0	$	232,060	100.0	$	518,634	100.0	$	458,164	100.0

Net premiums written
Pro rata	$	144,133	40.5	$	105,036	39.2	$	268,879	36.9	$	210,528	36.1
Excess of loss	211,516		59.5	163,244		60.8	459,701		63.1	372,739		63.9
Total	$	355,649	100.0	$	268,280	100.0	$	728,580	100.0	$	583,267	100.0

Net premiums earned
Pro rata	$	124,941	44.6	$	103,967	44.8	$	224,866	43.4	$	210,620	46.0
Excess of loss	155,121		55.4	128,093		55.2	293,768		56.6	247,544		54.0
Total	$	280,062	100.0	$	232,060	100.0	$	518,634	100.0	$	458,164	100.0

Net premiums written by client location
United States	$	218,624	61.5	$	169,116	63.0	$	392,624	53.9	$	336,331	57.7
Europe	74,762		21.0	50,382		18.8	215,120		29.5	176,082		30.2
Bermuda	4,597		1.3	22,786		8.5	34,197		4.7	27,165		4.7
Other	57,666		16.2	25,996		9.7	86,639		11.9	43,689		7.4
Total	$	355,649	100.0	$	268,280	100.0	$	728,580	100.0	$	583,267	100.0

Net premiums written by underwriting location
Bermuda	$	217,283	61.1	$	175,018	65.2	$	373,239	51.2	$	321,614	55.1
United States	82,786		23.3	76,609		28.6	212,245		29.1	190,365		32.6
Other	55,580		15.6	16,653		6.2	143,096		19.7	71,288		12.3
Total	$	355,649	100.0	$	268,280	100.0	$	728,580	100.0	$	583,267	100.0

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

(2) Includes facultative business.

(3) Includes U.K. motor, trade credit, surety, workers’ compensation catastrophe, accident and health and other.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

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

Gross premiums written	$	376,981		$	379,976		$	161,904		$	227,837		$	277,766		$	331,013		$	139,015		$	208,770		$	203,695		$	756,957		$	608,779
Net premiums written	355,649			372,931			150,385			218,395			268,280			314,987			131,070			204,756			201,421			728,580			583,267

Net premiums earned	$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	518,634		$	458,164
Fee income	178			13			253			187			82			37			2,053			10			9			191			119
Losses and loss adjustment expenses	(109,277		)	(92,043		)	(95,298		)	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(87,851		)	(201,320		)	(326,137		)
Acquisition expenses, net	(52,231		)	(45,092		)	(49,364		)	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(42,116		)	(97,323		)	(91,435		)
Other operating expenses	(29,140		)	(26,123		)	(25,707		)	(22,340		)	(23,671		)	(21,227		)	(29,693		)	(20,355		)	(20,215		)	(55,263		)	(44,898		)
Underwriting income (loss)	$	89,592		$	75,327		$	80,409		$	45,108		$	34,395		$	(38,582	)	$	56,031		$	57,431		$	67,365		$	164,919		$	(4,187	)

Underwriting Ratios
Loss ratio	39.0		%	38.6		%	38.0		%	54.6		%	56.0		%	86.8		%	45.0		%	43.5		%	40.4		%	38.8		%	71.2		%
Acquisition expense ratio	18.6		%	18.9		%	19.7		%	17.8		%	19.0		%	20.9		%	18.3		%	20.4		%	19.4		%	18.8		%	20.0		%
Other operating expense ratio	10.4		%	10.9		%	10.3		%	9.2		%	10.2		%	9.4		%	13.0		%	9.4		%	9.3		%	10.7		%	9.8		%
Combined ratio	68.0		%	68.4		%	68.0		%	81.6		%	85.2		%	117.1		%	76.3		%	73.3		%	69.1		%	68.3		%	101.0		%

Net premiums written
Casualty (1)	$	43,702		$	83,960		$	34,968		$	34,873		$	40,755		$	71,361		$	32,274		$	38,276		$	43,642		$	127,662		$	112,116
Property excluding property catastrophe (2)	65,734			75,493			36,430			64,495			53,938			71,150			46,835			70,149			57,880			141,227			125,088
Other specialty (3)	72,261			95,462			48,555			40,882			43,937			77,645			27,008			30,468			18,920			167,723			121,582
Property catastrophe	129,224			86,574			11,636			59,961			108,235			66,961			3,529			40,255			70,403			215,798			175,196
Marine and aviation	18,842			25,617			16,130			17,037			19,978			24,164			21,303			24,913			9,609			44,459			44,142
Other	25,886			5,825			2,666			1,147			1,437			3,706			121			695			967			31,711			5,143
Total	$	355,649		$	372,931		$	150,385		$	218,395		$	268,280		$	314,987		$	131,070		$	204,756		$	201,421		$	728,580		$	583,267

Net premiums earned
Casualty (1)	$	48,565		$	45,943		$	47,317		$	49,066		$	51,493		$	48,494		$	48,609		$	52,792		$	59,501		$	94,508		$	99,987
Property excluding property catastrophe (2)	58,720			61,632			60,607			62,565			57,524			63,006			70,744			66,438			65,742			120,352			120,530
Other specialty (3)	78,207			46,148			60,891			48,722			40,511			38,969			30,296			25,254			22,292			124,355			79,480
Property catastrophe	68,992			61,863			62,408			64,910			59,788			51,642			54,768			54,206			52,301			130,855			111,430
Marine and aviation	19,200			21,449			17,361			17,739			21,093			21,626			22,445			16,106			16,263			40,649			42,719
Other	6,378			1,537			1,941			1,077			1,651			2,367			1,009			732			1,439			7,915			4,018
Total	$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	217,538		$	518,634		$	458,164

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

(2) Includes facultative business.

(3) Includes U.K. motor, trade credit, surety, workers’ compensation catastrophe, accident and health and other.

Arch Capital Group Ltd. and Subsidiaries

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

(U.S. dollars in thousands)

	June 30,					March 31,					December 31,					September 30,					June 30,
	2012					2012					2011					2011					2011
Investable assets:
Fixed maturities available for sale, at fair value	$	9,556,326		75	%	$	9,221,145		74	%	$	9,375,604		76	%	$	9,529,834		78	%	$	9,247,002		77	%
Fixed maturities, at fair value (1)	242,735			2	%	250,805			2	%	147,779			1	%	122,866			1	%	102,897			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	74,032			1	%	50,813			0	%	56,393			1	%	72,399			1	%	150,501			1	%
Total fixed maturities	9,873,093			78	%	9,522,763			76	%	9,579,776			78	%	9,725,099			80	%	9,500,400			79	%
Short-term investments available for sale, at fair value	1,087,910			8	%	1,112,249			9	%	904,219			7	%	799,662			6	%	704,495			6	%
Cash	355,392			3	%	422,806			3	%	351,699			3	%	369,895			3	%	411,001			3	%
Equity securities available for sale, at fair value	260,864			2	%	318,181			3	%	299,584			2	%	273,213			2	%	320,434			3	%
Equity securities, at fair value (1)	23,118			0	%	52,766			0	%	87,403			1	%	100,719			1	%	152,844			1	%
Other investments available for sale, at fair value	381,576			3	%	357,992			3	%	238,111			2	%	229,974			2	%	299,845			2	%
Other investments, at fair value (1)	230,990			2	%	196,712			2	%	131,721			1	%	95,796			1	%	66,049			1	%
TALF investments, at fair value (3)	307,453			2	%	313,187			2	%	387,702			3	%	392,455			3	%	399,341			3	%
Investments accounted for using the equity method	331,601			3	%	347,273			3	%	380,507			3	%	383,543			3	%	399,968			3	%
Securities sold but not yet purchased	(9,206		)	0	%	(18,831		)	0	%	(27,178		)	0	%	(46,526		)	0	%	(51,626		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(106,435		)	(1	)%	(121,435		)	(1	)%	(17,339		)	0	%	(94,403		)	(1	)%	(104,856		)	(1	)%
Total investable assets	$	12,736,356		100	%	$	12,503,663		100	%	$	12,316,205		100	%	$	12,229,427		100	%	$	12,097,895		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	3.01					2.75					2.99					3.17					2.87
Average S&P/Moody’s credit ratings (4)	AA/Aa2					AA/Aa2					AA/Aa1					AA+/Aa1					AA+/Aa1
Imbedded book yield (before investment expenses)	2.76		%			2.76		%			2.98		%			3.09		%			3.23		%

Credit quality distribution of total fixed maturities (5):
U.S. government and government agencies (6)	$	3,043,908		31	%	$	2,850,031		30	%	$	3,154,480		33	%	$	2,968,250		30	%	$	2,880,650		30	%
AAA	3,325,996			34	%	3,420,490			36	%	3,229,161			34	%	3,453,116			36	%	3,622,886			38	%
AA	1,505,032			15	%	1,383,663			14	%	1,425,249			15	%	1,531,869			16	%	1,194,430			13	%
A	1,028,772			10	%	917,925			10	%	884,957			9	%	754,421			8	%	765,831			8	%
BBB	428,200			4	%	398,645			4	%	412,566			4	%	555,023			6	%	472,491			5	%
BB	152,982			2	%	157,427			2	%	140,029			1	%	151,665			1	%	158,517			2	%
B	175,613			2	%	172,360			2	%	165,003			2	%	140,571			1	%	241,538			2	%
Lower than B	116,846			1	%	125,134			1	%	114,672			1	%	106,775			1	%	97,748			1	%
Not rated	95,744			1	%	97,088			1	%	53,659			1	%	63,409			1	%	66,309			1	%
Total fixed maturities, at fair value	$	9,873,093		100	%	$	9,522,763		100	%	$	9,579,776		100	%	$	9,725,099		100	%	$	9,500,400		100	%

(1)	Represents investments 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 June 30, 2012:

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

Corporates	$	2,467,217	$	81,718	$	(10,366	)	$	71,352		$	2,395,865	103.0	%
Non-U.S. government-backed corporates	219,004		10,317		(1,167		)	9,150			209,854		104.4	%
FDIC guaranteed corporates	28,274		247		—			247			28,027		100.9	%
U.S. government and government agencies	1,380,074		29,797		(1,872		)	27,925			1,352,149		102.1	%
Agency mortgage-backed securities	1,374,900		19,231		(4,908		)	14,323			1,360,577		101.1	%
Non-agency mortgage-backed securities	295,208		4,512		(13,378		)	(8,866		)	304,074		97.1	%
Agency commercial mortgage-backed securities	288,934		9,864		(1,105		)	8,759			280,175		103.1	%
Non-agency commercial mortgage-backed securities	672,392		21,821		(1,307		)	20,514			651,878		103.1	%
Municipal bonds	1,542,262		67,946		(1,541		)	66,405			1,475,857		104.5	%
Non-U.S. government securities	1,034,657		32,558		(17,976		)	14,582			1,020,075		101.4	%
Asset-backed securities	570,171		17,294		(8,579		)	8,715			561,456		101.6	%
Total	$	9,873,093	$	295,305	$	(62,199	)	$	233,106		$	9,639,987	102.4	%

Corporates (Excluding Guaranteed Amounts)

The following table summarizes the Company’s corporate bonds by sector and by credit quality at June 30, 2012, excluding guaranteed amounts:

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Industrials	$	1,237,027	50.1	%	9.7	%
Financials	890,529		36.1	%	7.0	%
Utilities	99,050		4.0	%	0.8	%
Foreign agencies	3,562		0.1	%	0.0	%
All other (1)	237,049		59.8	%	1.9	%
Total	$	2,467,217	100.0	%	19.4	%

Credit quality distribution (3):
AAA	$	602,606	24.4	%	4.7	%
AA	361,201		14.6	%	2.8	%
A	750,155		30.4	%	5.9	%
BBB	360,736		14.6	%	2.8	%
BB	124,886		5.1	%	1.0	%
B	156,240		6.3	%	1.2	%
Lower than B	19,581		0.8	%	0.2	%
Not rated	91,812		3.8	%	0.7	%
Total	$	2,467,217	100.0	%	19.4	%

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at June 30, 2012, excluding guaranteed amounts and covered bonds:

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

General Electric Co	$	45,395	1.8	%	0.4	%	AA+/A	1
Caterpillar Inc	33,511		1.4	%	0.3	%	A/A2
Abbey National Treasury Svcs	31,810		1.3	%	0.2	%	A/A2
Wells Fargo & Company	29,802		1.2	%	0.2	%	A+/A	2
Total SA	29,402		1.2	%	0.2	%	AA-/Aa1
Royal Dutch Shell PLC	28,806		1.2	%	0.2	%	AA/Aa1
HSBC Holdings PLC	27,565		1.1	%	0.2	%	A/Baa1
National Australia Bank Ltd	27,279		1.1	%	0.2	%	AA-/Aa2
Coca-Cola Company	26,988		1.1	%	0.2	%	A+/Aa	3
Verizon Communications Inc	25,843		1.0	%	0.2	%	A-/A3
Total	$	306,401	12.4	%	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 June 30, 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	$	2,293	AAA	$	2,326	101.4	%	0.0	%
	2004	13,709		BBB+	12,918		94.2	%	0.1	%
	2005	44,324		B-	39,893		90.0	%	0.3	%
	2006	53,445		BBB-	49,370		92.4	%	0.4	%
	2007	41,731		CCC-	40,173		96.3	%	0.3	%
	2008	6,747		CCC	6,613		98.0	%	0.1	%
	2009 (6)	30,151		AAA	32,861		109.0	%	0.3	%
	2010 (6)	28,899		AAA	28,027		97.0	%	0.2	%
	2012 (6)	82,775		AAA	83,027		100.3	%	0.7	%
Total non-agency MBS		$	304,074	BBB+	$	295,208	97.1	%	2.3	%

Non-agency CMBS:	1998	$	3,452	AAA	$	3,471	100.6	%	0.0	%
	2002	68		AAA	69		101.5	%	0.0	%
	2004	27,556		AAA	27,375		99.3	%	0.2	%
	2005	40,271		AA+	40,297		100.1	%	0.3	%
	2006	5,160		A-	5,028		97.4	%	0.0	%
	2007	32,415		A	34,358		106.0	%	0.3	%
	2008	616		AAA	616		100.0	%	0.0	%
	2010	238,680		AAA	247,624		103.7	%	1.9	%
	2011	156,477		AAA	165,444		105.7	%	1.3	%
	2012	147,183		AAA	148,110		100.6	%	1.2	%
Total non-agency CMBS		$	651,878	AAA	$	672,392	103.1	%	5.3	%

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

Wtd. average loan age (months)	72		69		36
Wtd. average life (months) (2)	23		48		51
Wtd. average loan-to-value % (3)	69.9	%	69.0	%	64.7	%
Total delinquencies (4)	19.7	%	21.7	%	3.6	%
Current credit support % (5)	43.3	%	14.4	%	28.2	%

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

(2) The weighted average life for MBS is based on the interest rates in effect at June 30, 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 30% to 86%, while the range of loan-to-values on CMBS is 27% to 105%.

(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) June 30, 2012:

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

Sector:
Credit cards (1)	$	175,092	AA+	$	178,077	101.7	%	1.4	%
Autos (2)	140,224		AAA	139,531		99.5	%	1.1	%
Rate reduction bonds (3)	80,383		AAA	84,014		104.5	%	0.7	%
Equipment (4)	58,961		AA-	60,182		102.1	%	0.5	%
U.K. securitized (5)	31,874		AAA	31,779		99.7	%	0.2	%
Student loans (6)	6,636		AAA	6,773		102.1	%	0.1	%
Other	55,122		AA	55,486		100.7	%	0.4	%
	548,292		AA	555,842		101.4	%	4.4	%

Home equity (7)	$	1,676	AAA	$	1,454	86.8	%	0.0	%
	1,085		A	991		91.3	%	0.0	%
	2,296		BBB	2,446		106.5	%	0.0	%
	3,254		BB to B	3,330		102.3	%	0.0	%
	4,788		CCC to C	6,028		125.9	%	0.0	%
	65		D	80		123.1	%	0.0	%
	13,164		B+	14,329		108.8	%	0.1	%

Total ABS	$	561,456	AA+	$	570,171	101.6	%	4.5	%

The effective duration of the total ABS was 1.5 years at June 30, 2012.

(1) The weighted average credit support % on credit cards is 23.9%.

(2) The weighted average credit support % on autos is 22.0%.

(3) The weighted average credit support % on rate reduction bonds is 6.6%.

(4) The weighted average credit support % on equipment is 5.6%.

(5) The weighted average credit support % on U.K. securitized is 18.0%.

(6) The weighted average credit support % on student loans is 22.7%.

(7) The weighted average credit support % on home equity is 22.8%.

The Company’s investment portfolio included $61.0 million par in sub-prime securities at June 30, 2012, with an estimated fair value of $40.5 million and an average credit quality of “A+/B1.” Such amounts were primarily in the home equity and CMO sectors with the balance in SBA Loan and other ABS sectors. In addition, the portfolio of collateral backing the Company’s securities lending program contains approximately $6 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 June 30, 2012:

	Fair		% of Asset		% of Investable
	Value		Class		Assets
Composition:
Investment funds accounted for using the equity method	$	114,572	33.7	%	0.9	%
Corporate bonds	88,637		26.0	%	0.7	%
Other investments	137,214		40.3	%	1.1	%
Total	$	340,423	100.0	%	2.7	%

Currency:
U.S.-denominated	$	250,907	73.7	%	2.0	%
Euro-denominated	89,516		26.3	%	0.7	%
Total	$	340,423	100.0	%	2.7	%

Sector:
Consumer cyclical	$	70,191	20.6	%	0.6	%
Industrials	48,686		14.3	%	0.4	%
Media	45,920		13.5	%	0.4	%
Consumer non-cyclical	31,744		9.3	%	0.2	%
Basic materials	30,310		8.9	%	0.2	%
Utilities	10,966		3.2	%	0.1	%
All other	102,606		30.2	%	0.8	%
Total	$	340,423	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 Investments

The fair value of the Company’s Eurozone investments are as follows at June 30, 2012:

			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other		Total
Country (1):
Germany	$	159,511	$	1,271	$	22,482	$	0	$	22,726	$	1,536	$	207,526
Netherlands	7,382		31,873		30,925		30,710		6,692		16,053		123,635
France	—		992		32,519		40,345		4,308		8,639		86,803
Finland	105,015		247		—		—		—		—		105,262
Supranational (5)	45,426		—		—		—		—		—		45,426
Spain	—		—		687		12,240		4,998		213		18,138
Luxembourg	—		—		4,237		—		2,335		23		6,595
Italy	5,986		—		3,417		—		959		114		10,476
Belgium	3,905		—		7,049		—		—		—		10,954
Ireland	—		633		—		—		—		1,682		2,315
Portugal	—		—		627		—		—		—		627
Total	$	327,225	$	35,016	$	101,943	$	83,295	$	42,018	$	28,260	$	617,757

(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 investments from Austria, Cyprus, Estonia, Greece, Malta, Slovakia or Slovenia at June 30, 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 17.

(5) 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																											Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2012			2012			2011			2011			2011			2011			2010			2010			2010			2012			2011

After-tax operating income available to common shareholders	$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	130,873		$	255,060		$	67,315
Net realized gains, net of tax	33,275			40,873			13,464			28,458			44,799			21,585			71,821			68,611			61,119			74,148			66,384
Net impairment losses recognized in earnings, net of tax	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(4,410		)	(2,974		)	(4,364		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			(348		)	32,613			35,646
Net foreign exchange gains (losses), net of tax	32,108			(20,541		)	13,177			59,948			(18,685		)	(37,142		)	6,581			(65,346		)	48,447			11,567			(55,827		)
Net income available to common shareholders	$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	235,681		$	370,414		$	109,154

Diluted per common share results:
After-tax operating income available to common shareholders	$	1.02		$	0.82		$	0.94		$	0.78		$	0.43		$	0.06		$	0.87		$	0.85		$	0.82		$	1.85		$	0.48
Net realized gains, net of tax	0.24			0.30			0.10			0.21			0.32			0.15			0.48			0.45			0.38			0.54			0.48
Net impairment losses recognized in earnings, net of tax	(0.01		)	(0.01		)	(0.01		)	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.03		)	(0.02		)	(0.03		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	0.06			0.18			(0.11		)	(0.22		)	0.04			0.21			0.15			0.06			0.00			0.23			0.25
Net foreign exchange gains (losses), net of tax	0.23			(0.15		)	0.09			0.43			(0.13		)	(0.26		)	0.05			(0.43		)	0.30			0.08			(0.40		)
Net income available to common shareholders	$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	1.47		$	2.68		$	0.78

Weighted average common shares and common share equivalents outstanding — diluted	138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			159,795,909			138,017,490			139,234,931

Arch Capital Group Ltd. and Subsidiaries

Share Repurchase Activity

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

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

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

Effect of share repurchases:
Aggregate cost of shares repurchased	$	0	$	0	$	3		$	20,833		$	29,552		$	237,173		$	258,151		$	53,398		$	269,054		$	2,558,033
Shares repurchased	—		—		100			655,772			881,961			8,062,383			8,679,051			2,043,195			10,932,681			104,758,218
Average price per share repurchased	—		—		$	31.51		$	31.77		$	33.51		$	29.42		$	29.74		$	26.13		$	24.61		$	24.42

Average book value per common share (1)	$	33.89	$	32.55	$	31.34		$	30.81		$	30.39		$	29.90		$	29.61		$	28.30		$	26.25

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

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

After-tax operating income available to common shareholders	$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	130,873		$	255,060		$	67,315
Annualized after-tax operating income available to common shareholders (a)	$	565,600		$	454,640		$	515,564		$	428,704		$	238,956		$	30,304		$	525,108		$	522,636		$	523,492		$	510,120		$	134,630

Beginning 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		$	4,267,074		$	4,151,786
Ending common shareholders’ equity	4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905			4,035,011			4,695,316			4,078,030
Average common shareholders’ equity (b)	$	4,604,886		$	4,390,765		$	4,188,987		$	4,094,465		$	4,021,033		$	4,057,911		$	4,253,346		$	4,194,958		$	4,026,043		$	4,481,195		$	4,114,908

Annualized operating return on average common equity (a)/(b)	12.3		%	10.4		%	12.3		%	10.5		%	5.9		%	0.7		%	12.3		%	12.5		%	13.0		%	11.4		%	3.3		%

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

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

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

	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,
	2012			2012			2011			2011			2011			2011			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			100,000			125,000			125,000
Total debt	$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	425,000		$	425,000

Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%) (1)	$	0		$	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
Series C non-cumulative preferred shares (6.75%) (1)	325,000			—			—			—			—			—			—			—			—
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)	4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905			4,035,011
Total shareholders’ equity	$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905		$	4,360,011

Total capital	$	5,420,316		$	5,239,456		$	4,992,074		$	4,835,899		$	4,803,030		$	4,689,035		$	4,876,786		$	5,104,905		$	4,785,011

TALF non-recourse borrowings, at market value, due between 2012 to 2015 (various) (2)	235,818			239,551			310,486			314,137			318,441			322,222			325,770			331,797			336,213

Total capital and TALF non-recourse borrowings	$	5,656,134		$	5,479,007		$	5,302,560		$	5,150,036		$	5,121,471		$	5,011,257		$	5,202,556		$	5,436,702		$	5,121,224

Common shares outstanding, net of treasury shares (b)	136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113			148,891,710

Book value per common share (3) (a)/(b)	$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49		$	27.10

Leverage ratios:
Senior notes/total capital	5.5		%	5.7		%	6.0		%	6.2		%	6.2		%	6.4		%	6.2		%	5.9		%	6.3		%
Revolving credit agreement borrowings/total capital	1.8		%	1.9		%	2.0		%	2.1		%	2.1		%	2.1		%	2.1		%	2.4		%	2.6		%
Debt/total capital	7.4		%	7.6		%	8.0		%	8.3		%	8.3		%	8.5		%	8.2		%	8.3		%	8.9		%
Preferred/total capital	6.0		%	6.2		%	6.5		%	6.7		%	6.8		%	6.9		%	6.7		%	6.4		%	6.8		%
Debt and preferred/total capital	13.4		%	13.8		%	14.5		%	15.0		%	15.1		%	15.5		%	14.9		%	14.7		%	15.7		%

(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 were 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 11.2% and the ratio of debt and preferred to total capital would have been 17.0% at June 30, 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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ARCH CAPITAL GROUP LTD. Reports