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

Attached files

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a12-24213_18k.htm
EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a12-24213_1ex99d1.htm

Exhibit 99.2

Wessex House, 5th Floor

45 Reid Street

Hamilton HM 12 Bermuda

441-278-9250

441-278-9255 fax

Contact:

Mark D. Lyons

Executive Vice President and

Chief Financial Officer

Financial Supplement

Financial Information

as of September 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								Nine Months Ended
	September 30,								September 30,
	2012			2011			Change		2012			2011			Change

Gross premiums written	$	936,764		$	860,289		8.9	%	$	3,055,233		$	2,736,794		11.6	%

Net premiums written	$	755,249		$	691,381		9.2	%	$	2,439,093		$	2,162,202		12.8	%

Net premiums earned	$	748,691		$	682,049		9.8	%	$	2,155,659		$	1,958,623		10.1	%

Underwriting income (loss)	$	73,452		$	38,567		90.5	%	$	234,368		$	(25,456	)	N/M

Net investment income	$	73,221		$	82,753		(11.5	)%	$	221,126		$	257,731		(14.2	)%
Per diluted share	$	0.53		$	0.60		(11.7	)%	$	1.60		$	1.86		(14.0	)%

Net income available to common shareholders	$	184,172		$	162,294		13.5	%	$	554,586		$	271,448		104.3	%
Per diluted share	$	1.33		$	1.18		12.7	%	$	4.01		$	1.96		104.6	%

After-tax operating income available to common shareholders (1)	$	120,247		$	107,176		12.2	%	$	375,307		$	174,491		115.1	%
Per diluted share	$	0.87		$	0.78		11.5	%	$	2.72		$	1.26		115.9	%

Comprehensive income	$	320,691		$	51,747		519.7	%	$	744,389		$	232,904		219.6	%

Cash flow from operations	$	334,683		$	309,924		8.0	%	$	731,951		$	756,471		(3.2	)%

Diluted weighted average common shares and common share equivalents outstanding	138,696,934			137,140,929			1.1	%	138,235,995			138,542,558			(0.2	)%

							% Point								% Point
							Change								Change
Underwriting ratios:
Loss ratio	59.3		%	62.2		%	(2.9	)	57.5		%	68.9		%	(11.4	)
Acquisition expense ratio	17.0		%	17.5		%	(0.5	)	17.3		%	17.2		%	0.1
Other operating expense ratio	13.9		%	14.7		%	(0.8	)	14.4		%	15.2		%	(0.8	)
Combined ratio	90.2		%	94.4		%	(4.2	)	89.2		%	101.3		%	(12.1	)

Financial measures:

Growth in book value per common share	6.8		%	0.6		%	6.2		15.8		%	3.9		%	11.9

Annualized operating return on average common equity	9.9		%	10.5		%	(0.6	)	10.8		%	5.6		%	5.2

Total return on investments (2)
Including effects of foreign exchange	2.45		%	(0.23		)%	268 bps		5.04		%	2.97		%	207 bps
Excluding effects of foreign exchange	2.17		%	0.38		%	179 bps		4.89		%	3.11		%	178 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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2012			2012			2012			2011			2011			2011			2011			2010			2010			2012			2011

Gross premiums written	$	936,764		$	1,051,813		$	1,066,656		$	699,662		$	860,289		$	911,939		$	964,566		$	664,212		$	831,788		$	3,055,233		$	2,736,794
Net premiums written	755,249			820,233			863,611			511,124			691,381			706,543			764,278			482,911			636,117			2,439,093			2,162,202

Net premiums earned	$	748,691		$	726,656		$	680,312		$	673,192		$	682,049		$	642,879		$	633,695		$	632,146		$	627,409		$	2,155,659		$	1,958,623
Fee income	1,077			806			543			982			848			784			815			2,814			874			2,426			2,447
Losses and loss adjustment expenses	(443,871		)	(399,693		)	(395,207		)	(378,067		)	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(359,193		)	(1,238,771		)	(1,349,486		)
Acquisition expenses, net	(128,065		)	(128,289		)	(118,962		)	(123,339		)	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(111,279		)	(375,316		)	(339,598		)
Other operating expenses	(104,380		)	(105,757		)	(99,493		)	(103,300		)	(100,141		)	(101,445		)	(95,856		)	(112,228		)	(97,247		)	(309,630		)	(297,442		)
Underwriting income (loss)	73,452			93,723			67,193			69,468			38,567			(43		)	(63,980		)	50,582			60,564			234,368			(25,456		)

Net investment income	73,221			73,608			74,297			80,467			82,753			86,671			88,307			90,601			90,768			221,126			257,731
Net realized gains	60,391			34,867			44,121			14,542			30,199			45,210			20,695			74,027			68,828			139,379			96,104
Net impairment losses recognized in earnings	(2,379		)	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(5,353		)	(7,103		)
Equity in net income (loss) of investment funds accounted for using the equity method	24,330			7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			56,943			5,097
Other income (loss)	(532		)	695			(8,068		)	(4,848		)	2,432			(4,265		)	4,567			6,165			1,840			(7,905		)	2,734
Other expenses	(9,049		)	(11,944		)	(6,979		)	(6,777		)	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(5,796		)	(27,972		)	(24,603		)
Interest expense	(7,378		)	(7,439		)	(7,521		)	(8,087		)	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(7,371		)	(22,338		)	(23,604		)
Net foreign exchange gains (losses)	(16,959		)	31,689			(20,688		)	12,613			60,040			(18,375		)	(36,912		)	6,039			(65,157		)	(5,958		)	4,753
Income before income taxes	195,097			221,035			166,158			140,717			166,398			94,332			24,923			232,833			151,309			582,290			285,653
Income tax (expense) benefit	(5,441		)	(767		)	(1,902		)	4,615			2,357			2,271			550			3,067			(3,291		)	(8,110		)	5,178

Net income	189,656			220,268			164,256			145,332			168,755			96,603			25,473			235,900			148,018			574,180			290,831
Preferred dividends	(5,484		)	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,594		)	(19,383		)
Net income available to common shareholders	$	184,172		$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	554,586		$	271,448

Underwriting Ratios
Loss ratio	59.3		%	55.0		%	58.1		%	56.2		%	62.2		%	67.1		%	77.9		%	58.1		%	57.3		%	57.5		%	68.9		%
Acquisition expense ratio	17.0		%	17.6		%	17.4		%	18.2		%	17.5		%	17.1		%	17.0		%	16.5		%	17.6		%	17.3		%	17.2		%
Other operating expense ratio	13.9		%	14.6		%	14.6		%	15.3		%	14.7		%	15.8		%	15.1		%	17.8		%	15.5		%	14.4		%	15.2		%
Combined ratio	90.2		%	87.2		%	90.1		%	89.7		%	94.4		%	100.0		%	110.0		%	92.4		%	90.4		%	89.2		%	101.3		%

Net premiums written to gross premiums written	80.6		%	78.0		%	81.0		%	73.1		%	80.4		%	77.5		%	79.2		%	72.7		%	76.5		%	79.8		%	79.0		%

Net income per common share
Basic	$	1.36		$	1.58		$	1.18		$	1.05		$	1.23		$	0.69		$	0.14		$	1.60		$	0.96		$	4.12		$	2.06
Diluted	$	1.33		$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	4.01		$	1.96

Weighted average common shares and common share equivalents outstanding
Basic	135,067,360			134,529,129			133,954,623			132,612,528			131,560,851			131,232,269			133,499,241			143,320,146			146,993,373			134,519,046			132,090,354
Diluted	138,696,934			138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			138,235,995			138,542,558

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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


	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,
	2012			2012			2012			2011			2011			2011			2011			2010			2010
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,944,186		$	9,556,326		$	9,221,145		$	9,375,604		$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859		$	9,692,852
Short-term investments available for sale, at fair value	845,158			1,087,910			1,112,249			904,219			799,662			704,495			1,130,142			915,841			780,671
Investment of funds received under securities lending, at fair value	26,279			66,424			41,867			48,419			44,553			145,224			9,951			69,660			200,020
Equity securities available for sale, at fair value	312,371			260,864			318,181			299,584			273,213			320,434			361,639			310,194			79,805
Other investments available for sale, at fair value	477,857			381,576			357,992			238,111			229,974			299,845			293,073			275,538			229,488
Investments accounted for using the fair value option	698,068			496,843			500,283			366,903			319,381			321,790			256,614			219,173			175,841
TALF investments, at fair value	270,206			307,453			313,187			387,702			392,455			399,341			400,970			402,449			410,881
Investments accounted for using the equity method	339,587			331,601			347,273			380,507			383,543			399,968			449,206			508,334			500,737
Total investments	12,913,712			12,488,997			12,212,177			12,001,049			11,972,615			11,838,099			11,817,612			11,659,048			12,070,295

Cash	422,440			355,392			422,806			351,699			369,895			411,001			406,877			362,740			365,997
Accrued investment income	68,069			72,095			65,643			70,739			71,264			71,083			69,057			74,837			79,180
Investment in joint venture	109,363			109,240			107,866			107,576			107,642			105,982			105,495			105,698			104,347
Fixed maturities and short-term investments pledged under securities lending, at fair value	34,769			74,032			50,813			56,393			72,399			150,501			198,418			75,575			203,221
Securities purchased under agreements to resell using funds received under securities lending	—			—			—			—			20,032			—			185,176			—			—
Premiums receivable	773,172			834,116			700,137			501,563			606,963			712,397			633,144			503,434			662,634
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,733,830			1,849,191			1,849,603			1,851,584			1,840,191			1,855,342			1,772,130			1,763,985			1,715,122
Contractholder receivables	849,352			787,389			762,031			748,231			732,270			702,423			672,296			660,546			635,682
Prepaid reinsurance premiums	302,513			313,264			261,619			265,696			267,846			278,587			259,624			263,448			267,240
Deferred acquisition costs, net	279,171			272,736			261,467			227,884			253,163			257,292			251,226			227,278			244,441
Receivable for securities sold	894,318			821,527			621,560			462,891			1,067,188			733,931			749,708			56,145			1,329,508
Other assets	509,048			518,744			497,061			460,052			490,728			520,901			521,292			490,277			461,473
Total Assets	$	18,889,757		$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140

Liabilities
Reserve for losses and loss adjustment expenses	$	8,562,328		$	8,546,350		$	8,511,323		$	8,456,210		$	8,523,522		$	8,564,908		$	8,319,324		$	8,098,454		$	8,054,677
Unearned premiums	1,815,524			1,815,135			1,595,712			1,411,872			1,578,419			1,589,497			1,504,162			1,370,075			1,524,100
Reinsurance balances payable	172,016			184,763			137,791			133,866			123,815			154,860			131,512			132,452			130,274
Contractholder payables	849,352			787,389			762,031			748,231			732,270			702,423			672,296			660,546			635,682
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			100,000			125,000
TALF borrowings, at fair value	185,223			235,818			239,551			310,486			314,137			318,441			322,222			325,770			331,797
Securities lending payable	35,707			76,383			52,224			58,546			74,696			155,072			203,925			78,021			209,411
Payable for securities purchased	1,012,060			927,962			742,995			480,230			1,161,591			838,787			1,266,390			200,192			1,649,462
Other liabilities	508,753			502,607			531,700			513,842			527,847			510,521			533,189			500,715			498,832
Total Liabilities	13,540,963			13,476,407			12,973,327			12,513,283			13,436,297			13,234,509			13,353,020			11,766,225			13,459,235

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			556			552			549			544			541			535			534			531
Additional paid-in capital	200,607			187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640
Retained earnings	5,351,241			5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897
Accumulated other comprehensive income, net of deferred income tax	324,132			193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370
Common shares held in treasury, at cost	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)
Total Shareholders’ Equity	5,348,794			5,020,316			4,839,456			4,592,074			4,435,899			4,403,030			4,289,035			4,476,786			4,679,905
Total Liabilities and Shareholders’ Equity	$	18,889,757		$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011		$	18,139,140

Common shares outstanding, net of treasury shares	136,540,178			136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113

Book value per common share (1)	$	36.79		$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49

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

Comprehensive Income
Net income	$	189,656		$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	574,180		$	290,831
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	164,733			18,060			94,863			40,476			(71,861		)	84,862			40,370			(141,807		)	264,609			277,656			53,371
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(265		)	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(776		)	(3,303		)
Reclassification of net realized gains, net of income taxes, included in net income	(47,411		)	(43,792		)	(27,511		)	(29,785		)	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(56,299		)	(118,714		)	(98,565		)
Foreign currency translation adjustments	13,978			(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			12,043			(9,430		)
Other comprehensive income (loss)	131,035			(41,371		)	80,545			7,347			(117,008		)	38,179			20,902			(183,867		)	215,139			170,209			(57,927		)
Comprehensive Income	$	320,691		$	178,897		$	244,801		$	152,679		$	51,747		$	134,782		$	46,375		$	52,033		$	363,157		$	744,389		$	232,904

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)


	Three Months Ended																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2012			2012			2012			2011			2011			2011			2011			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	556			552			549			544			541			535			534			531			529			549			534
Common shares issued, net	—			4			3			5			3			6			1			3			2			7			10
Purchases of common shares under share repurchase program	—			—			—			—			—			—			—			—			—			—			—
Balance at end of period	556			556			552			549			544			541			535			534			531			556			544

Additional Paid-in Capital
Balance at beginning of period	187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640			83,828			161,419			110,325
Common shares issued, net	8			4,556			(3		)	1,857			(2		)	3,904			8			1,334			283			4,561			3,910
Issue costs on Series C preferred shares	—			(9,398		)	—			—			—			—			—			—			—			(9,398		)	—
Exercise of stock options	2,797			2,971			1,851			2,926			3,007			2,245			4,127			2,716			10,486			7,619			9,379
Common shares retired	—			—			—			—			—			—			—			—			—			—			—
Amortization of share-based compensation	10,729			16,519			7,411			5,700			5,781			13,877			5,628			5,615			6,074			34,659			25,286
Other	60			1,671			16			54			95			1,866			21			20			(31		)	1,747			1,982
Balance at end of period	200,607			187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640			200,607			150,882

Retained Earnings
Balance at beginning 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			4,796,655			4,386,336
Dividends declared on preferred shares	(5,484		)	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,594		)	(19,383		)
Net income	189,656			220,268			164,256			145,332			168,755			96,603			25,473			235,900			148,018			574,180			290,831
Balance at end of period	5,351,241			5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			4,156,897			5,351,241			4,657,784

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370			173,231			153,923			204,503
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	117,322			(25,732		)	67,352			10,691			(102,568		)	37,180			20,194			(185,221		)	208,310			158,942			(45,194		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(265		)	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(603		)	(776		)	(3,303		)
Foreign currency translation adjustments, net of deferred income tax	13,978			(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			7,432			12,043			(9,430		)
Balance at end of period	324,132			193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370			324,132			146,576

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(237,917		)	(845,472		)	(549,912		)
Shares repurchased for treasury	(323		)	(6,711		)	(236		)	(585		)	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(53,616		)	(7,270		)	(294,975		)
Balance at end of period	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(852,742		)	(844,887		)

Total Shareholders’ Equity	$	5,348,794		$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905		$	5,348,794		$	4,435,899

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

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

Operating Activities
Net income	$	189,656		$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	148,018		$	574,180		$	290,831
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(61,950		)	(36,681		)	(44,072		)	(12,940		)	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(72,534		)	(142,703		)	(100,982		)
Net impairment losses included in earnings	2,379			1,951			1,023			1,959			2,739			1,684			2,680			3,230			2,075			5,353			7,103
Equity in net income or loss of investment funds accounted for using the equity method and other income	(19,177		)	(6,111		)	(12,030		)	20,776			31,734			18,945			(355		)	(26,110		)	(11,545		)	(37,318		)	50,324
Share-based compensation	10,729			16,519			7,411			5,700			5,781			13,877			5,628			5,615			6,074			34,659			25,286
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	72,346			68,327			39,343			(59,998		)	48,397			130,746			155,477			3,546			49,420			180,016			334,620
Unearned premiums, net of prepaid reinsurance premiums	6,556			95,142			181,735			(162,490		)	9,919			63,987			130,136			(149,242		)	9,024			283,433			204,042
Premiums receivable	68,881			(83,633		)	(190,102		)	106,818			82,200			(77,556		)	(118,688		)	157,034			63,197			(204,854		)	(114,044		)
Deferred acquisition costs, net	(5,832		)	(13,121		)	(32,269		)	24,823			1,438			(5,464		)	(22,056		)	16,684			(31		)	(51,222		)	(26,082		)
Reinsurance balances payable	(17,958		)	40,310			(3,181		)	8,896			(19,368		)	23,109			(7,122		)	3,277			(4,853		)	19,171			(3,381		)
Other liabilities	24,190			(12,660		)	10,134			30,620			5,925			(26,613		)	33,366			(47,339		)	23,914			21,664			12,678
Other items, net	64,863			(37,864		)	22,573			145			2,019			31,535			42,522			20,179			54,665			49,572			76,076
Net Cash Provided By Operating Activities	334,683			252,447			144,821			109,641			309,924			221,967			224,580			144,513			267,424			731,951			756,471

Investing Activities
Purchases of:
Fixed maturity investments	(5,123,575		)	(3,952,868		)	(3,593,630		)	(3,758,854		)	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(5,018,619		)	(12,670,073		)	(10,116,781		)
Equity securities	(105,618		)	(76,500		)	(33,803		)	(69,962		)	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(65,155		)	(215,921		)	(343,062		)
Other investments	(314,065		)	(147,076		)	(239,167		)	(220,048		)	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(92,955		)	(700,308		)	(373,814		)
Proceeds from the sales of:
Fixed maturity investments	4,635,352			3,258,254			3,628,932			3,542,629			2,299,627			3,323,456			3,232,541			2,670,332			4,872,668			11,522,538			8,855,624
Equity securities	65,932			122,625			75,860			58,386			111,467			147,334			52,316			14,522			19,151			264,417			311,117
Other investments	112,129			105,815			111,149			147,243			191,767			119,780			84,967			133,211			68,843			329,093			396,514
Proceeds from redemptions and maturities of fixed maturities	268,288			337,132			261,660			296,408			200,671			283,512			253,898			266,044			226,889			867,080			738,081
Net (purchases) sales of short-term investments	246,746			32,837			(207,444		)	(114,854		)	(123,211		)	459,091			(223,415		)	(129,794		)	(205,411		)	72,139			112,465
Change in investment of securities lending collateral	40,677			(24,159		)	6,322			16,150			80,376			48,853			(125,904		)	131,389			10,385			22,840			3,325
Purchase of business, net of cash acquired	—			28,948			—			—			—			—			—			—			—			28,948			—
Purchases of furniture, equipment and other	(3,686		)	(3,710		)	(6,498		)	(3,461		)	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(2,251		)	(13,894		)	(15,526		)
Net Cash Provided By (Used For) Investing Activities	(177,820		)	(318,702		)	3,381			(106,363		)	(232,919		)	(131,125		)	(68,013		)	276,028			(186,455		)	(493,141		)	(432,057		)

Financing Activities
Proceeds from issuance of Series C preferred shares, net	(26		)	315,789			—			—			—			—			—			—			—			315,763			—
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		)	—			(287,558		)
Proceeds from common shares issued, net	1,256			(432		)	780			3,245			1,609			(1,397		)	2,875			4,693			8,586			1,604			3,087
Repayments of borrowings	(50,804		)	(3,910		)	(69,863		)	(3,513		)	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(5,646		)	(124,577		)	(11,839		)
Change in securities lending collateral	(40,677		)	24,159			(6,322		)	(16,150		)	(80,376		)	(48,853		)	125,904			(131,389		)	(10,385		)	(22,840		)	(3,325		)
Other	1,015			2,876			588			766			818			2,467			714			(893		)	1,593			4,479			3,999
Preferred dividends paid	(5,485		)	(10,951		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(22,897		)	(19,383		)
Net Cash Used For Financing Activities	(94,721		)	2,531			(81,278		)	(22,116		)	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(65,711		)	(173,468		)	(315,019		)

Effects of exchange rate changes on foreign currency cash	4,906			(3,690		)	4,183			642			(8,643		)	997			5,406			(526		)	9,270			5,399			(2,240		)

Increase (decrease) in cash	67,048			(67,414		)	71,107			(18,196		)	(41,106		)	4,124			44,137			(3,257		)	24,528			70,741			7,155
Cash beginning of period	355,392			422,806			351,699			369,895			411,001			406,877			362,740			365,997			341,469			351,699			362,740
Cash end of period	$	422,440		$	355,392		$	422,806		$	351,699		$	369,895		$	411,001		$	406,877		$	362,740		$	365,997		$	422,440		$	369,895

Income taxes paid (received), net	$	(220	)	$	1,548		$	2,788		$	(7,724	)	$	3,662		$	2,296		$	3,670		$	3,140		$	1,928		$	4,116		$	9,628
Interest paid	$	2,202		$	12,843		$	2,206		$	13,047		$	2,177		$	13,084		$	2,191		$	12,831		$	1,832		$	17,251		$	17,452

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; lenders products; national accounts casualty; professional liability; programs; property, energy, marine and aviation; surety; travel and accident; and other (including excess workers’ compensation, employers’ liability, alternative markets and accident and health 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 (including professional liability, executive assurance and healthcare business); marine and aviation; other specialty (including U.K. motor, trade credit, surety, workers’ compensation catastrophe, accident and health and other); property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (including mortgage, life, casualty clash and other).

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

Arch Capital Group Ltd. and Subsidiaries

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

(U.S. dollars in thousands)

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

Gross premiums written (1)	$	658,599		$	279,751		$	936,764		$	634,280		$	227,837		$	860,289
Net premiums written	483,356			271,893			755,249			472,986			218,395			691,381

Net premiums earned	$	456,341		$	292,350		$	748,691		$	437,970		$	244,079		$	682,049
Fee income	645			432			1,077			661			187			848
Losses and loss adjustment expenses	(307,155		)	(136,716		)	(443,871		)	(290,608		)	(133,376		)	(423,984		)
Acquisition expenses, net	(73,663		)	(54,402		)	(128,065		)	(76,763		)	(43,442		)	(120,205		)
Other operating expenses	(75,379		)	(29,001		)	(104,380		)	(77,801		)	(22,340		)	(100,141		)
Underwriting income (loss)	$	789		$	72,663		73,452			$	(6,541	)	$	45,108		38,567

Net investment income							73,221									82,753
Net realized gains							60,391									30,199
Net impairment losses recognized in earnings							(2,379		)							(2,739		)
Equity in net income (loss) of investment funds accounted for using the equity method							24,330									(30,549		)
Other income (loss)							(532		)							2,432
Other expenses							(9,049		)							(6,180		)
Interest expense							(7,378		)							(8,125		)
Net foreign exchange (losses) gains							(16,959		)							60,040
Income before income taxes							195,097									166,398
Income tax (expense) benefit							(5,441		)							2,357

Net income							189,656									168,755
Preferred dividends							(5,484		)							(6,461		)
Net income available to common shareholders							$	184,172								$	162,294

Underwriting Ratios
Loss ratio	67.3		%	46.8		%	59.3		%	66.4		%	54.6		%	62.2		%
Acquisition expense ratio (2)	16.0		%	18.6		%	17.0		%	17.4		%	17.8		%	17.5		%
Other operating expense ratio	16.5		%	9.9		%	13.9		%	17.8		%	9.2		%	14.7		%
Combined ratio	99.8		%	75.3		%	90.2		%	101.6		%	81.6		%	94.4		%

Net premiums written to gross premiums written	73.4		%	97.2		%	80.6		%	74.6		%	95.9		%	80.4		%

(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 — Nine Months Ended September 30, 2012 and 2011

(U.S. dollars in thousands)

	Nine Months Ended									Nine Months Ended
	September 30, 2012									September 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	2,022,802		$	1,036,708		$	3,055,233		$	1,903,868		$	836,616		$	2,736,794
Net premiums written	1,438,620			1,000,473			2,439,093			1,360,540			801,662			2,162,202

Net premiums earned	$	1,344,675		$	810,984		$	2,155,659		$	1,256,380		$	702,243		$	1,958,623
Fee income	1,803			623			2,426			2,141			306			2,447
Losses and loss adjustment expenses	(900,735		)	(338,036		)	(1,238,771		)	(889,973		)	(459,513		)	(1,349,486		)
Acquisition expenses, net	(223,591		)	(151,725		)	(375,316		)	(204,721		)	(134,877		)	(339,598		)
Other operating expenses	(225,366		)	(84,264		)	(309,630		)	(230,204		)	(67,238		)	(297,442		)
Underwriting income (loss)	$	(3,214	)	$	237,582		234,368			$	(66,377	)	$	40,921		(25,456		)

Net investment income							221,126									257,731
Net realized gains							139,379									96,104
Net impairment losses recognized in earnings							(5,353		)							(7,103		)
Equity in net income (loss) of investment funds accounted for using the equity method							56,943									5,097
Other income (loss)							(7,905		)							2,734
Other expenses							(27,972		)							(24,603		)
Interest expense							(22,338		)							(23,604		)
Net foreign exchange (losses) gains							(5,958		)							4,753
Income before income taxes							582,290									285,653
Income tax (expense) benefit							(8,110		)							5,178

Net income							574,180									290,831
Preferred dividends							(19,594		)							(19,383		)
Net income available to common shareholders							$	554,586								$	271,448

Underwriting Ratios
Loss ratio	67.0		%	41.7		%	57.5		%	70.8		%	65.4		%	68.9		%
Acquisition expense ratio (2)	16.5		%	18.7		%	17.3		%	16.1		%	19.2		%	17.2		%
Other operating expense ratio	16.8		%	10.4		%	14.4		%	18.3		%	9.6		%	15.2		%
Combined ratio	100.3		%	70.8		%	89.2		%	105.2		%	94.2		%	101.3		%

Net premiums written to gross premiums written	71.1		%	96.5		%	79.8		%	71.5		%	95.8		%	79.0		%

(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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Programs	$	98,052	20.3	$	79,086	16.7	$	272,666	19.0	$	235,111	17.3
Property, energy, marine and aviation	92,266		19.1	114,631		24.2	258,475		18.0	294,345		21.6
Professional liability	68,923		14.3	66,484		14.1	204,682		14.2	183,775		13.5
Executive assurance	63,059		13.0	62,328		13.2	191,642		13.3	172,370		12.7
Construction	23,481		4.9	23,576		5.0	106,918		7.4	97,493		7.2
Casualty	23,662		4.9	30,563		6.5	81,273		5.6	85,636		6.3
Travel and accident	22,017		4.6	17,404		3.7	65,147		4.5	58,189		4.3
Lenders products	20,257		4.2	22,551		4.8	63,149		4.4	65,151		4.8
National accounts	22,483		4.7	17,275		3.7	62,882		4.4	61,863		4.5
Surety	14,958		3.1	10,389		2.2	39,815		2.8	29,741		2.2
Healthcare	8,722		1.8	8,810		1.9	27,316		1.9	26,349		1.9
Other (1)	25,476		5.1	19,889		4.0	64,655		4.5	50,517		3.7
Total	$	483,356	100.0	$	472,986	100.0	$	1,438,620	100.0	$	1,360,540	100.0

Net premiums earned
Programs	$	83,978	18.4	$	73,561	16.8	$	238,565	17.7	$	212,513	16.9
Property, energy, marine and aviation	77,862		17.1	92,288		21.1	233,946		17.4	242,531		19.3
Professional liability	66,299		14.5	64,403		14.7	197,572		14.7	189,570		15.1
Executive assurance	61,599		13.5	56,783		13.0	181,221		13.5	171,841		13.7
Construction	32,409		7.1	28,590		6.5	95,909		7.1	84,195		6.7
Casualty	27,175		6.0	30,305		6.9	84,342		6.3	83,561		6.7
Travel and accident	21,826		4.8	19,051		4.3	59,200		4.4	54,105		4.3
Lenders products	20,271		4.4	18,293		4.2	73,835		5.5	56,495		4.5
National accounts	21,919		4.8	19,642		4.5	59,470		4.4	58,970		4.7
Surety	12,643		2.8	10,091		2.3	34,001		2.5	29,272		2.3
Healthcare	9,565		2.1	9,340		2.1	27,540		2.0	27,081		2.2
Other (1)	20,795		4.5	15,623		3.6	59,074		4.5	46,246		3.6
Total	$	456,341	100.0	$	437,970	100.0	$	1,344,675	100.0	$	1,256,380	100.0

Net premiums written by client location
United States	$	344,619	71.3	$	313,028	66.2	$	1,024,902	71.2	$	942,421	69.3
Europe	54,068		11.2	64,870		13.7	217,285		15.1	224,758		16.5
Other	84,669		17.5	95,088		20.1	196,433		13.7	193,361		14.2
Total	$	483,356	100.0	$	472,986	100.0	$	1,438,620	100.0	$	1,360,540	100.0

Net premiums written by underwriting location
United States	$	330,686	68.4	$	302,547	64.0	$	976,683	67.9	$	899,372	66.1
Europe	129,944		26.9	145,112		30.7	391,447		27.2	385,532		28.3
Other	22,726		4.7	25,327		5.3	70,490		4.9	75,636		5.6
Total	$	483,356	100.0	$	472,986	100.0	$	1,438,620	100.0	$	1,360,540	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																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2012			2012			2012			2011			2011			2011			2011			2010			2010			2012			2011

Gross premiums written	$	658,599		$	676,090		$	688,113		$	540,617		$	634,280		$	635,005		$	634,583		$	527,783		$	624,490		$	2,022,802		$	1,903,868
Net premiums written	483,356			464,584			490,680			360,739			472,986			438,263			449,291			351,841			431,361			1,438,620			1,360,540

Net premiums earned	$	456,341		$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	1,344,675		$	1,256,380
Fee income	645			628			530			729			661			702			778			761			864			1,803			2,141
Losses and loss adjustment expenses	(307,155		)	(290,416		)	(303,164		)	(282,769		)	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(265,411		)	(900,735		)	(889,973		)
Acquisition expenses, net	(73,663		)	(76,058		)	(73,870		)	(73,975		)	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(67,309		)	(223,591		)	(204,721		)
Other operating expenses	(75,379		)	(76,617		)	(73,370		)	(77,593		)	(77,801		)	(77,774		)	(74,629		)	(82,535		)	(76,892		)	(225,366		)	(230,204		)
Underwriting income (loss)	$	789		$	4,131		$	(8,134	)	$	(10,941	)	$	(6,541	)	$	(34,438	)	$	(25,398	)	$	(5,449	)	$	3,133		$	(3,214	)	$	(66,377	)

Underwriting Ratios
Loss ratio	67.3		%	65.0		%	68.6		%	66.9		%	66.4		%	73.4		%	73.0		%	65.5		%	64.4		%	67.0		%	70.8		%
Acquisition expense ratio (1)	16.0		%	16.9		%	16.6		%	17.3		%	17.4		%	16.0		%	14.9		%	15.4		%	16.1		%	16.5		%	16.1		%
Other operating expense ratio	16.5		%	17.2		%	16.6		%	18.4		%	17.8		%	18.9		%	18.3		%	20.4		%	18.7		%	16.8		%	18.3		%
Combined ratio	99.8		%	99.1		%	101.8		%	102.6		%	101.6		%	108.3		%	106.2		%	101.3		%	99.2		%	100.3		%	105.2		%

Net premiums written
Programs	$	98,052		$	92,998		$	81,616		$	62,874		$	79,086		$	81,629		$	74,396		$	60,969		$	68,264		$	272,666		$	235,111
Property, energy, marine and aviation	92,266			86,390			79,819			41,244			114,631			103,296			76,418			44,258			88,412			258,475			294,345
Professional liability	68,923			65,198			70,561			54,085			66,484			57,906			59,385			51,559			78,873			204,682			183,775
Executive assurance	63,059			60,205			68,378			59,035			62,328			53,974			56,068			54,448			51,503			191,642			172,370
Construction	23,481			49,784			33,653			22,912			23,576			42,408			31,509			20,014			20,245			106,918			97,493
Casualty	23,662			30,638			26,973			28,599			30,563			24,939			30,134			27,389			28,493			81,273			85,636
Travel and accident	22,017			20,294			22,836			13,751			17,404			19,284			21,501			14,486			19,673			65,147			58,189
Lenders products	20,257			20,477			22,415			21,543			22,551			21,526			21,074			30,942			23,452			63,149			65,151
National accounts	22,483			4,961			35,438			19,110			17,275			4,397			40,191			14,024			19,215			62,882			61,863
Surety	14,958			12,723			12,134			12,734			10,389			9,618			9,734			7,918			11,128			39,815			29,741
Healthcare	8,722			7,959			10,635			9,303			8,810			8,422			9,117			10,290			8,705			27,316			26,349
Other (2)	25,476			12,957			26,222			15,549			19,889			10,864			19,764			15,544			13,398			64,655			50,517
Total	$	483,356		$	464,584		$	490,680		$	360,739		$	472,986		$	438,263		$	449,291		$	351,841		$	431,361		$	1,438,620		$	1,360,540

Net premiums earned
Programs	$	83,978		$	80,589		$	73,998		$	75,085		$	73,561		$	71,934		$	67,018		$	69,462		$	68,404		$	238,565		$	212,513
Property, energy, marine and aviation	77,862			77,590			78,494			79,979			92,288			76,644			73,599			77,811			82,301			233,946			242,531
Professional liability	66,299			68,017			63,256			62,467			64,403			57,767			67,400			63,152			69,900			197,572			189,570
Executive assurance	61,599			60,856			58,766			56,782			56,783			60,488			54,570			55,270			51,675			181,221			171,841
Construction	32,409			31,692			31,808			28,569			28,590			27,214			28,391			26,837			25,664			95,909			84,195
Casualty	27,175			28,102			29,065			28,093			30,305			24,829			28,427			25,893			27,503			84,342			83,561
Travel and accident	21,826			20,661			16,713			15,840			19,051			19,455			15,599			15,705			17,418			59,200			54,105
Lenders products	20,271			21,411			32,153			18,796			18,293			19,966			18,236			19,617			17,593			73,835			56,495
National accounts	21,919			18,415			19,136			20,572			19,642			18,166			21,162			17,360			18,595			59,470			58,970
Surety	12,643			10,798			10,560			11,847			10,091			9,402			9,779			9,810			9,876			34,001			29,272
Healthcare	9,565			9,077			8,898			8,825			9,340			9,089			8,652			9,701			9,738			27,540			27,081
Other (2)	20,795			19,386			18,893			15,812			15,623			15,865			14,758			13,657			13,214			59,074			46,246
Total	$	456,341		$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	411,881		$	1,344,675		$	1,256,380

(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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Property catastrophe	$	50,196	18.5	$	59,961	27.5	$	265,994	26.6	$	235,157	29.3
Other specialty (1)	70,412		25.9	40,882		18.7	238,135		23.8	162,464		20.3
Property excluding property catastrophe (2)	68,627		25.2	64,495		29.5	209,854		21.0	189,583		23.6
Casualty (3)	38,273		14.1	34,873		16.0	165,935		16.6	146,989		18.3
Marine and aviation	19,152		7.0	17,037		7.8	63,611		6.4	61,179		7.6
Other (4)	25,233		9.3	1,147		0.5	56,944		5.6	6,290		0.9
Total	$	271,893	100.0	$	218,395	100.0	$	1,000,473	100.0	$	801,662	100.0

Net premiums earned
Property catastrophe	$	69,059	23.6	$	64,910	26.6	$	199,914	24.7	$	176,340	25.1
Other specialty (1)	87,330		29.9	48,722		20.0	211,685		26.1	128,202		18.3
Property excluding property catastrophe (2)	63,572		21.7	62,565		25.6	183,924		22.7	183,095		26.1
Casualty (3)	48,669		16.6	49,066		20.1	143,177		17.7	149,053		21.2
Marine and aviation	16,853		5.8	17,739		7.3	57,502		7.1	60,458		8.6
Other (4)	6,867		2.4	1,077		0.4	14,782		1.7	5,095		0.7
Total	$	292,350	100.0	$	244,079	100.0	$	810,984	100.0	$	702,243	100.0

Net premiums written
Pro rata	$	170,556	62.7	$	99,884	45.7	$	439,435	43.9	$	310,412	38.7
Excess of loss	101,337		37.3	118,511		54.3	561,038		56.1	491,250		61.3
Total	$	271,893	100.0	$	218,395	100.0	$	1,000,473	100.0	$	801,662	100.0

Net premiums earned
Pro rata	$	140,111	47.9	$	110,091	45.1	$	364,977	45.0	$	320,711	45.7
Excess of loss	152,239		52.1	133,988		54.9	446,007		55.0	381,532		54.3
Total	$	292,350	100.0	$	244,079	100.0	$	810,984	100.0	$	702,243	100.0

Net premiums written by client location
United States	$	130,221	47.9	$	115,128	52.7	$	522,845	52.3	$	451,459	56.3
Europe	65,090		23.9	39,892		18.3	280,210		28.0	215,974		26.9
Bermuda	17,162		6.3	17,027		7.8	51,359		5.1	44,192		5.5
Other	59,420		21.9	46,348		21.2	146,059		14.6	90,037		11.3
Total	$	271,893	100.0	$	218,395	100.0	$	1,000,473	100.0	$	801,662	100.0

Net premiums written by underwriting location
Bermuda	$	131,880	48.5	$	127,553	58.4	$	505,119	50.5	$	449,167	56.0
United States	82,716		30.4	77,972		35.7	294,961		29.5	268,337		33.5
Other	57,297		21.1	12,870		5.9	200,393		20.0	84,158		10.5
Total	$	271,893	100.0	$	218,395	100.0	$	1,000,473	100.0	$	801,662	100.0

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

(2) Includes facultative business.

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

(4) Includes mortgage, life, casualty clash and other.

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

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

Gross premiums written	$	279,751		$	376,981		$	379,976		$	161,904		$	227,837		$	277,766		$	331,013		$	139,015		$	208,770		$	1,036,708		$	836,616
Net premiums written	271,893			355,649			372,931			150,385			218,395			268,280			314,987			131,070			204,756			1,000,473			801,662

Net premiums earned	$	292,350		$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	810,984		$	702,243
Fee income	432			178			13			253			187			82			37			2,053			10			623			306
Losses and loss adjustment expenses	(136,716		)	(109,277		)	(92,043		)	(95,298		)	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(93,782		)	(338,036		)	(459,513		)
Acquisition expenses, net	(54,402		)	(52,231		)	(45,092		)	(49,364		)	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(43,970		)	(151,725		)	(134,877		)
Other operating expenses	(29,001		)	(29,140		)	(26,123		)	(25,707		)	(22,340		)	(23,671		)	(21,227		)	(29,693		)	(20,355		)	(84,264		)	(67,238		)
Underwriting income (loss)	$	72,663		$	89,592		$	75,327		$	80,409		$	45,108		$	34,395		$	(38,582	)	$	56,031		$	57,431		$	237,582		$	40,921

Underwriting Ratios
Loss ratio	46.8		%	39.0		%	38.6		%	38.0		%	54.6		%	56.0		%	86.8		%	45.0		%	43.5		%	41.7		%	65.4		%
Acquisition expense ratio	18.6		%	18.6		%	18.9		%	19.7		%	17.8		%	19.0		%	20.9		%	18.3		%	20.4		%	18.7		%	19.2		%
Other operating expense ratio	9.9		%	10.4		%	10.9		%	10.3		%	9.2		%	10.2		%	9.4		%	13.0		%	9.4		%	10.4		%	9.6		%
Combined ratio	75.3		%	68.0		%	68.4		%	68.0		%	81.6		%	85.2		%	117.1		%	76.3		%	73.3		%	70.8		%	94.2		%

Net premiums written
Property catastrophe	$	50,196		$	129,224		$	86,574		$	11,636		$	59,961		$	108,235		$	66,961		$	3,529		$	40,255		$	265,994		$	235,157
Other specialty (1)	70,412			72,261			95,462			48,555			40,882			43,937			77,645			27,008			30,468			238,135			162,464
Property excluding property catastrophe (2)	68,627			65,734			75,493			36,430			64,495			53,938			71,150			46,835			70,149			209,854			189,583
Casualty (3)	38,273			43,702			83,960			34,968			34,873			40,755			71,361			32,274			38,276			165,935			146,989
Marine and aviation	19,152			18,842			25,617			16,130			17,037			19,978			24,164			21,303			24,913			63,611			61,179
Other (4)	25,233			25,886			5,825			2,666			1,147			1,437			3,706			121			695			56,944			6,290
Total	$	271,893		$	355,649		$	372,931		$	150,385		$	218,395		$	268,280		$	314,987		$	131,070		$	204,756		$	1,000,473		$	801,662

Net premiums earned
Property catastrophe	$	69,059		$	68,992		$	61,863		$	62,408		$	64,910		$	59,788		$	51,642		$	54,768		$	54,206		$	199,914		$	176,340
Other specialty (1)	87,330			78,207			46,148			60,891			48,722			40,511			38,969			30,296			25,254			211,685			128,202
Property excluding property catastrophe (2)	63,572			58,720			61,632			60,607			62,565			57,524			63,006			70,744			66,438			183,924			183,095
Casualty (3)	48,669			48,565			45,943			47,317			49,066			51,493			48,494			48,609			52,792			143,177			149,053
Marine and aviation	16,853			19,200			21,449			17,361			17,739			21,093			21,626			22,445			16,106			57,502			60,458
Other (4)	6,867			6,378			1,537			1,941			1,077			1,651			2,367			1,009			732			14,782			5,095
Total	$	292,350		$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	215,528		$	810,984		$	702,243

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

(2) Includes facultative business.

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

(4) Includes mortgage, life, casualty clash 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)

	September 30,					June 30,					March 31,					December 31,					September 30,
	2012					2012					2012					2011					2011
Investable assets:
Fixed maturities available for sale, at fair value	$	9,944,186		75	%	$	9,556,326		75	%	$	9,221,145		74	%	$	9,375,604		76	%	$	9,529,834		78	%
Fixed maturities, at fair value (1)	306,424			2	%	242,735			2	%	250,805			2	%	147,779			1	%	122,866			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	34,769			1	%	74,032			1	%	50,813			0	%	56,393			1	%	72,399			1	%
Total fixed maturities	10,285,379			78	%	9,873,093			78	%	9,522,763			76	%	9,579,776			78	%	9,725,099			80	%
Short-term investments available for sale, at fair value	845,158			6	%	1,087,910			8	%	1,112,249			9	%	904,219			7	%	799,662			6	%
Cash	422,440			3	%	355,392			3	%	422,806			3	%	351,699			3	%	369,895			3	%
Equity securities available for sale, at fair value	312,371			2	%	260,864			2	%	318,181			3	%	299,584			2	%	273,213			2	%
Equity securities, at fair value (1)	28,405			0	%	23,118			0	%	52,766			0	%	87,403			1	%	100,719			1	%
Other investments available for sale, at fair value	477,857			4	%	381,576			3	%	357,992			3	%	238,111			2	%	229,974			2	%
Other investments, at fair value (1)	363,239			3	%	230,990			2	%	196,712			2	%	131,721			1	%	95,796			1	%
TALF investments, at fair value (3)	270,206			2	%	307,453			2	%	313,187			2	%	387,702			3	%	392,455			3	%
Investments accounted for using the equity method	339,587			3	%	331,601			3	%	347,273			3	%	380,507			3	%	383,543			3	%
Securities sold but not yet purchased	(8,017		)	0	%	(9,206		)	0	%	(18,831		)	0	%	(27,178		)	0	%	(46,526		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(117,742		)	(1	)%	(106,435		)	(1	)%	(121,435		)	(1	)%	(17,339		)	0	%	(94,403		)	(1	)%
Total investable assets	$	13,218,883		100	%	$	12,736,356		100	%	$	12,503,663		100	%	$	12,316,205		100	%	$	12,229,427		100	%

Investment portfolio metrics (1):
Average effective duration (in years)	2.90					3.01					2.75					2.99					3.17
Average S&P/Moody’s credit ratings (4)	AA/Aa2					AA/Aa2					AA/Aa2					AA/Aa1					AA+/Aa1
Imbedded book yield (5)	2.80		%			2.76		%			2.76		%			2.98		%			3.09		%

Credit quality distribution of total fixed maturities (6):
U.S. government and government agencies (7)	$	2,837,828		28	%	$	3,043,908		31	%	$	2,850,031		30	%	$	3,154,480		33	%	$	2,968,250		30	%
AAA	3,388,660			33	%	3,325,996			34	%	3,420,490			36	%	3,229,161			34	%	3,453,116			36	%
AA	1,770,851			17	%	1,505,032			15	%	1,383,663			14	%	1,425,249			15	%	1,531,869			16	%
A	1,158,492			11	%	1,028,772			10	%	917,925			10	%	884,957			9	%	754,421			8	%
BBB	503,890			5	%	428,200			4	%	398,645			4	%	412,566			4	%	555,023			6	%
BB	157,183			2	%	152,982			2	%	157,427			2	%	140,029			1	%	151,665			1	%
B	203,416			2	%	175,613			2	%	172,360			2	%	165,003			2	%	140,571			1	%
Lower than B	143,518			1	%	116,846			1	%	125,134			1	%	114,672			1	%	106,775			1	%
Not rated	121,541			1	%	95,744			1	%	97,088			1	%	53,659			1	%	63,409			1	%
Total fixed maturities, at fair value	$	10,285,379		100	%	$	9,873,093		100	%	$	9,522,763		100	%	$	9,579,776		100	%	$	9,725,099		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)	The imbedded book yield is calculated excluding cash and certain fund investments and is before investment expenses.
(6)	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.
(7)	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 September 30, 2012:

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

Corporates	$	2,699,592	$	102,290	$	(6,462	)	$	95,828	$	2,603,764	103.7	%
Non-U.S. government-backed corporates	217,403		10,885		(577		)	10,308		207,095		105.0	%
FDIC guaranteed corporates	25,457		120		—			120		25,337		100.5	%
U.S. government and government agencies	1,131,358		28,015		(1,520		)	26,495		1,104,863		102.4	%
Agency mortgage-backed securities	1,531,950		29,512		(2,755		)	26,757		1,505,193		101.8	%
Non-agency mortgage-backed securities	341,924		12,862		(4,684		)	8,178		333,746		102.5	%
Agency commercial mortgage-backed securities	174,520		6,909		(1,329		)	5,580		168,940		103.3	%
Non-agency commercial mortgage-backed securities	649,642		35,836		(509		)	35,327		614,315		105.8	%
Municipal bonds	1,579,872		74,558		(730		)	73,828		1,506,044		104.9	%
Non-U.S. government securities	1,098,403		37,927		(11,193		)	26,734		1,071,669		102.5	%
Asset-backed securities	835,258		25,400		(6,093		)	19,307		815,951		102.4	%
Total	$	10,285,379	$	364,314	$	(35,852	)	$	328,462	$	9,956,917	103.3	%

Corporates (Excluding Guaranteed Amounts)

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

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Industrials	$	1,375,345	50.9	%	10.4	%
Financials	988,052		36.6	%	7.5	%
Covered bonds	154,919		5.7	%	1.2	%
Utilities	98,926		3.7	%	0.7	%
All other (1)	82,350		3.1	%	0.6	%
Total	$	2,699,592	100.0	%	20.4	%

Credit quality distribution (3):
AAA	$	615,869	22.8	%	4.7	%
AA	414,503		15.4	%	3.1	%
A	802,275		29.7	%	6.1	%
BBB	414,498		15.4	%	3.1	%
BB	131,004		4.9	%	1.0	%
B	181,306		6.7	%	1.4	%
Lower than B	25,044		0.9	%	0.2	%
Not rated	115,093		4.2	%	0.9	%
Total	$	2,699,592	100.0	%	20.4	%

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

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

General Electric Co	$	64,755	2.4	%	0.5	%	AA+/A1
AT&T Inc	33,870		1.3	%	0.3	%	A-/A2
Abbey National Treasury Svcs	31,620		1.2	%	0.2	%	A+/A2
Wells Fargo & Company	29,157		1.1	%	0.2	%	A+/A2
Royal Dutch Shell PLC	28,720		1.1	%	0.2	%	AA/Aa1
Merck & Co Inc	27,574		1.0	%	0.2	%	AA/A1
Total SA	26,968		1.0	%	0.2	%	AA-/Aa1
Verizon Communications Inc	26,401		1.0	%	0.2	%	A-/A3
Berkshire Hathaway Inc	25,659		1.0	%	0.2	%	A/A2
Deere & Co	25,606		0.9	%	0.2	%	A/A2
Total	$	320,330	11.9	%	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 September 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	$	2,200	AAA	$	2,321	105.5	%	0.0	%
	2004	13,098		BBB+	12,991		99.2	%	0.1	%
	2005	44,436		B-	45,161		101.6	%	0.3	%
	2006	60,492		BB-	60,892		100.7	%	0.5	%
	2007	39,719		CC+	43,417		109.3	%	0.3	%
	2008	6,522		CC+	6,750		103.5	%	0.1	%
	2009 (6)	27,752		AAA	30,309		109.2	%	0.2	%
	2010 (6)	26,562		AAA	26,174		98.5	%	0.2	%
	2012 (6)	112,965		AAA	113,909		100.8	%	0.9	%
Total non-agency MBS		$	333,746	BBB+	$	341,924	102.5	%	2.6	%

Non-agency CMBS:	1998	$	1,086	AAA	$	1,088	100.2	%	0.0	%
	2004	4,477		AAA	4,423		98.8	%	0.0	%
	2005	29,277		AAA	29,951		102.3	%	0.2	%
	2006	2,861		A	3,084		107.8	%	0.0	%
	2007	28,104		A	29,937		106.5	%	0.2	%
	2008	662		AAA	647		97.7	%	0.0	%
	2010	138,458		AAA	149,716		108.1	%	1.1	%
	2011	154,331		AAA	165,905		107.5	%	1.3	%
	2012	255,059		AAA	264,891		103.9	%	2.0	%
Total non-agency CMBS		$	614,315	AAA	$	649,642	105.8	%	4.9	%

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

Wtd. average loan age (months)	77		73		26
Wtd. average life (months) (2)	18		49		63
Wtd. average loan-to-value % (3)	70.7	%	68.9	%	61.1	%
Total delinquencies (4)	23.0	%	20.2	%	1.5	%
Current credit support % (5)	52.5	%	14.0	%	26.5	%

(1)	Loans defeased with government/agency obligations represented less than 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 September 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 29% to 86%, while the range of loan-to-values on CMBS is 27% to 103%.
(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) September 30, 2012:

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

Sector:
Credit cards (1)	$	370,499	AAA	$	377,091	101.8	%	2.9	%
Autos (2)	100,325		AAA	99,975		99.7	%	0.8	%
Equipment (3)	134,169		A+	137,985		102.8	%	1.0	%
Rate reduction bonds (4)	79,109		AAA	83,227		105.2	%	0.6	%
U.K. securitized (5)	50,041		AAA	51,736		103.4	%	0.4	%
Commodities (6)	35,000		AAA	35,349		101.0	%	0.3	%
Other	34,035		AA	34,451		101.2	%	0.3	%
	803,178		AA+	819,814		102.1	%	6.2	%

Home equity (7)	$	1,597	AAA	$	1,466	91.8	%	0.0	%
	1,013		A	948		93.6	%	0.0	%
	2,244		BBB	2,437		108.6	%	0.0	%
	3,132		BB to B	3,581		114.3	%	0.0	%
	4,722		CCC to C	6,933		146.8	%	0.1	%
	65		D	79		121.5	%	0.0	%
	12,773		B+	15,444		120.9	%	0.1	%

Total ABS	$	815,951	AA+	$	835,258	102.4	%	6.3	%

The effective duration of the total ABS was 2.3 years at September 30, 2012.

(1)	The weighted average credit support % on credit cards is 20.1%.
(2)	The weighted average credit support % on autos is 25.9%.
(3)	The weighted average credit support % on equipment is 6.7%.
(4)	The weighted average credit support % on rate reduction bonds is 6.2%.
(5)	The weighted average credit support % on U.K. securitized is 19.2%.
(6)	The weighted average credit support % on commodities is 6.4%.
(7)	The weighted average credit support % on home equity is 22.2%.

	The Company’s investment portfolio included $58.7 million par in sub-prime securities at September 30, 2012, with an estimated fair value of $40.3 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-/Caa3.”

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 September 30, 2012:

	Fair		% of Asset		% of Investable
	Value		Class		Assets
Composition:
Investment funds accounted for using the equity method	$	106,003	28.3	%	0.8	%
Corporate bonds	91,319		24.4	%	0.7	%
Term loan investments (1)	176,767		47.3	%	1.3	%
Total	$	374,089	100.0	%	2.8	%

Currency:
U.S.-denominated	$	281,883	75.4	%	2.1	%
Euro-denominated	92,206		24.6	%	0.7	%
Total	$	374,089	100.0	%	2.8	%

Sector:
Consumer cyclical	$	85,755	22.9	%	0.6	%
Media	49,203		13.2	%	0.4	%
Industrials	47,496		12.7	%	0.4	%
Consumer non-cyclical	38,352		10.3	%	0.3	%
Basic materials	31,959		8.5	%	0.2	%
Utilities	10,748		2.9	%	0.1	%
All other	110,576		29.5	%	0.8	%
Total	$	374,089	100.0	%	2.8	%

Weighted average rating factor (Moody’s)	B2

(1) Included in “investments accounted for using the fair value option” on the Company’s balance sheet.

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 September 30, 2012:

			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other			Total
Country (1):
Germany	$	145,055	$	0	$	10,417	$	0	$	17,573	$	6,669		$	179,714
Netherlands	—		37,466		51,048		—		7,217		16,981			112,712
Finland	101,895		246		—		—		—		—			102,141
France	—		6,664		26,359		20,358		4,896		12,371			70,648
Supranational (5)	40,484		—		—		—		—		—			40,484
Spain	—		—		—		13,198		3,503		286			16,987
Luxembourg	—		1,742		5,431		—		3,383		508			11,064
Belgium	2,000		—		7,203		—		—		—			9,203
Italy	5,401		—		1,242		—		882		(110		)	7,415
Ireland	1,138		967		1,429		—		—		1,017			4,551
Austria	—		3,339		—		—		—		—			3,339
Total	$	295,973	$	50,424	$	103,129	$	33,556	$	37,454	$	37,722		$	558,258

(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 Cyprus, Estonia, Greece, Malta, Portugal, Slovakia or Slovenia at September 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 the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses recognized in earnings, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, net impairment losses recognized in earnings represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Due to these reasons, the Company excludes net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

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

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation

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

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

	Three Months Ended																											Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2012			2012			2012			2011			2011			2011			2011			2010			2010			2012			2011
After-tax operating income available to common shareholders	$	120,247		$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	375,307		$	174,491
Net realized gains, net of tax	58,904			33,275			40,873			13,464			28,458			44,799			21,585			71,821			68,611			133,052			94,842
Net impairment losses recognized in earnings, net of tax	(2,379		)	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(2,075		)	(5,353		)	(7,103		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	24,330			7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			9,708			56,943			5,097
Net foreign exchange gains (losses), net of tax	(16,930		)	32,108			(20,541		)	13,177			59,948			(18,685		)	(37,142		)	6,581			(65,346		)	(5,363		)	4,121
Net income available to common shareholders	$	184,172		$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	141,557		$	554,586		$	271,448

Diluted per common share results:
After-tax operating income available to common shareholders	$	0.87		$	1.02		$	0.82		$	0.94		$	0.78		$	0.43		$	0.06		$	0.87		$	0.85		$	2.72		$	1.26
Net realized gains, net of tax	0.42			0.24			0.30			0.10			0.21			0.32			0.15			0.48			0.45			0.96			0.68
Net impairment losses recognized in earnings, net of tax	(0.02		)	(0.01		)	(0.01		)	(0.01		)	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.01		)	(0.04		)	(0.05		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	0.18			0.06			0.18			(0.11		)	(0.22		)	0.04			0.21			0.15			0.06			0.41			0.04
Net foreign exchange gains (losses), net of tax	(0.12		)	0.23			(0.15		)	0.09			0.43			(0.13		)	(0.26		)	0.05			(0.43		)	(0.04		)	0.03
Net income available to common shareholders	$	1.33		$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	0.92		$	4.01		$	1.96

Weighted average common shares and common share equivalents outstanding — diluted	138,696,934			138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			153,546,027			138,235,995			138,542,558

Arch Capital Group Ltd. and Subsidiaries

Share Repurchase Activity

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

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

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

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

Average book value per common share (1)	$	35.62	$	33.89	$	32.55	$	31.34	$	30.81	$	30.39	$	29.90	$	29.61	$	28.30

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

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

After-tax operating income available to common shareholders	$	120,247		$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	130,659		$	375,307		$	174,491
Annualized after-tax operating income available to common shareholders (a)	$	480,988		$	565,600		$	454,640		$	515,564		$	428,704		$	238,956		$	30,304		$	525,108		$	522,636		$	500,409		$	232,655

Beginning 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		$	4,267,074		$	4,151,786
Ending common shareholders’ equity	5,023,794			4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905			5,023,794			4,110,899
Average common shareholders’ equity (b)	$	4,859,555		$	4,604,886		$	4,390,765		$	4,188,987		$	4,094,465		$	4,021,033		$	4,057,911		$	4,253,346		$	4,194,958		$	4,645,434		$	4,131,343

Annualized operating return on average common equity (a)/(b)	9.9		%	12.3		%	10.4		%	12.3		%	10.5		%	5.9		%	0.7		%	12.3		%	12.5		%	10.8		%	5.6		%

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

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

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

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

Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%)	$	0		$	0		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000
Series B non-cumulative preferred shares (7.875%)	—			—			125,000			125,000			125,000			125,000			125,000			125,000			125,000
Series C non-cumulative preferred shares (6.75%)	325,000			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)	5,023,794			4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,354,905
Total shareholders’ equity	$	5,348,794		$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	4,679,905

Total capital	$	5,748,794		$	5,420,316		$	5,239,456		$	4,992,074		$	4,835,899		$	4,803,030		$	4,689,035		$	4,876,786		$	5,104,905

TALF non-recourse borrowings, at market value, due between 2013 to 2015 (various) (1)	185,223			235,818			239,551			310,486			314,137			318,441			322,222			325,770			331,797

Total capital and TALF non-recourse borrowings	$	5,934,017		$	5,656,134		$	5,479,007		$	5,302,560		$	5,150,036		$	5,121,471		$	5,011,257		$	5,202,556		$	5,436,702

Common shares outstanding, net of treasury shares (b)	136,540,178			136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225			147,676,113

Book value per common share (2) (a)/(b)	$	36.79		$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73		$	29.49

Leverage ratios:
Senior notes/total capital	5.2		%	5.5		%	5.7		%	6.0		%	6.2		%	6.2		%	6.4		%	6.2		%	5.9		%
Revolving credit agreement borrowings/total capital	1.7		%	1.8		%	1.9		%	2.0		%	2.1		%	2.1		%	2.1		%	2.1		%	2.4		%
Debt/total capital	7.0		%	7.4		%	7.6		%	8.0		%	8.3		%	8.3		%	8.5		%	8.2		%	8.3		%
Preferred/total capital	5.7		%	6.0		%	6.2		%	6.5		%	6.7		%	6.8		%	6.9		%	6.7		%	6.4		%
Debt and preferred/total capital	12.6		%	13.4		%	13.8		%	14.5		%	15.0		%	15.1		%	15.5		%	14.9		%	14.7		%

(1)		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 9.9% and the ratio of debt and preferred to total capital would have been 15.3% at September 30, 2012.
(2)		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