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

Attached files

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a13-4324_18k.htm
EX-99.1 - EX-99.1 - ARCH CAPITAL GROUP LTD.	a13-4324_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 December 31, 2012

The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd.

This report is for informational purposes only. It should be read in conjunction with documents filed by Arch Capital Group Ltd. with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q. Please refer to the Company’s website at www.archcapgroup.bm for further information describing Arch Capital Group Ltd. The adoption of accounting guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts was adopted retrospectively in the 2012 first quarter 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								Year Ended
	December 31,								December 31,
	2012			2011			Change		2012			2011			Change

Gross premiums written	$	813,928		$	699,662		16.3	%	$	3,869,161		$	3,436,456		12.6	%

Net premiums written	$	613,142		$	511,124		20.0	%	$	3,052,235		$	2,673,326		14.2	%

Net premiums earned	$	779,481		$	673,192		15.8	%	$	2,935,140		$	2,631,815		11.5	%

Underwriting income (loss)	$	(91,334	)	$	69,468		(231.5	)%	$	143,034		$	44,012		225.0	%

Net investment income	$	73,769		$	80,467		(8.3	)%	$	294,895		$	338,198		(12.8	)%
Per diluted share	$	0.53		$	0.59		(10.2	)%	$	2.13		$	2.45		(13.1	)%

Net income available to common shareholders	$	13,732		$	138,871		(90.1	)%	$	568,318		$	410,319		38.5	%
Per diluted share	$	0.10		$	1.01		(90.1	)%	$	4.11		$	2.97		38.4	%

After-tax operating income available to common shareholders (1)	$	(24,667	)	$	128,891		(119.1	)%	$	350,640		$	303,382		15.6	%
Per diluted share	$	(0.18	)	$	0.94		(119.1	)%	$	2.54		$	2.19		16.0	%

Comprehensive income (loss)	$	(17,898	)	$	152,679		(111.7	)%	$	726,491		$	385,583		88.4	%

Cash flow from operations	$	189,652		$	109,641		73.0	%	$	921,603		$	866,112		6.4	%

Diluted weighted average common shares and common share equivalents outstanding	138,270,853			137,473,670			0.6	%	138,258,847			138,289,702			(0.0	)%

							% Point								% Point
							Change								Change
Underwriting ratios:
Loss ratio	79.9		%	56.2		%	23.7		63.4		%	65.6		%	(2.2	)
Acquisition expense ratio	17.1		%	18.2		%	(1.1	)	17.3		%	17.5		%	(0.2	)
Other operating expense ratio	15.4		%	15.3		%	0.1		14.7		%	15.2		%	(0.5	)
Combined ratio	112.4		%	89.7		%	22.7		95.4		%	98.3		%	(2.9	)

Financial measures:

Change in book value per common share	(1.6		)%	2.7		%	(4.3	)	13.9		%	6.8		%	7.1

Annualized operating return on average common equity	(2.0		)%	12.3		%	(14.3	)	7.7		%	7.2		%	0.5

Total return on investments (2)
Including effects of foreign exchange	0.80		%	0.82		%	-2 bps		5.88		%	3.81		%	207 bps
Excluding effects of foreign exchange	0.67		%	0.95		%	-28 bps		5.59		%	4.10		%	149 bps

(1)	See page 19, Comments on Regulation G.
(2)	Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by the Company’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses.

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

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

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

Gross premiums written	$	813,928		$	936,764		$	1,051,813		$	1,066,656		$	699,662		$	860,289		$	911,939		$	964,566		$	664,212		$	3,869,161		$	3,436,456
Net premiums written	613,142			755,249			820,233			863,611			511,124			691,381			706,543			764,278			482,911			3,052,235			2,673,326

Net premiums earned	$	779,481		$	748,691		$	726,656		$	680,312		$	673,192		$	682,049		$	642,879		$	633,695		$	632,146		$	2,935,140		$	2,631,815
Fee income	5,664			1,077			806			543			982			848			784			815			2,814			8,090			3,429
Losses and loss adjustment expenses	(622,506		)	(443,871		)	(399,693		)	(395,207		)	(378,067		)	(423,984		)	(431,622		)	(493,880		)	(367,326		)	(1,861,277		)	(1,727,553		)
Acquisition expenses, net	(133,568		)	(128,065		)	(128,289		)	(118,962		)	(123,339		)	(120,205		)	(110,639		)	(108,754		)	(104,824		)	(508,884		)	(462,937		)
Other operating expenses	(120,405		)	(104,380		)	(105,757		)	(99,493		)	(103,300		)	(100,141		)	(101,445		)	(95,856		)	(112,228		)	(430,035		)	(400,742		)
Underwriting income (loss)	(91,334		)	73,452			93,723			67,193			69,468			38,567			(43		)	(63,980		)	50,582			143,034			44,012

Net investment income	73,769			73,221			73,608			74,297			80,467			82,753			86,671			88,307			90,601			294,895			338,198
Net realized gains	54,849			60,391			34,867			44,121			14,542			30,199			45,210			20,695			74,027			194,228			110,646
Net impairment losses recognized in earnings	(6,035		)	(2,379		)	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(11,388		)	(9,062		)
Equity in net income (loss) of investment funds accounted for using the equity method	16,567			24,330			7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			73,510			(9,605		)
Other income (loss)	(4,189		)	(532		)	695			(8,068		)	(4,848		)	2,432			(4,265		)	4,567			6,165			(12,094		)	(2,114		)
Other expenses	(7,346		)	(9,049		)	(11,944		)	(6,979		)	(6,777		)	(6,180		)	(11,397		)	(7,026		)	(6,881		)	(35,318		)	(31,380		)
Interest expense	(6,187		)	(7,378		)	(7,439		)	(7,521		)	(8,087		)	(8,125		)	(7,758		)	(7,721		)	(7,460		)	(28,525		)	(31,691		)
Net foreign exchange gains (losses)	(22,997		)	(16,959		)	31,689			(20,688		)	12,613			60,040			(18,375		)	(36,912		)	6,039			(28,955		)	17,366
Income before income taxes	7,097			195,097			221,035			166,158			140,717			166,398			94,332			24,923			232,833			589,387			426,370
Income tax benefit (expense)	12,120			(5,441		)	(767		)	(1,902		)	4,615			2,357			2,271			550			3,067			4,010			9,793

Net income	19,217			189,656			220,268			164,256			145,332			168,755			96,603			25,473			235,900			593,397			436,163
Preferred dividends	(5,485		)	(5,484		)	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(25,079		)	(25,844		)
Net income available to common shareholders	$	13,732		$	184,172		$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	568,318		$	410,319

Underwriting Ratios
Loss ratio	79.9		%	59.3		%	55.0		%	58.1		%	56.2		%	62.2		%	67.1		%	77.9		%	58.1		%	63.4		%	65.6		%
Acquisition expense ratio	17.1		%	17.0		%	17.6		%	17.4		%	18.2		%	17.5		%	17.1		%	17.0		%	16.5		%	17.3		%	17.5		%
Other operating expense ratio	15.4		%	13.9		%	14.6		%	14.6		%	15.3		%	14.7		%	15.8		%	15.1		%	17.8		%	14.7		%	15.2		%
Combined ratio	112.4		%	90.2		%	87.2		%	90.1		%	89.7		%	94.4		%	100.0		%	110.0		%	92.4		%	95.4		%	98.3		%

Net premiums written to gross premiums written	75.3		%	80.6		%	78.0		%	81.0		%	73.1		%	80.4		%	77.5		%	79.2		%	72.7		%	78.9		%	77.8		%

Net income per common share
Basic	$	0.10		$	1.36		$	1.58		$	1.18		$	1.05		$	1.23		$	0.69		$	0.14		$	1.60		$	4.23		$	3.10
Diluted	$	0.10		$	1.33		$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	4.11		$	2.97

Weighted average common shares and common share equivalents outstanding
Basic	134,229,078			135,067,360			134,529,129			133,954,623			132,612,528			131,560,851			131,232,269			133,499,241			143,320,146			134,446,158			132,221,970
Diluted	138,270,853			138,696,934			138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			138,258,847			138,289,702

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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

	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,
	2012			2012			2012			2012			2011			2011			2011			2011			2010
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,839,988		$	9,944,186		$	9,556,326		$	9,221,145		$	9,375,604		$	9,529,834		$	9,247,002		$	8,916,017		$	8,957,859
Short-term investments available for sale, at fair value	722,121			845,158			1,087,910			1,112,249			904,219			799,662			704,495			1,130,142			915,841
Investment of funds received under securities lending, at fair value	42,531			26,279			66,424			41,867			48,419			44,553			145,224			9,951			69,660
Equity securities available for sale, at fair value	312,749			312,371			260,864			318,181			299,584			273,213			320,434			361,639			310,194
Other investments available for sale, at fair value	549,280			477,857			381,576			357,992			238,111			229,974			299,845			293,073			275,538
Investments accounted for using the fair value option	917,466			698,068			496,843			500,283			366,903			319,381			321,790			256,614			219,173
TALF investments, at fair value	—			270,206			307,453			313,187			387,702			392,455			399,341			400,970			402,449
Investments accounted for using the equity method	307,105			339,587			331,601			347,273			380,507			383,543			399,968			449,206			508,334
Total investments	12,691,240			12,913,712			12,488,997			12,212,177			12,001,049			11,972,615			11,838,099			11,817,612			11,659,048

Cash	371,041			422,440			355,392			422,806			351,699			369,895			411,001			406,877			362,740
Accrued investment income	71,748			68,069			72,095			65,643			70,739			71,264			71,083			69,057			74,837
Investment in joint venture	107,284			109,363			109,240			107,866			107,576			107,642			105,982			105,495			105,698
Fixed maturities and short-term investments pledged under securities lending, at fair value	50,848			34,769			74,032			50,813			56,393			72,399			150,501			198,418			75,575
Securities purchased under agreements to resell using funds received under securities lending	—			—			—			—			—			20,032			—			185,176			—
Premiums receivable	688,873			773,172			834,116			700,137			501,563			606,963			712,397			633,144			503,434
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,870,037			1,733,830			1,849,191			1,849,603			1,851,584			1,840,191			1,855,342			1,772,130			1,763,985
Contractholder receivables	865,728			849,352			787,389			762,031			748,231			732,270			702,423			672,296			660,546
Prepaid reinsurance premiums	298,484			302,513			313,264			261,619			265,696			267,846			278,587			259,624			263,448
Deferred acquisition costs, net	262,822			279,171			272,736			261,467			227,884			253,163			257,292			251,226			227,278
Receivable for securities sold	19,248			894,318			821,527			621,560			462,891			1,067,188			733,931			749,708			56,145
Other assets	519,409			509,048			518,744			497,061			460,052			490,728			520,901			521,292			490,277
Total Assets	$	17,816,762		$	18,889,757		$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011

Liabilities
Reserve for losses and loss adjustment expenses	$	8,933,292		$	8,562,328		$	8,546,350		$	8,511,323		$	8,456,210		$	8,523,522		$	8,564,908		$	8,319,324		$	8,098,454
Unearned premiums	1,647,978			1,815,524			1,815,135			1,595,712			1,411,872			1,578,419			1,589,497			1,504,162			1,370,075
Reinsurance balances payable	188,546			172,016			184,763			137,791			133,866			123,815			154,860			131,512			132,452
Contractholder payables	865,728			849,352			787,389			762,031			748,231			732,270			702,423			672,296			660,546
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			100,000
TALF borrowings, at fair value	—			185,223			235,818			239,551			310,486			314,137			318,441			322,222			325,770
Securities lending payable	52,356			35,707			76,383			52,224			58,546			74,696			155,072			203,925			78,021
Payable for securities purchased	37,788			1,012,060			927,962			742,995			480,230			1,161,591			838,787			1,266,390			200,192
Other liabilities	522,196			508,753			502,607			531,700			513,842			527,847			510,521			533,189			500,715
Total Liabilities	12,647,884			13,540,963			13,476,407			12,973,327			12,513,283			13,436,297			13,234,509			13,353,020			11,766,225

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	561			556			556			552			549			544			541			535			534
Additional paid-in capital	217,166			200,607			187,013			170,694			161,419			150,882			142,001			120,109			110,325
Retained earnings	5,364,973			5,351,241			5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336
Accumulated other comprehensive income, net of deferred income tax	287,017			324,132			193,097			234,468			153,923			146,576			263,584			225,405			204,503
Common shares held in treasury, at cost	(1,025,839		)	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)
Total Shareholders’ Equity	5,168,878			5,348,794			5,020,316			4,839,456			4,592,074			4,435,899			4,403,030			4,289,035			4,476,786
Total Liabilities and Shareholders’ Equity	$	17,816,762		$	18,889,757		$	18,496,723		$	17,812,783		$	17,105,357		$	17,872,196		$	17,637,539		$	17,642,055		$	16,243,011

Common shares outstanding, net of treasury shares	133,842,613			136,540,178			136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225

Book value per common share (1)	$	36.19		$	36.79		$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73

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

Comprehensive Income
Net income	$	19,217		$	189,656		$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	593,397		$	436,163
Other comprehensive income (loss), net of deferred income tax Unrealized holding gains (losses) arising during period	(2,938		)	164,733			18,060			94,863			40,476			(71,861		)	84,862			40,370			(141,807		)	274,718			93,847
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(11		)	(265		)	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(787		)	(4,788		)
Reclassification of net realized gains, net of income taxes, included in net income	(39,897		)	(47,411		)	(43,792		)	(27,511		)	(29,785		)	(30,707		)	(47,682		)	(20,176		)	(43,414		)	(158,611		)	(128,350		)
Foreign currency translation adjustments	5,731			13,978			(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			17,774			(11,289		)
Other comprehensive income (loss)	(37,115		)	131,035			(41,371		)	80,545			7,347			(117,008		)	38,179			20,902			(183,867		)	133,094			(50,580		)
Comprehensive Income (Loss)	$	(17,898	)	$	320,691		$	178,897		$	244,801		$	152,679		$	51,747		$	134,782		$	46,375		$	52,033		$	726,491		$	385,583

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2012			2012			2012			2012			2011			2011			2011			2011			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			556			552			549			544			541			535			534			531			549			534
Common shares issued, net	5			—			4			3			5			3			6			1			3			12			15
Balance at end of period	561			556			556			552			549			544			541			535			534			561			549

Additional Paid-in Capital
Balance at beginning of period	200,607			187,013			170,694			161,419			150,882			142,001			120,109			110,325			100,640			161,419			110,325
Common shares issued, net	2,262			8			4,556			(3		)	1,857			(2		)	3,904			8			1,334			6,823			5,767
Issue costs on Series C preferred shares	—			—			(9,398		)	—			—			—			—			—			—			(9,398		)	—
Exercise of stock options	6,599			2,797			2,971			1,851			2,926			3,007			2,245			4,127			2,716			14,218			12,305
Amortization of share-based compensation	7,644			10,729			16,519			7,411			5,700			5,781			13,877			5,628			5,615			42,303			30,986
Other	54			60			1,671			16			54			95			1,866			21			20			1,801			2,036
Balance at end of period	217,166			200,607			187,013			170,694			161,419			150,882			142,001			120,109			110,325			217,166			161,419

Retained Earnings
Balance at beginning 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			4,796,655			4,386,336
Dividends declared on preferred shares	(5,485		)	(5,484		)	(7,649		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(25,079		)	(25,844		)
Net income	19,217			189,656			220,268			164,256			145,332			168,755			96,603			25,473			235,900			593,397			436,163
Balance at end of period	5,364,973			5,351,241			5,167,069			4,954,450			4,796,655			4,657,784			4,495,490			4,405,348			4,386,336			5,364,973			4,796,655

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	324,132			193,097			234,468			153,923			146,576			263,584			225,405			204,503			388,370			153,923			204,503
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(42,835		)	117,322			(25,732		)	67,352			10,691			(102,568		)	37,180			20,194			(185,221		)	116,107			(34,503		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(11		)	(265		)	(503		)	(8		)	(1,485		)	(2,440		)	(285		)	(578		)	(111		)	(787		)	(4,788		)
Foreign currency translation adjustments, net of deferred income tax	5,731			13,978			(15,136		)	13,201			(1,859		)	(12,000		)	1,284			1,286			1,465			17,774			(11,289		)
Balance at end of period	287,017			324,132			193,097			234,468			153,923			146,576			263,584			225,405			204,503			287,017			153,923

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(291,533		)	(845,472		)	(549,912		)
Shares repurchased for treasury	(173,097		)	(323		)	(6,711		)	(236		)	(585		)	(21,301		)	(36,224		)	(237,450		)	(258,379		)	(180,367		)	(295,560		)
Balance at end of period	(1,025,839		)	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(844,887		)	(823,586		)	(787,362		)	(549,912		)	(1,025,839		)	(845,472		)

Total Shareholders’ Equity	$	5,168,878		$	5,348,794		$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786		$	5,168,878		$	4,592,074

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

	Three Months Ended																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2012			2012			2012			2012			2011			2011			2011			2011			2010			2012			2011
Operating Activities
Net income	$	19,217		$	189,656		$	220,268		$	164,256		$	145,332		$	168,755		$	96,603		$	25,473		$	235,900		$	593,397		$	436,163
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(56,844		)	(61,950		)	(36,681		)	(44,072		)	(12,940		)	(29,615		)	(48,886		)	(22,481		)	(78,261		)	(199,547		)	(113,922		)
Net impairment losses included in earnings	6,035			2,379			1,951			1,023			1,959			2,739			1,684			2,680			3,230			11,388			9,062
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	(6,315		)	(19,177		)	(6,111		)	(12,030		)	20,776			31,734			18,945			(355		)	(26,110		)	(43,633		)	71,100
Share-based compensation	7,644			10,729			16,519			7,411			5,700			5,781			13,877			5,628			5,615			42,303			30,986
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	215,885			72,346			68,327			39,343			(59,998		)	48,397			130,746			155,477			3,546			395,901			274,622
Unearned premiums, net of prepaid reinsurance premiums	(166,338		)	6,556			95,142			181,735			(162,490		)	9,919			63,987			130,136			(149,242		)	117,095			41,552
Premiums receivable	84,474			68,881			(83,633		)	(190,102		)	106,818			82,200			(77,556		)	(118,688		)	157,034			(120,380		)	(7,226		)
Deferred acquisition costs, net	16,851			(5,832		)	(13,121		)	(32,269		)	24,823			1,438			(5,464		)	(22,056		)	16,684			(34,371		)	(1,259		)
Reinsurance balances payable	23,569			(17,958		)	40,310			(3,181		)	8,896			(19,368		)	23,109			(7,122		)	3,277			42,740			5,515
Other liabilities	19,385			24,190			(12,660		)	10,134			30,620			5,925			(26,613		)	33,366			(47,339		)	41,049			43,298
Other items, net	26,089			64,863			(37,864		)	22,573			145			2,019			31,535			42,522			20,179			75,661			76,221
Net Cash Provided By Operating Activities	189,652			334,683			252,447			144,821			109,641			309,924			221,967			224,580			144,513			921,603			866,112

Investing Activities
Purchases of:
Fixed maturity investments	(4,898,519		)	(5,123,575		)	(3,952,868		)	(3,593,630		)	(3,758,854		)	(2,729,874		)	(4,235,140		)	(3,151,767		)	(2,434,319		)	(17,568,592		)	(13,875,635		)
Equity securities	(53,078		)	(105,618		)	(76,500		)	(33,803		)	(69,962		)	(94,115		)	(159,157		)	(89,790		)	(226,677		)	(268,999		)	(413,024		)
Other investments	(299,741		)	(314,065		)	(147,076		)	(239,167		)	(220,048		)	(166,449		)	(114,588		)	(92,777		)	(147,127		)	(1,000,049		)	(593,862		)
Proceeds from the sales of:
Fixed maturity investments	4,843,768			4,635,352			3,258,254			3,628,932			3,542,629			2,299,627			3,323,456			3,232,541			2,670,332			16,366,306			12,398,253
Equity securities	49,200			65,932			122,625			75,860			58,386			111,467			147,334			52,316			14,522			313,617			369,503
Other investments	114,537			112,129			105,815			111,149			147,243			191,767			119,780			84,967			133,211			443,630			543,757
Proceeds from redemptions and maturities of fixed maturities	248,514			268,288			337,132			261,660			296,408			200,671			283,512			253,898			266,044			1,115,594			1,034,489
Net (purchases) sales of short-term investments	113,780			246,746			32,837			(207,444		)	(114,854		)	(123,211		)	459,091			(223,415		)	(129,794		)	185,919			(2,389		)
Change in investment of securities lending collateral	(16,650		)	40,677			(24,159		)	6,322			16,150			80,376			48,853			(125,904		)	131,389			6,190			19,475
Purchase of business, net of cash acquired	—			—			28,948			—			—			—			—			—			—			28,948			—
Purchases of furniture, equipment and other	(4,638		)	(3,686		)	(3,710		)	(6,498		)	(3,461		)	(3,178		)	(4,266		)	(8,082		)	(1,553		)	(18,532		)	(18,987		)
Net Cash Provided By (Used For) Investing Activities	97,173			(177,820		)	(318,702		)	3,381			(106,363		)	(232,919		)	(131,125		)	(68,013		)	276,028			(395,968		)	(538,420		)

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 .	(172,056		)	—			—			—			(3		)	(20,833		)	(29,552		)	(237,173		)	(258,150		)	(172,056		)	(287,561		)
Proceeds from common shares issued, net	5,429			1,256			(432		)	780			3,245			1,609			(1,397		)	2,875			4,693			7,033			6,332
Repayments of borrowings	(186,291		)	(50,804		)	(3,910		)	(69,863		)	(3,513		)	(4,225		)	(3,919		)	(3,695		)	(31,072		)	(310,868		)	(15,352		)
Change in securities lending collateral	16,650			(40,677		)	24,159			(6,322		)	(16,150		)	(80,376		)	(48,853		)	125,904			(131,389		)	(6,190		)	(19,475		)
Other	2,185			1,015			2,876			588			766			818			2,467			714			(893		)	6,664			4,765
Preferred dividends paid	(5,484		)	(5,485		)	(10,951		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(28,381		)	(25,844		)
Net Cash Provided By (Used For) Financing Activities	(339,567		)	(94,721		)	2,531			(81,278		)	(22,116		)	(109,468		)	(87,715		)	(117,836		)	(423,272		)	(513,035		)	(337,135		)

Effects of exchange rate changes on foreign currency cash	1,343			4,906			(3,690		)	4,183			642			(8,643		)	997			5,406			(526		)	6,742			(1,598		)

Increase (decrease) in cash	(51,399		)	67,048			(67,414		)	71,107			(18,196		)	(41,106		)	4,124			44,137			(3,257		)	19,342			(11,041		)
Cash beginning of period	422,440			355,392			422,806			351,699			369,895			411,001			406,877			362,740			365,997			351,699			362,740
Cash end of period	$	371,041		$	422,440		$	355,392		$	422,806		$	351,699		$	369,895		$	411,001		$	406,877		$	362,740		$	371,041		$	351,699

Income taxes paid (received), net	$	(5,917	)	$	(220	)	$	1,548		$	2,788		$	(7,724	)	$	3,662		$	2,296		$	3,670		$	3,140		$	(1,801	)	$	1,904
Interest paid	$	11,882		$	2,202		$	12,843		$	2,206		$	13,047		$	2,177		$	13,084		$	2,191		$	12,831		$	29,133		$	30,499

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 December 31, 2012 and 2011

(U.S. dollars in thousands)

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

Gross premiums written (1)	$	571,157		$	245,292		$	813,928		$	540,617		$	161,904		$	699,662
Net premiums written	386,714			226,428			613,142			360,739			150,385			511,124

Net premiums earned	$	455,668		$	323,813		$	779,481		$	422,667		$	250,525		$	673,192
Fee income	532			5,132			5,664			729			253			982
Losses and loss adjustment expenses	(383,106		)	(239,400		)	(622,506		)	(282,769		)	(95,298		)	(378,067		)
Acquisition expenses, net	(75,392		)	(58,176		)	(133,568		)	(73,975		)	(49,364		)	(123,339		)
Other operating expenses	(82,123		)	(38,282		)	(120,405		)	(77,593		)	(25,707		)	(103,300		)
Underwriting income (loss)	$	(84,421	)	$	(6,913	)	(91,334		)	$	(10,941	)	$	80,409		69,468

Net investment income							73,769									80,467
Net realized gains							54,849									14,542
Net impairment losses recognized in earnings							(6,035		)							(1,959		)
Equity in net income (loss) of investment funds accounted for using the equity method							16,567									(14,702		)
Other income (loss)							(4,189		)							(4,848		)
Other expenses							(7,346		)							(6,777		)
Interest expense							(6,187		)							(8,087		)
Net foreign exchange (losses) gains							(22,997		)							12,613
Income before income taxes							7,097									140,717
Income tax (expense) benefit							12,120									4,615

Net income							19,217									145,332
Preferred dividends							(5,485		)							(6,461		)
Net income available to common shareholders							$	13,732								$	138,871

Underwriting Ratios
Loss ratio	84.1		%	73.9		%	79.9		%	66.9		%	38.0		%	56.2		%
Acquisition expense ratio (2)	16.4		%	18.0		%	17.1		%	17.3		%	19.7		%	18.2		%
Other operating expense ratio	18.0		%	11.8		%	15.4		%	18.4		%	10.3		%	15.3		%
Combined ratio	118.5		%	103.7		%	112.4		%	102.6		%	68.0		%	89.7		%

Net premiums written to gross premiums written	67.7		%	92.3		%	75.3		%	66.7		%	92.9		%	73.1		%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.

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

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Year Ended December 31, 2012 and 2011

(U.S. dollars in thousands)

	Year Ended									Year Ended
	December 31, 2012									December 31, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	2,593,959		$	1,282,000		$	3,869,161		$	2,444,485		$	998,520		$	3,436,456
Net premiums written	1,825,334			1,226,901			3,052,235			1,721,279			952,047			2,673,326

Net premiums earned	$	1,800,343		$	1,134,797		$	2,935,140		$	1,679,047		$	952,768		$	2,631,815
Fee income	2,335			5,755			8,090			2,870			559			3,429
Losses and loss adjustment expenses	(1,283,841		)	(577,436		)	(1,861,277		)	(1,172,742		)	(554,811		)	(1,727,553		)
Acquisition expenses, net	(298,983		)	(209,901		)	(508,884		)	(278,696		)	(184,241		)	(462,937		)
Other operating expenses	(307,489		)	(122,546		)	(430,035		)	(307,797		)	(92,945		)	(400,742		)
Underwriting income (loss)	$	(87,635	)	$	230,669		143,034			$	(77,318	)	$	121,330		44,012

Net investment income							294,895									338,198
Net realized gains							194,228									110,646
Net impairment losses recognized in earnings							(11,388		)							(9,062		)
Equity in net income (loss) of investment funds accounted for using the equity method							73,510									(9,605		)
Other income (loss)							(12,094		)							(2,114		)
Other expenses							(35,318		)							(31,380		)
Interest expense							(28,525		)							(31,691		)
Net foreign exchange (losses) gains							(28,955		)							17,366
Income before income taxes							589,387									426,370
Income tax (expense) benefit							4,010									9,793

Net income							593,397									436,163
Preferred dividends							(25,079		)							(25,844		)
Net income available to common shareholders							$	568,318								$	410,319

Underwriting Ratios
Loss ratio	71.3		%	50.9		%	63.4		%	69.8		%	58.2		%	65.6		%
Acquisition expense ratio (2)	16.5		%	18.5		%	17.3		%	16.4		%	19.3		%	17.5		%
Other operating expense ratio	17.1		%	10.8		%	14.7		%	18.3		%	9.8		%	15.2		%
Combined ratio	104.9		%	80.2		%	95.4		%	104.5		%	87.3		%	98.3		%

Net premiums written to gross premiums written	70.4		%	95.7		%	78.9		%	70.4		%	95.3		%	77.8		%

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

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended						Year Ended
	December 31,						December 31,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Programs	$	80,201	20.7	$	62,874	17.4	$	352,867	19.3	$	297,985	17.3
Property, energy, marine and aviation	36,215		9.4	41,244		11.4	294,690		16.1	335,589		19.5
Professional liability	56,023		14.5	54,085		15.0	260,705		14.3	237,860		13.8
Executive assurance	59,262		15.3	59,035		16.4	250,904		13.7	231,405		13.4
Construction	23,283		6.0	22,912		6.4	130,201		7.1	120,405		7.0
Casualty	31,034		8.0	28,599		7.9	112,307		6.2	114,235		6.6
Lenders products	23,838		6.2	21,543		6.0	86,987		4.8	86,694		5.0
National accounts	18,047		4.7	19,110		5.3	80,929		4.4	80,973		4.7
Travel and accident	15,342		4.0	13,751		3.8	80,489		4.4	71,940		4.2
Surety	13,456		3.5	12,734		3.5	53,271		2.9	42,475		2.5
Healthcare	9,498		2.5	9,303		2.6	36,814		2.0	35,652		2.1
Other (1)	20,515		5.2	15,549		4.3	85,170		4.8	66,066		3.9
Total	$	386,714	100.0	$	360,739	100.0	$	1,825,334	100.0	$	1,721,279	100.0

Net premiums earned
Programs	$	87,815	19.3	$	75,085	17.8	$	326,380	18.1	$	287,598	17.1
Property, energy, marine and aviation	79,135		17.4	79,979		18.9	313,081		17.4	322,510		19.2
Professional liability	60,829		13.3	62,467		14.8	258,401		14.4	252,037		15.0
Executive assurance	60,570		13.3	56,782		13.4	241,791		13.4	228,623		13.6
Construction	33,537		7.4	28,569		6.8	129,446		7.2	112,764		6.7
Casualty	29,255		6.4	28,093		6.6	113,597		6.3	111,654		6.6
Lenders products	22,003		4.8	18,796		4.4	95,838		5.3	75,291		4.5
National accounts	20,301		4.5	20,572		4.9	79,771		4.4	79,542		4.7
Travel and accident	18,850		4.1	15,840		3.7	78,050		4.3	69,945		4.2
Surety	13,301		2.9	11,847		2.8	47,302		2.6	41,119		2.4
Healthcare	9,239		2.0	8,825		2.1	36,779		2.0	35,906		2.1
Other (1)	20,833		4.6	15,812		3.8	79,907		4.6	62,058		3.9
Total	$	455,668	100.0	$	422,667	100.0	$	1,800,343	100.0	$	1,679,047	100.0

Net premiums written by client location
United States	$	289,675	74.9	$	265,586	73.6	$	1,314,577	72.0	$	1,208,007	70.2
Europe	53,993		14.0	48,820		13.5	271,278		14.9	273,578		15.9
Asia and Pacific	18,465		4.8	21,700		6.0	120,492		6.6	119,523		6.9
Other	24,581		6.3	24,633		6.9	118,987		6.5	120,171		7.0
Total	$	386,714	100.0	$	360,739	100.0	$	1,825,334	100.0	$	1,721,279	100.0

Net premiums written by underwriting location
United States	$	277,940	71.9	$	254,463	70.5	$	1,254,623	68.7	$	1,153,835	67.0
Europe	80,685		20.9	78,323		21.7	472,132		25.9	463,855		26.9
Other	28,089		7.2	27,953		7.8	98,579		5.4	103,589		6.1
Total	$	386,714	100.0	$	360,739	100.0	$	1,825,334	100.0	$	1,721,279	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																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2012			2012			2012			2012			2011			2011			2011			2011			2010			2012			2011

Gross premiums written	$	571,157		$	658,599		$	676,090		$	688,113		$	540,617		$	634,280		$	635,005		$	634,583		$	527,783		$	2,593,959		$	2,444,485
Net premiums written	386,714			483,356			464,584			490,680			360,739			472,986			438,263			449,291			351,841			1,825,334			1,721,279

Net premiums earned	$	455,668		$	456,341		$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	1,800,343		$	1,679,047
Fee income	532			645			628			530			729			661			702			778			761			2,335			2,870
Losses and loss adjustment expenses	(383,106		)	(307,155		)	(290,416		)	(303,164		)	(282,769		)	(290,608		)	(301,642		)	(297,723		)	(264,848		)	(1,283,841		)	(1,172,742		)
Acquisition expenses, net	(75,392		)	(73,663		)	(76,058		)	(73,870		)	(73,975		)	(76,763		)	(66,543		)	(61,415		)	(63,102		)	(298,983		)	(278,696		)
Other operating expenses	(82,123		)	(75,379		)	(76,617		)	(73,370		)	(77,593		)	(77,801		)	(77,774		)	(74,629		)	(82,535		)	(307,489		)	(307,797		)
Underwriting income (loss)	$	(84,421	)	$	789		$	4,131		$	(8,134	)	$	(10,941	)	$	(6,541	)	$	(34,438	)	$	(25,398	)	$	(5,449	)	$	(87,635	)	$	(77,318	)

Underwriting Ratios
Loss ratio	84.1		%	67.3		%	65.0		%	68.6		%	66.9		%	66.4		%	73.4		%	73.0		%	65.5		%	71.3		%	69.8		%
Acquisition expense ratio (1)	16.4		%	16.0		%	16.9		%	16.6		%	17.3		%	17.4		%	16.0		%	14.9		%	15.4		%	16.5		%	16.4		%
Other operating expense ratio	18.0		%	16.5		%	17.2		%	16.6		%	18.4		%	17.8		%	18.9		%	18.3		%	20.4		%	17.1		%	18.3		%
Combined ratio	118.5		%	99.8		%	99.1		%	101.8		%	102.6		%	101.6		%	108.3		%	106.2		%	101.3		%	104.9		%	104.5		%

Net premiums written
Programs	$	80,201		$	98,052		$	92,998		$	81,616		$	62,874		$	79,086		$	81,629		$	74,396		$	60,969		$	352,867		$	297,985
Property, energy, marine and aviation	36,215			92,266			86,390			79,819			41,244			114,631			103,296			76,418			44,258			294,690			335,589
Professional liability	56,023			68,923			65,198			70,561			54,085			66,484			57,906			59,385			51,559			260,705			237,860
Executive assurance	59,262			63,059			60,205			68,378			59,035			62,328			53,974			56,068			54,448			250,904			231,405
Construction	23,283			23,481			49,784			33,653			22,912			23,576			42,408			31,509			20,014			130,201			120,405
Casualty	31,034			23,662			30,638			26,973			28,599			30,563			24,939			30,134			27,389			112,307			114,235
Lenders products	23,838			20,257			20,477			22,415			21,543			22,551			21,526			21,074			30,942			86,987			86,694
National accounts	18,047			22,483			4,961			35,438			19,110			17,275			4,397			40,191			14,024			80,929			80,973
Travel and accident	15,342			22,017			20,294			22,836			13,751			17,404			19,284			21,501			14,486			80,489			71,940
Surety	13,456			14,958			12,723			12,134			12,734			10,389			9,618			9,734			7,918			53,271			42,475
Healthcare	9,498			8,722			7,959			10,635			9,303			8,810			8,422			9,117			10,290			36,814			35,652
Other (2)	20,515			25,476			12,957			26,222			15,549			19,889			10,864			19,764			15,544			85,170			66,066
Total	$	386,714		$	483,356		$	464,584		$	490,680		$	360,739		$	472,986		$	438,263		$	449,291		$	351,841		$	1,825,334		$	1,721,279

Net premiums earned
Programs	$	87,815		$	83,978		$	80,589		$	73,998		$	75,085		$	73,561		$	71,934		$	67,018		$	69,462		$	326,380		$	287,598
Property, energy, marine and aviation	79,135			77,862			77,590			78,494			79,979			92,288			76,644			73,599			77,811			313,081			322,510
Professional liability	60,829			66,299			68,017			63,256			62,467			64,403			57,767			67,400			63,152			258,401			252,037
Executive assurance	60,570			61,599			60,856			58,766			56,782			56,783			60,488			54,570			55,270			241,791			228,623
Construction	33,537			32,409			31,692			31,808			28,569			28,590			27,214			28,391			26,837			129,446			112,764
Casualty	29,255			27,175			28,102			29,065			28,093			30,305			24,829			28,427			25,893			113,597			111,654
Lenders products	22,003			20,271			21,411			32,153			18,796			18,293			19,966			18,236			19,617			95,838			75,291
National accounts	20,301			21,919			18,415			19,136			20,572			19,642			18,166			21,162			17,360			79,771			79,542
Travel and accident	18,850			21,826			20,661			16,713			15,840			19,051			19,455			15,599			15,705			78,050			69,945
Surety	13,301			12,643			10,798			10,560			11,847			10,091			9,402			9,779			9,810			47,302			41,119
Healthcare	9,239			9,565			9,077			8,898			8,825			9,340			9,089			8,652			9,701			36,779			35,906
Other (2)	20,833			20,795			19,386			18,893			15,812			15,623			15,865			14,758			13,657			79,907			62,058
Total	$	455,668		$	456,341		$	446,594		$	441,740		$	422,667		$	437,970		$	410,819		$	407,591		$	404,275		$	1,800,343		$	1,679,047

(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						Year Ended
	December 31,						December 31,
	2012			2011			2012			2011
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Other specialty (1)	$	59,827	26.4	$	48,555	32.3	$	297,962	24.3	$	211,019	22.2
Property catastrophe	17,683		7.8	11,636		7.7	283,677		23.1	246,793		25.9
Property excluding property catastrophe (2)	55,929		24.7	36,430		24.2	265,783		21.7	226,013		23.7
Casualty (3)	50,132		22.1	34,968		23.3	216,067		17.6	181,957		19.1
Marine and aviation	21,038		9.3	16,130		10.7	84,649		6.9	77,309		8.1
Other (4)	21,819		9.7	2,666		1.8	78,763		6.4	8,956		1.0
Total	$	226,428	100.0	$	150,385	100.0	$	1,226,901	100.0	$	952,047	100.0

Net premiums earned
Other specialty (1)	$	92,120	28.4	$	60,891	24.3	$	303,805	26.8	$	189,093	19.8
Property catastrophe	80,271		24.8	62,408		24.9	280,185		24.7	238,748		25.1
Property excluding property catastrophe (2)	70,414		21.7	60,607		24.2	254,338		22.4	243,702		25.6
Casualty (3)	51,082		15.8	47,317		18.9	194,259		17.1	196,370		20.6
Marine and aviation	18,643		5.8	17,361		6.9	76,145		6.7	77,819		8.2
Other (4)	11,283		3.5	1,941		0.8	26,065		2.3	7,036		0.7
Total	$	323,813	100.0	$	250,525	100.0	$	1,134,797	100.0	$	952,768	100.0

Net premiums written
Pro rata	$	159,439	70.4	$	105,909	70.4	$	598,874	48.8	$	416,321	43.7
Excess of loss	66,989		29.6	44,476		29.6	628,027		51.2	535,726		56.3
Total	$	226,428	100.0	$	150,385	100.0	$	1,226,901	100.0	$	952,047	100.0

Net premiums earned
Pro rata	$	150,787	46.6	$	114,600	45.7	$	515,764	45.4	$	435,311	45.7
Excess of loss	173,026		53.4	135,925		54.3	619,033		54.6	517,457		54.3
Total	$	323,813	100.0	$	250,525	100.0	$	1,134,797	100.0	$	952,768	100.0

Net premiums written by client location
United States	$	106,769	47.2	$	60,860	40.5	$	629,614	51.3	$	512,319	53.8
Europe	61,464		27.1	34,835		23.2	341,674		27.8	250,809		26.3
Asia and Pacific	18,814		8.3	13,413		8.9	104,398		8.5	75,590		7.9
Bermuda	21,505		9.5	16,054		10.7	72,864		5.9	60,246		6.3
Other	17,876		7.9	25,223		16.7	78,351		6.5	53,083		5.7
Total	$	226,428	100.0	$	150,385	100.0	$	1,226,901	100.0	$	952,047	100.0

Net premiums written by underwriting location
Bermuda	$	90,880	40.1	$	82,087	54.6	$	595,999	48.6	$	531,254	55.8
United States	84,278		37.2	55,394		36.8	379,239		30.9	323,731		34.0
Ireland	44,596		19.7	9,149		6.1	223,861		18.2	83,892		8.8
Other	6,674		3.0	3,755		2.5	27,802		2.3	13,170		1.4
Total	$	226,428	100.0	$	150,385	100.0	$	1,226,901	100.0	$	952,047	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																											Year Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			December 31,			December 31,			December 31,
	2012			2012			2012			2012			2011			2011			2011			2011			2010			2012			2011

Gross premiums written	$	245,292		$	279,751		$	376,981		$	379,976		$	161,904		$	227,837		$	277,766		$	331,013		$	139,015		$	1,282,000		$	998,520
Net premiums written	226,428			271,893			355,649			372,931			150,385			218,395			268,280			314,987			131,070			1,226,901			952,047

Net premiums earned	$	323,813		$	292,350		$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	1,134,797		$	952,768
Fee income	5,132			432			178			13			253			187			82			37			2,053			5,755			559
Losses and loss adjustment expenses	(239,400		)	(136,716		)	(109,277		)	(92,043		)	(95,298		)	(133,376		)	(129,980		)	(196,157		)	(102,478		)	(577,436		)	(554,811		)
Acquisition expenses, net	(58,176		)	(54,402		)	(52,231		)	(45,092		)	(49,364		)	(43,442		)	(44,096		)	(47,339		)	(41,722		)	(209,901		)	(184,241		)
Other operating expenses	(38,282		)	(29,001		)	(29,140		)	(26,123		)	(25,707		)	(22,340		)	(23,671		)	(21,227		)	(29,693		)	(122,546		)	(92,945		)
Underwriting income (loss)	$	(6,913	)	$	72,663		$	89,592		$	75,327		$	80,409		$	45,108		$	34,395		$	(38,582	)	$	56,031		$	230,669		$	121,330

Underwriting Ratios
Loss ratio	73.9		%	46.8		%	39.0		%	38.6		%	38.0		%	54.6		%	56.0		%	86.8		%	45.0		%	50.9		%	58.2		%
Acquisition expense ratio	18.0		%	18.6		%	18.6		%	18.9		%	19.7		%	17.8		%	19.0		%	20.9		%	18.3		%	18.5		%	19.3		%
Other operating expense ratio	11.8		%	9.9		%	10.4		%	10.9		%	10.3		%	9.2		%	10.2		%	9.4		%	13.0		%	10.8		%	9.8		%
Combined ratio	103.7		%	75.3		%	68.0		%	68.4		%	68.0		%	81.6		%	85.2		%	117.1		%	76.3		%	80.2		%	87.3		%

Net premiums written
Other specialty (1)	$	59,827		$	70,412		$	72,261		$	95,462		$	48,555		$	40,882		$	43,937		$	77,645		$	27,008		$	297,962		$	211,019
Property catastrophe	17,683			50,196			129,224			86,574			11,636			59,961			108,235			66,961			3,529			283,677			246,793
Property excluding property catastrophe (2)	55,929			68,627			65,734			75,493			36,430			64,495			53,938			71,150			46,835			265,783			226,013
Casualty (3)	50,132			38,273			43,702			83,960			34,968			34,873			40,755			71,361			32,274			216,067			181,957
Marine and aviation	21,038			19,152			18,842			25,617			16,130			17,037			19,978			24,164			21,303			84,649			77,309
Other (4)	21,819			25,233			25,886			5,825			2,666			1,147			1,437			3,706			121			78,763			8,956
Total	$	226,428		$	271,893		$	355,649		$	372,931		$	150,385		$	218,395		$	268,280		$	314,987		$	131,070		$	1,226,901		$	952,047

Net premiums earned
Other specialty (1)	$	92,120		$	87,330		$	78,207		$	46,148		$	60,891		$	48,722		$	40,511		$	38,969		$	30,296		$	303,805		$	189,093
Property catastrophe	80,271			69,059			68,992			61,863			62,408			64,910			59,788			51,642			54,768			280,185			238,748
Property excluding property catastrophe (2)	70,414			63,572			58,720			61,632			60,607			62,565			57,524			63,006			70,744			254,338			243,702
Casualty (3)	51,082			48,669			48,565			45,943			47,317			49,066			51,493			48,494			48,609			194,259			196,370
Marine and aviation	18,643			16,853			19,200			21,449			17,361			17,739			21,093			21,626			22,445			76,145			77,819
Other (4)	11,283			6,867			6,378			1,537			1,941			1,077			1,651			2,367			1,009			26,065			7,036
Total	$	323,813		$	292,350		$	280,062		$	238,572		$	250,525		$	244,079		$	232,060		$	226,104		$	227,871		$	1,134,797		$	952,768

(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)

	December 31,					September 30,					June 30,					March 31,					December 31,
	2012					2012					2012					2012					2011
Investable assets:
Fixed maturities available for sale, at fair value	$	9,839,988		76	%	$	9,944,186		75	%	$	9,556,326		75	%	$	9,221,145		74	%	$	9,375,604		76	%
Fixed maturities, at fair value (1)	363,541			3	%	306,424			2	%	242,735			2	%	250,805			2	%	147,779			1	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	42,600			0	%	34,769			1	%	74,032			1	%	50,813			0	%	56,393			1	%
Total fixed maturities	10,246,129			79	%	10,285,379			78	%	9,873,093			78	%	9,522,763			76	%	9,579,776			78	%
Short-term investments available for sale, at fair value	722,121			6	%	845,158			6	%	1,087,910			8	%	1,112,249			9	%	904,219			7	%
Short-term investments pledged under securities lending agreements, at fair value (2)	8,248			0	%	—			0	%	—			0	%	—			0	%	—			0	%
Cash	371,041			3	%	422,440			3	%	355,392			3	%	422,806			3	%	351,699			3	%
Equity securities available for sale, at fair value	312,749			2	%	312,371			2	%	260,864			2	%	318,181			3	%	299,584			2	%
Equity securities, at fair value (1)	25,954			0	%	28,405			0	%	23,118			0	%	52,766			0	%	87,403			1	%
Other investments available for sale, at fair value	549,280			4	%	477,857			4	%	381,576			3	%	357,992			3	%	238,111			2	%
Other investments, at fair value (1)	527,971			4	%	363,239			3	%	230,990			2	%	196,712			2	%	131,721			1	%
TALF investments, at fair value (3)	—			0	%	270,206			2	%	307,453			2	%	313,187			2	%	387,702			3	%
Investments accounted for using the equity method	307,105			2	%	339,587			3	%	331,601			3	%	347,273			3	%	380,507			3	%
Securities sold but not yet purchased	(6,924		)	0	%	(8,017		)	0	%	(9,206		)	0	%	(18,831		)	0	%	(27,178		)	0	%
Securities transactions entered into but not settled at the balance sheet date	(18,540		)	0	%	(117,742		)	(1	)%	(106,435		)	(1	)%	(121,435		)	(1	)%	(17,339		)	0	%
Total investable assets	$	13,045,134		100	%	$	13,218,883		100	%	$	12,736,356		100	%	$	12,503,663		100	%	$	12,316,205		100	%

Investment portfolio metrics (2):
Average effective duration (in years)	3.06					2.90					3.01					2.75					2.99
Average S&P/Moody’s credit ratings (4)	AA-/Aa2					AA/Aa2					AA/Aa2					AA/Aa2					AA/Aa1
Imbedded book yield (5)	2.60		%			2.80		%			2.76		%			2.76		%			2.98		%

Credit quality distribution of total fixed maturities (6):
U.S. government and government agencies (7)	$	2,523,212		25	%	$	2,837,828		28	%	$	3,043,908		31	%	$	2,850,031		30	%	$	3,154,480		33	%
AAA	3,413,431			33	%	3,388,660			33	%	3,325,996			34	%	3,420,490			36	%	3,229,161			34	%
AA	1,563,846			15	%	1,770,851			17	%	1,505,032			15	%	1,383,663			14	%	1,425,249			15	%
A	1,501,156			15	%	1,158,492			11	%	1,028,772			10	%	917,925			10	%	884,957			9	%
BBB	538,140			5	%	503,890			5	%	428,200			4	%	398,645			4	%	412,566			4	%
BB	174,527			2	%	157,183			2	%	152,982			2	%	157,427			2	%	140,029			1	%
B	220,772			2	%	203,416			2	%	175,613			2	%	172,360			2	%	165,003			2	%
Lower than B	175,866			2	%	143,518			1	%	116,846			1	%	125,134			1	%	114,672			1	%
Not rated	135,179			1	%	121,541			1	%	95,744			1	%	97,088			1	%	53,659			1	%
Total fixed maturities, at fair value	$	10,246,129		100	%	$	10,285,379		100	%	$	9,873,093		100	%	$	9,522,763		100	%	$	9,579,776		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) This table excludes the collateral received and reinvested and includes the fixed maturities and short-term investments pledged under in securities lending agreements, at fair value.

(3) During the 2012 fourth quarter, the Company sold all investments it held under the FRBNY’s TALF program and the related secured financing was extinguished accordingly.

(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 December 31, 2012:

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

Corporates	$	2,884,687	$	98,248	$	(6,643	)	$	91,605	$	2,793,082	103.3	%
Non-U.S. government-backed corporates	247,958		7,550		(67		)	7,483		240,475		103.1	%
U.S. government and government agencies	1,131,688		20,178		(1,095		)	19,083		1,112,605		101.7	%
Agency mortgage-backed securities	1,195,793		10,989		(3,719		)	7,270		1,188,523		100.6	%
Non-agency mortgage-backed securities	336,943		13,820		(3,765		)	10,055		326,888		103.1	%
Agency commercial mortgage-backed securities	195,731		4,910		(2,308		)	2,602		193,129		101.3	%
Non-agency commercial mortgage-backed securities	628,434		32,604		(2,160		)	30,444		597,990		105.1	%
Municipal bonds	1,463,586		62,322		(1,421		)	60,901		1,402,685		104.3	%
Non-U.S. government securities	1,087,310		33,701		(8,860		)	24,841		1,062,469		102.3	%
Asset-backed securities	1,073,999		25,528		(5,838		)	19,690		1,054,309		101.9	%
Total	$	10,246,129	$	309,850	$	(35,876	)	$	273,974	$	9,972,155	102.7	%

Corporates (Excluding Guaranteed Amounts)

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

	Estimated Fair Value
			% of Asset		% of Investable
	Total		Class		Assets
Sector:
Industrials	$	1,543,605	53.5	%	11.8	%
Financials	983,276		34.1	%	7.5	%
Covered bonds	168,404		5.8	%	1.3	%
Utilities	104,441		3.6	%	0.8	%
All other (1)	84,961		3.0	%	0.7	%
Total	$	2,884,687	100.0	%	22.1	%

Credit quality distribution (3):
AAA	$	525,917	18.2	%	4.0	%
AA	438,880		15.2	%	3.4	%
A	1,005,942		34.9	%	7.7	%
BBB	427,386		14.8	%	3.3	%
BB	142,309		4.9	%	1.1	%
B	199,823		6.9	%	1.5	%
Lower than B	29,339		1.0	%	0.2	%
Not rated	115,091		4.1	%	0.9	%
Total	$	2,884,687	100.0	%	22.1	%

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

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

General Electric Co	$	79,947	2.8	%	0.6	%	AA+/A1
SBA Communications Corp	48,460		1.7	%	0.4	%	NR/A2
Caterpillar Inc	46,205		1.6	%	0.4	%	A/A2
AT&T Inc	44,103		1.5	%	0.3	%	A-/A2
Crown Castle Int’l Corp	38,960		1.4	%	0.3	%	NR/A3
Abbey National Treasury Svcs	37,351		1.3	%	0.3	%	A/A2
National Bank of Canada	29,666		1.0	%	0.2	%	A-/Aa2
Desjardins Group	29,329		1.0	%	0.2	%	A+/Aa1
Verizon Communications Inc	28,781		1.0	%	0.2	%	A-/A2
Royal Dutch Shell PLC	28,725		1.0	%	0.2	%	AA/Aa1
Total	$	411,527	14.3	%	3.2	%

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

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

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

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Mortgage Backed, Commercial Mortgage Backed and Asset Backed Securities

(U.S. dollars in thousands)

The following table provides information on the Company’s mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) at December 31, 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	$	2,134	AA-	$	2,271	106.4	%	0.0	%
	2004	10,006		BB+	9,920		99.1	%	0.1	%
	2005	46,969		CCC+	48,716		103.7	%	0.4	%
	2006	63,120		B	64,249		101.8	%	0.5	%
	2007	46,698		C	50,799		108.8	%	0.4	%
	2008	6,121		CC+	6,206		101.4	%	0.0	%
	2009 (6)	25,502		AA-	27,795		109.0	%	0.2	%
	2010 (6)	24,705		AAA	24,330		98.5	%	0.2	%
	2012 (6)	101,633		AAA	102,657		101.0	%	0.8	%
Total non-agency MBS		$	326,888	BBB-	$	336,943	103.1	%	2.6	%

Non-agency CMBS:	2004	$	986	AAA	$	901	91.4	%	0.0	%
	2005	1,522		A+	1,538		101.1	%	0.0	%
	2006	3,338		A+	3,592		107.6	%	0.0	%
	2007	27,041		A	29,174		107.9	%	0.2	%
	2008	649		AA+	631		97.2	%	0.0	%
	2009	117,200		AAA	126,831		108.2	%	1.0	%
	2011	144,593		AAA	155,586		107.6	%	1.2	%
	2012	302,661		AAA	310,181		102.5	%	2.4	%
Total non-agency CMBS		$	597,990	AAA	$	628,434	105.1	%	4.8	%

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

Wtd. average loan age (months)	80		77		22
Wtd. average life (months) (2)	17		48		62
Wtd. average loan-to-value % (3)	70.4	%	68.9	%	59.7	%
Total delinquencies (4)	22.0	%	19.9	%	1.2	%
Current credit support % (5)	53.3	%	12.6	%	28.6	%

(1)	Loans defeased with government/agency obligations represented were not material to the collateral underlying the Company’s CMBS holdings.
(2)	The weighted average life for MBS is based on the interest rates in effect at December 31, 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 28% to 86%, while the range of loan-to-values on CMBS is 12% to 114%.
(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) December 31, 2012:

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

Sector:
Credit cards (1)	$	331,009	AAA	$	336,609	101.7	%	2.6	%
Equipment (2)	240,867		A	243,350		101.0	%	1.9	%
Loans (3)	129,708		AA+	130,289		100.4	%	1.0	%
Autos (4)	145,020		AAA	145,148		100.1	%	1.1	%
Rate reduction bonds (5)	78,115		AAA	81,747		104.6	%	0.6	%
U.K. securitized (6)	50,571		AAA	52,676		104.2	%	0.4	%
Commodities (7)	35,000		AAA	35,635		101.8	%	0.3	%
Home equity (8)	13,548		B	17,474		129.0	%	0.1	%
Other	30,471		AA-	31,071		102.0	%	0.2	%
Total ABS	$	1,054,309	AA	$	1,073,999	101.9	%	8.2	%

The effective duration of the total ABS was 2.2 years at December 31, 2012.

(1) The weighted average credit support % on credit cards is 13%.

(2) The weighted average credit support % on equipment is 7%.

(3) The weighted average credit support % on loans is 36%.

(4) The weighted average credit support % on autos is 27%.

(5) The weighted average credit support % on rate reduction bonds is 6%.

(6) The weighted average credit support % on U.K. securitized is 20%.

(7) The weighted average credit support % on commodities is 6%.

(8) The weighted average credit support % on home equity is 21%.

The Company’s investment portfolio included $66.9 million par in sub-prime securities at December 31, 2012, with an estimated fair value of $42.1 million and an average credit quality of “B2/A-.” 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 $5.4 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 December 31, 2012:

	Fair		% of Asset		% of Investable
	Value		Class		Assets
Composition:
Investment funds accounted for using the equity method	$	52,214	14.0	%	0.4	%
Corporate bonds	95,038		25.6	%	0.7	%
Term loan investments (1)	224,528		60.4	%	1.7	%
Total	$	371,780	100.0	%	2.8	%

Currency:
U.S.-denominated	$	275,914	74.2	%	2.1	%
Euro-denominated	95,866		25.8	%	0.7	%
Total	$	371,780	100.0	%	2.8	%

Sector:
Consumer cyclical	$	85,648	23.0	%	0.7	%
Media	42,489		11.4	%	0.3	%
Consumer non-cyclical	40,108		10.8	%	0.3	%
Industrials	33,409		9.0	%	0.3	%
Basic materials	31,906		8.6	%	0.2	%
Utilities	9,444		2.5	%	0.1	%
All other	128,776		34.7	%	1.0	%
Total	$	371,780	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 December 31, 2012:

			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other		Total
Country (1):
Germany	$	199,527	$	843	$	10,094	$	10,044	$	12,712	$	7,055	$	240,275
Finland	118,434		254		—		—		—		—		118,688
Netherlands	—		15,439		46,040		—		6,240		15,673		83,392
France	—		6,766		28,828		16,148		4,736		13,882		70,360
Supranational (5)	29,969		—		—		—		—		—		29,969
Spain	—		—		941		15,101		3,201		328		19,571
Luxembourg	—		—		8,049		—		4,343		482		12,874
Belgium	2,014		—		7,402		—		—		—		9,416
Italy	4,092		—		—		—		828		927		5,847
Ireland	—		—		2,156		—		—		1,506		3,662
Austria	—		3,432		—		—		—		—		3,432
Total	$	354,036	$	26,734	$	103,510	$	41,293	$	32,060	$	39,853	$	597,486

(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 December 31, 2012.
(2)	Sovereign includes securities issued and/or guaranteed by Eurozone governments.
(3)	Securities issued by Eurozone banks where the security is backed by a separate group of loans.
(4)	Included in “corporate bonds” in the Bank Loan Investments table on page 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 (loss) available to common shareholders to net income available to common shareholders along with related per common share results:

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

After-tax operating income (loss) available to common shareholders	$	(24,667	)	$	120,247		$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	350,640		$	303,382
Net realized gains, net of tax	51,031			58,904			33,275			40,873			13,464			28,458			44,799			21,585			71,821			184,083			108,306
Net impairment losses recognized in earnings, net of tax	(6,035		)	(2,379		)	(1,951		)	(1,023		)	(1,959		)	(2,739		)	(1,684		)	(2,680		)	(3,230		)	(11,388		)	(9,062		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	16,567			24,330			7,787			24,826			(14,702		)	(30,549		)	5,973			29,673			22,990			73,510			(9,605		)
Net foreign exchange gains (losses), net of tax	(23,164		)	(16,930		)	32,108			(20,541		)	13,177			59,948			(18,685		)	(37,142		)	6,581			(28,527		)	17,298
Net income available to common shareholders	$	13,732		$	184,172		$	212,619		$	157,795		$	138,871		$	162,294		$	90,142		$	19,012		$	229,439		$	568,318		$	410,319

Diluted per common share results:
After-tax operating income (loss) available to common shareholders	$	(0.18	)	$	0.87		$	1.02		$	0.82		$	0.94		$	0.78		$	0.43		$	0.06		$	0.87		$	2.54		$	2.19
Net realized gains, net of tax	0.37			0.42			0.24			0.30			0.10			0.21			0.32			0.15			0.48			1.33			0.78
Net impairment losses recognized in earnings, net of tax	(0.04		)	(0.02		)	(0.01		)	(0.01		)	(0.01		)	(0.02		)	(0.01		)	(0.02		)	(0.02		)	(0.08		)	(0.07		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	0.12			0.18			0.06			0.18			(0.11		)	(0.22		)	0.04			0.21			0.15			0.53			(0.07		)
Net foreign exchange (losses) gains, net of tax	(0.17		)	(0.12		)	0.23			(0.15		)	0.09			0.43			(0.13		)	(0.26		)	0.05			(0.21		)	0.14
Net income available to common shareholders	$	0.10		$	1.33		$	1.54		$	1.14		$	1.01		$	1.18		$	0.65		$	0.14		$	1.53		$	4.11		$	2.97

Weighted average common shares and common share equivalents outstanding — diluted	138,270,853			138,696,934			138,211,736			137,814,906			137,473,670			137,140,929			137,975,599			140,460,516			150,306,429			138,258,847			138,289,702

Arch Capital Group Ltd. and Subsidiaries

Share Repurchase Activity

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

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

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

Effect of share repurchases:
Aggregate cost of shares repurchased	$	172,056		$	0	$	0	$	0	$	3		$	20,833		$	29,552		$	237,173		$	258,151		$	2,730,089
Shares repurchased	3,924,306			—		—		—		100			655,772			881,961			8,062,383			8,679,051			108,682,524
Average price per share repurchased	$	43.84		—		—		—		$	31.51		$	31.77		$	33.51		$	29.42		$	29.74		$	25.12

Average book value per common share (1)	$	36.49		$	35.62	$	33.89	$	32.55	$	31.34		$	30.81		$	30.39		$	29.90		$	29.61

Average repurchase price-to-book multiple	1.20		x	—		—		—		1.01		x	1.03		x	1.10		x	0.98		x	1.00		x

Remaining share repurchase authorization (2)	$	769,911

(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. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

Arch Capital Group Ltd. and Subsidiaries

Annualized Operating Return on Average Common Equity

(U.S. dollars in thousands)

The following table provides the calculation of annualized operating return on average common equity:

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

After-tax operating income (loss) available to common shareholders	$	(24,667	)	$	120,247		$	141,400		$	113,660		$	128,891		$	107,176		$	59,739		$	7,576		$	131,277		$	350,640		$	303,382
Annualized after-tax operating income (loss) available to common shareholders (a)	$	(98,668	)	$	480,988		$	565,600		$	454,640		$	515,564		$	428,704		$	238,956		$	30,304		$	525,108		$	350,640		$	303,382

Beginning 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		$	4,267,074		$	4,151,786
Ending common shareholders’ equity	4,843,878			5,023,794			4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786			4,843,878			4,267,074
Average common shareholders’ equity (b)	$	4,933,836		$	4,859,555		$	4,604,886		$	4,390,765		$	4,188,987		$	4,094,465		$	4,021,033		$	4,057,911		$	4,253,346		$	4,555,476		$	4,209,430

Annualized operating return on average common equity (a)/(b)	(2.0		)%	9.9		%	12.3		%	10.4		%	12.3		%	10.5		%	5.9		%	0.7		%	12.3		%	7.7		%	7.2		%

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

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

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

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

Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%)	$	0		$	0		$	0		$	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
Series C non-cumulative preferred shares (6.75%)	325,000			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)	4,843,878			5,023,794			4,695,316			4,514,456			4,267,074			4,110,899			4,078,030			3,964,035			4,151,786
Total shareholders’ equity	$	5,168,878		$	5,348,794		$	5,020,316		$	4,839,456		$	4,592,074		$	4,435,899		$	4,403,030		$	4,289,035		$	4,476,786

Total capital	$	5,568,878		$	5,748,794		$	5,420,316		$	5,239,456		$	4,992,074		$	4,835,899		$	4,803,030		$	4,689,035		$	4,876,786

TALF non-recourse borrowings, at market value (1)	—			185,223			235,818			239,551			310,486			314,137			318,441			322,222			325,770

Total capital and TALF non-recourse borrowings	$	5,568,878		$	5,934,017		$	5,656,134		$	5,479,007		$	5,302,560		$	5,150,036		$	5,121,471		$	5,011,257		$	5,202,556

Common shares outstanding, net of treasury shares (b)	133,842,613			136,540,178			136,291,652			135,441,687			134,358,345			133,005,465			132,771,524			131,850,639			139,632,225

Book value per common share (2) (a)/(b)	$	36.19		$	36.79		$	34.45		$	33.33		$	31.76		$	30.91		$	30.71		$	30.06		$	29.73

Leverage ratios:
Senior notes/total capital	5.4		%	5.2		%	5.5		%	5.7		%	6.0		%	6.2		%	6.2		%	6.4		%	6.2		%
Revolving credit agreement borrowings/total capital	1.8		%	1.7		%	1.8		%	1.9		%	2.0		%	2.1		%	2.1		%	2.1		%	2.1		%
Debt/total capital	7.2		%	7.0		%	7.4		%	7.6		%	8.0		%	8.3		%	8.3		%	8.5		%	8.2		%
Preferred/total capital	5.8		%	5.7		%	6.0		%	6.2		%	6.5		%	6.7		%	6.8		%	6.9		%	6.7		%
Debt and preferred/total capital	13.0		%	12.6		%	13.4		%	13.8		%	14.5		%	15.0		%	15.1		%	15.5		%	14.9		%

(1)	During the 2012 fourth quarter, the Company sold all investments it held under the FRBNY’s TALF program and the related secured financing was extinguished accordingly.
(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