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

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8-K - 8-K - ARCH CAPITAL GROUP LTD.	a8-k72513.htm
EX-99.1 - EXHIBIT - ARCH CAPITAL GROUP LTD.	ex-991release63013.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 June 30, 2013

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.

Arch Capital Group Ltd. and Subsidiaries

Table of Contents



			Page

I.	Financial Highlights		3

II.	Consolidated Financial Statements
	a.	Consolidated Statements of Income	4
	b.	Consolidated Balance Sheets	5
	c.	Consolidated Statements of Comprehensive Income	6
	d.	Consolidated Statements of Changes in Shareholders’ Equity	7
	e.	Consolidated Statements of Cash Flows	8

III.	Segment Information
	a.	Overview	9
	b.	Consolidated Results	10
	c.	Insurance Segment Results	12
	d.	Reinsurance Segment Results	14

IV.	Investment Information
	a.	Investable Asset Summary and Investment Portfolio Metrics	16
	b.	Composition of Fixed Maturities	17
	c.	Credit Quality Distribution and Maturity Profile	18
	d.	Analysis of Corporate Exposures	19
	e.	Mortgage Backed and Commercial Mortgage Backed Securities	20
	f.	Asset Backed Securities	21
	g.	Bank Loan Investments	22
	h.	Eurozone Investments	23

V.	Other
	a.	Comments on Regulation G	24
	b.	Operating Income Reconciliation	25
	c.	Share Repurchase Activity	26
	d.	Annualized Operating Return on Average Common Equity	27
	e.	Capital Structure	28



	1

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.



	2

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights



(U.S. Dollars in thousands, except share data)	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change

Gross premiums written	$	1,040,738		$	1,051,813		(1.1	)%	$	2,204,437		$	2,118,469		4.1	%
Net premiums written	810,535			820,233			(1.2	)%	1,763,311			1,683,844			4.7	%
Net premiums earned	758,816			726,656			4.4	%	1,511,586			1,406,968			7.4	%
Underwriting income	96,029			93,723			2.5	%	212,427			160,916			32.0	%

Net investment income	$	68,369		$	73,608		(7.1	)%	$	134,041		$	147,905		(9.4	)%
Per diluted share	0.50			0.53			(5.7	)%	0.99			1.07			(7.5	)%

Net income available to common shareholders	$	171,455		$	202,007		(15.1	)%	$	422,447		$	359,802		17.4	%
Per diluted share	1.26			1.46			(13.7	)%	3.11			2.61			19.2	%

After-tax operating income available to common shareholders (1)	$	135,021		$	141,400		(4.5	)%	$	293,769		$	255,060		15.2	%
Per diluted share	0.99			1.02			(2.9	)%	2.17			1.85			17.3	%

Comprehensive income	$	(101,946	)	$	178,897		(157.0	)%	$	97,076		$	423,698		(77.1	)%

Cash flow from operations	$	182,695		$	252,447		(27.6	)%	$	388,354		$	397,268		(2.2	)%

Diluted weighted average common shares and common share equivalents outstanding	135,849,050			138,211,736			(1.7	)%	135,624,226			138,017,490			(1.7	)%

							% Point Change								% Point Change
Underwriting ratios:
Loss ratio	55.2		%	55.0		%	0.2		54.1		%	56.5		%	(2.4	)
Acquisition expense ratio	17.3		%	17.6		%	(0.3	)	17.1		%	17.5		%	(0.4	)
Other operating expense ratio	14.9		%	14.6		%	0.3		14.8		%	14.6		%	0.2
Combined ratio	87.4		%	87.2		%	0.2		86.0		%	88.6		%	(2.6	)

Financial measures:
Change in book value per common share during period	(2.3		)%	3.4		%	(5.7	)	1.7		%	8.5		%	(6.8	)

Annualized operating return on average common equity	10.9		%	12.3		%	(1.4	)	12.0		%	11.4		%	0.6

Total return on investments (2)
Including effects of foreign exchange	(1.59		)%	0.63		%	-222 bps		(1.11		)%	2.53		%	-364 bps
Excluding effects of foreign exchange	(1.56		)%	1.04		%	-260 bps		(0.57		)%	2.66		%	-323 bps


(1)	See 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.



	3

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income



(U.S. Dollars in thousands, except share data)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

Gross premiums written	$	1,040,738		$	1,163,699		$	813,928		$	936,764		$	1,051,813		$	1,066,656		$	2,204,437		$	2,118,469
Net premiums written	810,535			952,776			613,142			755,249			820,233			863,611			1,763,311			1,683,844

Net premiums earned	$	758,816		$	752,770		$	779,481		$	748,691		$	726,656		$	680,312		$	1,511,586		$	1,406,968
Fee income	902			538			5,664			1,077			806			543			1,440			1,349
Losses and loss adjustment expenses	(418,653		)	(399,403		)	(622,506		)	(443,871		)	(399,693		)	(395,207		)	(818,056		)	(794,900		)
Acquisition expenses, net	(131,677		)	(127,592		)	(133,568		)	(128,065		)	(128,289		)	(118,962		)	(259,269		)	(247,251		)
Other operating expenses	(113,359		)	(109,915		)	(120,405		)	(104,380		)	(105,757		)	(99,493		)	(223,274		)	(205,250		)
Underwriting income (loss)	96,029			116,398			(91,334		)	73,452			93,723			67,193			212,427			160,916
Net investment income	68,369			65,672			73,769			73,221			73,608			74,297			134,041			147,905
Net realized gains	12,652			58,340			54,849			60,391			34,867			44,121			70,992			78,988
Net impairment losses recognized in earnings	(724		)	(2,246		)	(6,035		)	(2,379		)	(1,951		)	(1,023		)	(2,970		)	(2,974		)
Equity in net income of investment funds accounted for using the equity method	10,941			13,823			16,567			24,330			7,787			24,826			24,764			32,613
Other income (loss)	834			1,244			(4,189		)	(532		)	695			(8,068		)	2,078			(7,373		)
Other expenses	(14,049		)	(10,268		)	(7,346		)	(9,049		)	(11,944		)	(6,979		)	(24,317		)	(18,923		)
Interest expense	(5,852		)	(5,898		)	(6,187		)	(7,378		)	(7,439		)	(7,521		)	(11,750		)	(14,960		)
Net foreign exchange gains (losses)	13,811			24,264			(22,997		)	(16,959		)	31,689			(20,688		)	38,075			11,001
Income before income taxes	182,011			261,329			7,097			195,097			221,035			166,158			443,340			387,193
Income tax (expense) benefit	(5,071		)	(4,853		)	12,120			(5,441		)	(767		)	(1,902		)	(9,924		)	(2,669		)
Net income	176,940			256,476			19,217			189,656			220,268			164,256			433,416			384,524
Preferred dividends	(5,485		)	(5,484		)	(5,485		)	(5,484		)	(7,649		)	(6,461		)	(10,969		)	(14,110		)
Loss on repurchase of preferred shares	—			—			—			—			(10,612		)	—			—			(10,612		)
Net income available to common shareholders	$	171,455		$	250,992		$	13,732		$	184,172		$	202,007		$	157,795		$	422,447		$	359,802

Underwriting Ratios
Loss ratio	55.2		%	53.1		%	79.9		%	59.3		%	55.0		%	58.1		%	54.1		%	56.5		%
Acquisition expense ratio	17.3		%	16.9		%	17.1		%	17.0		%	17.6		%	17.4		%	17.1		%	17.5		%
Other operating expense ratio	14.9		%	14.6		%	15.4		%	13.9		%	14.6		%	14.6		%	14.8		%	14.6		%
Combined ratio	87.4		%	84.6		%	112.4		%	90.2		%	87.2		%	90.1		%	86.0		%	88.6		%

Net premiums written to gross premiums written	77.9		%	81.9		%	75.3		%	80.6		%	78.0		%	81.0		%	80.0		%	79.5		%

Net income per common share
Basic	$	1.31		$	1.92		$	0.10		$	1.36		$	1.50		$	1.18		$	3.22		$	2.68
Diluted	$	1.26		$	1.85		$	0.10		$	1.33		$	1.46		$	1.14		$	3.11		$	2.61

Weighted average common shares and common share equivalents outstanding
Basic	131,377,274			130,907,902			134,229,078			135,067,360			134,529,129			133,954,623			131,143,885			134,241,876
Diluted	135,849,050			135,409,288			138,270,853			138,696,934			138,211,736			137,814,906			135,624,226			138,017,490



	4

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets



(U.S. Dollars in thousands, except share data)	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2013			2013			2012			2012			2012			2012
Assets
Investments:
Fixed maturities available for sale, at fair value	$	9,570,583		$	9,890,425		$	9,839,988		$	9,944,186		$	9,556,326		$	9,221,145
Short-term investments available for sale, at fair value	1,091,032			943,414			722,121			845,158			1,087,910			1,112,249
Investment of funds received under securities lending, at fair value	41,062			84,315			42,531			26,279			66,424			41,867
Equity securities available for sale, at fair value	438,038			342,091			312,749			312,371			260,864			318,181
Other investments available for sale, at fair value	569,407			585,277			549,280			477,857			381,576			357,992
Investments accounted for using the fair value option	1,065,684			902,230			917,466			698,068			496,843			500,283
TALF investments, at fair value	—			—			—			270,206			307,453			313,187
Investments accounted for using the equity method	208,796			219,674			307,105			339,587			331,601			347,273
Total investments	12,984,602			12,967,426			12,691,240			12,913,712			12,488,997			12,212,177
Cash	375,119			356,767			371,041			422,440			355,392			422,806
Accrued investment income	68,413			65,023			71,748			68,069			72,095			65,643
Investment in joint venture	108,710			108,038			107,284			109,363			109,240			107,866
Fixed maturities and short-term investments pledged under securities lending, at fair value	47,763			90,801			50,848			34,769			74,032			50,813
Premiums receivable	876,989			870,575			688,873			773,172			834,116			700,137
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,891			1,846,064			1,870,037			1,733,830			1,849,191			1,849,603
Contractholder receivables	947,887			908,034			865,728			849,352			787,389			762,031
Prepaid reinsurance premiums	330,854			301,736			298,484			302,513			313,264			261,619
Deferred acquisition costs, net	313,010			306,505			262,822			279,171			272,736			261,467
Receivable for securities sold	447,545			395,958			19,248			894,318			821,527			621,560
Other assets	566,900			540,134			519,409			509,048			518,744			497,061
Total Assets	$	18,917,683		$	18,757,061		$	17,816,762		$	18,889,757		$	18,496,723		$	17,812,783
Liabilities
Reserve for losses and loss adjustment expenses	$	8,808,594		$	8,835,710		$	8,933,292		$	8,562,328		$	8,546,350		$	8,511,323
Unearned premiums	1,921,849			1,841,870			1,647,978			1,815,524			1,815,135			1,595,712
Reinsurance balances payable	210,113			204,233			188,546			172,016			184,763			137,791
Contractholder payables	947,887			908,034			865,728			849,352			787,389			762,031
Senior notes	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
TALF borrowings, at fair value	—			—			—			185,223			235,818			239,551
Securities lending payable	49,135			93,375			52,356			35,707			76,383			52,224
Payable for securities purchased	853,156			594,521			37,788			1,012,060			927,962			742,995
Other liabilities	492,631			543,788			522,196			508,753			502,607			531,700
Total Liabilities	13,683,365			13,421,531			12,647,884			13,540,963			13,476,407			12,973,327
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares	325,000			325,000			325,000			325,000			325,000			325,000
Common shares	564			561			561			556			556			552
Additional paid-in capital	272,955			242,492			227,778			211,219			197,625			170,694
Retained earnings	5,776,808			5,605,353			5,354,361			5,340,629			5,156,457			4,954,450
Accumulated other comprehensive income, net of deferred income tax	(49,322		)	229,563			287,017			324,132			193,097			234,468
Common shares held in treasury, at cost	(1,091,687		)	(1,067,439		)	(1,025,839		)	(852,742		)	(852,419		)	(845,708		)
Total Shareholders’ Equity	5,234,318			5,335,530			5,168,878			5,348,794			5,020,316			4,839,456
Total Liabilities and Shareholders’ Equity	$	18,917,683		$	18,757,061		$	17,816,762		$	18,889,757		$	18,496,723		$	17,812,783

Common shares outstanding, net of treasury shares	133,416,419			133,063,225			133,842,613			136,540,178			136,291,652			135,441,687
Book value per common share (1)	$	36.80		$	37.66		$	36.19		$	36.79		$	34.45		$	33.33

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



	5

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

Comprehensive Income
Net income	$	176,940		$	256,476		$	19,217		$	189,656		$	220,268		$	164,256		$	433,416		$	384,524
Other comprehensive income (loss), net of deferred income tax
Unrealized holding gains (losses) arising during period	(259,562		)	9,471			(2,938		)	164,733			18,060			94,863			(250,091		)	112,923
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—			(2		)	(11		)	(265		)	(503		)	(8		)	(2		)	(511		)
Reclassification of net realized gains, net of income taxes, included in net income	(13,916		)	(38,701		)	(39,897		)	(47,411		)	(43,792		)	(27,511		)	(52,617		)	(71,303		)
Foreign currency translation adjustments	(5,408		)	(28,222		)	5,731			13,978			(15,136		)	13,201			(33,630		)	(1,935		)
Other comprehensive income (loss)	(278,886		)	(57,454		)	(37,115		)	131,035			(41,371		)	80,545			(336,340		)	39,174
Comprehensive Income (Loss)	$	(101,946	)	$	199,022		$	(17,898	)	$	320,691		$	178,897		$	244,801		$	97,076		$	423,698



	6

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

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
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

Common Shares
Balance at beginning of period	561			561			556			556			552			549			561			549
Common shares issued, net	3			—			5			—			4			3			3			7
Balance at end of period	564			561			561			556			556			552			564			556

Additional Paid-in Capital
Balance at beginning of period	242,492			227,778			211,219			197,625			170,694			161,419			227,778			161,419
Common shares issued, net	5,362			—			2,262			8			4,556			(3		)	5,362			4,553
Issue costs on Series C preferred shares	—			—			—			—			(9,398		)	—			—			(9,398		)
Reversal of issue costs on repurchase of preferred shares	—			—			—			—			10,612			—			—			10,612
Exercise of stock options	2,929			3,093			6,599			2,797			2,971			1,851			6,022			4,822
Amortization of share-based compensation	19,923			11,543			7,644			10,729			16,519			7,411			31,466			23,930
Other	2,249			78			54			60			1,671			16			2,327			1,687
Balance at end of period	272,955			242,492			227,778			211,219			197,625			170,694			272,955			197,625

Retained Earnings
Balance at beginning of period	5,605,353			5,354,361			5,340,629			5,156,457			4,954,450			4,796,655			5,354,361			4,796,655
Net income	176,940			256,476			19,217			189,656			220,268			164,256			433,416			384,524
Preferred share dividends	(5,485		)	(5,484		)	(5,485		)	(5,484		)	(7,649		)	(6,461		)	(10,969		)	(14,110		)
Loss on repurchase of preferred shares	—			—			—			—			(10,612		)	—			—			(10,612		)
Balance at end of period	5,776,808			5,605,353			5,354,361			5,340,629			5,156,457			4,954,450			5,776,808			5,156,457

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	229,563			287,017			324,132			193,097			234,468			153,923			287,017			153,923
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(273,478		)	(29,230		)	(42,835		)	117,322			(25,732		)	67,352			(302,708		)	41,620
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	—			(2		)	(11		)	(265		)	(503		)	(8		)	(2		)	(511		)
Foreign currency translation adjustments, net of deferred income tax	(5,407		)	(28,222		)	5,731			13,978			(15,136		)	13,201			(33,629		)	(1,935		)
Balance at end of period	(49,322		)	229,563			287,017			324,132			193,097			234,468			(49,322		)	193,097

Common Shares Held in Treasury, at Cost
Balance at beginning of period	(1,067,439		)	(1,025,839		)	(852,742		)	(852,419		)	(845,708		)	(845,472		)	(1,025,839		)	(845,472		)
Shares repurchased for treasury	(24,248		)	(41,600		)	(173,097		)	(323		)	(6,711		)	(236		)	(65,848		)	(6,947		)
Balance at end of period	(1,091,687		)	(1,067,439		)	(1,025,839		)	(852,742		)	(852,419		)	(845,708		)	(1,091,687		)	(852,419		)

Total Shareholders’ Equity	$	5,234,318		$	5,335,530		$	5,168,878		$	5,348,794		$	5,020,316		$	4,839,456		$	5,234,318		$	5,020,316



	7

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012
Operating Activities
Net income	$	176,940		$	256,476		$	19,217		$	189,656		$	220,268		$	164,256		$	433,416		$	384,524
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(14,107		)	(59,504		)	(56,844		)	(61,950		)	(36,681		)	(44,072		)	(73,611		)	(80,753		)
Net impairment losses included in earnings	724			2,246			6,035			2,379			1,951			1,023			2,970			2,974
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	14,441			23,052			(6,315		)	(19,177		)	(6,111		)	(12,030		)	37,493			(18,141		)
Share-based compensation	19,923			11,543			7,644			10,729			16,519			7,411			31,466			23,930
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	(10,981		)	(22,182		)	215,885			72,346			68,327			39,343			(33,163		)	107,670
Unearned premiums, net of prepaid reinsurance premiums	51,720			200,004			(166,338		)	6,556			95,142			181,735			251,724			276,877
Premiums receivable	(6,230		)	(198,814		)	84,474			68,881			(83,633		)	(190,102		)	(205,044		)	(273,735		)
Deferred acquisition costs, net	(6,812		)	(45,159		)	16,851			(5,832		)	(13,121		)	(32,269		)	(51,971		)	(45,390		)
Reinsurance balances payable	6,902			17,365			23,569			(17,958		)	40,310			(3,181		)	24,267			37,129
Other liabilities	(50,792		)	23,811			19,385			24,190			(12,660		)	10,134			(26,981		)	(2,526		)
Other items, net	967			(3,179		)	26,089			64,863			(37,864		)	22,573			(2,212		)	(15,291		)
Net Cash Provided By Operating Activities	182,695			205,659			189,652			334,683			252,447			144,821			388,354			397,268
Investing Activities
Purchases of fixed maturity investments	(4,629,377		)	(3,970,320		)	(4,898,519		)	(5,123,575		)	(3,952,868		)	(3,593,630		)	(8,599,697		)	(7,546,498		)
Purchases of equity securities	(208,970		)	(63,353		)	(53,078		)	(105,618		)	(76,500		)	(33,803		)	(272,323		)	(110,303		)
Purchases of other investments	(398,473		)	(250,442		)	(299,741		)	(314,065		)	(147,076		)	(239,167		)	(648,915		)	(386,243		)
Sales of fixed maturity investments	4,672,003			3,796,638			4,843,768			4,635,352			3,258,254			3,628,932			8,468,641			6,887,186
Sales of equity securities	112,699			81,513			49,200			65,932			122,625			75,860			194,212			198,485
Sales of other investments	226,424			280,010			114,537			112,129			105,815			111,149			506,434			216,964
Proceeds from redemptions and maturities of fixed maturities	243,226			181,727			248,514			268,288			337,132			261,660			424,953			598,792
Net (purchases) sales of short-term investments	(153,702		)	(221,444		)	113,780			246,746			32,837			(207,444		)	(375,146		)	(174,607		)
Change in investment of securities lending collateral	44,240			(41,019		)	(16,650		)	40,677			(24,159		)	6,322			3,221			(17,837		)
Purchase of business, net of cash acquired	—			—			—			—			28,948			—			—			28,948
Purchases of furniture, equipment and other	(3,350		)	(3,742		)	(4,638		)	(3,686		)	(3,710		)	(6,498		)	(7,092		)	(10,208		)
Net Cash Provided By (Used For) Investing Activities	(95,280		)	(210,432		)	97,173			(177,820		)	(318,702		)	3,381			(305,712		)	(315,321		)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	—			—			—			(26		)	315,789			—			—			315,789
Repurchase of Series A and B preferred shares	—			—			—			—			(325,000		)	—			—			(325,000		)
Purchases of common shares under share repurchase program	(15,499		)	(40,964		)	(172,056		)	—			—			—			(56,463		)	—
Proceeds from common shares issued, net	(1,797		)	1,280			5,429			1,256			(432		)	780			(517		)	348
Repayments of borrowings	—			—			(186,291		)	(50,804		)	(3,910		)	(69,863		)	—			(73,773		)
Change in securities lending collateral	(44,240		)	41,019			16,650			(40,677		)	24,159			(6,322		)	(3,221		)	17,837
Other	3,958			1,084			2,185			1,015			2,876			588			5,042			3,464
Preferred dividends paid	(5,485		)	(5,484		)	(5,484		)	(5,485		)	(10,951		)	(6,461		)	(10,969		)	(17,412		)
Net Cash Provided By (Used For) Financing Activities	(63,063		)	(3,065		)	(339,567		)	(94,721		)	2,531			(81,278		)	(66,128		)	(78,747		)
Effects of exchange rate changes on foreign currency cash	(6,000		)	(6,436		)	1,343			4,906			(3,690		)	4,183			(12,436		)	493
Increase (decrease) in cash	18,352			(14,274		)	(51,399		)	67,048			(67,414		)	71,107			4,078			3,693
Cash beginning of period	356,767			371,041			422,440			355,392			422,806			351,699			371,041			351,699
Cash end of period	$	375,119		$	356,767		$	371,041		$	422,440		$	355,392		$	422,806		$	375,119		$	355,392
Income taxes paid (received), net	$	3,512		$	1,304		$	(5,917	)	$	(220	)	$	1,548		$	2,788		$	4,816		$	4,336
Interest paid	$	11,369		$	414		$	11,882		$	2,202		$	12,843		$	2,206		$	11,783		$	15,049



	8

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 items related to the Company’s non-cumulative preferred shares.



	9

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Three Months Ended June 30, 2013 and 2012



(U.S. Dollars in thousands)	Three Months Ended									Three Months Ended
	June 30, 2013									June 30, 2012
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	703,904		$	337,642		$	1,040,738		$	676,090		$	376,981		$	1,051,813
Net premiums written	501,568			308,967			810,535			464,584			355,649			820,233

Net premiums earned	$	458,656		$	300,160		$	758,816		$	446,594		$	280,062		$	726,656
Fee income	529			373			902			628			178			806
Losses and loss adjustment expenses	(291,192		)	(127,461		)	(418,653		)	(290,416		)	(109,277		)	(399,693		)
Acquisition expenses, net	(74,249		)	(57,428		)	(131,677		)	(76,058		)	(52,231		)	(128,289		)
Other operating expenses	(80,167		)	(33,192		)	(113,359		)	(76,617		)	(29,140		)	(105,757		)
Underwriting income	$	13,577		$	82,452		96,029			$	4,131		$	89,592		93,723

Net investment income							68,369									73,608
Net realized gains							12,652									34,867
Net impairment losses recognized in earnings							(724		)							(1,951		)
Equity in net income of investment funds accounted for using the equity method							10,941									7,787
Other income							834									695
Other expenses							(14,049		)							(11,944		)
Interest expense							(5,852		)							(7,439		)
Net foreign exchange gains							13,811									31,689
Income before income taxes							182,011									221,035
Income tax expense							(5,071		)							(767		)

Net income							176,940									220,268
Preferred dividends							(5,485		)							(7,649		)
Loss on repurchase of preferred shares							—									(10,612		)
Net income available to common shareholders							$	171,455								$	202,007

Underwriting Ratios
Loss ratio	63.5		%	42.5		%	55.2		%	65.0		%	39.0		%	55.0		%
Acquisition expense ratio (2)	16.1		%	19.1		%	17.3		%	16.9		%	18.6		%	17.6		%
Other operating expense ratio	17.5		%	11.1		%	14.9		%	17.2		%	10.4		%	14.6		%
Combined ratio	97.1		%	72.7		%	87.4		%	99.1		%	68.0		%	87.2		%

Net premiums written to gross premiums written	71.3		%	91.5		%	77.9		%	68.7		%	94.3		%	78.0		%


(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.



	10

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Six Months Ended June 30, 2013 and 2012



(U.S. Dollars in thousands)	Six Months Ended									Six Months Ended
	June 30, 2013									June 30, 2012
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,392,721		$	813,847		$	2,204,437		$	1,364,203		$	756,957		$	2,118,469
Net premiums written	1,006,118			757,193			1,763,311			955,264			728,580			1,683,844

Net premiums earned	$	903,621		$	607,965		$	1,511,586		$	888,334		$	518,634		$	1,406,968
Fee income	1,054			386			1,440			1,158			191			1,349
Losses and loss adjustment expenses	(574,659		)	(243,397		)	(818,056		)	(593,580		)	(201,320		)	(794,900		)
Acquisition expenses, net	(145,007		)	(114,262		)	(259,269		)	(149,928		)	(97,323		)	(247,251		)
Other operating expenses	(156,482		)	(66,792		)	(223,274		)	(149,987		)	(55,263		)	(205,250		)
Underwriting income (loss)	$	28,527		$	183,900		212,427			$	(4,003	)	$	164,919		160,916

Net investment income							134,041									147,905
Net realized gains							70,992									78,988
Net impairment losses recognized in earnings							(2,970		)							(2,974		)
Equity in net income of investment funds accounted for using the equity method							24,764									32,613
Other income (loss)							2,078									(7,373		)
Other expenses							(24,317		)							(18,923		)
Interest expense							(11,750		)							(14,960		)
Net foreign exchange gains							38,075									11,001
Income before income taxes							443,340									387,193
Income tax expense							(9,924		)							(2,669		)

Net income							433,416									384,524
Preferred dividends							(10,969		)							(14,110		)
Loss on repurchase of preferred shares							—									(10,612		)
Net income available to common shareholders							$	422,447								$	359,802

Underwriting Ratios
Loss ratio	63.6		%	40.0		%	54.1		%	66.8		%	38.8		%	56.5		%
Acquisition expense ratio (2)	15.9		%	18.8		%	17.1		%	16.7		%	18.8		%	17.5		%
Other operating expense ratio	17.3		%	11.0		%	14.8		%	16.9		%	10.7		%	14.6		%
Combined ratio	96.8		%	69.8		%	86.0		%	100.4		%	68.3		%	88.6		%

Net premiums written to gross premiums written	72.2		%	93.0		%	80.0		%	70.0		%	96.3		%	79.5		%


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


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



	11

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment



(U.S. Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Programs	$	122,981	24.5	$	92,998	20.0	$	223,496	22.2	$	174,614	18.3
Property, energy, marine and aviation	81,675		16.3	86,390		18.6	165,286		16.4	166,209		17.4
Executive assurance	43,721		8.7	60,205		13.0	104,073		10.3	128,583		13.5
Professional liability	66,148		13.2	65,198		14.0	121,922		12.1	135,759		14.2
National accounts	13,642		2.7	4,961		1.1	58,758		5.8	40,399		4.2
Construction	55,418		11.0	49,784		10.7	97,630		9.7	83,437		8.7
Casualty	26,237		5.2	30,638		6.6	50,032		5.0	57,611		6.0
Lenders products	22,840		4.6	20,477		4.4	44,513		4.4	42,892		4.5
Travel and accident	16,758		3.3	20,294		4.4	33,215		3.3	43,130		4.5
Surety	17,501		3.5	12,723		2.7	32,757		3.3	24,857		2.6
Healthcare	10,374		2.1	7,959		1.7	20,020		2.0	18,594		1.9
Other (1)	24,273		4.9	12,957		2.8	54,416		5.5	39,179		4.2
Total	$	501,568	100.0	$	464,584	100.0	$	1,006,118	100.0	$	955,264	100.0
Net premiums earned
Programs	$	99,721	21.7	$	80,589	18.0	$	189,644	21.0	$	154,587	17.4
Property, energy, marine and aviation	71,978		15.7	77,590		17.4	149,983		16.6	156,084		17.6
Executive assurance	55,540		12.1	60,856		13.6	113,694		12.6	119,622		13.5
Professional liability	59,397		13.0	68,017		15.2	118,054		13.1	131,273		14.8
National accounts	23,942		5.2	18,415		4.1	45,585		5.0	37,551		4.2
Construction	37,251		8.1	31,692		7.1	72,490		8.0	63,500		7.1
Casualty	24,461		5.3	28,102		6.3	50,284		5.6	57,167		6.4
Lenders products	20,855		4.5	21,411		4.8	41,812		4.6	53,564		6.0
Travel and accident	17,893		3.9	20,661		4.6	30,798		3.4	37,374		4.2
Surety	14,306		3.1	10,798		2.4	27,489		3.0	21,358		2.4
Healthcare	9,442		2.1	9,077		2.0	18,449		2.0	17,975		2.0
Other (1)	23,870		5.3	19,386		4.5	45,339		5.1	38,279		4.4
Total	$	458,656	100.0	$	446,594	100.0	$	903,621	100.0	$	888,334	100.0
Net premiums written by client location
United States	$	400,183	79.8	$	345,730	74.4	$	770,861	76.6	$	680,283	71.2
Europe	43,087		8.6	55,586		12.0	134,826		13.4	163,217		17.1
Asia and Pacific	31,349		6.3	31,067		6.7	52,431		5.2	60,791		6.4
Other	26,949		5.3	32,201		6.9	48,000		4.8	50,973		5.3
Total	$	501,568	100.0	$	464,584	100.0	$	1,006,118	100.0	$	955,264	100.0
Net premiums written by underwriting location
United States	$	382,082	76.2	$	324,438	69.8	$	740,374	73.6	$	645,997	67.6
Europe	93,413		18.6	108,888		23.4	222,944		22.2	261,503		27.4
Other	26,073		5.2	31,258		6.8	42,800		4.2	47,764		5.0
Total	$	501,568	100.0	$	464,584	100.0	$	1,006,118	100.0	$	955,264	100.0

(1) Includes alternative markets, contract binding, accident and health and excess workers’ compensation business.



	12

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

Gross premiums written	$	703,904		$	688,817		$	571,157		$	658,599		$	676,090		$	688,113		$	1,392,721		$	1,364,203
Net premiums written	501,568			504,550			386,714			483,356			464,584			490,680			1,006,118			955,264

Net premiums earned	$	458,656		$	444,965		$	455,668		$	456,341		$	446,594		$	441,740		$	903,621		$	888,334
Fee income	529			525			532			645			628			530			1,054			1,158
Losses and loss adjustment expenses	(291,192		)	(283,467		)	(383,106		)	(307,155		)	(290,416		)	(303,164		)	(574,659		)	(593,580		)
Acquisition expenses, net	(74,249		)	(70,758		)	(75,392		)	(73,663		)	(76,058		)	(73,870		)	(145,007		)	(149,928		)
Other operating expenses	(80,167		)	(76,315		)	(82,123		)	(75,379		)	(76,617		)	(73,370		)	(156,482		)	(149,987		)
Underwriting income (loss)	$	13,577		$	14,950		$	(84,421	)	$	789		$	4,131		$	(8,134	)	$	28,527		$	(4,003	)
Underwriting Ratios
Loss ratio	63.5		%	63.7		%	84.1		%	67.3		%	65.0		%	68.6		%	63.6		%	66.8		%
Acquisition expense ratio (1)	16.1		%	15.8		%	16.4		%	16.0		%	16.9		%	16.6		%	15.9		%	16.7		%
Other operating expense ratio	17.5		%	17.2		%	18.0		%	16.5		%	17.2		%	16.6		%	17.3		%	16.9		%
Combined ratio	97.1		%	96.7		%	118.5		%	99.8		%	99.1		%	101.8		%	96.8		%	100.4		%
Net premiums written
Programs	$	122,981		$	100,515		$	80,201		$	98,052		$	92,998		$	81,616		$	223,496		$	174,614
Property, energy, marine and aviation	81,675			83,611			36,215			92,266			86,390			79,819			165,286			166,209
Executive assurance	43,721			60,352			59,262			63,059			60,205			68,378			104,073			128,583
Professional liability	66,148			55,774			56,023			68,923			65,198			70,561			121,922			135,759
National accounts	13,642			45,116			18,047			22,483			4,961			35,438			58,758			40,399
Construction	55,418			42,212			23,283			23,481			49,784			33,653			97,630			83,437
Casualty	26,237			23,795			31,034			23,662			30,638			26,973			50,032			57,611
Lenders products	22,840			21,673			23,838			20,257			20,477			22,415			44,513			42,892
Travel and accident	16,758			16,457			15,342			22,017			20,294			22,836			33,215			43,130
Surety	17,501			15,256			13,456			14,958			12,723			12,134			32,757			24,857
Healthcare	10,374			9,646			9,498			8,722			7,959			10,635			20,020			18,594
Other (2)	24,273			30,143			20,515			25,476			12,957			26,222			54,416			39,179
Total	$	501,568		$	504,550		$	386,714		$	483,356		$	464,584		$	490,680		$	1,006,118		$	955,264
Net premiums earned
Programs	$	99,721		$	89,923		$	87,815		$	83,978		$	80,589		$	73,998		$	189,644		$	154,587
Property, energy, marine and aviation	71,978			78,005			79,135			77,862			77,590			78,494			149,983			156,084
Executive assurance	55,540			58,154			60,570			61,599			60,856			58,766			113,694			119,622
Professional liability	59,397			58,657			60,829			66,299			68,017			63,256			118,054			131,273
National accounts	23,942			21,643			20,301			21,919			18,415			19,136			45,585			37,551
Construction	37,251			35,239			33,537			32,409			31,692			31,808			72,490			63,500
Casualty	24,461			25,823			29,255			27,175			28,102			29,065			50,284			57,167
Lenders products	20,855			20,957			22,003			20,271			21,411			32,153			41,812			53,564
Travel and accident	17,893			12,905			18,850			21,826			20,661			16,713			30,798			37,374
Surety	14,306			13,183			13,301			12,643			10,798			10,560			27,489			21,358
Healthcare	9,442			9,007			9,239			9,565			9,077			8,898			18,449			17,975
Other (2)	23,870			21,469			20,833			20,795			19,386			18,893			45,339			38,279
Total	$	458,656		$	444,965		$	455,668		$	456,341		$	446,594		$	441,740		$	903,621		$	888,334

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

(2) Includes alternative markets, contract binding, accident and health and excess workers’ compensation business.



	13

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment



(U.S. Dollars in thousands)	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total

Net premiums written
Other specialty (1)	$	61,480	19.9	$	73,590	20.7	$	192,817	25.5	$	168,873	23.2
Casualty (2)	51,502		16.7	42,373		11.9	148,747		19.6	126,512		17.4
Property excluding property catastrophe (3)	62,938		20.4	65,734		18.5	151,998		20.1	141,227		19.4
Property catastrophe	99,874		32.3	129,224		36.3	177,016		23.4	215,798		29.6
Marine and aviation	14,319		4.6	18,842		5.3	37,461		4.9	44,459		6.1
Other (4)	18,854		6.1	25,886		7.3	49,154		6.5	31,711		4.3
Total	$	308,967	100.0	$	355,649	100.0	$	757,193	100.0	$	728,580	100.0
Net premiums earned
Other specialty (1)	$	79,508	26.5	$	79,855	28.5	$	169,101	27.8	$	126,052	24.3
Casualty (2)	54,922		18.3	46,917		16.8	109,927		18.1	92,811		17.9
Property excluding property catastrophe (3)	66,980		22.3	58,720		21.0	131,882		21.7	120,352		23.2
Property catastrophe	63,332		21.1	68,992		24.6	127,565		21.0	130,855		25.2
Marine and aviation	20,392		6.8	19,200		6.9	40,496		6.7	40,649		7.8
Other (4)	15,026		5.0	6,378		2.2	28,994		4.7	7,915		1.6
Total	$	300,160	100.0	$	280,062	100.0	$	607,965	100.0	$	518,634	100.0
Net premiums written
Pro rata	$	115,105	37.3	$	144,133	40.5	$	302,956	40.0	$	268,879	36.9
Excess of loss	193,862		62.7	211,516		59.5	454,237		60.0	459,701		63.1
Total	$	308,967	100.0	$	355,649	100.0	$	757,193	100.0	$	728,580	100.0
Net premiums earned
Pro rata	$	141,625	47.2	$	124,941	44.6	$	295,806	48.7	$	224,866	43.4
Excess of loss	158,535		52.8	155,121		55.4	312,159		51.3	293,768		56.6
Total	$	300,160	100.0	$	280,062	100.0	$	607,965	100.0	$	518,634	100.0
Net premiums written by client location
United States	$	171,430	55.5	$	218,624	61.5	$	397,957	52.6	$	392,624	53.9
Europe	41,048		13.3	74,762		21.0	209,821		27.7	215,120		29.5
Asia and Pacific	34,111		11.0	34,109		9.6	54,797		7.2	48,013		6.6
Bermuda	43,782		14.2	4,597		1.3	48,983		6.5	34,197		4.7
Other	18,596		6.0	23,557		6.6	45,635		6.0	38,626		5.3
Total	$	308,967	100.0	$	355,649	100.0	$	757,193	100.0	$	728,580	100.0
Net premiums written by underwriting location
Bermuda	$	149,309	48.3	$	217,283	61.1	$	311,696	41.2	$	373,239	51.2
United States	99,327		32.1	82,786		23.3	252,920		33.4	212,245		29.1
Ireland	52,102		16.9	51,203		14.4	173,398		22.9	129,672		17.8
Other	8,229		2.7	4,377		1.2	19,179		2.5	13,424		1.9
Total	$	308,967	100.0	$	355,649	100.0	$	757,193	100.0	$	728,580	100.0

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

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

(3) Includes facultative business.

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



	14

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

Gross premiums written	$	337,642		$	476,205		$	245,292		$	279,751		$	376,981		$	379,976		$	813,847		$	756,957
Net premiums written	308,967			448,226			226,428			271,893			355,649			372,931			757,193			728,580

Net premiums earned	$	300,160		$	307,805		$	323,813		$	292,350		$	280,062		$	238,572		$	607,965		$	518,634
Fee income	373			13			5,132			432			178			13			386			191
Losses and loss adjustment expenses	(127,461		)	(115,936		)	(239,400		)	(136,716		)	(109,277		)	(92,043		)	(243,397		)	(201,320		)
Acquisition expenses, net	(57,428		)	(56,834		)	(58,176		)	(54,402		)	(52,231		)	(45,092		)	(114,262		)	(97,323		)
Other operating expenses	(33,192		)	(33,600		)	(38,282		)	(29,001		)	(29,140		)	(26,123		)	(66,792		)	(55,263		)
Underwriting income (loss)	$	82,452		$	101,448		$	(6,913	)	$	72,663		$	89,592		$	75,327		$	183,900		$	164,919
Underwriting Ratios
Loss ratio	42.5		%	37.7		%	73.9		%	46.8		%	39.0		%	38.6		%	40.0		%	38.8		%
Acquisition expense ratio	19.1		%	18.5		%	18.0		%	18.6		%	18.6		%	18.9		%	18.8		%	18.8		%
Other operating expense ratio	11.1		%	10.9		%	11.8		%	9.9		%	10.4		%	10.9		%	11.0		%	10.7		%
Combined ratio	72.7		%	67.1		%	103.7		%	75.3		%	68.0		%	68.4		%	69.8		%	68.3		%
Net premiums written
Other specialty (1)	$	61,480		$	131,337		$	67,377		$	71,854		$	73,590		$	95,283		$	192,817		$	168,873
Casualty (2)	51,502			97,245			42,582			36,831			42,373			84,139			148,747			126,512
Property excluding property catastrophe (3)	62,938			89,060			55,929			68,627			65,734			75,493			151,998			141,227
Property catastrophe	99,874			77,142			17,683			50,196			129,224			86,574			177,016			215,798
Marine and aviation	14,319			23,142			21,038			19,152			18,842			25,617			37,461			44,459
Other (4)	18,854			30,300			21,819			25,233			25,886			5,825			49,154			31,711
Total	$	308,967		$	448,226		$	226,428		$	271,893		$	355,649		$	372,931		$	757,193		$	728,580
Net premiums earned
Other specialty (1)	$	79,508		$	89,593		$	94,479		$	88,570		$	79,855		$	46,197		$	169,101		$	126,052
Casualty (2)	54,922			55,005			48,723			47,429			46,917			45,894			109,927			92,811
Property excluding property catastrophe (3)	66,980			64,902			70,414			63,572			58,720			61,632			131,882			120,352
Property catastrophe	63,332			64,233			80,271			69,059			68,992			61,863			127,565			130,855
Marine and aviation	20,392			20,104			18,643			16,853			19,200			21,449			40,496			40,649
Other (4)	15,026			13,968			11,283			6,867			6,378			1,537			28,994			7,915
Total	$	300,160		$	307,805		$	323,813		$	292,350		$	280,062		$	238,572		$	607,965		$	518,634

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

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

(3) Includes facultative business.

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



	15

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Investable Asset Summary and Investment Portfolio Metrics



(U.S. Dollars in thousands)	June 30,					March 31,					December 31,					September 30,					June 30,
	2013					2013					2012					2012					2012

Investable assets:
Fixed maturities available for sale, at fair value	$	9,570,583		73.8	%	$	9,890,425		75.3	%	$	9,839,988		75.4	%	$	9,944,186		75.2	%	$	9,556,326		75.0	%
Fixed maturities, at fair value (1)	353,310			2.7	%	364,385			2.8	%	363,541			2.8	%	306,424			2.3	%	242,735			1.9	%
Fixed maturities pledged under securities lending agreements, at fair value (2)	44,666			0.3	%	89,941			0.7	%	42,600			0.3	%	34,769			0.3	%	74,032			0.6	%
Total fixed maturities	9,968,559			76.9	%	10,344,751			78.8	%	10,246,129			78.5	%	10,285,379			77.8	%	9,873,093			77.5	%
Short-term investments available for sale, at fair value	1,091,032			8.4	%	943,414			7.2	%	722,121			5.5	%	845,158			6.4	%	1,087,910			8.5	%
Short-term investments pledged under securities lending agreements, at fair value (2)	3,097			—	%	860			—	%	8,248			0.1	%	—			—	%	—			—	%
Cash	375,119			2.9	%	356,767			2.7	%	371,041			2.8	%	422,440			3.2	%	355,392			2.8	%
Equity securities available for sale, at fair value	438,038			3.4	%	342,091			2.6	%	312,749			2.4	%	312,371			2.4	%	260,864			2.0	%
Equity securities, at fair value (1)	—			—	%	—			—	%	25,954			0.2	%	28,405			0.2	%	23,118			0.2	%
Other investments available for sale, at fair value	569,407			4.4	%	585,277			4.5	%	549,280			4.2	%	477,857			3.6	%	381,576			3.0	%
Other investments, at fair value (1)	712,374			5.5	%	537,845			4.1	%	527,971			4.0	%	363,239			2.7	%	230,990			1.8	%
TALF investments, at fair value (3)	—			—	%	—			—	%	—			—	%	270,206			2.0	%	307,453			2.4	%
Investments accounted for using the equity method	208,796			1.6	%	219,674			1.7	%	307,105			2.4	%	339,587			2.6	%	331,601			2.6	%
Securities sold but not yet purchased (4)	—			—	%	—			—	%	(6,924		)	(0.1	)%	(8,017		)	(0.1	)%	(9,206		)	(0.1	)%
Securities transactions entered into but not settled at the balance sheet date	(405,611		)	(3.1	)%	(198,563		)	(1.5	)%	(18,540		)	(0.1	)%	(117,742		)	(0.9	)%	(106,435		)	(0.8	)%
Total investable assets	$	12,960,811		100.0	%	$	13,132,116		100.0	%	$	13,045,134		100.0	%	$	13,218,883		100.0	%	$	12,736,356		100.0	%

Investment portfolio metrics (2):
Average effective duration (in years)	3.04					2.94					3.06					2.90					3.01
Average S&P/Moody’s credit ratings (5)	AA-/Aa2					AA-/Aa2					AA-/Aa2					AA/Aa2					AA/Aa2
Imbedded book yield (6)	2.43		%			2.45		%			2.60		%			2.80		%			2.76		%

(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) Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's balance sheet.

(5) 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”).

(6) Calculated before investment expenses.



	16

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Composition of Fixed Maturities

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements:



(U.S. Dollars in thousands)	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gains (Losses)			Amortized Cost		Fair Value / Amortized Cost		% of Total

At June 30, 2013
Corporates	$	2,669,652	$	32,223	$	(59,405	)	$	(27,182	)	$	2,696,834	99.0	%	26.8	%
Non-U.S. government-backed corporates	97,454		1,200		(859		)	341			97,113		100.4	%	1.0	%
U.S. government and government agencies	975,345		8,744		(7,251		)	1,493			973,852		100.2	%	9.8	%
Agency mortgage-backed securities	1,191,233		4,433		(37,512		)	(33,079		)	1,224,312		97.3	%	11.9	%
Non-agency mortgage-backed securities	400,974		12,441		(9,050		)	3,391			397,583		100.9	%	4.0	%
Agency commercial mortgage-backed securities	243,372		1,203		(6,421		)	(5,218		)	248,590		97.9	%	2.4	%
Non-agency commercial mortgage-backed securities	595,099		14,484		(6,919		)	7,565			587,534		101.3	%	6.0	%
Municipal bonds	1,507,924		35,880		(14,222		)	21,658			1,486,266		101.5	%	15.1	%
Non-U.S. government securities	1,062,323		9,671		(27,927		)	(18,256		)	1,080,579		98.3	%	10.7	%
Asset-backed securities	1,225,183		17,677		(17,948		)	(271		)	1,225,454		100.0	%	12.3	%
Total	$	9,968,559	$	137,956	$	(187,514	)	$	(49,558	)	$	10,018,117	99.5	%	100.0	%

At December 31, 2012
Corporates	$	2,884,687	$	98,248	$	(6,643	)	$	91,605		$	2,793,082	103.3	%	28.2	%
Non-U.S. government-backed corporates	247,958		7,550		(67		)	7,483			240,475		103.1	%	2.4	%
U.S. government and government agencies	1,131,688		20,178		(1,095		)	19,083			1,112,605		101.7	%	11.0	%
Agency mortgage-backed securities	1,195,793		10,989		(3,719		)	7,270			1,188,523		100.6	%	11.7	%
Non-agency mortgage-backed securities	336,943		13,820		(3,765		)	10,055			326,888		103.1	%	3.3	%
Agency commercial mortgage-backed securities	195,731		4,910		(2,308		)	2,602			193,129		101.3	%	1.9	%
Non-agency commercial mortgage-backed securities	628,434		32,604		(2,160		)	30,444			597,990		105.1	%	6.1	%
Municipal bonds	1,463,586		62,322		(1,421		)	60,901			1,402,685		104.3	%	14.3	%
Non-U.S. government securities	1,087,310		33,701		(8,860		)	24,841			1,062,469		102.3	%	10.6	%
Asset-backed securities	1,073,999		25,528		(5,838		)	19,690			1,054,309		101.9	%	10.5	%
Total	$	10,246,129	$	309,850	$	(35,876	)	$	273,974		$	9,972,155	102.7	%	100.0	%



	17

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Credit Quality Distribution and Maturity Profile

The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements:



(U.S. Dollars in thousands)	June 30,				March 31,				December 31,				September 30,				June 30,
	2013				2013				2012				2012				2012

Credit quality distribution of total fixed maturities (1) (2):
U.S. government and government agencies (3)	$	2,409,950	24.2	%	$	2,738,110	26.5	%	$	2,523,212	24.6	%	$	2,837,828	27.6	%	$	3,043,908	30.8	%
AAA	3,112,835		31.2	%	3,211,404		31.0	%	3,413,431		33.3	%	3,388,660		32.9	%	3,325,996		33.7	%
AA	1,921,194		19.3	%	1,747,704		16.9	%	1,563,846		15.3	%	1,770,851		17.2	%	1,505,032		15.2	%
A	1,392,488		14.0	%	1,389,885		13.4	%	1,501,156		14.7	%	1,158,492		11.3	%	1,028,772		10.4	%
BBB	414,100		4.2	%	432,799		4.2	%	538,140		5.3	%	503,890		4.9	%	428,200		4.3	%
BB	144,527		1.4	%	243,319		2.4	%	174,527		1.7	%	157,183		1.5	%	152,982		1.5	%
B	186,477		1.9	%	200,515		1.9	%	220,772		2.2	%	203,416		2.0	%	175,613		1.8	%
Lower than B	243,694		2.4	%	221,488		2.1	%	175,866		1.7	%	143,518		1.4	%	116,846		1.2	%
Not rated	143,294		1.4	%	159,527		1.5	%	135,179		1.3	%	121,541		1.2	%	95,744		1.0	%
Total fixed maturities, at fair value	$	9,968,559	100.0	%	$	10,344,751	100.0	%	$	10,246,129	100.0	%	$	10,285,379	100.0	%	$	9,873,093	100.0	%

Maturity profile of total fixed maturities (1):
Due in one year or less	$	332,687	3.3	%	$	443,515	4.3	%	$	472,107	4.6	%	$	509,898	5.0	%	$	500,152	5.1	%
Due after one year through five years	3,578,434		35.9	%	3,922,607		37.9	%	4,102,503		40.0	%	3,633,607		35.3	%	3,594,836		36.4	%
Due after five years through ten years	2,150,804		21.6	%	1,937,761		18.7	%	2,042,211		19.9	%	2,285,714		22.2	%	2,258,783		22.9	%
Due after 10 years	250,773		2.5	%	321,588		3.1	%	198,408		1.9	%	322,866		3.1	%	317,717		3.2	%
	6,312,698		63.3	%	6,625,471		64.0	%	6,815,229		66.5	%	6,752,085		65.6	%	6,671,488		67.6	%
Mortgage-backed securities	1,592,207		16.0	%	1,704,813		16.5	%	1,532,736		15.0	%	1,873,874		18.2	%	1,670,108		16.9	%
Commercial mortgage-backed securities	838,471		8.4	%	867,856		8.4	%	824,165		8.0	%	824,162		8.0	%	961,326		9.7	%
Asset-backed securities	1,225,183		12.3	%	1,146,611		11.1	%	1,073,999		10.5	%	835,258		8.1	%	570,171		5.8	%
Total fixed maturities, at fair value	$	9,968,559	100.0	%	$	10,344,751	100.0	%	$	10,246,129	100.0	%	$	10,285,379	100.0	%	$	9,873,093	100.0	%

(1) 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.

(2) 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.

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



	18

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Analysis of Corporate Exposures

The following table summarized the Company's corporate bonds by sector, excluding guaranteed amounts:



(U.S. Dollars in thousands)	June 30,				March 31,				December 31,				September 30,				June 30,
	2013				2013				2012				2012				2012

Sector:
Industrials	$	1,514,470	56.7	%	$	1,489,748	54.6	%	$	1,543,605	53.5	%	$	1,375,345	50.9	%	$	1,237,027	50.1	%
Financials	652,194		24.4	%	846,627		31.0	%	983,276		34.1	%	988,052		36.6	%	890,529		36.1	%
Covered bonds	296,250		11.1	%	194,359		7.1	%	168,404		5.8	%	154,919		5.7	%	156,668		6.3	%
Utilities	143,952		5.4	%	99,939		3.7	%	104,441		3.6	%	98,926		3.7	%	99,050		4.0	%
All other (1)	62,786		2.4	%	98,566		3.6	%	84,961		2.9	%	82,350		3.1	%	83,943		3.4	%
Total fixed maturities, at fair value	$	2,669,652	100.0	%	$	2,729,239	100.0	%	$	2,884,687	100.0	%	$	2,699,592	100.0	%	$	2,467,217	100.0	%

Credit quality distribution (2):
AAA	$	467,144	17.5	%	$	506,102	18.5	%	$	525,917	18.2	%	$	615,869	22.8	%	$	602,606	24.4	%
AA	576,135		21.6	%	427,532		15.7	%	438,880		15.2	%	414,503		15.4	%	361,201		14.6	%
A	854,959		32.0	%	920,005		33.7	%	1,005,942		34.9	%	802,275		29.7	%	750,155		30.4	%
BBB	330,149		12.4	%	330,641		12.1	%	427,386		14.8	%	414,498		15.4	%	360,736		14.6	%
BB	112,291		4.2	%	209,957		7.7	%	142,309		4.9	%	131,004		4.9	%	124,886		5.1	%
B	171,000		6.4	%	174,286		6.4	%	199,823		6.9	%	181,306		6.7	%	156,240		6.3	%
Lower than B	38,450		1.4	%	28,266		1.0	%	29,339		1.0	%	25,044		0.9	%	19,581		0.8	%
Not rated	119,524		4.5	%	132,450		4.9	%	115,091		4.0	%	115,093		4.3	%	91,812		3.7	%
Total fixed maturities, at fair value	$	2,669,652	100.0	%	$	2,729,239	100.0	%	$	2,884,687	100.0	%	$	2,699,592	100.0	%	$	2,467,217	100.0	%

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

(2) 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.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at June 30, 2013, excluding guaranteed amounts and covered bonds:



(U.S. Dollars in thousands)	Fair Value		% of Asset Class		% of Investable Assets		Credit Quality (1)

Issuer:
Apple Inc.	$	66,797	2.5	%	0.5	%	AA+/Aa1
General Electric Co.	62,071		2.3	%	0.5	%	AA+/A1
Crown Castle Int'l Corp.	36,905		1.4	%	0.3	%	NR/A2
Caterpillar Inc.	35,719		1.3	%	0.3	%	A/A2
Chevron Corp.	34,827		1.3	%	0.3	%	AA/Aa1
Merck & Co Inc.	33,166		1.2	%	0.3	%	AA/A2
HSBC Holdings PLC	32,246		1.2	%	0.2	%	AA-/Aa3
United Parcel Service Inc.	31,041		1.2	%	0.2	%	A+/Aa3
International Business Machines Corp	30,417		1.1	%	0.2	%	AA-/Aa3
Anheuser-Busch Inbev NV	29,997		1.1	%	0.2	%	A/A3
Total	$	393,186	14.7	%	3.0	%

(1) Average credit ratings assigned by S&P and Moody’s, respectively.



	19

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Mortgage Backed and Commercial Mortgage Backed Securities

The following table provides information on the Company’s mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) at June 30, 2013, excluding amounts guaranteed by the U.S. government:



(U.S. Dollars in thousands)						Average		Estimated Fair Value
	Issuance		Amortized			Credit				% of Amortized		% of Investable
	Year		Cost			Quality		Total		Cost		Assets

Non-agency MBS:	2003		$	1,882		AA-		$	1,978	105.1	%	—	%
	2004		6,311			BB		6,041		95.7	%	—	%
	2005		46,699			CCC+		49,021		105.0	%	0.4	%
	2006		75,712			CCC		78,361		103.5	%	0.6	%
	2007		70,431			C		73,985		105.0	%	0.6	%
	2008		5,674			CC+		5,883		103.7	%	—	%
	2009		1,798			AA-		1,841		102.4	%	—	%
	2010		22,423			AA		22,679		101.1	%	0.2	%
	2012		50,600			AA+		50,664		100.1	%	0.4	%
	2013		116,053			AAA		110,521		95.2	%	0.9	%
Total non-agency MBS			$	397,583		BB+		$	400,974	100.9	%	3.1	%

Non-agency CMBS:	2004		$	792		AAA		$	738	93.2	%	—	%
	2005		30,090			AAA		29,883		99.3	%	0.2	%
	2006		18,907			AA+		18,840		99.6	%	0.1	%
	2007		28,233			A-		29,756		105.4	%	0.2	%
	2008		295			AA+		310		105.1	%	—	%
	2009		224			AAA		223		99.6	%	—	%
	2010		114,220			AAA		120,122		105.2	%	0.9	%
	2011		133,952			AAA		140,248		104.7	%	1.1	%
	2012		145,731			AA+		143,664		98.6	%	1.1	%
	2013		115,090			AAA		111,315		96.7	%	0.9	%
Total non-agency CMBS			$	587,534		AA+		$	595,099	101.3	%	4.6	%

	Non-Agency MBS					Non-Agency
Additional Statistics	Re-REMICs		All Other			CMBS (1)
Wtd. average loan age (months)	88		62			31
Wtd. average life (months) (2)	23		53			51
Wtd. average loan-to-value % (3)	69.3	%	68.1		%	60.9	%
Total delinquencies (4)	20.8	%	16.0		%	1.3	%
Current credit support % (5)	53.0	%	7.1		%	29.5	%


(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 June 30, 2013. 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 26% to 91%, while the range of loan-to-values on CMBS is 7% to 112%.


(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.



	20

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Asset Backed Securities

The following table provides information on the Company’s asset-backed securities (ABS) at June 30, 2013:



(U.S. Dollars in thousands)			Average	Estimated Fair Value
	Amortized		Credit			% of Amortized		% of Investable
	Cost		Quality	Total		Cost		Assets

Sector:
Equipment (1)	$	343,398	A+	$	336,245	97.9	%	2.6	%
Credit cards (2)	269,105		AAA	267,954		99.6	%	2.1	%
Loans (3)	213,521		AA+	213,447		100.0	%	1.6	%
Autos (4)	146,915		AAA	145,780		99.2	%	1.1	%
Rate reduction bonds (5)	72,794		AAA	74,604		102.5	%	0.6	%
U.K. securitized (6)	38,589		AAA	39,083		101.3	%	0.3	%
Commodities (7)	23,000		AA+	23,450		102.0	%	0.2	%
Home equity (8)	20,298		CCC+	26,832		132.2	%	0.2	%
Other	97,834		AA+	97,788		100.0	%	0.8	%
Total ABS	$	1,225,454	AA	$	1,225,183	100.0	%	9.5	%

The effective duration of the total ABS was 2.1 years at June 30, 2013.

(1) The weighted average credit support % on credit cards is 4%.

(2) The weighted average credit support % on equipment is 16%.

(3) The weighted average credit support % on loans is 47%.

(4) The weighted average credit support % on autos is 29%.

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

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

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

(8) The weighted average credit support % on home equity is 19%.

The Company’s investment portfolio included $51.1 million par in sub-prime securities at June 30, 2013, with an estimated fair value of $27.9 million and an average credit quality of “B/Caa1.” 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 $6.3 million estimated fair value of sub-prime securities with an average credit quality of “Ca/CCC-.”



	21

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Bank Loan Investments

The Company’s investments in bank loans are included in the following categories at June 30, 2013:



(U.S. Dollars in thousands)	Fair Value		% of Asset Class		% of Investable Assets

Composition:
Investment funds accounted for using the equity method	$	23,720	5.5	%	0.2	%
Term loan investments (1)	408,445		94.5	%	3.2	%
Total	$	432,165	100.0	%	3.3	%

Currency:
U.S.-denominated	$	334,028	77.3	%	2.6	%
Euro-denominated	98,137		22.7	%	0.8	%
Total	$	432,165	100.0	%	3.3	%

Sector:
Consumer cyclical	$	115,507	26.7	%	0.9	%
Consumer non-cyclical	88,016		20.4	%	0.7	%
Industrials	76,804		17.8	%	0.6	%
Media	49,917		11.6	%	0.4	%
Basic materials	34,049		7.9	%	0.3	%
Utilities	23,417		5.4	%	0.2	%
All other	44,455		10.2	%	0.3	%
Total	$	432,165	100.0	%	3.3	%

Weighted average rating factor (Moody's)	B2

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



	22

Arch Capital Group Ltd. and Subsidiaries

Investment Information — Eurozone Investments

The fair value of the Company’s Eurozone investments are as follows at June 30, 2013:



(U.S. Dollars in thousands)			Financial		Other		Covered		Bank		Equities
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		and Other		Total

Country (1):
Finland	$	132,593	$	—	$	—	$	—	$	—	$	789	$	133,382
Netherlands	10,489		263		36,686		—		5,803		7,741		60,982
Germany	24,477		—		4,196		10,039		8,935		7,263		54,910
France	—		5,524		3,495		—		5,719		12,677		27,415
Supranational (5)	26,475		—		—		—		—		—		26,475
Luxembourg	—		—		15,249		—		5,044		399		20,692
Ireland	1,621		627		8,242		—		—		1,484		11,974
Austria	—		3,467		470		—		—		—		3,937
Spain	—		—		—		534		3,244		—		3,778
Italy	827		—		—		—		594		—		1,421
Belgium	—		—		—		—		—		770		770
Cyprus	—		—		360		—		—		—		360
Total	$	196,482	$	9,881	$	68,698	$	10,573	$	29,339	$	31,123	$	346,096

(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 Estonia, Greece, Malta, Portugal, Slovakia or Slovenia at June 30, 2013.


(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 “term loan investments” in the Bank Loan Investments table.


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



	23

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, net foreign exchange gains or losses and loss on repurchase of preferred shares, 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, net foreign exchange gains or losses and loss on repurchase of preferred shares 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. The loss on repurchase of preferred shares related to the redemption of the Company's Series A and B preferred shares in April 2012 and had no impact on shareholders' equity or cash flows. 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, net foreign exchange gains or losses and loss on repurchase of preferred shares 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.



	24

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation

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:



(U.S. Dollars in thousands, except share data)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

After-tax operating income (loss) available to common shareholders	$	135,021		$	158,748		$	(24,667	)	$	120,247		$	141,400		$	113,660		$	293,769		$	255,060
Net realized gains, net of tax	13,779			54,923			51,031			58,904			33,275			40,873			68,702			74,148
Net impairment losses recognized in earnings, net of tax	(724		)	(2,246		)	(6,035		)	(2,379		)	(1,951		)	(1,023		)	(2,970		)	(2,974		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	10,941			13,823			16,567			24,330			7,787			24,826			24,764			32,613
Net foreign exchange gains (losses), net of tax	12,438			25,744			(23,164		)	(16,930		)	32,108			(20,541		)	38,182			11,567
Loss on repurchase of preferred shares, net of tax	—			—			—			—			(10,612		)	—			—			(10,612		)
Net income available to common shareholders	$	171,455		$	250,992		$	13,732		$	184,172		$	202,007		$	157,795		$	422,447		$	359,802

Diluted per common share results:
After-tax operating income (loss) available to common shareholders	$	0.99		$	1.17		$	(0.18	)	$	0.87		$	1.02		$	0.82		$	2.17		$	1.85
Net realized gains, net of tax	$	0.10		$	0.41		$	0.37		$	0.42		$	0.24		$	0.30		$	0.51		$	0.54
Net impairment losses recognized in earnings, net of tax	$	—		$	(0.02	)	$	(0.04	)	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	$	0.08		$	0.10		$	0.12		$	0.18		$	0.06		$	0.18		$	0.18		$	0.24
Net foreign exchange gains (losses), net of tax	$	0.09		$	0.19		$	(0.17	)	$	(0.12	)	$	0.23		$	(0.15	)	$	0.28		$	0.08
Loss on repurchase of preferred shares, net of tax	$	—		$	—		$	—		$	—		$	(0.08	)	$	—		$	—		$	(0.08	)
Net income available to common shareholders	$	1.26		$	1.85		$	0.10		$	1.33		$	1.46		$	1.14		$	3.11		$	2.61

Weighted average common shares and common share equivalents outstanding — diluted	135,849,050			135,409,288			138,270,853			138,696,934			138,211,736			137,814,906			135,624,226			138,017,490



	25

Arch Capital Group Ltd. and Subsidiaries

Share Repurchase Activity

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



(U.S. Dollars in thousands except share data)	Three Months Ended															Cumulative
	June 30,			March 31,			December 31,			September 30,		June 30,		March 31,		June 30,
	2013			2013			2012			2012		2012		2012		2013

Effect of share repurchases:
Aggregate cost of shares repurchased	$	15,499		$	40,964		$	172,056		$	—	$	—	$	—	$	2,786,552
Shares repurchased	307,659			930,759			3,924,306			—		—		—		109,920,942
Average price per share repurchased	$	50.37		$	44.01		$	43.84		$	—	$	—	$	—	$	25.35

Average book value per common share (1)	$	37.23		$	36.93		$	36.49		$	35.62	$	33.89	$	32.55

Average repurchase price-to-book multiple	1.35		x	1.19		x	1.20		x	—		—		—

Remaining share repurchase authorization (2)	$	713,448

(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 2014. 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.



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Arch Capital Group Ltd. and Subsidiaries

Annualized Operating Return on Average Common Equity

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



(U.S. Dollars in thousands)	Three Months Ended																		Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			June 30,			June 30,
	2013			2013			2012			2012			2012			2012			2013			2012

After-tax operating income (loss) available to common shareholders	$	135,021		$	158,748		$	(24,667	)	$	120,247		$	141,400		$	113,660		$	293,769		$	255,060
Annualized after-tax operating income (loss) available to common shareholders (a)	$	540,084		$	634,992		$	(98,668	)	$	480,988		$	565,600		$	454,640		$	587,538		$	510,120

Beginning common shareholders’ equity	$	5,010,530		$	4,843,878		$	5,023,794		$	4,695,316		$	4,514,456		$	4,267,074		$	4,843,878		$	4,267,074
Ending common shareholders’ equity	4,909,318			5,010,530			4,843,878			5,023,794			4,695,316			4,514,456			4,909,318			4,695,316
Average common shareholders’ equity (b)	$	4,959,924		$	4,927,204		$	4,933,836		$	4,859,555		$	4,604,886		$	4,390,765		$	4,876,598		$	4,481,195

Annualized operating return on average common equity (a)/(b)	10.9		%	12.9		%	(2.0		)%	9.9		%	12.3		%	10.4		%	12.0		%	11.4		%



	27

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

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



(U.S. Dollars in thousands, except share data)	June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2013			2013			2012			2012			2012			2012

Debt:
Senior notes, due May 1, 2034 (7.35%)	$	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
Total debt	$	400,000		$	400,000		$	400,000		$	400,000		$	400,000		$	400,000

Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%)	$	—		$	—		$	—		$	—		$	—		$	200,000
Series B non-cumulative preferred shares (7.875%)	—			—			—			—			—			125,000
Series C non-cumulative preferred shares (6.75%)	325,000			325,000			325,000			325,000			325,000			—
Preferred shareholders’ equity	325,000			325,000			325,000			325,000			325,000			325,000
Common shareholders’ equity (a)	4,909,318			5,010,530			4,843,878			5,023,794			4,695,316			4,514,456
Total shareholders’ equity	$	5,234,318		$	5,335,530		$	5,168,878		$	5,348,794		$	5,020,316		$	4,839,456

Total capital	$	5,634,318		$	5,735,530		$	5,568,878		$	5,748,794		$	5,420,316		$	5,239,456

Common shares outstanding, net of treasury shares (b)	133,416,419			133,063,225			133,842,613			136,540,178			136,291,652			135,441,687

Book value per common share (1) (a)/(b)	$	36.80		$	37.66		$	36.19		$	36.79		$	34.45		$	33.33

Leverage ratios:
Senior notes/total capital	5.3		%	5.2		%	5.4		%	5.2		%	5.5		%	5.7		%
Revolving credit agreement borrowings/total capital	1.8		%	1.7		%	1.8		%	1.7		%	1.8		%	1.9		%
Debt/total capital	7.1		%	7.0		%	7.2		%	7.0		%	7.4		%	7.6		%
Preferred/total capital	5.8		%	5.7		%	5.8		%	5.7		%	6.0		%	6.2		%
Debt and preferred/total capital	12.9		%	12.6		%	13.0		%	12.6		%	13.4		%	13.8		%


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



	28

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