10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2008
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period                                        to

Commission file number:  0-26456

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

Bermuda	Not Applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Wessex House, 45 Reid Street
Hamilton HM 12, Bermuda
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (441) 278-9250

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x   Accelerated filer  o   Non-accelerated filer   o       Smaller reporting company  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

Indicate the number of shares outstanding of each of the issuer’s classes of common shares as of the latest practicable date.

Class	Outstanding at April 30, 2008
Common Shares, $0.01 par value	64,086,081

ARCH CAPITAL GROUP LTD.

INDEX

	Page No.
PART I. Financial Information
Item 1 — Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets March 31, 2008 (unaudited) and December 31, 2007	3
Consolidated Statements of Income For the three month periods ended March 31, 2008 and 2007 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity For the three month periods ended March 31, 2008 and 2007 (unaudited)	5
Consolidated Statements of Comprehensive Income For the three month periods ended March 31, 2008 and 2007 (unaudited)	6
Consolidated Statements of Cash Flows For the three month periods ended March 31, 2008 and 2007 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	47
Item 4 — Controls and Procedures	47
PART II. Other Information
Item 1 — Legal Proceedings	48
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 5 — Other Information	49
Item 6 — Exhibits	50

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

We have reviewed the accompanying consolidated balance sheets of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2008, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the three-month periods ended March 31, 2008 and March 31, 2007. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

New York, New York

May 8, 2008

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	March 31,	December 31,
	2008	2007
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2008, $7,511,224; 2007, $7,037,272)	$7,591,695	$7,137,998
Short-term investments available for sale, at fair value (amortized cost: 2008, $629,249; 2007, $700,262)	631,285	699,036
Short-term investment of funds received under securities lending agreements, at fair value	1,228,868	1,503,723
Other investments (cost: 2008, $308,075; 2007, $323,950)	316,252	353,694
Investment funds accounted for using the equity method	294,379	235,975
Total investments	10,062,479	9,930,426
Cash	258,680	239,915
Accrued investment income	73,686	73,862
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value	1,190,086	1,463,045
Premiums receivable	880,946	729,628
Funds held by reinsureds	72,844	74,752
Unpaid losses and loss adjustment expenses recoverable	1,652,117	1,609,619
Paid losses and loss adjustment expenses recoverable	110,962	132,289
Prepaid reinsurance premiums	419,046	480,462
Deferred income tax assets, net	55,645	57,051
Deferred acquisition costs, net	311,364	290,059
Receivable for securities sold	671,354	17,359
Other assets	595,266	525,800
Total Assets	$16,354,475	$15,624,267
Liabilities
Reserve for losses and loss adjustment expenses	$7,319,141	$7,092,452
Unearned premiums	1,810,324	1,765,881
Reinsurance balances payable	322,280	301,309
Senior notes	300,000	300,000
Securities lending collateral	1,228,868	1,503,723
Payable for securities purchased	710,994	23,155
Other liabilities	658,324	601,936
Total Liabilities	12,349,931	11,588,456
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized)
- Series A (issued: 2008 and 2007, 8,000,000)	80	80
- Series B (issued: 2008 and 2007, 5,000,000)	50	50
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2008, 64,649,618; 2007, 67,318,466)	646	673
Additional paid-in capital	1,269,821	1,451,667
Retained earnings	2,617,539	2,428,117
Accumulated other comprehensive income, net of deferred income tax	116,408	155,224
Total Shareholders’ Equity	4,004,544	4,035,811
Total Liabilities and Shareholders’ Equity	$16,354,475	$15,624,267

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Revenues
Net premiums written	$811,342		$871,745
Increase in unearned premiums	(103,108	)	(126,252	)
Net premiums earned	708,234		745,493
Net investment income	122,193		110,047
Net realized gains (losses)	35,975		(981	)
Fee income	1,068		1,969
Equity in net income (loss) of investment funds accounted for using the equity method	(22,313	)	2,642
Other income	4,036		604
Total revenues	849,193		859,774
Expenses
Losses and loss adjustment expenses	404,417		420,061
Acquisition expenses	114,639		120,128
Other operating expenses	97,187		90,813
Interest expense	5,524		5,523
Net foreign exchange losses	23,587		9,742
Total expenses	645,354		646,267
Income before income taxes	203,839		213,507
Income tax expense	7,956		8,495
Net income	195,883		205,012
Preferred dividends	6,461		6,461
Net income available to common shareholders	$189,422		$198,551
Net income per common share
Basic	$2.90		$2.69
Diluted	$2.78		$2.59
Weighted average common shares and common share equivalents outstanding
Basic	65,295,516		73,931,996
Diluted	68,019,413		76,640,686

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Non-Cumulative Preferred Shares
Balance at beginning and end of period	$130		$130
Common Shares
Balance at beginning of year	673		743
Common shares issued, net	0		1
Purchases of common shares under share repurchase program	(27	)	(7	)
Balance at end of period	646		737
Additional Paid-in Capital
Balance at beginning of year	1,451,667		1,944,304
Common shares issued	0		109
Exercise of stock options	3,749		6,997
Common shares retired	(190,278	)	(46,291	)
Amortization of share-based compensation	4,600		4,306
Other	83		700
Balance at end of period	1,269,821		1,910,125
Retained Earnings
Balance at beginning of year	2,428,117		1,593,907
Adjustment to adopt SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”	—		2,111
Balance at beginning of year, as adjusted	2,428,117		1,596,018
Dividends declared on preferred shares	(6,461	)	(6,461	)
Net income	195,883		205,012
Balance at end of period	2,617,539		1,794,569
Accumulated Other Comprehensive Income
Balance at beginning of year	155,224		51,535
Adjustment to adopt SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”	—		(2,111	)
Balance at beginning of year, as adjusted	155,224		49,424
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(37,577	)	20,587
Foreign currency translation adjustments, net of deferred income tax	(1,239	)	7,776
Balance at end of period	116,408		77,787
Total Shareholders’ Equity	$4,004,544		$3,783,348

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Comprehensive Income
Net income	$195,883		$205,012
Other comprehensive income (loss), net of deferred income tax
Unrealized decline in value of investments:
Unrealized holding gains arising during period	12,707		22,014
Reclassification of net realized gains, net of income taxes, included in net income	(50,284	)	(1,427	)
Foreign currency translation adjustments	(1,239	)	7,776
Other comprehensive (loss) income	(38,816	)	28,363
Comprehensive Income	$157,067		$233,375

See Notes to Consolidated Financial Statements

6

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Operating Activities
Net income	$195,883		$205,012
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(33,791	)	1,097
Equity in net (income) loss of investment funds accounted for using the equity method and other income	18,277		(3,246	)
Share-based compensation	4,600		4,306
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	182,498		147,462
Unearned premiums, net of prepaid reinsurance premiums	105,497		127,107
Premiums receivable	(148,197	)	(203,707	)
Deferred acquisition costs, net	(21,319	)	(23,700	)
Funds held by reinsureds	1,908		21,602
Reinsurance balances payable	19,677		91,498
Other liabilities	40,490		1,296
Other items, net	(30,978	)	34,404
Net Cash Provided By Operating Activities	334,545		403,131
Investing Activities
Purchases of fixed maturity investments	(3,772,652	)	(5,047,868	)
Proceeds from sales of fixed maturity investments	3,523,338		4,326,607
Proceeds from redemptions and maturities of fixed maturity investments	136,932		183,984
Purchases of other investments	(146,815	)	(151,978	)
Proceeds from sales of other investments	65,226		54,754
Net sales of short-term investments	74,201		188,663
Change in securities lending collateral	274,855		(268,722	)
Purchases of furniture, equipment and other	(3,045	)	(4,138	)
Net Cash Provided By (Used For) Investing Activities	152,040		(718,698	)
Financing Activities
Purchases of common shares under share repurchase program	(189,843	)	(44,475	)
Proceeds from common shares issued, net	2,540		3,145
Change in securities lending collateral	(274,855	)	268,722
Excess tax benefits from share-based compensation	660		2,355
Preferred dividends paid	(6,461	)	(6,461	)
Net Cash (Used For) Provided By Financing Activities	(467,959	)	223,286
Effects of exchange rate changes on foreign currency cash	139		513
Increase (decrease) in cash	18,765		(91,768	)
Cash beginning of year	239,915		317,017
Cash end of period	$258,680		$225,249
Income taxes paid, net	$2,510		$596
Interest paid	—		—

See Notes to Consolidated Financial Statements

7

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.      General

Arch Capital Group Ltd. (“ACGL”) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of ACGL and its wholly owned subsidiaries (together with ACGL, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, including the Company’s audited consolidated financial statements and related notes and the section entitled “Risk Factors.”

To facilitate period-to-period comparisons, certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on the Company’s consolidated net income.

2.      Share Transactions

Share Repurchase Program

On February 28, 2007, ACGL’s board of directors authorized the investment of up to $1 billion in ACGL’s common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2009. During the 2008 first quarter, ACGL repurchased approximately 2.7 million common shares under the share repurchase program for an aggregate purchase price of $189.8 million. Since the inception of the share repurchase program, ACGL has repurchased approximately 10.5 million common shares for an aggregate purchase price of $726.9 million. As a result of the share repurchase transactions, book value per common share was reduced by $1.70 per share at March 31, 2008 and weighted average shares outstanding for the 2008 first quarter were reduced by 9.4 million shares. 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. In connection with the repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under its shareholders agreement with ACGL for all repurchases of common shares by ACGL under the repurchase program in open market transactions and certain privately negotiated transactions.

Non-Cumulative Preferred Shares

During 2006, ACGL completed two public offerings of non-cumulative preferred shares (“Preferred Shares”). On February 1, 2006, $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) were issued with net proceeds of $193.5 million and, on May 24, 2006, $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares”) were issued with net proceeds of $120.9 million. The net proceeds of the offerings were used to

8

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

support the underwriting activities of ACGL’s insurance and reinsurance subsidiaries. ACGL has the right to redeem all or a portion of each series of Preferred Shares at a redemption price of $25.00 per share on or after (1) February 1, 2011 for the Series A Preferred Shares and (2) May 15, 2011 for the Series B Preferred Shares. Dividends on the Preferred Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preferred Shares for any dividend period, holders of Preferred Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. Holders of Preferred Shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of the board of directors. Any such dividends will be payable from the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.0% of the $25.00 liquidation preference per annum for the Series A Preferred Shares and 7.875% of the $25.00 liquidation preference per annum for the Series B Preferred Shares. At March 31, 2008, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

Share-Based Compensation

As required by the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), the Company recorded after-tax share-based compensation expense related to stock options in the 2008 first quarter of $1.1 million, or $0.02 per diluted share, compared to $1.6 million, or $0.02 per diluted share, in the 2007 first quarter.

3.      Debt and Financing Arrangements

Senior Notes

On May 4, 2004, ACGL completed a public offering of $300 million principal amount of 7.35% senior notes (“Senior Notes”) due May 1, 2034 and received net proceeds of $296.4 million. ACGL used $200 million of the net proceeds to repay all amounts outstanding under a revolving credit agreement. The Senior Notes are ACGL’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the Senior Notes are due on May 1st and November 1st of each year. ACGL may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. For the 2008 and 2007 first quarters, interest expense on the Senior Notes was approximately $5.5 million. The fair value of the Senior Notes at March 31, 2008 and December 31, 2007 was $285.2 million and $325.4 million, respectively.

Letter of Credit and Revolving Credit Facilities

As of March 31, 2008, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $1.0 billion secured letter of credit facility (the “Credit Agreement”). The $300 million unsecured revolving loan is also available for the issuance of unsecured letters of credit up to $100 million for Arch Reinsurance Company (“Arch Re U.S.”). Borrowings of revolving loans may be made by ACGL and Arch Re U.S. at a variable rate based on LIBOR or an alternative base rate at the option of the Company. Secured letters of credit are available for issuance on behalf of the Company’s insurance and reinsurance subsidiaries. Issuance of letters of credit and borrowings under the Credit Agreement are subject to the Company’s compliance with certain covenants and conditions, including absence of a material adverse change. These covenants require, among other things, that the Company maintain a debt to shareholders’ equity ratio of not greater than 0.35 to 1 and shareholders’ equity in excess of $1.95 billion plus 25% of future aggregate net income for each quarterly period (not including any future net losses) beginning after June 30, 2006 and 25% of future aggregate proceeds from the issuance of common or preferred equity and that the Company’s principal insurance and reinsurance subsidiaries maintain at least a “B++” rating from A.M. Best. In addition, certain of the Company’s subsidiaries which are party to the Credit Agreement are required to maintain minimum shareholders’ equity levels. The

9

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Company was in compliance with all covenants contained in the Credit Agreement at December 31, 2007. The Credit Agreement expires on August 30, 2011.

Including the secured letter of credit portion of the Credit Agreement and another letter of credit facility (together, the “LOC Facilities”), the Company has access to letter of credit facilities for up to a total of $1.45 billion. The principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company’s reinsurance subsidiaries in United States jurisdictions where such subsidiaries are not licensed or otherwise admitted as an insurer, as required under insurance regulations in the United States, and to comply with requirements of Lloyd’s of London in connection with qualifying quota share and other arrangements. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. When issued, certain letters of credit are secured by a portion of the Company’s investment portfolio. In addition, the LOC Facilities also require the maintenance of certain covenants, which the Company was in compliance with at March 31, 2008. At such date, the Company had approximately $579.9 million in outstanding letters of credit under the LOC Facilities, which were secured by investments totaling $612.2 million. It is anticipated that the LOC Facilities will be renewed (or replaced) on expiry, but such renewal (or replacement) will be subject to the availability of credit from banks which the Company utilizes. In addition to letters of credit, the Company has and may establish insurance trust accounts in the U.S. and Canada to secure its reinsurance amounts payable as required.

4.      Segment Information

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 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 SFAS No. 131, “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. The insurance segment consists of nine product lines: casualty; construction and national accounts; executive assurance; healthcare; professional liability; programs; property, marine and aviation; surety; and other (consisting of collateral protection, excess workers’ compensation and employers’ liability business and travel and accident 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 treaties. Classes of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of non-traditional and casualty clash business).

10

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Corporate and other (non-underwriting) includes net investment income, other fee income, net of related expenses, other income (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. In addition, corporate and other results include dividends on the Company’s non-cumulative preferred shares. The following tables set forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income available to common shareholders:

	Three Months Ended
	March 31, 2008
(U.S. dollars in thousands)	Insurance		Reinsurance		Total
Gross premiums written (1)	$626,348		$433,827		$1,053,152
Net premiums written (1)	402,764		408,578		811,342
Net premiums earned (1)	$419,100		$289,134		$708,234
Fee income	882		186		1,068
Losses and loss adjustment expenses	(287,303	)	(117,114	)	(404,417	)
Acquisition expenses, net	(51,889	)	(62,750	)	(114,639	)
Other operating expenses	(73,637	)	(18,238	)	(91,875	)
Underwriting income	$7,153		$91,218		98,371
Net investment income					122,193
Net realized gains					35,975
Equity in net income (loss) of investment funds accounted for using the equity method					(22,313	)
Other income					4,036
Other expenses					(5,312	)
Interest expense					(5,524	)
Net foreign exchange losses					(23,587	)
Income before income taxes					203,839
Income tax expense					(7,956	)
Net income					195,883
Preferred dividends					(6,461	)
Net income available to common shareholders					$189,422
Underwriting Ratios
Loss ratio	68.6	%	40.5	%	57.1	%
Acquisition expense ratio (2)	12.2	%	21.7	%	16.1	%
Other operating expense ratio	17.6	%	6.3	%	13.0	%
Combined ratio	98.4	%	68.5	%	86.2	%

(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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. The insurance segment results include $7.0 million of gross and net premiums written and $8.7 million of net premiums earned assumed through intersegment transactions. The reinsurance segment results include $0.1 million of net premiums earned assumed through intersegment transactions.

(2)The acquisition expense ratio is adjusted to include policy-related fee income.

11

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended
	March 31, 2007
(U.S. dollars in thousands)	Insurance		Reinsurance		Total
Gross premiums written (1)	$661,210		$558,654		$1,210,614
Net premiums written (1)	428,344		443,401		871,745
Net premiums earned (1)	$413,847		$331,646		$745,493
Fee income	1,425		544		1,969
Losses and loss adjustment expenses	(259,322	)	(160,739	)	(420,061	)
Acquisition expenses, net	(46,695	)	(73,433	)	(120,128	)
Other operating expenses	(68,894	)	(13,781	)	(82,675	)
Underwriting income	$40,361		$84,237		124,598
Net investment income					110,047
Net realized losses					(981	)
Equity in net income (loss) of investment funds accounted for using the equity method					2,642
Other income					604
Other expenses					(8,138	)
Interest expense					(5,523	)
Net foreign exchange losses					(9,742	)
Income before income taxes					213,507
Income tax expense					(8,495	)
Net income					205,012
Preferred dividends					(6,461	)
Net income available to common shareholders					$198,551
Underwriting Ratios
Loss ratio	62.7	%	48.5	%	56.3	%
Acquisition expense ratio (2)	11.1	%	22.1	%	16.0	%
Other operating expense ratio	16.6	%	4.2	%	11.1	%
Combined ratio	90.4	%	74.8	%	83.4	%

(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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. The insurance segment and reinsurance segment results include $0.5 million and $8.7 million, respectively, of gross and net premiums written and $0.5 million and $10.6 million, respectively, of net premiums earned assumed through intersegment transactions.

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

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Set forth below is summary information regarding net premiums written and earned by major line of business and net premiums written by client location for the insurance segment:

	Three Months Ended
	March 31,
	2008		2007
INSURANCE SEGMENT (U.S. dollars in thousands)	Amount	% of Total	Amount	% of Total
Net premiums written (1)
Property, marine and aviation	$98,162	24.4	$84,863	19.8
Construction and national accounts	61,211	15.2	60,483	14.1
Programs	54,583	13.5	58,323	13.6
Professional liability	54,081	13.4	58,355	13.6
Executive assurance	42,169	10.5	44,091	10.3
Casualty	27,618	6.9	43,091	10.1
Healthcare	10,997	2.7	21,530	5.0
Surety	10,867	2.7	18,747	4.4
Other (2)	43,076	10.7	38,861	9.1
Total	$402,764	100.0	$428,344	100.0
Net premiums earned (1)
Property, marine and aviation	$84,992	20.3	$81,804	19.8
Construction and national accounts	57,115	13.6	47,975	11.6
Programs	56,987	13.6	56,209	13.6
Professional liability	68,810	16.4	67,884	16.4
Executive assurance	44,408	10.6	45,378	11.0
Casualty	41,772	10.0	51,542	12.4
Healthcare	13,445	3.2	19,844	4.8
Surety	13,499	3.2	19,129	4.6
Other (2)	38,072	9.1	24,082	5.8
Total	$419,100	100.0	$413,847	100.0
Net premiums written by client location (1)
United States	$279,255	69.3	$320,005	74.7
Europe	86,300	21.4	74,935	17.5
Other	37,209	9.3	33,404	7.8
Total	$402,764	100.0	$428,344	100.0
Net premiums written by underwriting location (1)
United States	$287,207	71.3	$331,557	77.4
Europe	102,011	25.3	82,016	19.1
Other	13,546	3.4	14,771	3.5
Total	$402,764	100.0	$428,344	100.0

(1)Insurance segment results include premiums earned assumed through intersegment transactions of $0.1 million for the 2008 first quarter and premiums written and earned assumed of $0.5 million and $0.5 million, respectively, for the 2007 first quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $7.0 million and $8.7 million, respectively, for the 2008 first quarter and $8.7 million and $10.6 million, respectively, for the 2007 first quarter.

(2)Includes excess workers’ compensation and employers’ liability business and travel and accident business.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the reinsurance segment’s net premiums written and earned by major line of business and type of business, together with net premiums written by client location:

	Three Months Ended
	March 31,
	2008		2007
REINSURANCE SEGMENT (U.S. dollars in thousands)	Amount	% of Total	Amount	% of Total
Net premiums written (1)
Property catastrophe	$106,224	26.0	$80,659	18.2
Casualty (2)	105,987	26.0	144,476	32.6
Property excluding property catastrophe (3)	95,922	23.5	94,944	21.4
Other specialty	75,680	18.5	73,996	16.7
Marine and aviation	22,164	5.4	43,715	9.8
Other	2,601	0.6	5,611	1.3
Total	$408,578	100.0	$443,401	100.0
Net premiums earned (1)
Property catastrophe	$50,281	17.4	$34,691	10.5
Casualty (2)	107,648	37.2	140,444	42.4
Property excluding property catastrophe (3)	63,341	21.9	73,039	22.0
Other specialty	38,484	13.3	52,042	15.7
Marine and aviation	27,431	9.5	26,622	8.0
Other	1,949	0.7	4,808	1.4
Total	$289,134	100.0	$331,646	100.0
Net premiums written (1)
Pro rata	$215,419	52.7	$263,815	59.5
Excess of loss	193,159	47.3	179,586	40.5
Total	$408,578	100.0	$443,401	100.0
Net premiums earned (1)
Pro rata	$192,076	66.4	$242,439	73.1
Excess of loss	97,058	33.6	89,207	26.9
Total	$289,134	100.0	$331,646	100.0
Net premiums written by client location (1)
United States	$217,179	53.2	$253,991	57.3
Europe	143,920	35.2	124,338	28.0
Bermuda	34,060	8.3	50,841	11.5
Other	13,419	3.3	14,231	3.2
Total	$408,578	100.0	$443,401	100.0
Net premiums written by underwriting location (1)
Bermuda	$220,669	54.0	$252,028	56.8
United States	154,480	37.8	180,362	40.7
Other	33,429	8.2	11,011	2.5
Total	$408,578	100.0	$443,401	100.0

(1)Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $7.0 million and $8.7 million, respectively, for the 2008 first quarter and $8.7 million and $10.6 million, respectively, for the 2007 first quarter. Reinsurance segment results exclude premiums earned ceded through intersegment transactions of $0.1 million for the 2008 first quarter and premiums written and earned ceded of $0.5 million and $0.5 million, respectively, for the 2007 first quarter.

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

(3)Includes facultative business.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.      Reinsurance

In the normal course of business, the Company’s insurance subsidiaries cede a substantial portion of their premium through pro rata, excess of loss and facultative reinsurance agreements. The Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.

The effects of reinsurance on the Company’s written and earned premiums and losses and loss adjustment expenses with unaffiliated reinsurers were as follows:

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Premiums Written
Direct	$619,486		$649,880
Assumed	433,666		560,734
Ceded	(241,810	)	(338,869	)
Net	$811,342		$871,745
Premiums Earned
Direct	$630,814		$637,008
Assumed	365,364		416,132
Ceded	(287,944	)	(307,647	)
Net	$708,234		$745,493
Losses and Loss Adjustment Expenses
Direct	$420,971		$359,476
Assumed	141,249		195,271
Ceded	(157,803	)	(134,686	)
Net	$404,417		$420,061

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At March 31, 2008 and December 31, 2007, approximately 87.9% and 88.5%, respectively, of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.76 billion and $1.74 billion, respectively, were due from carriers which had an A.M. Best rating of “A-” or better. At March 31, 2008 and December 31, 2007, the largest reinsurance recoverables from any one carrier were less than 5.7% and 5.2%, respectively, of the Company’s total shareholders’ equity.

On December 29, 2005, Arch Re Bermuda entered into a quota share reinsurance treaty with Flatiron Re Ltd., a Bermuda reinsurance company, pursuant to which Flatiron Re Ltd. assumed a 45% quota share (the “Treaty”) of certain lines of property and marine business underwritten by Arch Re Bermuda for unaffiliated third parties for the 2006 and 2007 underwriting years (January 1, 2006 to December 31, 2007). Effective June 28, 2006, the parties amended the Treaty to increase the percentage ceded to Flatiron Re Ltd. from 45% to 70% of all covered business bound by Arch Re Bermuda from (and including) June 28, 2006 until (and including) August 15, 2006 provided such business did not incept beyond September 30, 2006. The ceding percentage for all business bound outside of this period continued to be 45%. On December 31, 2007, the Treaty expired by its terms.

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Flatiron Re Ltd. is required to contribute funds into a trust for the benefit of Arch Re Bermuda (the “Trust”). Effective June 28, 2006, the parties amended the Treaty to provide that, through the earning of all written premium, the amount required to be on deposit in the Trust, together with certain other amounts, will be an amount equal to a calculated amount estimated to cover ceded losses arising from in excess of two 1-in-250 year events for the applicable forward twelve-month period (the “Requisite Funded Amount”). If the actual amounts on deposit in the Trust, together with certain other amounts (the “Funded Amount”), do not at least equal the Requisite Funded Amount, Arch Re Bermuda will, among other things, recapture unearned premium reserves and reassume losses that would have been ceded in respect of such unearned premiums. No assurances can be given that actual losses will not exceed the Requisite Funded Amount or that Flatiron Re Ltd. will make, or will have the ability to make, the required contributions into the Trust.

Arch Re Bermuda pays to Flatiron Re Ltd. a reinsurance premium in the amount of the ceded percentage of the original gross written premium on the business reinsured less a ceding commission, which includes a reimbursement of direct acquisition expenses as well as a commission to Arch Re Bermuda for generating the business. The Treaty also provides for a profit commission to Arch Re Bermuda based on the underwriting results for the 2006 and 2007 underwriting years on a cumulative basis. For the 2008 first quarter, $18.4 million of premiums written, $58.9 million of premiums earned and $11.8 million of losses and loss adjustment expenses were ceded to Flatiron Re Ltd. by Arch Re Bermuda, compared to $108.9 million of premiums written, $66.0 million of premiums earned and $25.4 million of losses and loss adjustment expenses for the 2007 first quarter. At March 31, 2008, $104.5 million of premiums ceded to Flatiron Re Ltd. were unearned. Reinsurance recoverables from Flatiron Re Ltd., which is not rated by A.M. Best, were $167.1 million at March 31, 2008, compared to $152.6 million at December 31, 2007. As noted above, Flatiron Re Ltd. is required to contribute funds into a trust for the benefit of Arch Re Bermuda. The recoverable from Flatiron Re Ltd. was fully collateralized through such trust at March 31, 2008 and December 31, 2007.

6.      Investment Information

The following table summarizes the Company’s invested assets:

	March 31,		December 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities available for sale, at fair value	$7,591,695		$7,137,998
Fixed maturities pledged under securities lending agreements, at fair value (1)	1,189,050		1,462,826
Total fixed maturities	8,780,745		8,600,824
Short-term investments available for sale, at fair value	631,285		699,036
Short-term investments pledged under securities lending agreements, at fair value (1)	1,036		219
Other investments	316,252		353,694
Investment funds accounted for using the equity method	294,379		235,975
Total investments (1)	10,023,697		9,889,748
Securities transactions entered into but not settled at the balance sheet date	(39,640	)	(5,796	)
Total investments, net of securities transactions	$9,984,057		$9,883,952

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received at March 31, 2008 and December 31, 2007 of $1.23 billion and $1.5 billion, respectively, which is reflected as “short-term investment of funds received under securities lending agreements, at fair value” and included the $1.19 billion and $1.46 billion, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at fair value.”

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fixed Maturities and Fixed Maturities Pledged Under Securities Lending Agreements

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

(U.S. dollars in thousands)	Estimated Fair Value	Gross Unrealized Gains	Gross Unrealized Losses		Amortized Cost
March 31, 2008:
Corporate bonds	$2,380,756	$63,605	($32,568	)	$2,349,719
Commercial mortgage backed securities	1,334,521	17,326	(6,536	)	1,323,731
Mortgage backed securities	1,333,473	19,605	(41,664	)	1,355,532
Municipal bonds	1,184,123	17,156	(3,156	)	1,170,123
Asset backed securities	1,082,196	15,956	(7,020	)	1,073,260
U.S. government and government agencies	1,028,256	29,468	(735	)	999,523
Non-U.S. government securities	437,420	34,497	(2,259	)	405,182
Total	$8,780,745	$197,613	($93,938	)	$8,677,070
December 31, 2007:
Corporate bonds	$2,452,527	$40,296	($10,994	)	$2,423,225
Commercial mortgage backed securities	1,315,680	17,339	(558	)	1,298,899
Mortgage backed securities	1,234,596	14,211	(4,087	)	1,224,472
Municipal bonds	990,325	13,213	(195	)	977,307
Asset backed securities	1,008,030	9,508	(4,030	)	1,002,552
U.S. government and government agencies	1,165,423	21,598	(447	)	1,144,272
Non-U.S. government securities	434,243	28,032	(3,056	)	409,267
Total	$8,600,824	$144,197	($23,367	)	$8,479,994

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). Upon adopting SFAS No. 155 on January 1, 2007, the Company applied the “fair value option” to certain hybrid securities which are included in the Company’s fixed maturities and records changes in market value of such securities as realized gains or losses. The fair market values of such securities at March 31, 2008 were approximately $62.9 million and the Company recorded a realized loss of $2.4 million on such securities in the 2008 first quarter.

17

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s investment portfolio, which includes fixed maturity securities, short-term investments and other investments, had a “AA+” average credit quality rating at March 31, 2008 and December 31, 2007. The credit quality distribution of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown below:

(U.S. dollars in thousands)	March 31, 2008		December 31, 2007
Rating (1)	Estimated Fair Value	% of Total	Estimated Fair Value	% of Total
AAA	$6,676,227	76.0	$6,600,258	76.7
AA	950,671	10.8	882,262	10.3
A	730,523	8.3	677,047	7.9
BBB	209,874	2.4	243,610	2.8
BB	34,072	0.4	25,390	0.3
B	113,912	1.3	128,459	1.5
Lower than B	9,785	0.1	11,321	0.1
Not rated	55,681	0.7	32,477	0.4
Total	$8,780,745	100.0	$8,600,824	100.0

(1) Ratings as assigned by the major rating agencies.

Securities Lending Agreements

The Company participates in a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. Such securities have been reclassified as “Fixed maturities and short-term investments pledged under securities lending agreements, at fair value.” The Company maintains control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral received, primarily in the form of cash, is required at a rate of 102% of the market value of the loaned securities (or 105% of the market value of the loaned securities when the collateral and loaned securities are denominated in non-U.S. currencies) including accrued investment income and is monitored and maintained by the lending agent. Such collateral is reinvested and is reflected as “Short-term investment of funds received under securities lending agreements, at fair value.” At March 31, 2008, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $1.19 billion and $1.17 billion, respectively, while collateral received totaled $1.23 billion at fair value and amortized cost. At December 31, 2007, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $1.46 billion and $1.44 billion, respectively, while collateral received totaled $1.5 billion at fair value and amortized cost.

Investment-Related Derivatives

The Company’s investment strategy allows for the use of derivative securities. Derivative instruments may be used to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under the Company’s investment guidelines if implemented in other ways. The fair values of those derivatives are based on quoted market prices. At March 31, 2008, the notional value of the net short position for equity futures was $66.2 million, compared to a net long position for equity futures of $91.2 million at December 31, 2007. At March 31, 2008 and December 31, 2007, the notional value of the net long position for Treasury note futures was $444.4 million and $61.7 million, respectively. For the 2008 first quarter, the Company recorded $5.8 million of net realized losses related to changes in the fair value of all futures contracts, compared to $0.9 million of net realized losses for the 2007 first quarter.

18

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Investments

The following table details the Company’s other investments:

	March 31, 2008		December 31, 2007
(U.S. dollars in thousands)	Estimated Fair Value	Cost	Estimated Fair Value	Cost
Mutual funds	$253,947	$255,624	$286,147	$266,515
Privately held securities and other	62,305	52,451	67,547	57,435
Total	$316,252	$308,075	$353,694	$323,950

Other investments include: (i) mutual funds which invest in fixed maturity securities and international equity index funds; and (ii) privately held securities and other which include the Company’s investment in Aeolus LP (see Note 9). The Company’s investment commitments relating to its other investments and investment funds accounted for using the equity method totaled approximately $91.5 million at March 31, 2008.

Investment Funds Accounted for Using the Equity Method

The Company’s investment portfolio includes certain funds that invest in fixed maturity securities which, due to their ownership structure, are accounted for by the Company using the equity method. 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). Changes in the carrying value of such investments are recorded in net income as ‘Equity in net income (loss) of investment funds accounted for using the equity method.’ Changes in the carrying value of the Company’s other fixed income investments are recorded as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity. Investment funds accounted for using the equity method totaled $294.4 million at March 31, 2008, compared to $236.0 million at December 31, 2007. The Company recorded $22.3 million of equity in net loss of investment funds accounted for using the equity method in the 2008 first quarter, compared to equity in net income of $2.6 million in the 2007 first quarter.

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. The following table details the value of restricted assets:

	March 31,	December 31,
(U.S. dollars in thousands)	2008	2007
Assets used for collateral or guarantees	$714,871	$736,938
Deposits with U.S. regulatory authorities	248,399	251,586
Trust funds	139,005	133,238
Deposits with non-U.S. regulatory authorities	57,130	46,789
Total restricted assets	$1,159,405	$1,168,551

In addition, certain of the Company’s operating subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies. At March 31, 2008 and December 31, 2007, such amounts approximated $3.84 billion and $3.8 billion, respectively.

19

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Net Investment Income

The components of net investment income were as follows:

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities	$107,233		$98,099
Short-term investments	7,167		9,734
Other (1)	10,782		6,019
Gross investment income	125,182		113,852
Investment expenses	(2,989	)	(3,805	)
Net investment income	$122,193		$110,047

(1) Primarily consists of interest income on operating cash accounts, other investments and securities lending transactions.

Net Realized Gains (Losses)

The components of net realized gains (losses) were as follows:

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities	$52,821		($1,144	)
Other investments	(3,178	)	1,139
Other	(13,668	)	(976	)
Net realized gains (losses)	$35,975		($981	)

For the 2008 first quarter, net realized gains on the Company’s fixed maturities of $52.8 million included a provision for declines in the market value of investments held in the Company’s available for sale portfolio which were considered to be other-than-temporary of $12.6 million based on a review performed. For the 2007 first quarter, net realized losses on the Company’s fixed maturities of $1.1 million included a provision for declines in the market value of investments held in the Company’s available for sale portfolio which were considered to be other-than-temporary of $7.2 million based on a review performed. For the 2008 and 2007 first quarters, the balance of net realized gains or losses on the Company’s fixed maturities resulted from the sale of securities following the Company’s decisions to reduce credit exposure, changes in duration targets and sales related to rebalancing the portfolio.

Certain of the Company’s investments, primarily included in other investments and investments accounted for using the equity method on the Company’s balance sheet, may use leverage to achieve a higher rate of return. While leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Accordingly, any event that adversely affects the value of the underlying securities held by such investments would be magnified to the extent leverage is used and the Company’s potential losses from such investments would be magnified.

Fair Value

Effective January 1, 2008, the Company adopted and implemented SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which provides a fair value option to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. The Company did not apply the fair value option on any financial assets or financial liabilities during the 2008 first quarter.

20

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In addition, effective January 1, 2008, the Company adopted and implemented SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.

SFAS No. 157 establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority). The three levels are defined as follows:

Level 1:	Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2:	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy.

The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisors and others. Upon adoption of SFAS No. 157 and at March 31, 2008, the Company determined that Level 1 securities would include highly liquid, recent issue U.S. Treasuries and certain of its short-term investments held in highly liquid money market-type funds where it believes that quoted prices are available in an active market.

Where the Company believes that quoted market prices are not available or that the market is not active, fair values are estimated by using quoted prices of securities with similar characteristics, pricing models or matrix pricing and are generally classified as Level 2 securities. The Company determined that Level 2 securities would include corporate bonds, mortgage backed securities, municipal bonds, asset backed securities, certain U.S. government and government agencies, non-U.S. government securities, certain short-term securities and investments in mutual funds.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include certain private equity investments and a small number of corporate premium-tax bonds held at amortized cost by the Company’s U.S. insurance operations. Private equity investments are valued initially based upon transaction price and then adjusted upwards or downwards from the transaction price to reflect expected exit values.

21

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s invested assets, categorized by the level within the SFAS No. 157 hierarchy in which the fair value measurements fall, at March 31, 2008:

		Fair Value Measurement Using:
	March 31,	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
(U.S. dollars in thousands)	2008	(Level 1)	(Level 2)	(Level 3)
Fixed maturities (1)	$8,780,745	$205,042	$8,570,567	$5,136
Short-term investments (1)	632,321	577,660	54,661	—
Other investments (2)	252,732	—	241,587	11,145
Total	$9,665,798	$782,702	$8,866,815	$16,281

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received at March 31, 2008 of $1.23 billion, which is reflected as “short-term investment of funds received under securities lending agreements, at fair value” and included the $1.19 billion of “fixed maturities and short-term investments pledged under securities lending agreements, at fair value.”

(2)Excludes the Company’s investment in Aeolus LP which is accounted for using the equity method.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the 2008 first quarter:

	Fair Value Measurements Using:
	Significant Unobservable Inputs (Level 3)
(U.S. dollars in thousands)	Fixed Maturities		Other Investments		Total
Beginning balance at January 1, 2008	$3,752		$11,504		$15,256
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	(38	)	237		199
Included in other comprehensive income	—		(303	)	(303	)
Purchases, issuances and settlements	1,422		(293	)	1,129
Transfers in and/or out of Level 3	—		—		—
Ending balance at March 31, 2008	$5,136		$11,145		$16,281

(1)Losses on fixed maturities were recorded as a component of net investment income while gains on other investments were recorded in net realized gains.

The amount of total gains for the 2008 first quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2008 was $0.2 million.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7.      Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended
	March 31,
(U.S. dollars in thousands, except share data)	2008		2007
Basic earnings per common share:
Net income	$195,883		$205,012
Preferred dividends	(6,461	)	(6,461	)
Net income available to common shareholders	$189,422		$198,551
Divided by:
Weighted average common shares outstanding	65,295,516		73,931,996
Basic earnings per common share	$2.90		$2.69
Diluted earnings per common share:
Net income	$195,883		$205,012
Preferred dividends	(6,461	)	(6,461	)
Net income available to common shareholders	$189,422		$198,551
Divided by:
Weighted average common shares outstanding	65,295,516		73,931,996
Effect of dilutive securities:
Nonvested restricted shares	223,787		165,006
Stock options (1)	2,500,110		2,543,684
Weighted average common shares and common share equivalents outstanding – diluted	68,019,413		76,640,686
Diluted earnings per common share	$2.78		$2.59

(1)Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2008 and 2007 first quarters, the number of stock options excluded were 347,298 and 268,250, respectively.

8.      Income Taxes

ACGL is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to ACGL or any of its operations until March 28, 2016. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda.

ACGL and its non-U.S. subsidiaries will be subject to U.S. federal income tax only to the extent that they derive U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL and its non-U.S. subsidiaries will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors (subject to reduction by any applicable income tax treaty). ACGL and its non-U.S. subsidiaries intend to conduct their operations in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, therefore, will not be required to pay U.S. federal income taxes (other than U.S. excise taxes on insurance and reinsurance premium and withholding taxes on dividends and certain other U.S. source investment income). However, because there is uncertainty as to the

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL’s shareholders’ equity and earnings could be materially adversely affected. ACGL has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which ACGL’s subsidiaries and branches are subject to tax are the United States, United Kingdom, Canada, Switzerland, Germany and Denmark.

The Company’s income tax provision resulted in an effective tax rate on income before income taxes of 3.9% for the 2008 first quarter, compared to 4.0% for the 2007 first quarter. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income reported by jurisdiction due primarily to the varying tax rates in each jurisdiction.

The United States also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers or reinsurers with respect to risks located in the United States. The rates of tax, unless reduced by an applicable U.S. tax treaty, are four percent for non-life insurance premiums and one percent for life insurance and all reinsurance premiums. The Company incurs federal excise taxes on certain of its reinsurance transactions, including amounts ceded through intercompany transactions. For the 2008 first quarter and 2007 first quarter, the Company withheld and paid approximately $2.8 million and $3.9 million, respectively, of federal excise taxes.

9.      Transactions with Related Parties

The Company made an investment of $50.0 million in Aeolus LP (“Aeolus”) in 2006. Aeolus operates as an unrated reinsurance platform that provides property catastrophe protection to insurers and reinsurers on both an ultimate net loss and industry loss warranty basis. In return for its investment, included in “Other investments” on the Company’s balance sheet, the Company received an approximately 4.9% preferred interest in Aeolus and a pro rata share of certain founders’ interests. The Company made its investment in Aeolus on the same economic terms as a fund affiliated with Warburg Pincus, which has invested $350 million in Aeolus. Funds affiliated with Warburg Pincus owned 16.3% of the Company’s outstanding voting shares as of December 31, 2007. In addition, one of the founders of Aeolus is Peter Appel, former President and CEO and a former director of the Company.

10.    Contingencies Relating to the Sale of Prior Reinsurance Operations

On May 5, 2000, the Company sold the prior reinsurance operations of Arch Re U.S. pursuant to an agreement entered into as of January 10, 2000 with Folksamerica Reinsurance Company and Folksamerica Holding Company (collectively, “Folksamerica”). Folksamerica Reinsurance Company assumed Arch Re U.S.’s liabilities under the reinsurance agreements transferred in the asset sale and Arch Re U.S. transferred to Folksamerica Reinsurance Company assets estimated in an aggregate amount equal in book value to the book value of the liabilities assumed. The Folksamerica transaction was structured as a transfer and assumption agreement (and not reinsurance) and, accordingly, the loss reserves (and any related reinsurance recoverables) relating to the transferred business are not included as assets or liabilities on the Company’s balance sheet. Folksamerica assumed Arch Re U.S.’s rights and obligations under the reinsurance agreements transferred in the asset sale. The reinsureds under such agreements were notified that Folksamerica had assumed Arch Re U.S.’s obligations and that, unless the reinsureds object to the assumption, Arch Re U.S. will be released from its obligations to those reinsured. None of such reinsureds objected to the assumption. However, Arch Re U.S. will continue to be liable under those reinsurance agreements if the notice is found not to be an effective release by the reinsureds. Folksamerica has agreed to indemnify the Company for any losses arising out of the reinsurance agreements transferred to Folksamerica Reinsurance Company in the asset sale. However, in the event that Folksamerica refuses or is unable to perform its obligations to the Company, Arch Re U.S. may incur losses

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

relating to the reinsurance agreements transferred in the asset sale. Folksamerica’s A.M. Best rating was “A-” (Excellent) at March 31, 2008.

Under the terms of the agreement, in 2000, the Company had also purchased reinsurance protection covering the Company’s transferred aviation business to reduce the net financial loss to Folksamerica on any large commercial airline catastrophe to $5.4 million, net of reinstatement premiums. Although the Company believes that any such net financial loss will not exceed $5.4 million, the Company has agreed to reimburse Folksamerica if a loss is incurred that exceeds $5.4 million for aviation losses under certain circumstances prior to May 5, 2003. The Company also made representations and warranties to Folksamerica about the Company and the business transferred to Folksamerica for which the Company retains exposure for certain periods, and made certain other agreements. In addition, the Company retained its tax and employee benefit liabilities and other liabilities not assumed by Folksamerica, including all liabilities not arising under reinsurance agreements transferred to Folksamerica in the asset sale and all liabilities (other than liabilities arising under reinsurance agreements) arising out of or relating to a certain managing underwriting agency. Although Folksamerica has not asserted that any amount is currently due under any of the indemnities provided by the Company under the asset purchase agreement, Folksamerica has previously indicated a potential indemnity claim under the agreement in the event of the occurrence of certain future events. Based on all available information, the Company has denied the validity of any such potential claim.

11.    Commitments and Contingencies

Variable Interest Entities

On December 29, 2005, Arch Re Bermuda entered into a quota share reinsurance treaty with Flatiron Re Ltd., a newly-formed Bermuda reinsurance company, pursuant to which Flatiron Re Ltd. assumed a 45% quota share (the “Treaty”) of certain lines of property and marine business underwritten by Arch Re Bermuda for unaffiliated third parties for the 2006 and 2007 underwriting years (January 1, 2006 to December 31, 2007). As a result of the terms of the Treaty, the Company determined that Flatiron Re Ltd. is a variable interest entity. However, Arch Re Bermuda is not the primary beneficiary of Flatiron Re Ltd. and, as such, the Company is not required to consolidate the assets, liabilities and results of operations of Flatiron Re Ltd. per FIN 46R. On December 31, 2007, the Treaty expired by its terms. See Note 5, “Reinsurance” for information on the Treaty with Flatiron Re Ltd.

12.    Legal Proceedings

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of March 31, 2008, the Company was not a party to any material litigation or arbitration other than as a part of the ordinary course of business in relation to claims and reinsurance recoverable matters, none of which is expected by management to have a significant adverse effect on the Company’s results of operations and financial condition and liquidity.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13.    Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is reviewing the impact that adopting SFAS No. 161 will have on its financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements which involve inherent risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. These statements are based on our current assessment of risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed in this report, including the section entitled “Cautionary Note Regarding Forward Looking Statements,” and in our periodic reports filed with the Securities and Exchange Commission (“SEC”). For additional information regarding our business and operations, please also refer to our Annual Report on Form 10-K for the year ended December 31, 2007, including our audited consolidated financial statements and related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

GENERAL

Overview

Arch Capital Group Ltd. (“ACGL” and, together with its subsidiaries, “we” or “us”) is a Bermuda public limited liability company with over $4.3 billion in capital at March 31, 2008 and, through operations in Bermuda, the United States, Europe and Canada, writes insurance and reinsurance on a worldwide basis. While we are positioned to provide a full range of property and casualty insurance and reinsurance lines, we focus on writing specialty lines of insurance and reinsurance. It is our belief that our underwriting platform, our experienced management team and our strong capital base that is unencumbered by significant pre-2002 risks have enabled us to establish a strong presence in the insurance and reinsurance markets.

The worldwide insurance and reinsurance industry is highly competitive and has traditionally been subject to an underwriting cycle in which a hard market (high premium rates, restrictive underwriting standards, as well as terms and conditions, and underwriting gains) is eventually followed by a soft market (low premium rates, relaxed underwriting standards, as well as broader terms and conditions, and underwriting losses). Insurance market conditions may affect, among other things, the demand for our products, our ability to increase premium rates, the terms and conditions of the insurance policies we write, changes in the products offered by us or changes in our business strategy.

The financial results of the insurance and reinsurance industry are influenced by factors such as the frequency and/or severity of claims and losses, including natural disasters or other catastrophic events, variations in interest rates and financial markets, changes in the legal, regulatory and judicial environments, inflationary pressures and general economic conditions. These factors influence, among other things, the demand for insurance or reinsurance, the supply of which is generally related to the total capital of competitors in the market.

In general, market conditions improved during 2002 and 2003 in the insurance and reinsurance marketplace. This reflected improvement in pricing, terms and conditions following significant industry losses arising from the events of September 11, 2001, as well as the recognition that intense competition in the late 1990s led to inadequate pricing and overly broad terms, conditions and coverages. Such industry developments resulted in poor financial results and erosion of the industry’s capital base. Consequently, many established insurers and reinsurers reduced their participation in, or exited from, certain markets and, as a result, premium rates escalated in many lines of business. These developments provided relatively new insurers and reinsurers, like us, with an opportunity to provide needed underwriting capacity. Beginning in late 2003 and continuing through 2005, additional capacity emerged in many classes of business and, consequently, premium rate increases decelerated significantly and, in many classes of business, premium rates decreased. The weather-related catastrophic events that occurred in the second half of 2005 caused significant industry losses and led to

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a strengthening of rating agency capital requirements for catastrophe-exposed business. The 2005 events also resulted in substantial improvements in market conditions in property and certain marine lines of business and slowed declines in premium rates in other lines. During 2006 and 2007, excellent industry results led to a significant increase in capacity and, accordingly, competition intensified in 2007 and prices declined generally in all lines of business, including property. This trend has continued in 2008.

Current Outlook

We increased our writings in property and certain marine lines of business in 2006 and 2007 in order to take advantage of improved market conditions and these lines represented a larger proportion of our overall book of business in 2006 and 2007 than in prior periods. We expect that our writings in these lines of business will continue to represent a significant proportion of our overall book of business in future periods and may represent a larger proportion of our overall book of business in future periods, which could increase the volatility in our results of operations. Although we saw price erosion in many of our lines in 2006 and 2007, current pricing remains at acceptable levels in many areas, even in lines for which rates have fallen. The most attractive area from a pricing point of view remains catastrophe-related property business. We believe that we are still able to write insurance and reinsurance business at what we believe to be acceptable rates. We maintained underwriting discipline during the 2008 first quarter and, as a result, premiums written by our insurance and reinsurance operations were lower than in the 2007 first quarter. Such trend may continue as we respond to more challenging market conditions.

In December 2005, we entered into a quota-share reinsurance treaty with Flatiron Re Ltd., a dedicated reinsurance vehicle, which allowed us to increase our participation in property and marine lines without significantly increasing our probable maximum loss. On December 31, 2007, the treaty expired by its terms. For its January 1, 2008 renewals, our Bermuda-based reinsurer adjusted its book of business in light of the expiration of the treaty with Flatiron Re Ltd. The treaty with Flatiron Re Ltd. provides for commission income (in excess of the reimbursement of direct acquisition expenses) which includes a profit commission based on the reported underwriting results on a cumulative basis. We record the profit commission portion of income from Flatiron Re Ltd. based on underwriting experience recorded each quarter. The profit commission arrangement with Flatiron Re Ltd. may increase the volatility of our reported results of operations on both a quarterly and annual basis. At March 31, 2008, $104.5 million of premiums ceded to Flatiron Re Ltd. were unearned. The attendant premiums earned, losses incurred and acquisition expenses will primarily be reflected in our results during the balance of 2008.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007, updated where applicable in the notes accompanying our consolidated financial statements.

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RESULTS OF OPERATIONS

Three Months Ended March 31, 2008 and 2007

The following table sets forth net income available to common shareholders and earnings per common share data:

	Three Months Ended
	March 31,
(U.S. dollars in thousands, except share data)	2008	2007
Net income available to common shareholders	$189,422	$198,551
Diluted net income per common share	$2.78	$2.59
Diluted weighted average common shares and common share equivalents outstanding	68,019,413	76,640,686

Our net income available to common shareholders for the 2008 first quarter represented a 20.5% annualized return on average common equity, compared to 23.6% for the 2007 first quarter. For purposes of computing return on average common equity, average common equity has been calculated as the average of common shareholders’ equity outstanding at the beginning and ending of each period.

Diluted weighted average common shares and common share equivalents outstanding, used in the calculation of net income per common share, were 68.0 million in the 2008 first quarter, compared to 76.6 million in the 2007 first quarter. The lower level of weighted average shares outstanding in the 2008 first quarter was primarily due to the impact of share repurchases. As a result of the share repurchase transactions to date, weighted average shares outstanding for the 2008 first quarter were reduced by 9.4 million shares. Share repurchases during the 2007 first quarter had a minimal impact on the weighted average shares outstanding in the period due to the timing of such transactions.

Segment Information

We classify our businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires certain disclosures about operating segments in a manner that is consistent with how management evaluates the performance of the segment. For a description of our underwriting segments, refer to note 4, “Segment Information,” of the notes accompanying our consolidated financial statements. Management measures segment performance based on underwriting income or loss.

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Insurance Segment

The following table sets forth our insurance segment’s underwriting results:

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Gross premiums written	$626,348		$661,210
Net premiums written	402,764		428,344
Net premiums earned	$419,100		$413,847
Fee income	882		1,425
Losses and loss adjustment expenses	(287,303	)	(259,322	)
Acquisition expenses, net	(51,889	)	(46,695	)
Other operating expenses	(73,637	)	(68,894	)
Underwriting income	$7,153		$40,361
Underwriting Ratios
Loss ratio	68.6%		62.7%
Acquisition expense ratio (1)	12.2%		11.1%
Other operating expense ratio	17.6%		16.6%
Combined ratio	98.4%		90.4%

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

Underwriting Income.  The insurance segment’s underwriting income was $7.2 million for the 2008 first quarter, compared to $40.4 million for the 2007 first quarter. The combined ratio for the insurance segment was 98.4% for the 2008 first quarter, compared to 90.4% for the 2007 first quarter. The components of the insurance segment’s underwriting income are discussed below.

Premiums Written.  Gross premiums written by the insurance segment in the 2008 first quarter were 5.3% lower than in the 2007 first quarter, while net premiums written were 6.0% lower as the insurance segment maintained underwriting discipline in response to the current rate environment. The decrease in net premiums written in the 2008 first quarter was partially driven by a lower level of U.S. specialty casualty business, primarily driven by the U.S. housing market and residential construction project cancellations. Other contributors to the decrease in the 2008 first quarter were a reduction in healthcare business in response to competition and the current rate environment and an increase in the use of reinsurance on surety business. For information regarding net premiums written produced by major line of business and geographic location, refer to note 4, “Segment Information,” of the notes accompanying our consolidated financial statements.

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The presentation of the insurance segment’s net premiums written and earned by major line of business has been adjusted. Surety business has been separated from construction, surety and national accounts and travel and accident business has been separated from professional liability and shown in ‘other’. Set forth below is an adjusted schedule of net premiums written and earned by major line of business for the remaining three quarterly periods in 2007 adjusted for the 2008 presentation changes:

	Three Months Ended
INSURANCE SEGMENT	December 31,	September 30,	June 30,
(U.S. dollars in thousands)	2007	2007	2007
Net premiums written
Property, marine and aviation	$55,531	$85,361	$104,705
Construction and national accounts	57,396	54,543	55,514
Programs	50,523	67,792	59,154
Professional liability	65,832	80,707	64,356
Executive assurance	46,511	46,845	47,904
Casualty	35,235	46,209	57,240
Healthcare	13,891	15,952	12,383
Surety	11,114	13,233	12,968
Other (1)	41,324	49,377	37,604
Total	$377,357	$460,019	$451,828
Net premiums earned
Property, marine and aviation	$79,948	$81,430	$92,387
Construction and national accounts	58,602	55,464	50,965
Programs	58,248	59,518	57,036
Professional liability	67,280	67,257	65,805
Executive assurance	44,885	46,481	47,408
Casualty	47,086	50,049	52,570
Healthcare	15,256	16,249	17,107
Surety	14,874	16,597	16,597
Other (1)	40,173	36,539	32,685
Total	$426,352	$429,584	$432,560

(1)Includes excess workers’ compensation and employers’ liability business and travel and accident business.

Net Premiums Earned.  Net premiums earned by the insurance segment in the 2008 first quarter were 1.3% higher than in the 2007 first quarter, and reflect changes in net premiums written over the previous five quarters, including the mix and type of business written.

Losses and Loss Adjustment Expenses.  The loss ratio for the insurance segment was 68.6% in the 2008 first quarter, compared to 62.7% for the 2007 first quarter. The 2008 first quarter loss ratio included 4.8 points related to the Australian floods in the period and 2.8 points related to large specific risk losses in short-tail lines in the period, while the 2007 first quarter loss ratio included 1.3 points related to large specific risk losses. The 2008 first quarter loss ratio reflected a 1.4 point reduction related to estimated net favorable development in prior year loss reserves, compared to a 0.2 point reduction in prior year loss reserves in the 2007 first quarter. The estimated net favorable development in the 2008 first quarter was primarily in medium-tail and longer-tail lines, partially offset by adverse development from short-tail lines which primarily resulted from higher than expected claims development on property, marine and aviation business. The insurance segment’s loss ratio in the 2008 first quarter also reflects an increase in expected loss ratios across a number of lines of business and changes in the mix of business.

In the 2008 first quarter, the insurance segment renewed its reinsurance program which provides coverage for certain property-catastrophe related losses occurring during 2008 equal to a maximum of 70% of the first $275 million in excess of a $75 million retention per occurrence. The insurance segment had in effect during 2007 a reinsurance program which provided coverage equal to a maximum of 88% of the first $325 million in

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excess of a $75 million retention per occurrence for certain property catastrophe-related losses occurring during 2007.

Underwriting Expenses.  The insurance segment’s underwriting expense ratio was 29.8% in the 2008 first quarter, compared to 27.7% in the 2007 first quarter. The acquisition expense ratio was 12.2% for the 2008 first quarter, compared to 11.1% for the 2007 first quarter. The acquisition expense ratio is influenced by, among other things, (1) the amount of ceding commissions received from unaffiliated reinsurers, (2) the amount of business written on a surplus lines (non-admitted) basis and (3) mix of business. The acquisition expense ratio in the 2008 first quarter reflects changes in the form of reinsurance ceded and the mix of business. The insurance segment’s other operating expense ratio was 17.6% for the 2008 first quarter, compared to 16.6% in the 2007 first quarter. The higher operating expense ratio in the 2008 first quarter compared to the 2007 first quarter was primarily due to growth in operating expenses without a proportionate increase in net premiums earned.

Reinsurance Segment

The following table sets forth our reinsurance segment’s underwriting results:

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Gross premiums written	$433,827		$558,654
Net premiums written	408,578		443,401
Net premiums earned	$289,134		$331,646
Fee income	186		544
Losses and loss adjustment expenses	(117,114	)	(160,739	)
Acquisition expenses, net	(62,750	)	(73,433	)
Other operating expenses	(18,238	)	(13,781	)
Underwriting income	$91,218		$84,237
Underwriting Ratios
Loss ratio	40.5%		48.5%
Acquisition expense ratio	21.7%		22.1%
Other operating expense ratio	6.3%		4.2%
Combined ratio	68.5%		74.8%

Underwriting Income.  The reinsurance segment’s underwriting income was $91.2 million for the 2008 first quarter, compared to $84.2 million for the 2007 first quarter. The combined ratio for the reinsurance segment was 68.5% for the 2008 first quarter, compared to 74.8% for the 2007 first quarter. The components of the reinsurance segment’s underwriting income are discussed below.

Premiums Written.  Gross premiums written by the reinsurance segment in the 2008 first quarter were 22.3% lower than in the 2007 first quarter, with reductions in all treaty lines of business. The reinsurance segment’s Bermuda-based reinsurer, Arch Reinsurance Ltd. (“Arch Re Bermuda”), ceded certain lines of property and marine premiums written under a quota share reinsurance treaty (the “Treaty”) to Flatiron Re Ltd. Under the Treaty, Flatiron Re Ltd. assumed a 45% quota share of certain lines of property and marine business underwritten by Arch Re Bermuda for the 2006 and 2007 underwriting years (the percentage ceded was increased from 45% to 70% of covered business bound from June 28, 2006 until August 15, 2006 provided such business did not incept beyond September 30, 2006). On December 31, 2007, the Treaty expired by its terms. For its January 1, 2008 renewals, Arch Re Bermuda adjusted its book of business in light of the expiration of the Treaty. In addition, other reductions in the reinsurance segment’s book of business resulted from continued competition which led to non-renewals or lower shares written.

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Ceded premiums written by the reinsurance segment were 5.8% of gross premiums written for the 2008 first quarter, compared to 20.6% for the 2007 first quarter. In the 2008 first quarter, Arch Re Bermuda ceded $18.4 million, or 4.2% of gross premiums written, of certain lines of property and marine premiums written under the Treaty to Flatiron Re Ltd., compared to $108.9 million, or 19.5%, in the 2007 first quarter, with the lower level due to the expiration of the Treaty. On an earned basis, Arch Re Bermuda ceded $58.9 million to Flatiron Re Ltd. in the 2008 first quarter, compared to $66.0 million in the 2007 first quarter. Commission income from the Treaty (in excess of the reimbursement of direct acquisition expenses) reduced the reinsurance segment’s acquisition expense ratio by 3.3 points in the 2008 first quarter, compared to 2.8 points in the 2007 first quarter. At March 31, 2008, $104.5 million of premiums ceded to Flatiron Re Ltd. were unearned. The attendant premiums earned, losses incurred and acquisition expenses will primarily be reflected in the reinsurance segment’s results during the balance of 2008.

Net premiums written by the reinsurance segment in the 2008 first quarter were 7.9% lower than in the 2007 first quarter. For information regarding net premiums written produced by major line of business and geographic location, refer to note 4, “Segment Information,” of the notes accompanying our consolidated financial statements.

Net Premiums Earned.  Net premiums earned by the reinsurance segment in the 2008 first quarter were 12.8% lower than in the 2007 first quarter. The decrease in net premiums earned in the 2008 first quarter primarily resulted from changes in net premiums written over the previous five quarters, including the mix and type of business written.

Losses and Loss Adjustment Expenses.  The reinsurance segment’s loss ratio was 40.5% in the 2008 first quarter, compared to 48.5% for the 2007 first quarter. The loss ratio for the 2008 first quarter reflected a 17.7 point reduction related to estimated net favorable development in prior year loss reserves, compared to a 14.1 point reduction in the 2007 first quarter. The estimated net favorable development in the 2008 first quarter was primarily in short-tail lines and resulted from better than anticipated loss emergence. The 2008 first quarter loss ratio also reflected approximately 2.0 points of catastrophic activity, while the 2007 first quarter loss ratio reflected approximately 4.8 points of catastrophic activity. The reinsurance segment’s loss ratio in the 2008 first quarter also reflected an increase in expected loss ratios across a number of lines of business and changes in the mix of business.

For its January 1 renewals, Arch Re Bermuda adjusted its book of business in light of the expiration of the Treaty with Flatiron Re Ltd. While our reinsurance operations may purchase industry loss warranty contracts and other reinsurance which is intended to limit their exposure, the expiration of the Treaty increases the risk retention of our reinsurance operations and, as a result, may increase the volatility in our results of operations in future periods.

Underwriting Expenses.  The underwriting expense ratio for the reinsurance segment was 28.0% in the 2008 first quarter, compared to 26.3% in the 2007 first quarter. The acquisition expense ratio for the 2008 first quarter was 21.7%, compared to 22.1% for the 2007 first quarter. The acquisition expense ratio is influenced by, among other things, the mix and type of business written and earned and the level of ceding commission income. The reinsurance segment’s other operating expense ratio was 6.3% for the 2008 first quarter, compared to 4.2% for the 2007 first quarter. The higher ratio in the 2008 first quarter primarily resulted from expenses related to the reinsurance segment’s property facultative reinsurance operation, which commenced operations during the 2007 second quarter, and a lower level of net premiums earned.

Net Investment Income

Net investment income for the 2008 first quarter was $122.2 million, compared to $110.0 million for the 2007 first quarter. The increase in net investment income in the 2008 first quarter primarily resulted from a higher level of average invested assets in the 2008 first quarter and also included $3.4 million of interest income

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resulting from a favorable arbitration decision. The pre-tax investment income yield increased to 4.88% (excluding the arbitration interest) for the 2008 first quarter, compared to 4.84% for the 2007 first quarter. The pre-tax investment income yields were calculated based on amortized cost. Yields on future investment income may vary based on financial market conditions, investment allocation decisions and other factors.

Net Realized Gains or Losses

Following is a summary of net realized gains (losses):

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities	$52,821		($1,144	)
Other investments	(3,178	)	1,139
Other	(13,668	)	(976	)
Total	$35,975		($981	)

Currently, our portfolio is actively managed to maximize total return within certain guidelines. In assessing returns under this approach, we include net investment income, net realized gains and losses and the change in unrealized gains and losses generated by our investment portfolio. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Total return on our portfolio under management, as reported to us by our investment advisors, for the 2008 first quarter was 0.95%, compared to 1.47% for the 2007 first quarter.

For the 2008 first quarter, net realized gains on our fixed maturities of $52.8 million, respectively, included a provision for declines in the market value of investments held in our available for sale portfolio which were considered to be other-than-temporary of $12.6 million based on a review performed. For the 2007 first quarter, net realized losses on our fixed maturities of $1.1 million included a provision for declines in the market value of investments held in the Company’s available for sale portfolio which were considered to be other-than-temporary of $7.2 million based on a review performed. For the 2008 and 2007 first quarters, the balance of net realized gains or losses on our fixed maturities resulted from the sale of securities following our decisions to reduce credit exposure, changes in duration targets and sales related to rebalancing the portfolio.

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method

We recorded $22.3 million of equity in net loss of investment funds accounted for using the equity method in the 2008 first quarter. Investment funds accounted for using the equity method totaled $294.4 million at March 31, 2008. Our investment portfolio includes certain funds that invest in fixed maturity securities which, due to the ownership structure of the funds, are accounted for by us using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our 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).

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Following is a summary of equity in net income (loss) of investment funds accounted for using the equity method (previously included in net investment income) for each quarterly period in 2007 and the investment funds accounted for using the equity method (previously included in other investments) at each balance sheet date during 2007:

	Three Months Ended
(U.S. dollars in thousands)	December 31, 2007		September 30, 2007		June 30, 2007	March 31, 2007
Equity in net income (loss) of investment funds accounted for using the equity method	($906	)	($5,283	)	$3,376	$2,642
Investment funds accounted for using the equity method, at balance sheet date	$235,974		$216,917		$188,005	$153,663

Other Expenses

Other expenses, which are included in our other operating expenses and part of corporate and other (non-underwriting), were $5.3 million for the 2008 first quarter, compared to $8.1 million for the 2007 first quarter. Such amounts primarily represent certain holding company costs necessary to support our worldwide insurance and reinsurance operations, share based compensation expense and costs associated with operating as a publicly traded company.

Net Foreign Exchange Gains or Losses

Net foreign exchange losses for the 2008 first quarter of $23.6 million consisted of net unrealized losses of $22.3 million and net realized losses of $1.3 million, compared to net foreign exchange losses for the 2007 first quarter of $9.7 million which consisted of net unrealized losses of $17.2 million and net realized gains of $7.5 million. Net unrealized foreign exchange gains or losses result from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date. We hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. However, changes in the value of such investments due to foreign currency rate movements are reflected as a direct increase or decrease to shareholders’ equity, as part of the “Change in unrealized appreciation (decline) in value of investments, net of deferred income tax” in accumulated other comprehensive income, and not in the statement of income.

Income Taxes

The effective tax rate on income before income taxes was 3.9% for the 2008 first quarter, compared to 4.0% for the 2007 first quarter. Our effective tax rates may fluctuate from period to period based on the relative mix of income reported by jurisdiction primarily due to the varying tax rates in each jurisdiction. Our quarterly tax provision is adjusted to reflect changes in our expected annual effective tax rates, if any.

A significant portion of our catastrophe-exposed property business is written by a Bermuda-based subsidiary. As a result, on a relative basis, our effective tax rate is likely to be favorably affected in periods that have a low level of catastrophic losses incurred and adversely impacted in periods with significant catastrophic claims activity. In addition, our Bermuda-based reinsurer incurs federal excise taxes for premiums assumed on U.S. risks. Such expenses are included in our acquisition expenses.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Investable Assets

The finance and investment committee of our board of directors establishes our investment policies and creates guidelines for our investment managers. The finance and investment committee reviews the implementation of the investment strategy on a regular basis. Our current approach stresses preservation of capital, market liquidity and diversification of risk.

On a consolidated basis, our aggregate investable assets totaled $10.24 billion at March 31, 2008, compared to $10.12 billion at December 31, 2007, as detailed in the table below. The increase in investable assets in the 2008 first quarter resulted primarily from cash flows from operations during the period, partially offset by share repurchase activity.

	March 31,		December 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities available for sale, at fair value	$7,591,695		$7,137,998
Fixed maturities pledged under securities lending agreements, at fair value (1)	1,189,050		1,462,826
Total fixed maturities	8,780,745		8,600,824
Short-term investments available for sale, at fair value	631,285		699,036
Short-term investments pledged under securities lending agreements, at fair value (1)	1,036		219
Cash	258,680		239,915
Other investments	316,252		353,694
Investment funds accounted for using the equity method	294,379		235,975
Total cash and investments (1)	10,282,377		10,129,663
Securities transactions entered into but not settled at the balance sheet date	(39,640	)	(5,796	)
Total investable assets	$10,242,737		$10,123,867

(1) In our securities lending transactions, we receive collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, we have excluded the collateral received at March 31, 2008 and December 31, 2007 of $1.23 billion and $1.5 billion, respectively, which is reflected as “short-term investment of funds received under securities lending agreements, at fair value” and included the $1.19 billion and $1.46 billion, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at fair value.”

At March 31, 2008, our fixed income portfolio, which includes fixed maturity securities and short-term investments, had a “AA+” average Standard & Poor’s quality rating, an average effective duration of 3.50 years, and an average yield to maturity (imbedded book yield), before investment expenses, of 4.82%. At December 31, 2007, our fixed income portfolio had a “AA+” average Standard & Poor’s quality rating, an average effective duration of 3.29 years, and an average yield to maturity (imbedded book yield), before investment expenses, of 5.03%. The increase in the effective duration of our investment portfolio in the 2008 first quarter was primarily attributable to an increase in the duration of our municipal bond holdings due to the method of calculating duration on such securities, which relies on the yield relationship of municipal bonds to U.S. Treasuries.

In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the subprime sector. In addition, in recent months residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. A continued decline or an extended flattening in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to second homes and investment properties, and with respect to any residential mortgage loans where the aggregate loan amounts

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(including any subordinate loans) are close to or greater than the related property values. These developments may have a significant adverse effect on the prices of loans and securities, including those in our investment portfolio. The situation continues to have wide ranging consequences, including downward pressure on economic growth and the potential for increased insurance and reinsurance exposures, which could have an adverse impact on our results of operations, financial condition, business and operations.

Certain of the our investments, primarily included in other investments and investments accounted for using the equity method on our balance sheet, may use leverage to achieve a higher rate of return. While leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Accordingly, any event that adversely affects the value of the underlying securities held by such investments would be magnified to the extent leverage is used and our potential losses from such investments would be magnified.

Our Chief Investment Officer administers the investment portfolio, oversees our investment managers, formulates investment strategy in conjunction with our finance and investment committee and directly manages certain portions of our fixed income portfolio. At March 31, 2008, approximately $4.76 billion, or 46.5%, of our total investments and cash was internally managed, compared to $4.61 billion, or 45.5%, at December 31, 2007. While maintaining our emphasis on preservation of capital and liquidity, we expect our portfolio to become more diversified and, as a result, we may expand into areas which are not currently part of our investment strategy.

Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts as part of the management of our stock index fund investments and to replicate equity investment positions. Derivative instruments may be used to enhance investment performance, to replicate investment positions or to manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See Note 6, “Investment Information—Investment-Related Derivatives,” of the notes accompanying our consolidated financial Statements for additional disclosures concerning derivatives.

Other investments totaled $316.3 million at March 31, 2008, compared to $353.7 million at December 31, 2007. Investment funds accounted for using the equity method totaled $294.4 million at March 31, 2008, compared to $236.0 million at December 31, 2007. Our investment commitments related to other investments and investment funds accounted for using the equity method totaled approximately $91.5 million at March 31, 2008. See Note 6, “Investment Information—Other Investments” and “Investment Information—Investment Funds Accounted for Using the Equity Method” of the notes accompanying our consolidated financial statements for further details.

Reinsurance Recoverables

We monitor the financial condition of our reinsurers and attempt to place coverages only with substantial, financially sound carriers. At March 31, 2008, approximately 87.9% of reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.76 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverable from any one carrier was less than 5.7% of our total shareholders’ equity. At December 31, 2007, approximately 88.5% of our reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.74 billion were due from carriers which had an A.M. Best rating of “A-” or better, and the largest reinsurance recoverable from any one carrier was less than 5.2%, respectively, of our total shareholders’ equity.

Reinsurance recoverables from Flatiron Re Ltd., which is not rated by A.M. Best, were $167.1 million at March 31, 2008, compared to $152.6 million at December 31, 2007. Flatiron Re Ltd. is required to contribute funds into a trust for the benefit of Arch Re Bermuda. The recoverable from Flatiron Re Ltd. was fully collateralized through such trust at March 31, 2008 and December 31, 2007.  See Note 5, “Reinsurance,” of the

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notes accompanying our consolidated financial Statements for further details on the quota share reinsurance treaty with Flatiron Re Ltd.

Reserves for Losses and Loss Adjustment Expenses

We establish reserves for losses and loss adjustment expenses (“Loss Reserves”) which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of losses incurred. Estimating Loss Reserves is inherently difficult, which is exacerbated by the fact that we are a relatively new company with relatively limited historical experience upon which to base such estimates. We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to assist in the establishment of Loss Reserves. Actual losses and loss adjustment expenses paid will deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.

At March 31, 2008 and December 31, 2007, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:

	March 31,	December 31,
(U.S. dollars in thousands)	2008	2007
Insurance:
Case reserves.	$884,743	$811,054
IBNR reserves	2,158,479	2,100,696
Total net reserves	$3,043,222	$2,911,750
Reinsurance:
Case reserves	$641,286	$623,419
Additional case reserves	78,784	80,438
IBNR reserves	1,903,732	1,867,226
Total net reserves	$2,623,802	$2,571,083
Total:
Case reserves	$1,526,029	$1,434,473
Additional case reserves	78,784	80,438
IBNR reserves	4,062,211	3,967,922
Total net reserves	$5,667,024	$5,482,833

At March 31, 2008 and December 31, 2007, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

	March 31,	December 31,
(U.S. dollars in thousands)	2008	2007
Casualty	$658,853	$647,842
Construction and national accounts	456,599	431,309
Executive assurance	453,055	431,068
Professional liability	445,264	412,527
Property, marine and aviation	392,698	345,177
Programs	371,158	370,852
Healthcare	149,384	153,018
Surety	78,193	87,232
Other	38,018	32,725
Total net reserves	$3,043,222	$2,911,750

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At March 31, 2008 and December 31, 2007, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

	March 31,	December 31,
(U.S. dollars in thousands)	2008	2007
Casualty	$1,769,483	$1,715,712
Property excluding property catastrophe	306,946	295,728
Other specialty.	204,113	212,088
Marine and aviation	174,863	167,290
Property catastrophe	104,868	111,084
Other	63,529	69,181
Total net reserves	$2,623,802	$2,571,083

Shareholders’ Equity

Our shareholders’ equity was $4.0 billion at March 31, 2008, compared to $4.04 billion at December 31, 2007. The decrease in the 2008 first quarter of $31.3 million was primarily attributable to share repurchase activity and an after-tax decrease in the fair value of our investment portfolio, partially offset by net income in the period.

Liquidity and Capital Resources

ACGL is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, ACGL depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to the series A non-cumulative and series B non-cumulative preferred shares and common shares.

On a consolidated basis, our aggregate cash and invested assets totaled $10.24 billion at March 31, 2008, compared to $10.12 billion at December 31, 2007. ACGL’s readily available cash, short-term investments and marketable securities, excluding amounts held by our regulated insurance and reinsurance subsidiaries, totaled $17.4 million at March 31, 2008, compared to $36.3 million at December 31, 2007. During the 2008 first quarter, ACGL received dividends of $160.0 million from Arch Re Bermuda which were used to fund the share repurchase program described below along with the payment of preferred dividends and other corporate expenses.

The ability of our regulated insurance and reinsurance subsidiaries to pay dividends or make distributions or other payments to us is dependent on their ability to meet applicable regulatory standards. Under Bermuda law, Arch Re Bermuda is required to maintain a minimum solvency margin (i.e., the amount by which the value of its general business assets must exceed its general business liabilities) equal to the greatest of (1) $100 million, (2) 50% of net premiums written (being gross premiums written by us less any premiums ceded by us, but we may not deduct more than 25% of gross premiums when computing net premiums written) and (3) 15% of loss and other insurance reserves. Arch Re Bermuda is prohibited from declaring or paying any dividends during any financial year if it is not in compliance with its minimum solvency margin or minimum liquidity ratio. In addition, Arch Re Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority an affidavit stating that it will continue to meet the required margins. In addition, Arch Re Bermuda is prohibited, without prior approval of the Bermuda Monetary Authority, from reducing by 15% or more its total statutory capital, as set out in its previous year’s statutory financial statements. At December 31, 2007, as determined under Bermuda law, Arch Re Bermuda had statutory capital of $2.0 billion and statutory capital and surplus of $3.73 billion. Such amounts include ownership interests in U.S. insurance and reinsurance subsidiaries. Accordingly, Arch Re Bermuda can pay approximately $933 million to ACGL during 2008 without

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providing an affidavit to the Bermuda Monetary Authority, as discussed above. Our U.S. insurance and reinsurance subsidiaries can pay approximately $113.9 million in dividends or distributions to Arch-U.S., our U.S. holding company, which is owned by Arch Re Bermuda, during 2008 without prior regulatory approval. Such dividends or distributions may be subject to applicable withholding or other taxes. Arch-Europe can pay approximately £8.4 million, or $16.7 million, in dividends to ACGL during 2008 without prior notice and approval by the FSA. In addition, the ability of our insurance and reinsurance subsidiaries to pay dividends is also constrained by our dependence on the financial strength ratings of our insurance and reinsurance subsidiaries from independent rating agencies. The ratings from these agencies depend to a large extent on the capitalization levels of our insurance and reinsurance subsidiaries. We believe that ACGL has sufficient cash resources and available dividend capacity to service its indebtedness and other current outstanding obligations.

Our insurance and reinsurance subsidiaries are required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support their operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. Our insurance and reinsurance subsidiaries also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. At March 31, 2008 and December 31, 2007, such amounts approximated $1.16 billion and $1.17 billion, respectively. In addition, certain of our operating subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies. At March 31, 2008 and December 31, 2007, such amounts approximated $3.84 billion and $3.8 billion, respectively.

ACGL, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements essential to the ratings of such subsidiaries. Except as described in the preceding sentence, or where express reinsurance, guarantee or other financial support contractual arrangements are in place, each of ACGL’s subsidiaries or affiliates is solely responsible for its own liabilities and commitments (and no other ACGL subsidiary or affiliate is so responsible). Any reinsurance arrangements, guarantees or other financial support contractual arrangements that are in place are solely for the benefit of the ACGL subsidiary or affiliate involved and third parties (creditors or insureds of such entity) are not express beneficiaries of such arrangements.

Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. Sources of liquidity include cash flows from operations, financing arrangements or routine sales of investments.

As part of our investment strategy, we seek to establish a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed by us to be adequate to meet our foreseeable payment obligations. However, due to the nature of our operations, cash flows are affected by claim payments that may comprise large payments on a limited number of claims and which can fluctuate from year to year. We believe that our liquid investments and cash flow will provide us with sufficient liquidity in order to meet our claim payment obligations. However, the timing and amounts of actual claim payments related to recorded Loss Reserves vary based on many factors, including large individual losses, changes in the legal environment, as well as general market conditions. The ultimate amount of the claim payments could differ materially from our estimated amounts. Certain lines of business written by us, such as excess casualty, have loss experience characterized as low frequency and high severity. The foregoing may result in significant variability in loss payment patterns. The impact of this variability can be exacerbated by the fact that the timing of the receipt of reinsurance recoverables owed to us may be slower than anticipated by us. Therefore, the irregular timing of claim payments can create significant variations in cash flows from operations between periods and may require us to utilize other sources of liquidity to make these payments, which may include the sale of investments or utilization of existing or new credit facilities or capital market transactions. If the source of liquidity is the sale of investments, we may be forced to sell such investments at a loss, which may be material.

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Consolidated cash provided by operating activities was $334.5 million for the 2008 first quarter, compared to $403.1 million for the 2007 first quarter. The lower level of operating cash flows in the 2008 first quarter primarily resulted from an increase in paid losses, as the Company’s insurance and reinsurance loss reserves have continued to mature, along with a lower level of premiums written and collected. Cash flow from operating activities are provided by premiums collected, fee income, investment income and collected reinsurance recoverables, offset by losses and loss adjustment expense payments, reinsurance premiums paid, operating costs and current taxes paid.

We expect that our operational needs, including our anticipated insurance obligations and operating and capital expenditure needs, for the next twelve months, at a minimum, will be met by our balance of cash, short-term investments and our credit facilities, as well as by funds generated from underwriting activities and investment income and proceeds on the sale or maturity of our investments.

We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by several ratings agencies, at a level considered necessary by management to enable our key operating subsidiaries to compete; (2) sufficient capital to enable our underwriting subsidiaries to meet the capital adequacy tests performed by statutory agencies in the U.S. and other key markets; and (3) letters of credit and other forms of collateral that are necessary for our non-U.S. operating companies because they are “non-admitted” under U.S. state insurance regulations.

As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our shareholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of our board of directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements and such other factors as our board of directors deems relevant.

On February 28, 2007, our board of directors authorized us to invest up to $1 billion in ACGL’s common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2009. During the 2008 first quarter, ACGL repurchased approximately 2.7 million common shares under the share repurchase program for an aggregate purchase price of $189.8 million. Since the inception of the share repurchase program, ACGL has repurchased approximately 10.5 million common shares for an aggregate purchase price of $726.9 million. As a result of the share repurchase transactions to date, book value per common share was reduced by $1.70 per share at March 31, 2008, compared to $1.45 at December 31, 2007, and weighted average shares outstanding for the 2008 first quarter were reduced by 9.4 million shares. 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. In connection with the repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under the shareholders agreement for all repurchases of common shares by ACGL under the repurchase program in open market transactions and certain privately negotiated transactions.

In January 2008, we announced that Arch Re Bermuda finalized a joint venture agreement with Gulf Investment Corporation GSC (“GIC”) to establish a new reinsurer to be based in the Dubai International Financial Centre. The joint venture will initially target the six member states of the Gulf Cooperation Council, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Under the agreement, each of Arch Re Bermuda and GIC will own 50% of the joint venture. The joint venture will write a broad range of property and casualty reinsurance, including aviation, energy, commercial transportation, marine, engineered risks and property, on both a treaty and facultative basis. The initial total capital of the joint venture, which will be provided by Arch Re Bermuda and GIC equally, will consist of $200 million, plus an additional

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$200 million to be funded depending on the joint venture’s business needs. The joint venture’s underwriting activities are expected to commence during the first half of 2008, subject to approval by the Dubai Financial Services Authority.

To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our operating subsidiaries, which could place those operating subsidiaries at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our operating subsidiaries are able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of bank credit and letters of credit.

In addition to common share capital, we depend on external sources of finance to support our underwriting activities, which can be in the form (or any combination) of debt securities, preference shares, common equity and bank credit facilities providing loans and/or letters of credit. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities.

In June 2006, ACGL and Arch-U.S. filed a universal shelf registration statement with the SEC. This registration statement allows for the possible future offer and sale by us of various types of securities, including unsecured debt securities, preference shares, common shares, warrants, share purchase contracts and units and depositary shares. The shelf registration statement enables us to efficiently access the public debt and/or equity capital markets in order to meet our future capital needs. The shelf registration statement also allows selling shareholders to resell common shares that they own in one or more offerings from time to time. We will not receive any proceeds from any shares offered by the selling shareholders. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

In August 2006, we entered into a five-year agreement for a $300 million unsecured revolving loan and letter of credit facility and a $1.0 billion secured letter of credit facility. The $300 million unsecured loan and letter of credit facility is also available for the issuance of unsecured letters of credit up to $100 million for our U.S.-based reinsurance operation. Including the secured letter of credit portion of the Credit Agreement and another letter of credit facility (together, the “LOC Facilities”), we have access to letter of credit facilities for up to a total of $1.45 billion. At March 31, 2008 and December 31, 2007, we had approximately $579.9 million and $612.4 million, respectively, in outstanding letters of credit under the LOC Facilities, which were secured by investments totaling $612.2 million and $652.8 million, respectively.

During 2006, ACGL completed two public offerings of non-cumulative preferred shares. On February 1, 2006, $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“series A preferred shares”) were issued with net proceeds of $193.5 million and, on May 24, 2006, $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“series B preferred shares” and together with the series A preferred shares, the “preferred shares”) were issued with net proceeds of $120.9 million. The net proceeds of the offerings were used to support the underwriting activities of ACGL’s insurance and reinsurance subsidiaries. ACGL has the right to redeem all or a portion of each series of preferred shares at a redemption price of $25.00 per share on or after (1) February 1, 2011 for the series A preferred shares and (2) May 15, 2011 for the series B preferred shares. Dividends on the preferred shares are non-cumulative. Consequently, in the event dividends are not declared on the preferred shares for any dividend period, holders of preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not

42

be payable. Holders of preferred shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of ACGL’s board of directors. Any such dividends will be payable from the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.0% of the $25.00 liquidation preference per annum for the series A preferred shares and 7.875% of the $25.00 liquidation preference per annum for the series B preferred shares. In the 2008 and 2007 first quarters, we paid $6.5 million to holders of the preferred shares and, at March 31, 2008, had declared an aggregate of $3.3 million of dividends to be paid to holders of the preferred shares.

At March 31, 2008, ACGL’s capital of $4.3 billion consisted of $300.0 million of senior notes, representing 7.0% of the total, $325.0 million of preferred shares, representing 7.6% of the total, and common shareholders’ equity of $3.68 billion, representing the balance. At December 31, 2007, ACGL’s capital of $4.34 billion consisted of $300.0 million of senior notes, representing 6.9% of the total, $325.0 million of preferred shares, representing 7.5% of the total, and common shareholders’ equity of $3.71 billion, representing the balance. The decrease in capital during the 2008 first quarter of $31.3 million was primarily attributable to share repurchase activity and an after-tax decrease in the fair value of our investment portfolio, partially offset by net income in the period.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

Book Value Per Common Share and Share Repurchases

The following table presents the calculation of book value per common share and the impact of transactions under the share repurchase program on book value per common share:

	March 31,		December 31,
(U.S. dollars in thousands, except share data)	2008		2007
Calculation of book value per common share:
Total shareholders’ equity	$4,004,544		$4,035,811
Less preferred shareholders’ equity	(325,000	)	(325,000	)
Common shareholders’ equity	$3,679,544		$3,710,811
Common shares outstanding (1)	64,649,618		67,318,466
Book value per common share	$56.92		$55.12
Effect of share repurchases to date:
Aggregate purchase price of shares repurchased	$726,909		$537,066
Shares repurchased	10,518,948		7,769,039
Average price per share repurchased	$69.10		$69.13
Estimated dilutive impact on ending book value per common share (2)	$(1.70	)	$(1.45	)

(1)Excludes the effects of 5,400,266 and 5,486,033 stock options and 115,053 and 116,453 restricted stock units outstanding at March 31, 2008 and December 31, 2007, respectively.

(2)As the average price per share repurchased during the periods exceeded the book value per common share at March 31, 2008 and December 31, 2007, the repurchase of shares during the periods reduced book value per common share at both dates.

(3)The estimated impact on diluted earnings per share was calculated comparing reported results versus (i) net income per share plus an estimate of lost net investment income on the share repurchases divided by (ii) weighted average

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diluted shares outstanding plus an estimate of the weighted average shares repurchased. The repurchase of shares was accretive to diluted earnings per share in the 2008 first quarter. The repurchase of shares during the 2007 first quarter had a minimal impact on diluted earnings per share due to the timing of such transactions.

Market Sensitive Instruments and Risk Management

In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of March 31, 2008. (See section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management” included in our 2007 Annual Report on Form 10-K.) Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. At March 31, 2008, material changes in market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 2007 are as follows:

Investment Market Risk

Fixed Income Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the market value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments and investment funds accounted for using the equity method which invest in fixed income securities and the corresponding change in unrealized appreciation. As interest rates rise, the market value of our interest rate sensitive securities falls, and the converse is also true. The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on the portfolio at March 31, 2008 and December 31, 2007. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time and, accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth below. For further discussion on investment activity, please refer to “Investments.”

	Interest Rate Shift in Basis Points
(U.S. dollars in millions)	-100	-50	0	50	100
March 31, 2008:
Total market value	$10,191.0	$10,013.7	$9,839.8	$9,669.4	$9,502.4
Market value change from base	3.57%	1.77%	—	(1.73%)	(3.43%)
Change in unrealized value	$351.2	$173.9	—	($170.4)	($337.4)
December 31, 2007:
Total market value	$10,048.9	$9,885.3	$9,725.0	$9,565.4	$9,409.6
Market value change from base	3.33%	1.65%	—	(1.64%)	(3.24%)
Change in unrealized value	$323.9	$160.3	—	($159.6)	($315.4)

Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR attempts to take into account a broad cross-section of risks facing a portfolio by utilizing relevant securities volatility data skewed towards the most recent months and quarters. VaR measures the amount of a portfolio at risk for outcomes 1.65 standard deviations from the mean based on normal market conditions over a one year time horizon and is expressed as a percentage of the portfolio’s initial value. In other words, 95% of the time, should the risks taken into account in the VaR model perform per their historical tendencies, the portfolio’s loss in any one year period is expected to be less than or equal to the calculated VaR, stated as a percentage of the measured portfolio’s initial value. As of March 31, 2008, our portfolio’s VaR was estimated to be 5.47%, compared to an estimated 3.73% at December 31, 2007.

Equities and Privately Held Securities. Our investment portfolio includes an allocation to other investments which include investments in certain stock index funds, other preferred stocks and privately held securities. See

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Note 6, “Investment Information—Other Investments,” of the notes accompanying our consolidated financial Statements for additional disclosures concerning our other investments. At March 31, 2008 and December 31, 2007, the fair value of our investments in equities and privately held securities totaled $183.9 million and $164.8 million, respectively. These securities are exposed to price risk, which is the potential loss arising from decreases in the market value of equities. An immediate hypothetical 10% depreciation in the value of each equity position would reduce the fair value of such investments by approximately $18.4 million and $16.5 million at March 31, 2008 and December 31, 2007, respectively, and would have decreased book value per common share by approximately $0.28 and $0.24, respectively.

Investment-Related Derivatives.We began to invest in certain derivative instruments in 2006 to replicate investment positions and to manage market exposures and duration risk. At March 31, 2008, the notional value of the net short position for equity futures was $66.2 million, compared to a net long position for equity futures of $91.2 million at December 31, 2007. At March 31, 2008 and December 31, 2007, the notional value of the net long position for Treasury note futures was $444.4 million and $61.7 million, respectively. A 10% depreciation of the underlying exposure to these derivative instruments at March 31, 2008 and December 31, 2007 would have resulted in a reduction in net income of approximately $51.1 million and $15.3 million, respectively, and would have decreased book value per common share by $0.79 and $0.23, respectively.

Foreign Currency Exchange Risk

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. A 10% depreciation of the U.S. Dollar against other currencies under our outstanding contracts at March 31, 2008 and December 31, 2007, net of unrealized appreciation on our securities denominated in currencies other than the U.S. Dollar, would have resulted in unrealized gains of approximately $14.4 million and $12.9 million, respectively, and would have increased book value per common share by approximately $0.22 and $0.19, respectively. A 10% appreciation of the U.S. Dollar against other currencies under our outstanding contracts at March 31, 2008 and December 31, 2007, net of unrealized depreciation on our securities denominated in currencies other than the U.S. Dollar, would have resulted in unrealized losses of approximately $14.4 million and $12.9 million, respectively, and would have decreased book value per common share by approximately $0.22 and $0.19, respectively. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (“PLSRA”) provides a “safe harbor” for forward-looking statements. This report or any other written or oral statements made by or on behalf of us 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 report are forward-looking statements. Forward-looking statements, for purposes of the PLSRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature 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. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below, elsewhere in this report and in our periodic reports filed with the SEC, and include:

·our ability to successfully implement our business strategy during “soft” as well as “hard” markets;

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·acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;

·our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;

·general economic and market conditions (including inflation, interest rates, foreign currency exchange rates and prevailing credit terms) and conditions specific to the reinsurance and insurance markets in which we operate;

·competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;

·our ability to successfully integrate, establish and maintain operating procedures (including the implementation of improved computerized systems and programs to replace and support manual systems) to effectively support our underwriting initiatives and to develop accurate actuarial data;

·the loss of key personnel;

·the integration of businesses we have acquired or may acquire into our existing operations;

·accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through March 31, 2008;

·greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries;

·severity and/or frequency of losses;

·claims for natural or man-made catastrophic events in our insurance or reinsurance business could cause large losses and substantial volatility in our results of operations;

·acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;

·losses relating to aviation business and business produced by a certain managing underwriting agency for which we may be liable to the purchaser of our prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in our periodic reports filed with the SEC;

·availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;

·the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;

·the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;

·our investment performance;

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·material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;

·changes in accounting principles or policies or in our application of such accounting principles or policies;

·changes in the political environment of certain countries in which we operate or underwrite business;

·statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers; and

·the other matters set forth in this Quarterly Report on Form 10-Q, as well as the risk and other factors set forth in ACGL’s Annual Report on Form 10-K and other documents on file with the SEC.

In addition, other general factors could affect our results, including developments in the world’s financial and capital markets and our access to such markets.

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. 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. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Other Financial Information

The interim financial information included in this Quarterly Report on Form 10-Q as of and for the three months ended March 31, 2008 has not been audited by PricewaterhouseCoopers LLP. In reviewing such information, PricewaterhouseCoopers LLP has applied limited procedures in accordance with professional standards for reviews of interim financial information. However, their separate report included in this Quarterly Report on Form 10-Q for the 2008 first quarter states that they did not audit and they do not express an opinion on that interim financial information. Accordingly, you should restrict your reliance on their reports on such information. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their reports on the interim financial information because such reports do not constitute “reports” or “parts” of the registration statements prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which information is hereby incorporated by reference.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to applicable Exchange Act Rules as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to

47

information being recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to ACGL and its consolidated subsidiaries.

We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.

Changes in Internal Controls Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of March 31, 2008, we were not a party to any material litigation or arbitration other than as a part of the ordinary course of business in relation to claims and reinsurance recoverable matters, none of which is expected by management to have a significant adverse effect on our results of operations and financial condition and liquidity.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes ACGL’s purchases of its common shares for the 2008 first quarter:

	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs (2)
1/1/2008-1/31/2008	1,361,816	$69.55	1,361,816	$368,215
2/1/2008-2/29/2008	722,997	$68.56	716,394	$318,183
3/1/2008-3/31/2008	671,699	$67.13	671,699	$273,091
Total	2,756,512	$68.70	2,749,909	$273,091

(1)Includes 6,603 shares repurchased from employees in order to facilitate the payment of withholding taxes on restricted shares granted. We purchased these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested.

(2)On February 28, 2007, ACGL’s Board of Directors authorized ACGL to invest up to $1 billion in ACGL’s common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2009. 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. In connection with the repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under the shareholders agreement for all repurchases of common shares by ACGL under the repurchase program in open market transactions and certain privately negotiated transactions.

Item 5.  Other Information

In accordance with Section 10a(i)(2) of the Securities Exchange Act of 1934, as amended, we are responsible for disclosing non-audit services to be provided by our independent registered public accounting firm, PricewaterhouseCoopers LLP, which are approved by the Audit Committee of our board of directors. During the 2008 first quarter, the Audit Committee approved engagements of PricewaterhouseCoopers LLP for the following permitted non-audit services: tax services, tax consulting and tax compliance.

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Item 6.  Exhibits

Exhibit No.	Description
10	Joint Venture Agreement, dated January 22, 2008, between Gulf Investment Corporation GSC and Arch Reinsurance Ltd. relating to Gulf Re Holdings Limited (1)
15	Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)Pursuant to 17 CFR 240.24 b-2, confidential information has been omitted and filed separately with the SEC pursuant to a request for confidential treatment filed with the SEC.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ARCH CAPITAL GROUP LTD.
	(REGISTRANT)
	/s/ Constantine Iordanou
Date:  May 8, 2008	Constantine Iordanou
	President and Chief Executive Officer (Principal Executive Officer) and Director
	/s/ John D. Vollaro
Date:  May 8, 2008	John D. Vollaro
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10	Joint Venture Agreement, dated January 22, 2008, between Gulf Investment Corporation GSC and Arch Reinsurance Ltd. relating to Gulf Re Holdings Limited (1)
15	Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(2)Pursuant to 17 CFR 240.24 b-2, confidential information has been omitted and filed separately with the SEC pursuant to a request for confidential treatment filed with the SEC.

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EX-10

Exhibit 10

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION”) PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  OMISSIONS ARE DESIGNATED AS [****].

EXECUTION COPY

JOINT VENTURE AGREEMENT
DATED JANUARY 22, 2008

GULF INVESTMENT CORPORATION GSC

and

ARCH REINSURANCE LTD.

relating to

GULF RE HOLDINGS LIMITED

ALLEN & OVERY
ALLEN & OVERY LLP
LONDON CAHILL GORDON & REINDEL LLP
80 Pine Street
New York, New York 10005

CONTENTS

Clause		Page
1.	Interpretation	2
2.	The Business of the Company	9
3.	Conditions Subsequent	10
4.	Share Capital	10
5.	Warranties	13
6.	The Board	14
7.	Proceedings of Directors	15
8.	Company Management	17
9.	Shareholders’ Interests	17
10.	Reserved Matters	18
11.	Continuing Obligations	18
12.	Intellectual Property And Services	21
13.	Dividend Policy	21
14.	Protective Covenants	22
15.	Transfers	24
16.	Deadlock	27
17.	Default	30
18.	Confidentiality	31
19.	Covenants	33
20.	Duration	33
21.	Disputes	33
22.	Determination of Fair Price	34
23.	Announcements	34
24.	Notices	34
25.	Costs	35
26.	Severability	35
27.	General	35
28.	Whole Agreement	36
29.	Governing Law	36
30.	Language	36

i

THIS AGREEMENT is made on January 22, 2008,

BETWEEN:

(1)GULF INVESTMENT CORPORATION GSC, a company incorporated in the State of Kuwait whose principal office is at Jaber Al-Mubarak Street, Al-Sharq, Kuwait City, State of Kuwait (GIC); and

(2)ARCH REINSURANCE LTD., a limited company incorporated in Bermuda whose principal office is at Wessex House, 3rd Floor, 45 Reid Street, PO Box HM 339, Hamilton, HM 12 (ARCH RE).

WHEREAS:

(A)GIC and Arch Re wish to participate in a joint venture by becoming Shareholders in the Company which, through its Subsidiaries, is to carry on the Business in the Territory.

(B)Arch Re has extensive experience in the reinsurance industry throughout the world, and it is intended that Arch Re will use its strategic and operational expertise to provide oversight and assist the Company in (i) recruiting senior management, (ii) developing the business plan and (iii) developing underwriting expertise, know-how and systems to carry on the Business in the Territory.

(C)GIC is an investment vehicle established by the member states of the Gulf Cooperation Council (GCC, which consists of the United Arab Emirates, the Kingdom of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait).  It is intended that GIC, in compliance with all applicable laws, will use its extensive investments and experience in the Territory to assist the Company in building its book of reinsurance business, including by promoting and introducing the Company and its Subsidiaries to insureds and insurance companies in the Territory.

(D)Each of GIC and Arch Re intend, at its discretion, to provide the Company such non-financial assistance and support as may be necessary for the Company to carry out its Business.

(E)GIC and Arch Re have agreed to enter into this agreement for the purposes of regulating certain aspects of the affairs of the Company.

IT IS AGREED as follows:

1.INTERPRETATION

1.1In this agreement:

ACGL means Arch Capital Group Ltd.;

Actuary means the independent actuary for the time being of the Reinsurance Subsidiary and any other Subsidiary engaged in a reinsurance business;

2

Affiliate means in relation to any person, any Subsidiary or Ultimate Holding Company of that person and any other Subsidiary of that Ultimate Holding Company provided always that neither the Company nor any of its Subsidiaries shall be regarded as being an Affiliate of any Shareholder for the purposes of this agreement.  [****];

Agreed City has the meaning given in Subclause 16.3;

Agreed Form means, in relation to any document, the form of that document which has been initialed for the purpose of identification by or on behalf of GIC and by or on behalf of Arch Re;

Alternate Director has the meaning given in Subclause 6.6;

Applicable Arch Entity has the meaning given in Subclause 14.5;

Applicable Insured has the meaning given in Subclause 14.5;

Applicable Post-Termination Period has the meaning given in Subclause 14.5;

Applicable Reinsurance Business has the meaning given in Subclause 14.3;

Appointed Investment Bank has the meaning given in Subclause 22.2;

Arch Europe has the meaning given in Subclause 14.2;

Arch Re has the meaning given in the preamble hereto;

Arch Re Directors means the directors of the Company appointed by Arch Re from time to time;

Articles means the articles of association of the Company in the Agreed Form;

Auditors means the independent public accountants for the time being of the Company and each of its Subsidiaries;

Available Business has the meaning given in Subclause 14.3;

Available Business Acceptance Notice has the meaning given in Subclause 14.3;

Available Business Notice has the meaning given in Subclause 14.3;

Available Business Offer has the meaning given in Subclause 14.3;

Board means the board of directors for the time being of the Company;

Budget means the budget from time to time of the Company and its Subsidiaries approved by the Shareholders in accordance with the provisions of this agreement;

Business has the meaning given in Subclause 2.1;

3

Business Day means a day (other than a Friday, Saturday or Sunday) on which banks are generally open in Kuwait and New York for normal business;

Business Plan means the business plan from time to time of the Company and its Subsidiaries approved by the Shareholders in accordance with the provisions of this agreement;

Buy-Sell Offer Notice has the meaning given in Subclause 16.5;

Capital Call means a demand by the Company to the Shareholders made in accordance with Clause 4 for the provision of capital to the Company by way of payment of their subscription for Shares under Subclause 4.3;

Capital Call Notice has the meaning given in Subclause 4.6;

Change of Control means in relation to any party which at the Relevant Date is not a Subsidiary, it becoming a Subsidiary and in relation to any party which at the Relevant Date is a Subsidiary, either any change in its Ultimate Holding Company or it ceasing to be a Subsidiary;

Competing Business has the meaning given in Subclause 14.5;

Competing Investment has the meaning given in Subclause 14.4;

Company means Gulf Re Holdings Limited, a private par value limited liability company to be incorporated in the Bailiwick of Jersey, British Channel Islands, whose registered office will be initially situated at First Island House, Peter Street, St Helier, Jersey JE4 8SG, Channel Islands;

Confidential Information has the meaning given in Subclause 18.1;

Deadlock Notice has the meaning given in Subclause 16.3;

Default Notice has the meaning given in Subclause 4.8;

Defaulting Party has the meaning given in Subclause 17.1;

DFSA means the Dubai Financial Services Authority or a successor agency;

DIFC means the Dubai International Financial Centre;

Directors means the GIC Directors and the Arch Re Directors and Director means any of them;

Disclosing Party has the meaning given in Subclause 18.1;

Dispute has the meaning given in Subclause 21.1;

Dispute Meeting has the meaning given in Subclause 21.1;

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Disputes Notice has the meaning given in Subclause 21.1;

Encumber means creating or allowing to exist or agreeing to create or agreeing to allow to exist any mortgage, charge (fixed or floating), pledge, lien, option, right to acquire, assignment by way of security, trust arrangement for the purpose of providing security or any other security interest of any kind, including retention arrangements;

equity securities has the meaning given in Subclause 14.5;

Exempted Person has the meaning given in Subclause 14.5;

Fair Price has the meaning given in Subclause 22.1;

Financial Year means a financial year of the Company ending on 31 December or any other financial year agreed by the Shareholders pursuant to the provisions of this agreement;

First Sale Shares has the meaning given in Subclause 16.5;

First Shareholder has the meaning given in Subclause 16.5;

GAAP means accounting principles generally accepted in the United States of America, as in effect from time to time;

GCC has the meaning given in the recitals hereto;

GIC has the meaning given in the preamble hereto;

GIC Directors means the directors of the Company appointed by GIC from time to time;

Group means in relation to any party, it and its Affiliates;

Holding Company has the meaning given in Subclause 1.2;

IFRS means the International Financial Reporting Standards;

Initial Period has the meaning given in Subclause 15.1;

Intellectual Property Rights means:

(a)trade marks, service marks, trade names, copyright, patents, patent rights, database rights, licenses, designs, know-how and confidential information (whether registered or unregistered);

(b)applications for registration, and the right to apply for registration, for any of these rights; and

(c)all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;

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Interested Director Transaction means entering into, modifying or voluntarily terminating any existing or proposed agreement, transaction or other arrangement, or any determination with respect to litigation or other proceedings, in each case between the Company or any of its Subsidiaries, on the one hand, and that Director or any Related Person of that Director, on the other;

Interested Shareholder Transaction means, in relation to any Shareholder, entering into, modifying or voluntarily terminating any existing or proposed agreement, transaction or other arrangement, or any determination with respect to litigation or other proceedings, in each case between the Company or any of its Subsidiaries, on the one hand, and that Shareholder, any of its Affiliates or any person in which such Shareholder or any of its Affiliates shall own 10% or more of the equity interests, on the other;

JV IPR has the meaning given in Subclause 12.1;

Net Premiums has the meaning given in Subclause 14.5;

Non-Compete Territory has the meaning given in Subclause 14.5;

Non-Compete Territory Percentage has the meaning given in Subclause 14.5;

Non-Paying Shareholder has the meaning given in Subclause 4.8;

percentage has the meaning given in Subclause 14.5;

Receiving Party has the meaning given in Subclause 18.1;

Referral Business Acceptance Notice has the meaning given in Subclause 14.2;

Referral Offer has the meaning given in Subclause 14.2;

Referral Offer Notice has the meaning given in Subclause 14.2;

Referring Shareholder has the meaning given in Subclause 14.2;

Reinsurance Subsidiary means Gulf Re Limited, a company limited by shares to be incorporated in the Dubai International Financial Centre;

Related Person means, with respect to any Director, (x) any family member of such Director and (y) any person in which such Director and such Director’s family members own directly or indirectly 10% or more of all outstanding shares or other equity interests;

Relevant Amount has the meaning given in Subclause 4.6;

Relevant Date means the date on which any party becomes a party to this agreement whether as an original party or by subsequently adhering to its terms in the manner described in this agreement;

Relevant Shareholder has the meaning given in Subclause 12.2;

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Response Period has the meaning given in Subclause 14.5;

Retrocede has the meaning given in Subclause 14.5;

Second Sale Shares has the meaning given in Subclause 16.5;

Second Shareholder has the meaning given in Subclause 16.5;

Senior Management Team has the meaning given in Subclause 8.1;

Shareholder IPR Improvements has the meaning given in Subclause 12.2;

[****];

Shareholders means the Shareholders in the Company who are parties to this agreement and any person to whom Shares are transferred in accordance with this agreement from time to time and Shareholder means any of them;

Shares means shares in the share capital of the Company;

Specified Price has the meaning given in Subclause 15.2;

Starting Date means the date on which the Shareholders have funded the Starting Date Subscription Amount in accordance with Subclause 4.4; provided that the Starting Date shall be a Business Day to be agreed that is within five days after the date on which the conditions specified in Subclause 3.1 are fulfilled or waived.

Starting Date Subscription Amount means the difference of US$99,990,000 less the aggregate amount of Shareholder Start-Up Advances.

Subsidiary has the meaning given in Subclause 1.2;

Tag-Along Notice has the meaning given in Subclause 15.3;

Tag-Along Offeree has the meaning given in Subclause 15.3;

Tag-Along Offeror has the meaning given in Subclause 15.3;

Termination Date has the meaning given in Subclause 14.5;

Territory means the United Arab Emirates, the State of Kuwait, the Kingdom of Saudi Arabia, the State of Qatar, the Sultanate of Oman and the Kingdom of Bahrain and any other country as the Shareholders may agree in writing; provided that the failure of the Shareholders to agree to include any additional country in the Territory shall in no event constitute a Deadlock Event;

Transfer Notice has the meaning given in Subclause 15.2;

Transferee has the meaning given in Subclause 15.2;

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Transferor has the meaning given in Subclause 15.1;

Ultimate Holding Company means a Holding Company which is not also a Subsidiary;

Underlying Shareholder IPR has the meaning given in Subclause 12.2;

Wholly-Owned Group has the meaning given in Subclause 1.2; and

Wholly-Owned Subsidiary has the meaning given in Subclause 1.2.

1.2(a)A company is a Subsidiary of another company, its Holding Company if that other company:

(i)holds a majority of the voting rights in it, or

(ii)is a member of it and has the right to appoint or remove a majority of its board of directors, or

(iii)is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it,

or if it is a Subsidiary of a company which is itself a Subsidiary of that other company.

(b)A company is a Wholly-Owned Subsidiary of another company if it has no members except that other company and that other company’s wholly-owned Subsidiaries.

(c)Wholly-Owned Group means a body corporate and any Holding Company of which it is a Wholly-Owned Subsidiary and any other Wholly-Owned Subsidiaries of that Holding Company (including any Wholly-Owned Subsidiary of the body corporate).

(d)In this Subclause company includes any body corporate.

1.3Any express reference to an enactment (which includes any legislation in any jurisdiction) includes references to:

(a)that enactment as amended, extended or applied by or under any other enactment before or after the date of this agreement;

(b)any enactment which that enactment re-enacts (with or without modification); and

(c)any subordinate legislation (including regulations) made (before or after the date of this agreement) under that enactment, as re-enacted, amended, extended or applied as described in Subclause 1.3(a) above, or under any enactment referred to in Subclause 1.3(b) above,

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except to the extent that any of the matters referred to in Subclauses 1.3(a) to 1.3(c) above occurring after the date of this agreement increases or alters the liability of any party to this agreement, and enactment includes any legislation in any jurisdiction.

1.4References to a company shall be construed so as to include any company, corporation or other body corporate or other legal entity, wherever and however incorporated or established.

1.5References to a person shall be construed so as to include any individual, firm, company, government, state or agency of a state or any joint venture, association, partnership, works council or employee representative body (whether or not having separate legal personality).

1.6References to times of the day are to local time in the relevant jurisdiction unless otherwise stated.  References to days are to calendar days.

1.7References to any English legal term for any action, remedy, method or judicial proceeding, legal document, legal status, court, official, or any legal concept or thing shall in respect of any jurisdiction other than England be deemed to include what most nearly approximates in that jurisdiction to the English legal term.

1.8References to US Dollars or USD or US$ are to the lawful currency from time to time of the United States of America.

1.9Where there is any inconsistency between the definitions set out in this Clause and the definitions set out in any Clause or Schedule, then for the purposes of construing such Clause or Schedule, the definitions set out in such Clause or Schedule shall prevail.

1.10Subclauses 1.1 to 1.9 apply unless the contrary intention appears.

1.11The headings in this agreement do not affect its interpretation.

1.12Any schedule or appendix to this agreement shall take effect as if set out in this agreement and references to this agreement shall include its schedules and appendices.

2.THE BUSINESS OF THE COMPANY

2.1The business of the Company shall be to be a holding company for its operating Subsidiaries.  The activities of the operating Subsidiaries shall be primarily to provide a broad range of property and casualty reinsurance products to insurance companies in the Territory or where the ultimate insured, or its parent company, are located in the Territory, which reinsurance products will cover property and casualty risks, including aviation, energy, commercial transportation, marine, engineering, industrial and specialty property catastrophe risks in accordance with the Company’s regulatory approvals, consents and licenses and the Business Plan and Budget (the Business).  For the avoidance of doubt, throughout this agreement, reinsurance includes retrocession.

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3.CONDITIONS SUBSEQUENT

3.1The obligations of the parties under this agreement are conditional on:

(a)receipt of regulatory consents, licenses and approvals from the DFSA to enable the Reinsurance Subsidiary to effect contracts of insurance and to carry out contracts of insurance free of conditions and restrictions;

(b)incorporation of the Company and the Reinsurance Subsidiary in accordance with Clause 4;

(c)[****];

(d)the Reinsurance Subsidiary obtaining and accepting a pre-start up rating of [****]; and

(e)receipt of regulatory consents from any applicable competition authority or expiration of relevant waiting periods under any applicable competition law.

3.2The Shareholders may mutually agree in writing to waive all or any of the conditions (c) to (f) in Subclause 3.1 in whole or in part at any time by notice.

3.3Each party shall use all reasonable endeavours to procure that the conditions in Subclause 3.1 are fulfilled on or before [****].

3.4If the conditions in Subclause 3.1 are not fulfilled or waived on or before the date specified in Subclause 3.3 (or such later date as the parties may agree), the Company shall be wound-up and none of the parties shall have any rights or obligations under this agreement (so that no party shall have any claim against the other for costs, damages, compensation or otherwise) except:

(a)in respect of any previous breach of this agreement (including, without limitation, Subclause 3.3); and

(b)the provisions of Clauses 1, 4, 18, 19, 21, and 23 to 30 and Clause 17 (so far as it relates to an obligation under this agreement arising prior to such release) shall continue to apply.

4.SHARE CAPITAL

4.1As soon as practical following the date of this agreement, the Shareholders shall apply for the authorisation and incorporation of the Company in the Bailiwick of Jersey, British Channel Islands, and the Reinsurance Subsidiary in the DIFC.

4.2The authorised share capital of the Company shall be US$400,000,000, divided into 400,000 Shares with a nominal value of US$1,000 each.  Upon the incorporation of the Company, each Shareholder shall be issued ten Shares at a total subscription price of US$10,000.  Each Shareholder agrees to pay within five days of the date hereof (or, if the

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Company has not been incorporated or the bank account for the Company has not been established by such date, the date on which both the Company is incorporated and such bank account is established), US$10,000 to satisfy payment in full of each Shareholder’s subscription amount in respect of ten Shares.

4.3As soon as the conditions subsequent specified in Subclause 3.1 are fulfilled or waived, the Shareholders shall subscribe for the following Shares in the manner described in Subclause 4.4:

(a)GIC – 199,990 Shares, which, together with the Shares subscribed to by GIC pursuant to Subclause 4.2, shall comprise 50% of the authorised share capital of the Company, for a total subscription price of US$200,000,000;

(b)Arch Re – 199,990 Shares, which, together with the Shares subscribed to by Arch Re pursuant to Subclause 4.2, shall comprise 50% of the authorised share capital of the Company, for a total subscription price of US$200,000,000.

For the avoidance of doubt, such subscription shall be pursuant to this Agreement and shall not require any further written agreement of the Shareholders.

4.4[****]  For the avoidance of doubt, in no event shall any Shareholder be obligated to fund more than US$200,000,000 to the capital of the Company (minus profits capitalized pursuant to Subclause 13.1) in the aggregate under this agreement.  Prior to the Starting Date, the Shareholders may enter into an amendment to this agreement with respect to the par value of the Shares and additional paid-in capital to the extent the Shareholders agree such changes may be necessary in light of applicable accounting and legal considerations.

4.5The Shareholders shall procure that, on the Starting Date, the Company shall enter into an undertaking to observe and perform the provisions and obligations of this agreement in the form set out in Schedule 1.  Until the Starting Date, to the extent any obligations are imposed on the Company under this agreement, the Shareholders shall procure that the Company complies with these obligations.

4.6In the event that the Board shall determine that the Company’s resources are insufficient to meet its requirements, then the Board may make a Capital Call by giving at least 21 days’ notice in writing (a Capital Call Notice) to each Shareholder detailing such determination and including a statement of the amount which is required to redress the deficit (the Relevant Amount) and the purpose for which it is required.

4.7Each Capital Call shall be paid by the Shareholders in proportion to its subscription set out in Subclause 4.3 by payment of the amount required in the Capital Call Notice pursuant to Subclause 4.4.  Payment of a Capital Call shall be made in US Dollars at the time or times determined by the Board.  No Capital Call shall be made on any Shareholder without an equivalent Capital Call being made on the other Shareholder.

4.8In the event that any Shareholder (the Non-Paying Shareholder) fails to pay all or part of its proportion of any Capital Call on the due date and such default is not remedied within 14 days after notification of the default to that Shareholder by the Board or the

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other Shareholder (Default Notice) except where a Shareholder’s funding cap has been reached in accordance with Subclause 4.4, the Company shall immediately notify the Shareholders of the Default Notice and the other Shareholder may elect by notice in writing to the Company to treat the failure to fund as a default in accordance with Clause 17.

4.9All Shares shall rank pari passu in all respects.

4.10Each Share will carry one vote at any general meeting of the Company.

4.11General meetings of the Company shall be held at least once every calendar year.  General meetings of the Company shall be held between the hours of 3.00 p.m. and 8.00 p.m. (Dubai time) on Business Days unless agreed otherwise by all Shareholders.  Any director or Shareholder may call a general meeting of the Company.  At least 21 days’ notice of each general meeting of the Company shall be given to each Shareholder unless in any particular case the Shareholders otherwise agree in writing.  The notice shall specify the time and place of the meeting. The notice shall be accompanied by an agenda of all the business to be transacted at the general meeting of the Company.  Any matter not on the agenda may not be raised at the meeting unless the Shareholders all agree.

4.12A general meeting of the Company may consist of a conference between the Shareholders some or all of whom are in different places, provided that each Shareholder who participates is able:

(a)to hear each of the other participating Shareholders addressing the meeting; and

(b)if he so wishes, to address all of the other participating Shareholders simultaneously,

whether directly, by conference telephone or by any other form of communications equipment (whether in use when these articles are adopted or not) or by a combination of those methods.  A meeting held in this way is deemed to take place at the place from where the chairman at the meeting participates.

4.13No general meeting of the Shareholders may proceed to business unless a quorum is present at the start and throughout the meeting.  Two Shareholders entitled to vote present in person or by proxy or by a duly authorised representative shall constitute a quorum.  In the event that the quorum is not present the meeting shall be reconvened, subject to Subclause 4.15, to the same day in five days at the same time and place or to such time and place as the Shareholders may determine.

4.14In the event that any of the Shareholders are unable to attend the general meeting, GIC or Arch Re may cause the meeting to be delayed by written notice to the Company at least two Business Days before the scheduled meeting, in which case the Shareholders will in good faith seek to reschedule the meeting to a time within five Business Days of the originally scheduled meeting at which the Shareholders can attend the meeting.

4.15The chairman, if any, of the Board or in his absence some other director designated by the Shareholders shall preside as chairman of the meeting, but if neither the chairman nor

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such other Director (if any) be present within fifteen minutes after the time appointed for holding the meeting and willing to act, the Shareholders present shall elect one of their representatives to be chairman.

4.16Subject to Clause 10, resolutions to be voted on at any Shareholders’ meeting shall be decided by a simple majority of votes except where a greater majority is required by the Company’s articles of association, any agreement between the Shareholders or by relevant legislation. The chairman shall not have a casting vote or deciding vote in case of equality of votes.

4.17A resolution in writing signed (in person or by fax or by email) by each Shareholder shall be as effective as if the same had been passed at a general meeting of the members of the Company duly convened and held and may be executed in several counterparts.

4.18The Company shall distribute dividends to the Shareholders in proportion to the amounts paid up by each Shareholder in respect of their respective shareholdings in the Company set out in Subclause 4.3 as at the date of such distribution.

4.19After the allotment of the Shares specified in Subclause 4.3, any Shares in the Company shall be issued to the Shareholders so as to maintain the proportions noted in Subclause 4.3.

4.20In the event of the liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution to the Shareholders shall be distributed among the Shareholders in proportion to the amounts paid up by each Shareholder in respect of their respective shareholdings in the Company set out in Subclause 4.3 as at the date of such distribution.

4.21The Shareholders shall procure that the Company shall appoint Auditors on the Starting Date.

5.WARRANTIES

Each Shareholder represents and warrants to the other Shareholder as at the date of this agreement that each of the following statements is true and accurate:

(a)it is duly organised and validly existing under the laws of its country of incorporation;

(b)it has the power to enter into and perform its obligations under this agreement and each of the other documents referred to in this agreement to which it is a party;

(c)the signing, delivery and performance by such Shareholder of its obligations under this agreement have been duly authorised by all necessary corporate or other organisational action;

(d)such Shareholder has duly signed and delivered this agreement;

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(e)this agreement is a legal, valid and binding obligation of such Shareholder, enforceable against such Shareholder in accordance with its terms except as limited by bankruptcy, insolvency or other similar laws; [****]

(f)it has all necessary consents, licences and approvals in connection with the entry into and performance of its obligations under this agreement and (if applicable) as a shareholder in the Company; and

(g)its entry into this agreement and performance of its obligations under this agreement will not violate or conflict with, or exceed any limit imposed by (i) any law or regulation to which it is subject; (ii) its constitutional documents; or (iii) any other agreement, instrument or undertaking binding upon it.

6.THE BOARD

6.1Prior to the Starting Date, the Board shall consist of two Directors, one of whom shall be an GIC Director and the other shall be an Arch Re Director.  From and after the Starting Date, the Board shall consist of six Directors, of whom three shall be GIC Directors and three shall be Arch Re Directors.

6.2GIC shall be entitled by notice in writing to the Company to appoint and to remove or replace any or all of the GIC Directors, and Arch Re shall be entitled by notice in writing to the Company to appoint and to remove or replace any or all of the Arch Re Directors.

6.3The Shareholders shall procure that GIC and Arch Re’s respective nominations for approval, removal or replacement are effected.

6.4The party removing any Director shall indemnify the Company against any liability arising as a result of that Director’s removal from office.

6.5Any appointment or removal shall, unless the contrary intention appears, take effect from the date it is notified to the Company in writing.

6.6Each Director shall be entitled to appoint a person who is another Director at any time to act on his behalf as his alternate (the Alternate Director).  All appointments shall be made in writing.

6.7In addition to his vote as a Director of the Company, the Alternate Director shall be entitled to vote on behalf of the Director appointing him at any such meeting at which the Director appointing him is not personally present.

6.8The business of the Company shall be managed by the Directors who may exercise all the powers of the Company save as otherwise provided in this agreement or the Articles and to delegate their management authority to the Senior Management Team in accordance with Subclause 8.1.

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6.9The appointment of the chairman shall rotate between the Shareholders every two years on the anniversary of the Starting Date.  The initial chairman shall be appointed by Arch Re and shall be Marc Grandisson.

6.10The chairman shall not be entitled to a second or casting vote either in general meeting of the Company or at any meeting of the Board.

6.11Each Shareholder shall be entitled to designate on an annual basis one observer, who shall be entitled to attend meetings of the Board and any committee thereof for a period of one year.  Each such observer shall be an officer or director of such Shareholder or any of its Affiliates.  An observer shall be entitled to receive notices of meetings of the Board and any committee thereof and copies of materials provided to the Board and any committee thereof but shall have no voting rights and shall otherwise have no rights or obligations as a Director.

7.PROCEEDINGS OF DIRECTORS

7.1The Board shall meet as reasonably necessary to discharge its duties but in any case no less frequently than four times per year, unless decided otherwise by the Board.  Questions arising at a meeting shall be decided by a majority of votes. Meetings of the Board shall be held between the hours of 3.00 p.m. and 8.00 p.m. (Dubai time) on Business Days unless agreed to by all Directors.

7.2Any Director may, and, upon request of any Director, the Secretary of the Company shall, give notice of a Board meeting.  At least seven days’ prior written notice of each Board meeting shall be given to each Shareholder and each Director.  The notice shall be accompanied by an agenda of all the business to be transacted at the meeting, which shall include reasonable details of all items to be discussed or requested to be acted upon at such meeting.  Any matter not on the agenda may not be raised at the meeting unless all the Directors agree.

7.3The quorum at meetings of the Board (including meetings held by conference between the Directors in accordance with Subclause 7.8) shall be at least two Directors of whom one shall be a GIC Director and one shall be an Arch Re Director.  In the event that the quorum is not present, the meeting shall be reconvened, subject to Subclause 7.4, to the same day in five days at the same time and place.  In the event that the quorum is not present at such reconvened meeting, the meeting shall be reconvened, subject to Subclause 7.4, to the same day in five days at the same time and place and the quorum at such reconvened meeting shall be any three Directors.

7.4In the event that a GIC Director or an Arch Re Director is unable to attend the meeting, GIC (in respect of the GIC Director) or Arch Re (in respect of the Arch Re Director) may cause the meeting to be delayed by written notice to the Company at least two Business Days before the scheduled meeting, in which case the Shareholders will in good faith seek to reschedule the meeting to a time within five Business Days of the originally scheduled meeting at which the GIC Director or the Arch Re Director (as applicable) can attend the meeting.

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7.5Any committee of the Board shall include an equal number of GIC Directors and Arch Re Directors and the quorum for a committee of the Board shall be at least two Directors of whom one shall be a GIC Director and one shall be an Arch Re Director.

7.6All acts done by a meeting duly held of Directors, or of a committee of Directors, or by a person acting as a Director shall, notwithstanding that it be afterwards discovered that there was a defect in the appointment of any Director or that any of them were disqualified from holding office, or had vacated office, or were not entitled to vote, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director and had been entitled to vote.

7.7(a)A resolution which is signed or approved by all the Directors or all of the members of a committee of Directors shall be as valid and effectual as if it had been passed at a meeting of Directors or (as the case may be) a committee of Directors duly called and constituted.

(b)The resolution may be signed in counterparts. A resolution signed or approved by an Alternate Director need not also be signed or approved by his appointor and, if it is signed or approved by a Director who has appointed an Alternate Director, it need not be signed or approved by the Alternate Director in that capacity.

(c)For the purposes of this Subclause 7.7 the signed counterpart of a Director or Alternate Director may be delivered by letter, fax or e-mail.

7.8A meeting of the Directors may consist of a conference between Directors some or all of whom are in different places provided that each Director who participates is able:

(a)to hear each of the other participating Directors addressing the meeting; and

(b)if he so wishes, to address all of the other participating Directors simultaneously,

whether directly, by conference telephone or by any other form of communications equipment (whether or not in use when this agreement was executed) or by a combination of those methods.

7.9A meeting held as described in Subclause 7.8 is deemed to take place at the place where the largest group of participating Directors is assembled or, if no such group is readily identifiable, at the place from where the chairman of the meeting participates.

7.10In the case of any Interested Director Transaction to be considered or voted upon at a meeting at a Board, then the Director or Directors associated with the Interested Director Transaction shall disclose his or her interest in the Interested Director Transaction, and such Director or Directors shall not be entitled to:

(a)attend or participate in any discussion of that matter;

(b)receive information or advice received by the Company on such matter; or

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(c)vote (or be counted in the quorum at a meeting) in relation to such matter.

7.11The Company shall obtain and maintain directors’ liability insurance for the Directors.

7.12The provisions of Clauses 6 and 7 shall apply equally to the composition and proceedings of the board of directors of each of the Company’s Subsidiaries mutatis mutandis; provided that, other than in the case of the board of directors of the Reinsurance Subsidiary, to the extent application of Clauses 6 and 7 shall not be permitted by any law or regulation applicable to a Subsidiary (such as if local law requires a resident director), the Shareholders shall, in good faith, negotiate changes to such provisions as they apply to such Subsidiary in order to comply with applicable law and regulation and achieve substantially the same substantive results.

8.COMPANY MANAGEMENT

8.1The Board, and the Board shall procure that the Company’s Subsidiaries, shall delegate control of the day-to-day management of the Company and its Subsidiaries to a senior management team (the Senior Management Team).  The Senior Management Team shall comprise such number of persons and functions as shall be determined by the Board to be necessary to effectively carry out its function, including the Chief Executive Officer, the Chief Financial Officer, the Controller, the Chief Underwriting Officer and the Chief Operating Officer.

8.2The appropriate members of the Senior Management Team shall establish the year-end reserves for underwriting liabilities, which shall be reviewed by the Actuary on an annual basis.

9.SHAREHOLDERS’ INTERESTS

9.1In the case of any Interested Shareholder Transaction that requires approval by the Shareholders, whether pursuant to the terms of this agreement or otherwise, or if such Interested Shareholder Transaction is to be the subject of discussion at any meeting of Shareholders, then the Shareholder associated with the Interested Shareholder Transaction shall promptly disclose its interest in the Interested Shareholder Transaction by giving written notice to the Company and the other Shareholder.  Subject to Subclause 9.2, following disclosure of such Interested Shareholder Transaction, such Shareholder shall be entitled to vote (and be counted in the quorum at a meeting) in relation to such matter.

9.2No Shareholder or Director, in its or his or her capacity as such, shall be entitled to exercise any right or power to prevent the Company or any of its Subsidiaries (x) in the event that the Company or any of its Subsidiaries is enforcing its rights under, or taking any action against such Shareholder in relation to, or (y) from defending itself in relation to any action taken against it by a Shareholder in connection with, any matter arising under any subsequent agreement entered into between the Company or any of its Subsidiaries and such Shareholder.  For the purposes of Subclause 4.13 and 7.3, such Shareholder or Director shall be deemed to be present to constitute the quorum at the meeting.

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10.RESERVED MATTERS

10.1Neither the Company nor any Subsidiary of it (from time to time) shall do any of the following (or do anything which is analogous to or has a substantially similar effect to any of the following) without the prior written approval of each Shareholder:

(a)alter its name;

(b)alter its constitutional documents;

(c)merge, amalgamate or consolidate with or into any entity;

(d)create, issue, purchase, redeem or otherwise reorganise, increase or decrease its share or loan capital;

(e)pass any resolution for its winding up;

(f)apply for the appointment of a receiver or an administrator over its assets;

(g)appoint or change its Auditors or Actuary;

(h)alter its financial year end;

(i)form any Subsidiary or acquire shares in any company or participate in, or terminate any participation in, any partnership or joint venture;

(j)apply for any new or expanded regulatory consents, licenses or approvals in any jurisdiction;

(k)engage in any business other than the Business;

[****].

10.2GIC and Arch Re may grant authority in writing to any GIC Director or Arch Re Director (as applicable) to represent GIC or Arch Re (as applicable) at a meeting of the Shareholders and to approve one or more of the matters set out in Subclause 10.1 on behalf of GIC or Arch Re (as applicable).

10.3Where a matter which would otherwise require approval under this Clause has been expressly included in either a Business Plan or a Budget approved by the Shareholders, no further approval shall be required under this Clause.

11.CONTINUING OBLIGATIONS

11.1The Company shall prepare for the review and approval of the Shareholders both a draft Business Plan and a draft Budget for the coming Financial Year of the Company (including any Subsidiaries of the Company) both of which it shall submit to the Shareholders not less than 90 days before the end of the current Financial Year of the Company.

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(a)Each Business Plan shall include a reasonably detailed plan for the coming Financial Year and a more general plan for the next five years, on a per line basis in respect of each of the Company and its Subsidiaries’ business lines;

(b)Each Budget shall include, for the upcoming Financial Year:

(i)a projected balance sheet, income statement and statement of cash flows;

(ii)an estimate of working capital requirements;

(iii)an estimate of the regulatory capital requirements;

(iv)an operating expense budget; and

(v)a report on the Company and each of its Subsidiaries’ performance during the current Financial Year of the Company.

11.2The Shareholders shall consider the draft Business Plan and the draft Budget submitted to them under Subclause 11.1 above and shall in good faith take appropriate steps with a view to their approving, not less than 20 days before the end of the then current Financial Year of the Company, the draft Business Plan and draft Budget (with such amendments as the Shareholders shall agree) as the Business Plan and the Budget for the then following Financial Year of the Company.  In the event that the Shareholders fail to agree on a draft Business Plan or Budget (as applicable) prior to the end of the then current Financial Year, the Business Plan or Budget (as applicable) for such current Financial Year shall remain in effect until the Shareholders shall agree on a new Business Plan or Budget (as applicable).

11.3The Company shall provide each Shareholder with:

(a)within two months after the end of each Financial Year, (i) a consolidated balance sheet of the Company and each of its Subsidiaries as at the end of such Financial Year and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such Financial Year, setting forth in each case in comparative form the figures for the previous Financial Year, all prepared in accordance with IFRS (and presented in U.S. Dollars) and accompanied by a report of the Auditors, which shall not be qualified in scope; (ii) the financial statements referred to above set forth in comparative form against budgeted figures for such Financial Year; and (iii) a report of the Actuary on the reserving requirements of the Subsidiaries;

(b)within 45 days after the end of each financial quarter, (i) a consolidated balance sheet of the Company and each of its Subsidiaries as at the end of such financial quarter and the related consolidated statements of income or operations and cash flows for such financial quarter and for the period elapsed from the beginning of the Financial Year, setting forth in each case in comparative form the figures for the same periods in the previous financial year, all prepared in accordance with IFRS (and presented in U.S. Dollars) and accompanied by a certificate of the

19

Chief Executive Officer and the Chief Financial Officer of the Company; and (ii) the financial statements referred to above set forth in comparative form against budgeted figures for such financial quarter and for the period elapsed from the beginning of the Financial Year;

(c)financial statements of the Subsidiaries for each Financial Year or financial quarter, as the case may be, prepared in accordance with IFRS (and presented in US Dollars) and in a form required by applicable regulatory authorities, within five days of filing with such authorities;

(d)within three weeks after the end of each month, monthly management reports in a form agreed by the Shareholders; and

(e)such further information as each Shareholder may from time to time reasonably require as to all matters relating to the businesses or affairs or the financial position of the Company and its Subsidiaries.

11.4Subject to applicable laws and regulations, the Company and each of its Subsidiaries shall:

(a)maintain accurate and complete accounting and other financial records and shall procure that such accounting records are, during normal business hours, available for inspection by each Shareholder or its respective authorised representatives; and

(b)permit each Shareholder or its respective authorised representatives reasonable access at all such times as may reasonably be expected:

(i)to conduct an independent audit of the accounting and other financial records of the Company and its Subsidiaries;

(ii)to inspect the premises of the Company and its Subsidiaries; and

(iii)to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Senior Management Team, other employees and consultants of the Company and its Subsidiaries, the Auditors and the Actuary.

11.5The Company shall provide the Shareholders with such information and assistance as necessary to enable the Shareholders to present the Company’s accounts in accordance with GAAP.

11.6Subject always to applicable laws in the Territory, the Company and its Subsidiaries intend in good faith and to the best of their knowledge to voluntarily operate in adherence with, and to implement such procedures developed in consultation with the Shareholders designed to comply with, the economic sanctions and embargo programs administered from time to time by the Office of Foreign Assets Control of the United States Department of the Treasury, and United States government requirements which prohibit dealing

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with all sanctioned, debarred, denied or unverified persons as set forth in United States government lists promulgated by the United States Department of Commerce and the United States Department of State.

11.7Neither the Company nor any of its Subsidiaries nor any of their respective directors, officers or employees shall make, or offer to make, any payment or provide any other item of value to any government official in order to obtain favourable treatment or to benefit the Company or any of its Subsidiaries or in any way assist the Company or any of its Subsidiaries in its business.

12.INTELLECTUAL PROPERTY AND SERVICES

12.1The Company shall have the sole ownership of any and all Intellectual Property Rights save for Shareholder IPR Improvements (as defined below) created by the Company or any of its Subsidiaries (the JV IPR).  The Company shall take all reasonable steps to protect and maintain the JV IPR.

12.2[****]

12.3[****]

12.4The Company and its Subsidiaries shall defend, indemnify and hold harmless each Shareholder and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives from and against, and hold them harmless from, any and all claims, liabilities, losses, costs, actions, suits, proceedings, damages and expenses (including reasonable attorneys’ fees and costs) (Losses), as incurred (payable promptly on request) that result from or arise in connection with (i) the use or practice by the Company and its Subsidiaries of the Underlying Shareholder IPR or Shareholder IPR Improvements, except [****]or (ii) any other product or service provided to the Company or any of its Subsidiaries by any Shareholder or any of its Affiliates, including any claim (including without limitation, strict liability or tort claims), action, suit or other proceeding, made or brought by or on behalf of a third party, in any such case, allegedly or in fact based on or arising from the items described in clause (i) (a Third Party Claim).  The Company shall have the right to assume control of any proceedings relating to the Third Party Claim and each Shareholder shall provide the Company with all commercially reasonable assistance.  The Company shall not admit liability or settle a Third Party Claim without the prior written consent of each Shareholder (not to be unreasonably withheld).

13.DIVIDEND POLICY

13.1The Shareholders agree that the profits of the Company shall be capitalised until such time as such aggregate capitalized amount, together with the proceeds of all Capital Calls, equals US$200,000,000.  Thereafter, the Company shall, to the extent permitted by law, distribute on a prudent basis by way of dividend in respect of each Financial Year the profits of the Company for that Financial Year as agreed by the Shareholders after taking into account the statutory reserve requirements, the regulatory capital requirements

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and the capital and working capital requirements of the Company and its Subsidiaries and the Company’s growth plans pursuant to its current Business Plan and Budget.

13.2The Shareholders shall procure that the Company shall take all reasonable steps to maximise profits available for distribution by the Company including, without limitation, procuring the payment of such dividends by a Subsidiary to enable the Company to pay the dividend referred to in subclause 13.1.

13.3Any dividends to be paid pursuant to Subclause 13.1 shall be paid within six months of the date of the Auditors’ opinion on the financial statements for such Financial Year.

14.PROTECTIVE COVENANTS

14.1Each Shareholder covenants with the other Shareholder that it shall not and shall procure that none of its Affiliates (either personally or through an agent), other than any Exempted Person, shall:

(a)at any time after the Starting Date and prior to the expiration of the Applicable Post-Termination Period, (x) engage in a Competing Business unless such Shareholder shall have complied with Subclause 14.2 or (y) make or retain a Competing Investment.

(b)at any time after the date hereof and prior to [****], induce, or attempt to induce, any director or any employee who was employed by the Company or any of its Subsidiaries at the Termination Date or at any time during the six months prior to the Termination Date to leave the employment of that Company or any of its Subsidiaries or to be employed by such Shareholder or any of its Affiliates, as the case may be.

(c)at any time after the date hereof, use or allow to be used (except by the Company and any of its Subsidiaries) any trademark, service mark or trade name of, or licensed to, the Company or any of its Subsidiaries or any other name or mark intended or likely to be confused with such a trademark, service mark or trade name.

(d)at any time after the date hereof, (i) use or allow to be used, any trademark, service mark or trade name of, or licensed to, the other Shareholder, or any trademark, service mark or trade name in a way as to be capable of or likely to be confused with the name of or trademark, service mark or trade name of, or licensed to, the other Shareholder, or (ii) use any of such other Shareholder’s Intellectual Property Rights.

In addition, neither the Company nor any of its Subsidiaries shall use or allow to be used any trademark, service mark or trade name of, or licensed to, any Shareholder, or a trademark, service mark or trade name in a way as to be capable of or likely to be confused with the name of or trademark, service mark or trade name of, or licensed to, any Shareholder without the written consent of such Shareholder (and subject to the conditions of such consent).

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14.2No Shareholder or any of its Affiliates (the Referring Shareholder), other than an Exempted Person, shall engage in a Competing Business unless the Referring Shareholder shall have complied with the following in respect of such Competing Business:

[****]

14.3If at any time after the Starting Date and prior to the expiration of the Applicable Post-Termination Period, the Company or any of its Subsidiaries shall receive a submission for reinsurance (whether treaty or facultative) (the Applicable Reinsurance Business) and intends to decline to write all or any part of the Applicable Reinsurance Business (the reinsurance or any portion thereof intended to be declined by the Company and its Subsidiaries is referred to as Available Business), the following shall apply:

[****]

14.4For purposes of this Clause 14, Competing Investment means [****].

14.5For purposes of this Clause 14, the following words have the meanings set forth below:

[****]

Applicable Post-Termination Period means [****].

Competing Business means [****].

[****]

Exempted Person means [****].

[****]

Termination Date means, with respect to a Shareholder, the date on which such Shareholder ceases to hold Shares.

14.6Each Shareholder acknowledges that the provisions of this Clause are no more extensive than is reasonable to protect the other Shareholder as a subscriber of Shares.

14.7

(a)The Company and each Shareholder acknowledges and agrees that no Shareholder, nor any of its Affiliates or any of their respective officers, directors, employees and agents, shall have any obligation to refer to the Company or any of its Subsidiaries any business opportunities presented or developed by any of them except as required by Subclause 14.2.

(b)For the avoidance of doubt, nothing in this Clause 14 shall require any Referring Shareholder or the Reinsurance Subsidiary to pursue or write any business that it determines not to pursue or write.

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(c)The Company and each Shareholder acknowledges and agrees that no Shareholder shall have any fiduciary or similar duties to the Company or to any other Shareholder, including with respect to any of the matters covered by this Clause 14.

(d)Notwithstanding anything herein to the contrary, the Company and each Shareholder acknowledges and agrees that Subclauses 14.1(a) and (b) shall not apply unless the conditions subsequent listed in Subclause 3.1 have been fulfilled or waived by both Shareholders.

15.TRANSFERS

15.1General

(a)Except as expressly required by Subclause 16.5 or 17.3 or as permitted by Subclause 15.2(b)(i), no Shareholder may transfer or otherwise dispose of or Encumber any of its Shares or any interest in any of its Shares for a period of five years from the date of this agreement (the Initial Period).

(b)Following the Initial Period, no Shareholder may, except as expressly required by Subclauses 16.5 or 17.3 or permitted by Subclause 15.2, transfer or otherwise dispose of or Encumber any of its Shares or any interest in any of its Shares.

(c)Any transfer or other disposal of any Shares permitted or required by this Clause shall only be made to a company.

(d)Any transfer or other disposal of Shares permitted or required by this Clause shall be in respect of all and not part only of the Shares held by the proposing transferor (the Transferor).

(e)The restrictions on transfer contained in this Clause shall apply to all transfers operating by law or otherwise.

15.2Permitted transfers

(a)[Reserved].

(b)A Shareholder may transfer all of its Shares:

(i)to another member of its Wholly-Owned Group; or

(ii)following the Initial Period, to any other person; provided that in the case of this Subclause 15.2(b)(ii) only the Transferor shall have complied with (A) the requirements in Subclause 15.2(e) and the other Shareholder shall not have purchased the offered Shares in accordance with Subclause 15.2(h) and (B) Subclause 15.3(a).

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(c)If a Shareholder transfers its Shares in accordance with Subclause 15.2(b)(i), such Shareholder shall remain bound by the obligation contained in Subclause 4.4 of this agreement unless agreed otherwise by the other Shareholder.

(d)If a Shareholder holding Shares transferred to it under Subclause 15.2(b) above is about to cease to be a member of the Wholly-Owned Group to which it currently belongs, it shall without delay and prior to it so ceasing to be a member notify the Company and the other Shareholder that such event will occur and shall transfer those Shares to a member of its current Wholly-Owned Group.

(e)Following the Initial Period, a Transferor who wishes to transfer Shares (other than as permitted by Subclauses 15.2(b)(i) or required by Subclause 16.5 or 17.3) shall give notice to the other Shareholder (the Transferee) in accordance with Subclause 15.2(f) below (a Transfer Notice).  No Shareholder shall give a Transfer Notice at a time while a default with respect to such Shareholder exists under Subclause 17.2, a notice under Subclause 17.3 is outstanding or while a Deadlock Notice or a Buy-Sell Offer Notice is outstanding.

(f)A Transfer Notice shall specify the identity of the proposed third party acquirer, the Shares offered (which shall constitute all the Shares owned by the Transferor), the price at which they are offered (the Specified Price) and other material terms of the offer, and shall invite the Transferee to notify the Transferor whilst the offer remains open whether it is willing to purchase the offered Shares.  A copy of the Transfer Notice shall be served on the Company.

(g)A Transfer Notice may not be revoked, and the offer shall remain open for a period of 45 days from the date of the Transfer Notice.

(h)On the expiry of the offer period referred to in Subclause 15.2(g), if the Transferee has notified the Transferor that it wishes to purchase the offered Shares, the Transferee shall be bound to pay the Specified Price for, and to accept a transfer of, the offered Shares and the Transferor shall be bound, on payment of the Specified Price, to transfer such offered Shares upon the terms and conditions specified in the Transfer Notice, free and clear of any and all Encumbrances, to the Transferee within a period of 45 days from the expiry of the offer period.  The provisions of Subclause 16.5(i) shall apply to such transfer mutatis mutandis.

(i)If prior to the expiry of the offer period referred to in Subclause 15.2(g), the Transferee has not notified in writing the Transferor that it wishes to purchase the offered Shares or the Transferee has notified in writing to the Transferor that it does not wish to purchase the offered Shares, the Transferor may at any time within a period of [****] transfer the offered Shares to the proposed third party acquirer identified in the Transfer Notice, subject to compliance with Subclause 15.3, at any price which is not less than the Specified Price, and on other terms and conditions not materially less favourable to the Transferor than those, specified in the Transfer Notice; provided that the offered Shares are to be transferred under a bona fide sale for the consideration stated in the transfer without any deduction, rebate or allowance to the purchaser for the offered Shares.

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15.3Tag Along

(a)If at any time following the Initial Period a Shareholder intends to dispose of its Shares (the Tag-Along Offeror), the Tag-Along Offeror shall give notice in writing (a Tag-Along Notice) to the other Shareholder (the Tag-Along Offeree), specifying:

(i)its intention to dispose of its Shares in the Company;

(ii)the name of the proposed third party transferee; and

(iii)the terms of the disposal, provided that such terms are unconditional.

A Tag-Along Notice may be given concurrently, and/or combined with, a Transfer Notice under Subclause 15.2(e).

(b)If the Tag-Along Offeree wishes to dispose of its Shares on the same terms as specified in the Tag-Along Notice it shall within 45 days after the date of the Tag-Along Notice notify the Tag-Along Offeror in writing.

(c)The Tag-Along Offeror shall not dispose of its Shares unless it has:

(i)given a Tag-Along Notice in accordance with Subclause 15.3(a) not less than 45 days before the disposal;

(ii)in the event that the Tag-Along Offeree determines to participate in the sale and has given notice pursuant to Subclause 15.3(b), procured the disposal of the Shares of both the Tag-Along Offeree and Tag-Along Offeror at a price not lower than the price specified in the Tag-Along Notice and on other terms and conditions not materially less favorable to the Tag-Along Offeree than those contained in the Tag-Along Notice; provided that the terms of the disposal of the Shares to the Tag-Along Offeror and to the Tag-Along Offeree shall be the same; and

(iii)in the event that the Tag-Along Offeree determines not to participate in the sale or has not given notice pursuant to Subclause 15.3(b), procured the disposal of the Shares of the Tag-Along Offeror at a price not higher than the price specified in the Tag-Along Notice and on other terms and conditions not materially more favorable to the Tag-Along Offeror than those contained in the Tag-Along Notice.

(d)No Shareholder shall give a Tag-Along Notice at a time while a default with respect to such Shareholder exists under Subclause 17.2 or while a notice under Subclause 17.3, a Deadlock Notice or Buy-Sell Offer Notice is outstanding.

15.4Deed of adherence

(a)It shall be a condition of any transfer of Shares (whether permitted or required) that:

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(i)the transferee, if not already a party to this agreement, enters into an undertaking to observe and perform the provisions and obligations of this agreement in the form set out in Schedule 2; and

(ii)in the event any loans owed by the Company or any of its Subsidiaries to the transferor remain outstanding at the time of such transfer, the transferor at the same time procures the transfer of all of the loans made by it or by any of its Affiliates to the transferee.

(b)No allotment of Shares shall be made to any person who is not already a party to this agreement.

15.5Registration of transfers

(a)A person executing an instrument of transfer of a Share is deemed to remain the holder of the Share until the name of the transferee is entered in the register of members of the Company in respect of it.

(b)Upon registration of a transfer or allotment of Shares, and provided the provisions of this Clause shall have been complied with, a Shareholder’s benefit of the continuing rights under this agreement shall attach to the transferee who may enforce them as if it had been a party to this agreement and named in it as a Shareholder.

16.DEADLOCK

16.1A Deadlock Event shall be deemed to have occurred if [****].

16.2[****]

16.3If a Deadlock Event is deemed to occur, the matter may be referred by any Shareholder at any time within 45 days of the occurrence of the Deadlock Event by written notice (a Deadlock Notice) to the Chief Executive Officer of GIC and the Chief Executive Officer of ACGL for informal resolution.  [****]  If the Chief Executive Officers of GIC and ACGL are unable to resolve the Deadlock Event within 48 hours after the time at which their last meeting occurred, either Shareholder shall be entitled to invoke the remaining provisions of this Clause by giving the Buy-Sell Offer Notice specified below.  If neither Shareholder delivers a Deadlock Notice within 45 days of the occurrence of the Deadlock Event, no Deadlock Event shall be deemed to exist and the refusals to consent or failures to agree described in Subclause 16.1 shall be required again for any Deadlock Event to exist.

16.4[****]

16.5(a)After the 48 hour period referred to in Subclause 16.3 and prior to the end of the 45 day period referred to in Subclause 16.4, either Shareholder (the First Shareholder) may deliver a notice in the form of Schedule 3 (a Buy-Sell Offer Notice) in writing on the other Shareholder (the Second Shareholder) signed by or on behalf of the First Shareholder offering (i) to sell to the Second Shareholder all

27

the Shares held by the First Shareholder (the First Sale Shares) and (ii) if the Second Shareholder does not buy all of the First Sale Shares from the First Shareholder, to buy from the Second Shareholder all the Shares held by the Second Shareholder (the Second Sale Shares).

(b)The First Shareholder shall deliver a copy of the Buy-Sell Offer Notice to the Company at the same time as the Buy-Sell Offer Notice is served on the Second Shareholder.

(c)The Buy-Sell Offer Notice shall specify the price in US Dollars at which all of the First Sale Shares are offered and shall request the Second Shareholder to notify the First Shareholder in writing within 45 days from the date of service of the Buy-Sell Offer Notice whether or not the Second Shareholder is willing to purchase the First Sale Shares at such price.

(d)The Second Shareholder shall deliver a notice in the form of Schedule 4 to the First Shareholder within 45 days from the date of delivery of the Buy-Sell Offer Notice, stating whether or not it is willing to purchase the First Sale Shares on the terms set out in the Buy-Sell Offer Notice.

(e)If the Second Shareholder gives notice to the First Shareholder that it is willing to purchase the First Sale Shares on the terms set out in the Buy-Sell Offer Notice, the First Shareholder shall be obliged to sell the First Sale Shares to the Second Shareholder or, subject to Subclause 16.5(i), as the Second Shareholder may direct at the price per Share in US Dollars specified in the Buy-Sell Offer Notice.  Subject to Subclause 16.5(i), the Second Shareholder shall within 45 days from the date when such obligation arose, pay to the First Shareholder the purchase price in US Dollars for the First Sale Shares, and the First Shareholder shall, concurrently with receipt of such purchase price, deliver to the Second Shareholder duly executed transfers in favour of the Second Shareholder or as the Second Shareholder may direct and the share certificate(s) representing the First Sale Shares.

(f)If the Second Shareholder gives notice to the First Shareholder that it is not willing to purchase the First Sale Shares on the terms set out in the Buy-Sell Offer Notice or if it becomes bound to sell the Second Sale Shares under Subclause 16.5(g) below the Second Shareholder shall be obliged to sell to the First Shareholder or, subject to Subclause 16.5(i), as the First Shareholder may direct the transfer of the Second Sale Shares at the same price per share in US Dollars as is specified in the Buy-Sell Offer Notice.  Subject to Subclause 16.5(i), the First Shareholder shall, within 45 days from the date when such obligation arose, pay to the Second Shareholder the purchase price in US Dollars for the Second Sale Shares, and the Second Shareholder shall, concurrently with the receipt of such purchase price, deliver to the First Shareholder duly executed transfers in favour of the First Shareholder or as the First Shareholder may direct and the share certificate(s) representing the Second Sale Shares.

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(g)If, after the expiry of the 45-day period referred to in Subclause 16.5(c), the Second Shareholder has not given any notice in writing to the First Shareholder in accordance with Subclause 16.5(c), the Second Shareholder shall be deemed to have declined the offer made by the First Shareholder and shall be bound in accordance with Subclause 16.5(f) to sell to the First Shareholder the Second Sale Shares at the same price per Share in US Dollars as is specified in the notice given by the First Shareholder, and shall be deemed to have made the representations in Schedule 4 hereof.

(h)Neither Shareholder shall be entitled to serve a Deadlock Notice or a Buy-Sell Offer Notice at a time while a default with respect to such Shareholder exists under Subclause 17.2 or while a notice under Subclause 17.3, a Transfer Notice under Subclause 15.2(e) or a Tag-Along Notice is outstanding; provided that the 45-day period referred to in the last sentence of Subclause 16.3 shall be extended during any period that a Deadlock Offer Notice may not be delivered pursuant to the foregoing.

(i)The Shareholders shall promptly seek approval of the DFSA and all other necessary regulatory consents for a transfer of Shares pursuant to this Subclause 16.5 and use all commercially reasonable efforts to obtain such approval and consents within the 45-day period specified for the closing of the transfer in Subclause 16.5(e) or 16.5(f).  No Shareholder shall be permitted to direct the transfer of Shares to a third party unless such third party shall be approved by the DFSA and any other relevant regulators within such 45-day period.  If the DFSA and any other relevant regulators do not approve the transfer of Shares from one Shareholder to the other Shareholder within such 45-day period, such 45-day period shall be extended for such additional period as is reasonably necessary to obtain such approvals during which the Shareholders shall continue to use all commercially reasonable efforts to obtain the approval of the DFSA and any other relevant regulators as promptly as possible.

16.6(a)All Shares transferred under this Clause shall be free from all liens, charges and encumbrances and shall carry all rights, benefits and advantages attached to them except the right to any dividend declared but not paid prior to the date of the registration of such transfer; and on the transfer of any Shares the holders of them shall secure the resignations of their nominees from any offices in the Company held before the transfer and the transferee of the Shares may fill such vacancies as if the transfer had been registered.

(b)Save as provided in Subclause 16.6(a), no Shareholder shall be obliged to give any representations or warranties in relation to the Company on a transfer of the Shares held by it.

(c)The Shareholders agree to do or procure to be done all such acts and things as may be required to give effect to the transfer and the registration of the Shares to be transferred into the name(s) of the transferees.

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17.DEFAULT

17.1If (x) any of the matters in Subclauses 17.2(a) to 17.2(i) shall occur and be continuing in relation to a Shareholder or (y) any of the matters in Subclauses 17.2(b) to 17.2(g) shall occur and be continuing in relation to the Ultimate Holding Company of such Shareholder, then that Shareholder shall be a Defaulting Party (so long as such matters continue) and shall notify the other Shareholder that it is a Defaulting Party.

17.2For the purposes of Subclause 17.1 the matters referred to in relation to the relevant company are, if it:

(a)makes a serious or persistent default in performing and observing any of its obligations under this agreement and, where such default is capable of remedy, fails to remedy it within 30 days after service of written notice from the other Shareholder of such default, which period shall be extended by an additional 30 days if the Defaulting Party undertakes to remedy the default within the first 30 days and provides evidence that it has taken substantial steps to remedy the default;

(b)is unable to pay its debts as they become due (as defined in section 123 of the UK Insolvency Act 1986) or is liable to be wound up by a court of competent jurisdiction;

(c)enters into a composition or arrangement with its creditors (as defined in section 425 of the UK Companies Act 1986) or a moratorium is declared in respect of any of its indebtedness or any creditor action;

(d)takes any action to appoint, to request the appointment of, or suffers the appointment of, a receiver, administrative receiver, administrator, trustee or similar officer over all or a material part of its assets or undertaking;

(e)has a winding-up or administration petition presented in relation to it or has documents filed with a court for an administration in relation to it provided that, in the case of a winding up petition, if the relevant company is contesting the winding up petition in good faith and with due diligence it shall not be a Defaulting Party until a period of 30 days has expired since the presentation of the winding up petition without it having been either discharged or struck out;

(f)any action in any jurisdiction other than England and Wales by anything equivalent to any of the things referred to in Subclauses 17.2(b) to 17.2(e) above has occurred and is continuing;

(g)subject to Subclause 17.4, suffers a Change of Control;

(h)fails to meet its funding obligations as required under pursuant to Clause 4; or

(i)attempts at any time to transfer or otherwise dispose of any interest in any Share or Shares otherwise than in accordance with Clause 15 or 16.

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17.3If a default described in Subclause 17.2(a) through (i) continues, upon giving 45 days’ written notice to the Defaulting Party and the Company, the Shareholder which is not a Defaulting Party shall have the right, at its election, to:

(a)purchase all of the Shares of the Defaulting Party at a cash price in US Dollars equal to the Fair Price; or

(b)terminate this agreement and liquidate the assets of the Company; or

(c)in the case of a default under Subclause 17.2(g) occurring prior to the third anniversary of the Starting Date, sell all of its Shares to the Defaulting Party at a cash price in US Dollars equal to the Fair Price (it being understood, for the avoidance of doubt, that this Subclause (c) shall have no effect on or after the third anniversary of the Starting Date).

Other than with respect to a default under Subclauses 17.2(b) through (g), the provisions of this Subclause 17.3 shall not apply while a Transfer Notice is outstanding under Subclause 15.2(e) or a Tag-Along Notice, a Deadlock Notice or a Buy-Sell Offer Notice is outstanding.  Once given, such notice may not be revoked or rescinded.  The provisions of Subclause 16.5(i) shall apply mutatis mutandis.

If the Shareholder which is not a Defaulting Party elects to purchase all of the Shares of the Defaulting Party in accordance with Subclause 17.3(a) or sell all of its Shares to the Defaulting Party in accordance with Subclause 17.3(c), the Fair Price shall be determined in accordance with Clause 22.

The Shareholder that intends to undergo a Change of Control may provide written notice to the other Shareholder of the proposed Change of Control, which notice may be contingent upon the consummation of a Change of Control.  If a Shareholder has provided such written notice and the other Shareholder has not either consented to such Change of Control or initiated its rights pursuant to Subclause 17.3, in each case within [****] following receipt of such notice of Change of Control then such Change of Control shall not constitute a default under Subclause 17.2(g) and the Shareholder receiving such notice shall be deemed to have consented to such Change of Control and shall have no rights thereafter under Subclause 17.3 in respect of such Change of Control; provided that the Change of Control is completed within [****] of the end of the period referred to in the foregoing clause (x) or (y), as applicable.

17.4For the avoidance of doubt, Subclause 17.3 shall be in addition to any other remedies available for a default under Subclause 17.2(a), (h) or (i).

18.CONFIDENTIALITY

18.1For the purposes of this Clause Confidential Information means all information of a confidential nature disclosed by whatever means by one party (the Disclosing Party) to any other party (the Receiving Party) and includes such information disclosed by or to the Company or any of its Subsidiaries and includes the provisions and subject matter of this agreement.

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18.2Each of the Company, its Subsidiaries and the Shareholders undertakes to keep, and each Shareholder shall procure that each of its Affiliates and each Director appointed by it under Subclause 6.2 shall keep, the Confidential Information confidential and not disclose it to any person, other than as permitted under this Clause.

18.3Subclause 18.2 shall not apply to the disclosure of Confidential Information if and to the extent:

(a)required by any law or by regulation of any country with jurisdiction over the affairs of the Receiving Party or the Company or any of its Subsidiaries;

(b)required by the rules of any securities exchange on which securities of the Receiving Party or any member of its Group are listed;

(c)required or requested by any court of competent jurisdiction, or any competent judicial, governmental, supervisory or regulatory body;

(d)for the purposes of filing such Shareholder’s tax returns or the tax returns of any Affiliate of such Shareholder;

(e)for the purposes of preparing and publishing such Shareholder’s financial statements or the financial statements of an Affiliate of such Shareholder;

(f)that such information is in the public domain other than through breach of this Clause;

(g)that such information otherwise is legally known to such Shareholder other than through disclosure by the Disclosing Party or the Company or any of its Subsidiaries;

(h)as approved by the Board; or

(i)that such disclosure is to a rating agency on a confidential basis;

provided that in the case of disclosure pursuant to paragraph (c) pursuant to compulsory legal process the Receiving Party will promptly notify the Disclosing Party or the Company (as appropriate) and, at the expense of the Disclosing Party, co-operate with the Disclosing Party or the Company (as appropriate) regarding the timing and content of such disclosure and any action which the Disclosing Party or the Company (as appropriate) may reasonably wish to take to challenge the validity of such requirement.

18.4The Receiving Party may disclose Confidential Information to its Affiliates and to its and its Affiliates’ directors, officers, employees, auditors, advisers and financing sources on a need-to-know basis; provided that the Receiving Party (i) makes each such recipient aware of the obligations of confidentiality assumed by it under this agreement and (ii) shall be responsible for breaches by such persons as if they were parties to this agreement.

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18.5A Shareholder may disclose Confidential Information relating to the Company (but not the other Shareholder) in connection with [****].

18.6This Clause shall continue to bind the parties notwithstanding termination or expiry of this agreement or transfer of a party’s Shares.

19.COVENANTS

19.1The Shareholders undertake to each other to execute and perform all such deeds, documents, assurances, acts and things and to exercise all powers and rights available to them, including the convening of all meetings and the giving of all waivers and consents and passing of all resolutions reasonably required to ensure that the Shareholders, the Directors appointed by them and, so far as any obligations are expressed to be imposed upon them, the Company and its Subsidiaries give effect to the terms of this agreement.

19.2Without prejudice to the generality of Subclause 19.1, the Shareholders agree, as between themselves, that, if any provisions of the Articles of the Company at any time conflict with any provisions of this agreement, the provisions of this agreement shall prevail and the Shareholders shall exercise all powers and rights available to them to procure the amendment of the Articles of the Company to the extent necessary to permit the Company and its affairs to be regulated as provided in this agreement.

20.DURATION

This agreement shall commence on the date of this agreement and, unless terminated by the written agreement of the parties to it, shall continue for so long as two or more parties continue to hold Shares in the Company but a Shareholder will cease to have any further rights or obligations under this agreement on ceasing to hold any Shares except in relation to those provisions which are expressed to continue in force and provided that this Clause shall not affect any of the rights or liabilities of any parties in connection with any breach of this agreement which may have occurred before that Shareholder ceased to hold any Shares.

21.DISPUTES

21.1In the event of any dispute between the parties arising out of or relating to this agreement including any question regarding its existence, validity or termination (a Dispute), the Shareholders shall, within 15 days of service of a written notice from either party to the other party (a Disputes Notice), hold a meeting (a Dispute Meeting) in an effort to resolve the dispute.  [****]

21.2Each party shall use all reasonable endeavours to send a representative who has authority to settle the dispute to attend the Dispute Meeting.

21.3[****]

21.4Each party shall pay the costs and expenses incurred by it and each of its Affiliates in connection with a Dispute.  This Subclause 21.4 shall not apply to the costs incurred in

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connection with arbitral proceedings pursuant to Subclause 21.3.  The arbitral tribunal shall decide which party shall have to bear those costs.

22.DETERMINATION OF FAIR PRICE

22.1Fair Price means the price that the Appointed Investment Bank determines to be equal to 50% of the fair market value of all the Shares of the Company.  In determining such fair market value, the Appointed Investment Bank shall [****].

22.2Appointed Investment Bank means [****].

22.3[****]

22.4[****]

23.ANNOUNCEMENTS

Neither party shall make or permit any person connected with it to make any public announcement concerning this agreement or any ancillary matter before, on or after the date of this agreement except as required by law, rule or regulation or any competent regulatory body or securities exchange or with the prior written approval of the other party, such approval not to be unreasonably withheld or delayed.

24.NOTICES

24.1Any notice or other communication to be given under this agreement shall be given in writing in English and may be delivered in person or sent by internationally recognised express courier service, electronic mail or fax to the relevant party as follows:

(a)to GIC at:	(b)to Arch Re at:
Jaber Al-Mubarak Street	Wessex House, 3rd Floor
Al-Sharq	45 Reid Street
Kuwait City	PO Box HM 339
State of Kuwait	Hamilton, HM 12, Bermuda
Fax: +965 (222) 5124	Fax: +441 278-9230
Email: sali@gic.com.kw	Email: tim.peckett@archreinsurance.bm
Marked for the attention of: Shafic Ali	Marked for the attention of: Tim Peckett

or at such other address or fax number as it may notify to the Company and the other Shareholder under this Clause, and

(c)           to each Director at such address, telephone number, fax number and email address that such Director shall specify in writing to the Chief Operating Officer for the purpose of receiving notices hereunder.

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24.2Any notice or document shall be deemed to be given:

(a)if delivered in person, at the time of delivery; or

(b)if sent by courier, at 5.00 p.m. local time on the fifth day after timely delivery to the courier, specifying delivery on or before the fifth day after delivery to the courier and signature of recipient required; or

(c)if sent by electronic mail, upon acknowledgment of receipt (excluding out-of-office auto-reply); or

(d)if sent by fax, on the date of issuance by the transmitting fax machine of a confirmation slip that the number of pages constituting the notice has been transmitted by fax without error, if so confirmed before 3.00 p.m. (local time at the place of destination) on any Business Day, and on the next Business Day following the date of such confirmation if so confirmed after 3.00 p.m. (local time at the place of destination) on any Business Day.

24.3In proving service of a notice or document it shall be sufficient to prove that delivery was made.

24.4The parties agree that the provisions of this Clause shall not apply to the service of any writ, summons, order, judgment or other document relating to or in connection with any legal proceedings.

25.COSTS

Save as otherwise provided in this agreement, or as otherwise specifically agreed in writing by the parties after the date of this agreement, each party shall pay the costs and expenses incurred by it and each of its Affiliates in connection with the entering into and completion of this agreement, including without limitation in respect of its obligations in satisfying the conditions subsequent set out in Clause 3 and the other requirements for transferring the Shares.

26.SEVERABILITY

The provisions contained in each Clause and Subclause of this agreement shall be enforceable independently of each of the others and its validity shall not be affected if any of the others is invalid.  If any of those provisions is void but would be valid if some part of the provision were deleted, the provision in question shall apply with such modification as may be necessary to make it valid.

27.GENERAL

27.1Save where this agreement provides otherwise, none of the rights or obligations under this agreement may be assigned or transferred without the prior written consent of all the parties.

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27.2Nothing in this agreement shall be deemed to constitute a partnership between any of the parties nor constitute any party the agent of any other party for any purpose.

27.3This agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any party may enter into this agreement by executing a counterpart.

27.4A person who is not a party to this agreement may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.

28.WHOLE AGREEMENT

28.1This agreement and the documents referred to in it contain the whole agreement between the parties relating to the transactions contemplated by this agreement and supersede all previous agreements between the parties relating to these transactions.

28.2Each party acknowledges that, in agreeing to enter into this agreement, it has not relied on any express or implied representation, warranty, collateral contract or other assurance (except those set out in this agreement and the documents referred to in it) made by or on behalf of any other party before the signature of this agreement.

28.3Nothing in the preceding Subclause limits or excludes any liability for fraud.

28.4All dates and periods of time shall be determined in accordance with the Gregorian Calendar.

28.5Each party waives all rights and remedies which, but for Subclause 28.2, might otherwise be available to it in respect of any such representation, warranty, collateral contract or other assurance, provided that nothing in this Clause shall limit or exclude any liability for fraud.

29.GOVERNING LAW

This agreement shall be construed in accordance with and governed by English law.

30.LANGUAGE

The language of this agreement and the transactions envisaged by it is English and all notices, demands, requests, statements, certificates or other documents or communications shall be in English unless otherwise agreed.

AS WITNESS the hands of the duly authorised officers of the parties on the date which appears first on page 1.

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SIGNATORIES

Signed by Shafic Ali	)	/s/ Shafic Ali
for GULF INVESTMENT CORPORATION GSC	)	Director, Principal Investments
Signed by Nicolas Papadopoulo	)	/s/ Nicolas Papadopoulo
for ARCH REINSURANCE LTD.	)	President and Chief Executive Officer

F-1

EX-15

Exhibit 15

PricewaterhouseCoopers LLP

PricewaterhouseCoopers Center

300 Madison Avenue

New York NY 10017

Telephone (646) 471 3000

Facsimile (813) 286 6000

May 8, 2008

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

Commissioners:

We are aware that our report dated May 8, 2008 on our review of interim financial information of Arch Capital Group Ltd. and its subsidiaries (the “Company”) for the three month period ended March 31, 2008 and 2007 and included in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2008 is incorporated by reference in the Registration Statement on Forms S-3 (Registration No. 33-34499, Registration No. 333-82612, Registration No. 333-110190, Registration No. 333-117099 and Registration No. 333-135421) and in the Registration Statements on Forms S-8 (Registration No. 33-99974, Registration No. 333-86145, Registration No. 333-72182, Registration No. 333-82772, Registration No. 333-98971, Registration No. 333-124422 and Registration No. 333-142835).

Very truly yours,

/s/ PricewaterhouseCoopers LLP

EX-31.1

Exhibit 31.1

Certification
of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Constantine Iordanou, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Arch Capital Group Ltd.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 8, 2008
By:	/s/ Constantine Iordanou
Name:	Constantine Iordanou
Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification
of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, John D. Vollaro, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Arch Capital Group Ltd.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 8, 2008
By:	/s/ John D. Vollaro
Name:	John D. Vollaro
Title:	Executive Vice President, Chief Financial Officer
	and Treasurer

EX-32.1

Exhibit 32.1

Certification Pursuant to Chapter 63, Title 18 United States Code §1350
As Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Arch Capital Group Ltd. (the “Company”) on Form 10-Q for the period ending March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Constantine Iordanou, as President and Chief Executive Officer of the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2)the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2008

/s/ Constantine Iordanou

Constantine Iordanou

President and Chief Executive Officer

A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Arch Capital Group Ltd. and will be retained by Arch Capital Group Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant to Chapter 63, Title 18 United States Code §1350
As Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Arch Capital Group Ltd. (the “Company”) on Form 10-Q for the period ending March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John D. Vollaro, as Executive Vice President, Chief Financial Officer and Treasurer of the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2)the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2008

/s/ John D. Vollaro

John D. Vollaro

Executive Vice President,

Chief Financial Officer and Treasurer

A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Arch Capital Group Ltd. and will be retained by Arch Capital Group Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.