8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 8-K

Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

October 23, 2008

Date of Report (Date of earliest event reported)

Arch Capital Group Ltd.

(Exact name of registrant as specified in its charter)

Bermuda	0-26456	N/A
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(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

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 2.02             Results of Operations and Financial Condition.

On October 23, 2008, Arch Capital Group Ltd. issued a press release reporting its earnings and the availability of its third quarter financial supplement for the three and nine month periods ended September 30, 2008.  The press release and financial supplement are attached to this Current Report on Form 8-K as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein by reference.

The information in this Current Report on Form 8-K, including the information set forth in Exhibit 99.1 and Exhibit 99.2, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing

ITEM 9.01             Exhibits.

EXHIBIT NO.	DESCRIPTION
99.1	Press Release dated October 23, 2008 announcing the earnings of Arch Capital Group Ltd. for the three and nine month periods ended September 30, 2008
99.2	Third Quarter 2008 Financial Supplement

2

SIGNATURES

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

	ARCH CAPITAL GROUP LTD.
Date: October 23, 2008	By:	/s/ W. Preston Hutchings
		Name:  W. Preston Hutchings
		Title:  Senior Vice President and Chief Investment Officer

3

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
99.1	Press Release dated October 23, 2008 announcing the earnings of Arch Capital Group Ltd. for the three and nine month periods ended September 30, 2008
99.2	Third Quarter 2008 Financial Supplement

4

EX-99.1

Exhibit 99.1

ARCH CAPITAL GROUP LTD.

Earnings Release Supplement

As of September 30, 2008

INDEX TO SUPPLEMENT

	PAGE
Earnings Release	1
Supplemental Financial Information	8
Consolidated Statements of Income	16
Consolidated Balance Sheets	17

	Wessex House, 4th Floor
	45 Reid Street
	Hamilton HM 12 Bermuda
	441-278-9250
	441-278-9255 fax
PRESS RELEASE	CONTACT:
NASDAQ Symbol ACGL	John D. Vollaro
For Immediate Release	Executive Vice President and
	Chief Financial Officer

ARCH CAPITAL GROUP LTD. REPORTS 2008 THIRD QUARTER RESULTS

HAMILTON, BERMUDA, October 23, 2008 — Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income available to common shareholders for the 2008 third quarter was $26.4 million, or $0.42 per share, compared to $199.7 million, or $2.76 per share, for the 2007 third quarter, and $408.1 million, or $6.23 per share, for the nine months ended September 30, 2008, compared to $597.7 million, or $8.00 per share, for the 2007 period. The Company also reported after-tax operating income available to common shareholders of $64.1 million, or $1.02 per share, for the 2008 third quarter, compared to $214.6 million, or $2.96 per share, for the 2007 third quarter, and $451.5 million, or $6.89 per share, for the nine months ended September 30, 2008, compared to $624.9 million, or $8.36 per share, for the 2007 period. All earnings per share amounts discussed in this release are on a diluted basis.

The Company’s book value per common share, including the net effect of share repurchases, was $53.04 at September 30, 2008, compared to $57.49 at June 30, 2008 and $55.12 at December 31, 2007. The Company’s after-tax operating income available to common shareholders represented a 7.6% annualized return on average common equity for the 2008 third quarter, compared to 24.8% for the 2007 third quarter, and 17.4% for the nine months ended September 30, 2008, compared to 24.5% for the 2007 period. After-tax operating income available to common shareholders, a non-GAAP measure, is defined as net income available to common shareholders, excluding net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, net of income taxes. See page 7 for a further discussion of after-tax operating income available to common shareholders and Regulation G.

In the 2008 third quarter, the Company recorded estimated after-tax net losses of $133.0 million, or $2.12 per share, related to Hurricanes Gustav and Ike, after reinsurance recoveries and net of reinstatement premiums. Such estimates were based on currently available information derived from modeling techniques, industry assessments of exposure, preliminary claims information obtained from the Company’s clients and brokers and a review of the Company’s in-force contracts. The Company’s actual losses from these events may vary materially from the estimates due to the inherent uncertainties in making such determinations resulting from several factors, including the preliminary nature of the available information, the potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques, the contingent nature of business interruption exposures, the effects of any resultant demand surge on claims activity and attendant coverage issues. In particular, the models used for offshore energy risks are relatively new and may be subject to even greater variability. In addition, actual losses may increase if the Company’s reinsurers fail to meet their obligations to the Company or the reinsurance protections purchased by the Company are exhausted or are otherwise unavailable.

1

The following table summarizes the Company’s underwriting results:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(U.S. dollars in thousands)	2008			2007			2008			2007
Gross premiums written	$	903,533		$	999,159		$	2,843,611		$	3,311,983
Net premiums written	692,692			694,630			2,190,152			2,324,270
Net premiums earned	733,031			735,529			2,146,940			2,232,434
Underwriting (loss) income	(38,516		)	112,319			151,260			357,212
Combined ratio	105.3		%	84.8		%	92.9		%	84.1		%

The following table summarizes, on an after-tax basis, the Company’s consolidated financial data, including a reconciliation of after-tax operating income available to common shareholders to net income available to common shareholders and related diluted per share results:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(U.S. dollars in thousands, except per share data)	2008			2007			2008			2007
After-tax operating income available to common shareholders	$	64,094		$	214,582		$	451,452		$	624,938
Net realized (losses) gains, net of tax	(104,418		)	13,879			(84,150		)	11,874
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(1,731		)	(5,283		)	(4,461		)	735
Net foreign exchange gains (losses), net of tax	68,445			(23,433		)	45,253			(39,857		)
Net income available to common shareholders	$	26,390		$	199,745		$	408,094		$	597,690
Diluted per common share results:
After-tax operating income available to common shareholders	$	1.02		$	2.96		$	6.89		$	8.36
Net realized (losses) gains, net of tax	(1.66		)	0.19			(1.28		)	0.16
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	(0.03		)	(0.07		)	(0.07		)	0.01
Net foreign exchange gains (losses), net of tax	1.09			(0.32		)	0.69			(0.53		)
Net income available to common shareholders	$	0.42		$	2.76		$	6.23		$	8.00
Weighted average common shares and common share equivalents outstanding – diluted	62,830,910			72,378,940			65,530,570			74,734,343

The combined ratio represents a measure of underwriting profitability, excluding investment income, and is the sum of the loss ratio and expense ratio. A combined ratio under 100% represents an underwriting profit and a combined ratio over 100% represents an underwriting loss. The combined ratio of the Company’s insurance and reinsurance subsidiaries consisted of a loss ratio of 74.9% and an underwriting expense ratio of 30.4% for the 2008 third quarter, compared to a loss ratio of 54.7% and an underwriting expense ratio of 30.1% for the 2007 third quarter. The combined ratio of the Company’s insurance and reinsurance subsidiaries consisted of a loss ratio of 63.2% and an underwriting expense ratio of 29.7% for the nine months ended September 30, 2008, compared to a loss ratio of 55.9% and an underwriting expense ratio of 28.2% for the 2007 period. The loss ratio of 74.9% for the 2008 third quarter was comprised of 41.6 points of paid losses, 9.4 points related to reserves for reported losses and 23.9 points related to incurred but not reported reserves.

In establishing the reserves for losses and loss adjustment expenses, the Company has made various assumptions relating to the pricing of its reinsurance contracts and insurance policies and also has considered available historical industry experience and current industry conditions. The Company’s reserving method to

2

date has been, to a large extent, the expected loss method, which is commonly applied when limited loss experience exists. Any estimates and assumptions made as part of the reserving process could prove to be inaccurate due to several factors, including the fact that relatively limited historical information has been reported to the Company through September 30, 2008. For a discussion of underwriting activities and a review of the Company’s results by operating segment, see “Segment Information” in the Supplemental Financial Information section of this release.

Net investment income for the 2008 third quarter was $117.0 million, or $1.86 per share, compared to $118.5 million, or $1.64 per share, for the 2007 third quarter. For the nine months ended September 30, 2008, net investment income was $356.3 million, or $5.44 per share, compared to $342.4 million, or $4.58 per share, for the 2007 period. The comparability of net investment income during the 2008 and 2007 periods was influenced by the Company’s share repurchase program described below. The pre-tax investment income yield was 4.74% for the 2008 third quarter, compared to 5.06% for the 2007 third quarter, and 4.80% for the nine months ended September 30, 2008, compared to 4.94% for the 2007 period.

During the 2008 third quarter, pre-tax net realized losses on the Company’s investment portfolio were $105.5 million, which reflected $82.5 million of other-than-temporary impairment charges, including $23 million of write downs on the Company’s holdings in fixed income securities issued by Lehman Brothers Holdings Inc. The Company recorded approximately $200 million of unrealized losses on its investment portfolio during the 2008 third quarter, excluding foreign exchange, which was primarily attributable to wider credit spreads and not to issue-specific credit events in the period. In addition, the Company recorded approximately $70 million of unrealized losses on investments held in foreign currencies due to strengthening of the U.S. Dollar, which was largely offset by net foreign exchange gains described below. Through October 22, 2008, the Company estimates that the total return on its investment portfolio, excluding foreign exchange, generated approximately $150 million of additional unrealized losses. This estimate was prepared without the benefit of the Company’s normal quarterly financial procedures and, therefore, the actual total return at October 22, 2008 could be materially different than the estimated amount and there can be no assurances given as to the performance of the Company’s investment portfolio for the complete 2008 fourth quarter or any future period.

The Company’s investment portfolio continues to be comprised primarily of high quality fixed income securities, with no collateralized debt obligations (CDOs), collateralized loan obligations (CLOs) or credit default swaps (CDSs). The Company’s portfolio does not include ownership of common stock or preferred stock of any publicly-traded issuers and essentially includes no investments in hedge funds or private equity funds. The average credit quality rating of the portfolio remained at “AA+” at September 30, 2008 and the average effective duration remained relatively constant at 3.44 years at September 30, 2008, compared to 3.36 years at June 30, 2008 and 3.29 years at December 31, 2007. Further information on the Company’s investments is included on page 10.

In addition, the Company’s investment portfolio includes certain funds that invest in fixed maturity securities which, due to the ownership structure of the funds, 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). This method of accounting is different from the way the Company accounts for its other fixed maturity securities. Investment funds accounted for using the equity method totaled $384.1 million at September 30, 2008, compared to $351.9 million at June 30, 2008 and $236.0 million at December 31, 2007.

For the nine months ended September 30, 2008, the effective tax rates on income before income taxes and pre-tax operating income were 2.6% and 2.0%, respectively, compared to 2.6% and 2.9% for the 2007 period. The Company’s 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. The Company’s quarterly tax provision is adjusted to reflect changes in its expected annual effective tax rates, if any. The Company reduced

3

its estimated annual effective tax rate on pre-tax operating income slightly during the 2008 third quarter. The impact of applying the lower effective tax rate on pre-tax operating income for the six months ended June 30, 2008 increased the Company’s after-tax results for the 2008 third quarter by $2.1 million, or $0.03 per share. The Company currently expects that its annual effective tax rate on pre-tax operating income available to common shareholders for the year ended December 31, 2008 will be in the range of 1.0% to 3.0%. In addition, the Company’s Bermuda-based reinsurer incurs federal excise taxes for premiums assumed on U.S. risks. Such expenses are included in the Company’s acquisition expenses.

Net foreign exchange gains for the 2008 third quarter of $68.4 million consisted of net unrealized gains of $66.7 million and net realized gains of $1.7 million, compared to net foreign exchange losses for the 2007 third quarter of $23.7 million which consisted of net unrealized losses of $22.5 million and net realized losses of $1.2 million. Net foreign exchange gains for the nine months ended September 30, 2008 of $45.1 million consisted of net unrealized gains of $45.5 million and net realized losses of $0.4 million, compared to net foreign exchange losses for the 2007 period of $39.8 million which consisted of net unrealized losses of $45.6 million and net realized gains of $5.8 million. Net unrealized foreign exchange gains or losses result from the effects of revaluing the Company’s net insurance liabilities required to be settled in foreign currencies at each balance sheet date. As discussed above, the Company holds investments in foreign currencies which are intended to mitigate its exposure to foreign currency fluctuations in its 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 and are not included in the statement of income.

Diluted weighted average common shares and common share equivalents outstanding, used in the calculation of after-tax operating income and net income per common share, were 62.8 million for the 2008 third quarter, compared to 72.4 million for the 2007 third quarter, and 65.5 million for the nine months ended September 30, 2008, compared to 74.7 million for the 2007 period. The lower level of weighted average shares outstanding in the 2008 periods was primarily due to the impact of share repurchases as discussed below.

The board of directors of ACGL has authorized the investment of up to $1.5 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 2010. During the 2008 third quarter, ACGL repurchased approximately 1.9 million common shares under the share repurchase program for an aggregate purchase price of $123.4 million. Since the inception of the share repurchase program through September 30, 2008, ACGL has repurchased approximately 15.3 million common shares for an aggregate purchase price of $1.05 billion. At September 30, 2008, approximately $450 million of repurchases were available under the share repurchase program. As a result of the share repurchase transactions to date, book value per common share was reduced by $3.20 per share at September 30, 2008, compared to $1.45 at December 31, 2007, while weighted average shares outstanding for the 2008 third quarter and nine months ended September 30, 2008 were reduced by 14.9 million and 12.1 million shares, respectively, compared to 4.9 million shares and 2.3 million shares for the 2007 third quarter and nine months ended September 30, 2007, respectively.

At September 30, 2008, the Company’s capital of $3.92 billion consisted of $300.0 million of senior notes, representing 7.7% of the total, $100.0 million of revolving credit agreement borrowings due in August 2011, representing 2.6% of the total, $325.0 million of preferred shares, representing 8.3% of the total, and common shareholders’ equity of $3.19 billion, representing the balance. At December 31, 2007, the Company’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 2008 was primarily attributable to an after-tax decrease in the fair value of our investment portfolio and share repurchase activity, partially offset by net income and borrowings during the period.

The Company will hold a conference call for investors and analysts at 11:00 a.m. Eastern Time on Friday, October 24, 2008. A live webcast of this call will be available via the Media-Earnings Webcasts section of the

4

Company’s website at http://www.archcapgroup.bm and will be archived on the website from 1:00 p.m. Eastern Time on October 24 through midnight Eastern Time on November 25, 2008. A telephone replay of the conference call also will be available beginning on October 24 at 1:00 p.m. Eastern Time until October 31, 2008 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 33126071), and international callers should dial 617-801-6888 (passcode 33126071).

Please refer to the Company’s Financial Supplement dated September 30, 2008, which is posted on the Company’s website at http://www.archcapgroup.bm/docs/3Q2008_Financial Supplement.pdf. The Financial Supplement provides additional detail regarding the financial performance of the Company.

Arch Capital Group Ltd., a Bermuda-based company with over $3.9 billion in capital at September 30, 2008, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (“PLSRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, 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 the Company’s 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 and elsewhere in this release and in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:

·the Company’s ability to successfully implement its business strategy during “soft” as well as “hard” markets;

·acceptance of the Company’s business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and its insureds and reinsureds;

·the Company’s ability to maintain or improve its ratings, which may be affected by its 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 the Company operates;

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

·the Company’s 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 its underwriting initiatives and to develop accurate actuarial data;

·the loss of key personnel;

·the integration of businesses the Company has acquired or may acquire into its existing operations;

·accuracy of those estimates and judgments utilized in the preparation of the Company’s 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

5

the deposit method of accounting, which for a relatively new insurance and reinsurance company, like the Company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to the Company through September 30, 2008;

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

·severity and/or frequency of losses;

·claims for natural or man-made catastrophic events in the Company’s insurance or reinsurance business could cause large losses and substantial volatility in its 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 the Company may be liable to the purchaser of its prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in the Company’s periodic reports filed with the SEC;

·availability to the Company of reinsurance to manage its 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 the Company;

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

·the Company’s investment performance;

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

·changes in accounting principles or policies or in the Company’s application of such accounting principles or policies;

·changes in the political environment of certain countries in which the Company operates or underwrites 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 the Company, its subsidiaries, brokers or customers; and

·the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of the Company’s Annual Report on
Form 10-K, as well as the other factors set forth in the Company’s other documents on file with the SEC, and management’s response to any of the aforementioned factors.

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

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its 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. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

6

Comment on Regulation G

Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to common shareholders, which is defined as net income available to common shareholders, excluding net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, net of income taxes. The presentation of after-tax operating income available to common shareholders is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on page 2 of this release.

The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic, and, under applicable GAAP accounting, losses on the Company’s investments can be realized as the result of other-than-temporary declines in value without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

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

7

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

Book Value Per Common Share and Share Repurchases

	September 30,			December 31,
(U.S. dollars in thousands, except share data)	2008			2007
Calculation of book value per common share:
Total shareholders’ equity	$	3,516,710		$	4,035,811
Less preferred shareholders’ equity	(325,000		)	(325,000		)
Common shareholders’ equity	$	3,191,710		$	3,710,811
Common shares outstanding (1)	60,173,489			67,318,466
Book value per common share	$	53.04		$	55.12

	Three Months Ended						Nine Months Ended						Cumulative
	September 30,						September 30,						September 30,
(U.S. dollars in thousands, except share data)	2008			2007			2008			2007			2008
Effect of share repurchases:
Aggregate purchase price of shares repurchased	$	123,377		$	145,732		$	513,130		$	400,705		$	1,050,196
Shares repurchased	1,865,482			2,173,801			7,487,250			5,812,443			15,256,289
Average price per share repurchased	$	66.14		$	67.04		$	68.53		$	68.94		$	68.84
Estimated dilutive impact on ending book value per common share (2)	$	(0.40	)	$	(0.48	)	$	(1.71	)	$	(1.36	)	$	(3.20	)
Estimated net accretive impact on diluted earnings per share (3)	$	0.03		$	0.13		$	0.67		$	0.10

(1)Excludes the effects of 5,500,900 and 5,486,033 stock options and 433,404 and 116,453 restricted stock units outstanding at September 30, 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 September 30, 2008 and December 31, 2007, the repurchase of shares during the periods reduced book value per common share in the periods presented.

(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 diluted shares outstanding excluding the weighted average impact of share repurchases. The repurchase of shares was accretive to diluted earnings per share in the periods presented.

Annualized Operating Return on Average Common Equity

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(U.S. dollars in thousands)	2008			2007			2008			2007
After-tax operating income available to common shareholders	$	64,094		$	214,582		$	451,452		$	624,938
Annualized operating income available to common shareholders	256,376			858,328			601,936			833,251
Beginning common shareholders’ equity	$	3,561,233		$	3,379,067		$	3,710,811		$	3,265,619
Ending common shareholders’ equity	3,191,710			3,549,795			3,191,710			3,549,795
Average common shareholders’ equity	$	3,376,472		$	3,464,431		$	3,451,261		$	3,407,707
Annualized operating return on average common equity	7.6		%	24.8		%	17.4		%	24.5		%

8

Selected Information on Losses and Loss Adjustment Expenses

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(U.S. dollars in thousands)	2008			2007			2008			2007
Components of losses and loss adjustment expenses
Paid losses and loss adjustment expenses	$	304,625		$	300,143		$	860,729		$	833,016
Increase in unpaid losses and loss adjustment expenses	244,261			102,552			497,199			415,403
Total losses and loss adjustment expenses	$	548,886		$	402,695		$	1,357,928		$	1,248,419
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments
Net impact on underwriting results:
Insurance (2)	$	(5,783	)	$	(7,496	)	$	(30,891	)	$	(648	)
Reinsurance	(49,592		)	(42,168		)	(136,217		)	(124,471		)
Total	$	(55,375	)	$	(49,664	)	$	(167,108	)	$	(125,119	)
Impact on losses and loss adjustment expenses:
Insurance	$	(13,315	)	$	(8,192	)	$	(42,354	)	$	(5,839	)
Reinsurance	(54,618		)	(54,829		)	(144,738		)	(140,166		)
Total	$	(67,933	)	$	(63,021	)	$	(187,092	)	$	(146,005	)
Impact on acquisition expenses:
Insurance	$	7,532		$	696		$	11,463		$	5,191
Reinsurance	5,026			12,661			8,521			15,695
Total	$	12,558		$	13,357		$	19,984		$	20,886
Impact on combined ratio:
Insurance	(1.3		)%	(1.7		)%	(2.4		)%	(0.1		)%
Reinsurance	(17.0		)%	(13.8		)%	(15.6		)%	(13.0		)%
Total	(7.6		)%	(6.8		)%	(7.8		)%	(5.6		)%
Impact on loss ratio:
Insurance	(3.0		)%	(1.9		)%	(3.3		)%	(0.5		)%
Reinsurance	(18.7		)%	(17.9		)%	(16.6		)%	(14.6		)%
Total	(9.3		)%	(8.6		)%	(8.7		)%	(6.5		)%
Impact on acquisition expense ratio:
Insurance	1.7		%	0.2		%	0.9		%	0.4		%
Reinsurance	1.7		%	4.1		%	1.0		%	1.6		%
Total	1.7		%	1.8		%	0.9		%	0.9		%
Estimated net losses incurred from current period catastrophic events (1)
Insurance	$	36,490		—			$	63,740		—
Reinsurance	105,965			$	19,911		128,519			$	47,769
Total	$	142,455		$	19,911		$	192,259		$	47,769
Impact on loss ratio:
Insurance	8.3		%	—			5.0		%	—
Reinsurance	36.3		%	6.5		%	14.8		%	5.0		%
Total	19.4		%	2.7		%	9.0		%	2.1		%

(1)Equals estimated losses from catastrophic events occurring in the current accident year, net of reinsurance and reinstatement premiums. Amounts shown for the insurance segment are for named catastrophic events only. Amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda operations and (ii) all catastrophe losses incurred by its U.S. operations.

(2)Insurance amounts shown are net of premium, loss and expense adjustments related to the recording of involuntary pool activity, which resulted in a net loss to the Company of $1.8 million in the 2008 third quarter.

9

Investment Information

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(U.S. dollars in thousands)	2008			2007			2008			2007
Net investment income:
Total	$	117,022		$	118,464		$	356,335		$	342,434
Per share	$	1.86		$	1.64		$	5.44		$	4.58
Pre-tax investment income yield (at amortized cost)	4.74		%	5.06		%	4.80		%	4.94		%
After-tax investment income yield (at amortized cost)	4.63		%	4.89		%	4.68		%	4.78		%
Cash flow from operations	$	382,189		$	426,583		$	972,997		$	1,103,586

	September 30,			December 31,
(U.S. dollars in thousands)	2008			2007
Investable assets:
Fixed maturities available for sale, at fair value	$	7,544,831		$	7,137,998
Fixed maturities pledged under securities lending agreements, at fair value (1)	901,559			1,462,826
Total fixed maturities	8,446,390			8,600,824
Short-term investments available for sale, at fair value	863,783			699,036
Short-term investments pledged under securities lending agreements, at fair value (1)	3,987			219
Cash	239,097			239,915
Other investments (2)
Fixed income mutual funds	60,051			194,090
International equity index funds	—			92,056
Privately held securities and other	82,095			67,548
Investment funds accounted for using the equity method (3)	384,139			235,975
Investment in joint venture	98,951			—
Securities transactions entered into but not settled at the balance sheet date	(39,117		)	(5,796		)
Total investable assets (1)	$	10,139,376		$	10,123,867
Fixed income portfolio (1):
Average effective duration (in years)	3.44			3.29
Average credit quality	AA+			AA+
Imbedded book yield (before investment expenses)	4.74		%	5.03		%

(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 and reinvested at September 30, 2008 and December 31, 2007 of $933.8 million and $1.5 billion, respectively, which is reflected as “investment of funds received under securities lending agreements, at fair value” and included the $905.5 million and $1.46 billion, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at fair value.”

(2)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 and other privately held securities.

(3)The Company’s investment portfolio includes certain funds that invest in fixed maturity securities which, due to the ownership structure of the funds, 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 as ‘Equity in net income (loss) of investment funds accounted for using the equity method’ rather than as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity as are changes in the carrying value of the Company’s other fixed income investments.

10

Investment Information (continued)

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
September 30, 2008:
Corporate bonds	$	2,047,925	$	13,222	$	(150,603	)	$	2,185,306
Mortgage backed securities	1,562,880		8,718		(85,531		)	1,639,693
Commercial mortgage backed securities	1,217,610		6,789		(26,434		)	1,237,255
U.S. government and government agencies	1,116,819		11,504		(9,094		)	1,114,409
Municipal bonds	1,107,966		3,724		(18,386		)	1,122,628
Asset backed securities	1,026,118		157		(34,476		)	1,060,437
Non-U.S. government securities	367,072		10,778		(12,654		)	368,948
Total	$	8,446,390	$	54,892	$	(337,178	)	$	8,728,676
December 31, 2007:
Corporate bonds	$	2,452,527	$	40,296	$	(10,994	)	$	2,423,225
Mortgage backed securities	1,234,596		14,211		(4,087		)	1,224,472
Commercial mortgage backed securities	1,315,680		17,339		(558		)	1,298,899
U.S. government and government agencies	1,165,423		21,598		(447		)	1,144,272
Municipal bonds	990,325		13,213		(195		)	977,307
Asset backed securities	1,008,030		9,508		(4,030		)	1,002,552
Non-U.S. government securities	434,243		28,032		(3,056		)	409,267
Total	$	8,600,824	$	144,197	$	(23,367	)	$	8,479,994

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers at September 30, 2008:

(U.S. dollars in thousands)	Estimated Fair Value
September 30, 2008:
General Electric Capital Corp.	$	129,902
Citigroup, Inc.	99,173
JPMorgan Chase & Co.	72,395
Bank of America Corp.	69,791
Wells Fargo & Company	57,561
Wachovia Corp.	41,592
American Express Company	31,258
Barclays Bank PLC	29,141
Verizon Communications Inc.	27,983
Morgan Stanley Corp.	24,649

11

Investment Information (continued)

The following table provides information on the Company’s mortgage backed securities (“MBS”) and commercial mortgage backed securities (“CMBS”) at September 30, 2008, excluding amounts guaranteed by the U.S. government:

					Estimated Fair Value
(U.S. dollars in thousands)	Issuance Year	Par Value		Average Credit Quality	Total		% of Asset Class	% of Investable Assets
MBS:
Prime non-agency MBS	2002	$	7,565	AAA	$	7,107	0.5	0.1
	2003	19,290		AAA	18,366		1.2	0.2
	2004	68,789		AAA	62,226		4.0	0.6
	2005	122,921		AAA	92,610		5.9	0.9
	2006	106,908		AAA	81,832		5.2	0.8
	2007	126,460		AAA	99,003		6.3	1.0
	2008	31,997		AAA	27,614		1.8	0.2
Total non-agency MBS		$	483,930	AAA	$	388,758	24.9	3.8
CMBS:
Non-agency CMBS	1998	$	3,400	AAA	$	3,477	0.3	0.0
	1999	108,787		AAA	111,076		9.1	1.1
	2000	123,642		AAA	125,195		10.3	1.2
	2001	104,483		AAA	103,250		8.5	1.0
	2002	75,845		AAA	73,248		6.0	0.7
	2003	101,196		AAA	94,895		7.8	1.0
	2004	77,601		AAA	74,135		6.1	0.7
	2005	77,961		AAA	70,722		5.8	0.7
	2006	35,289		AAA	31,921		2.6	0.3
	2007	28,435		AAA	25,330		2.1	0.3
Total non-agency CMBS		$	736,639	AAA	$	713,249	58.6	7.0

Additional Statistics:

	Prime Non- Agency MBS		Non-Agency CMBS (1)
Weighted average loan age (months)	36		74
Weighted average life (months) (2)	66		36
Weighted average loan-to-value % (3)	66.0	%	58.0	%
Total delinquencies (4)	5.2	%	0.7	%
Current credit support % (5)	12.4	%	28.3	%

(1) Loans defeased with government/agency obligations represented approximately 23% of the collateral underlying the Company’s non-agency CMBS holdings.

(2) The weighted average life for MBS is based on the interest rates in effect at September 30, 2008. The weighted average life for non-agency CMBS reflects the average life of the collateral underlying the Company’s non-agency CMBS holdings.

(3) The range of loan-to-values on MBS is 36% to 93% while the range of loan-to-values on CMBS is 44% to 72%.

(4) Total delinquencies for MBS includes 60 days and over while CMBS includes 30 days and over.

(5) Current credit support % represents the percentage for a collateralized mortgage obligation (“CMO”) or CMBS class/tranche from other subordinate classes in the same CMO or CMBS deal.

12

Investment Information (continued)

The following table provides information on the Company’s asset backed securities (“ABS”) at September 30, 2008:

					Estimated Fair Value
			Average					% of
			Credit	Effective				Investable
(U.S. dollars in thousands)	Par Value		Quality	Duration	Total		% of Class	Assets
Sector:
Autos	$	308,718	AAA	1.35	$	299,646	29.2	3.0
Credit cards	490,155		AAA	1.85	473,607		46.1	4.7
Rate reduction bonds	136,961		AAA	2.17	136,128		13.3	1.3
Other	89,043		AAA	0.79	86,189		8.4	0.8
	$	1,024,877	AAA	1.65	$	995,570	97.0	9.8
Home equity (1)	$	27,585	AAA	0.01	$	23,130	2.3	0.2
	18,800		AA	0.01	6,420		0.6	0.1
	464		A	0.01	246		0.0	0.0
	4,913		B	0.01	473		0.1	0.0
	2,900		CCC	0.01	163		0.0	0.0
	702		D	0.07	116		0.0	0.0
	$	55,364	AA+	0.01	$	30,548	3.0	0.3
Total ABS	$	1,080,241	AAA	1.57	$	1,026,118	100.0	10.1

(1) The Company’s investment portfolio included $67.9 million par in sub-prime securities at September 30, 2008, with an estimated fair value of $40.3 million, an average credit quality of AA+ and an effective duration of 0.01 years. Such amounts were primarily in the home equity sector with the balance in other ABS, MBS and CMBS sectors. In addition, the portfolio of collateral backing the Company’s securities lending program contains approximately $70.7 million of AAA rated sub-prime securities with an effective duration of 0.36 years.

13

Segment Information

Please refer to the Company’s Financial Supplement dated September 30, 2008, which is posted on the Company’s website at http://www.archcapgroup.bm/docs/3Q2008_Financial Supplement.pdf for additional detail regarding the Company’s operating segments.

Discussion of 2008 Third Quarter Performance

Insurance Segment

	Three Months Ended
	September 30,
(U.S. dollars in thousands)	2008			2007
Gross premiums written	$	678,338		$	722,688
Net premiums written	466,115			460,019
Net premiums earned	441,049			429,584
Underwriting (loss) income	$	(30,148	)	$	35,296
Loss ratio	76.5		%	63.8		%
Acquisition expense ratio	14.0		%	12.1		%
Other operating expense ratio	16.3		%	16.0		%
Combined ratio	106.8		%	91.9		%

Gross premiums written by the insurance segment in the 2008 third quarter were 6.1% lower than in the 2007 third quarter, with reductions in casualty, property and professional liability exposures as the insurance segment maintained underwriting discipline in response to the current market environment. Net premiums written in the 2008 third quarter were 1.3% higher than in the 2007 third quarter, with the increase due to $10.9 million of premium adjustments recorded in the 2008 third quarter related to involuntary pools ($10.5 million on an earned basis). Net premiums earned by the insurance segment in the 2008 third quarter were 2.7% higher than in the 2007 third quarter, and reflect changes in net premiums written over the previous five quarters, including the mix and type of business written.

The loss ratio for the insurance segment was 76.5% in the 2008 third quarter, compared to 63.8% in the 2007 third quarter. The 2008 third quarter loss ratio reflected approximately 8.3 points related to catastrophic activity, primarily related to Hurricanes Gustav and Ike, while the 2007 third quarter loss ratio did not include any significant losses from catastrophic events. The 2008 third quarter loss ratio also reflected a 3.0 point reduction related to estimated net favorable development in prior year loss reserves, compared to 1.9 points of estimated net favorable development in prior year loss reserves in the 2007 third quarter. The estimated net favorable development in the 2008 third quarter was primarily in medium-tail and longer-tail lines and resulted from better than expected claims emergence. The insurance segment’s loss ratio in the 2008 third quarter also reflected an increase in expected loss ratios across a number of lines of business primarily due to rate changes and changes in the mix of business. In addition, the 2008 third quarter included a higher level of large, specific risk loss activity than the 2007 third quarter.

The insurance segment’s underwriting expense ratio was 30.3% in the 2008 third quarter, compared to 28.1% in the 2007 third quarter. The acquisition expense ratio was 14.0% for the 2008 third quarter, compared to 12.1% for the 2007 third 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 for the 2008 third quarter included 1.7 points related to favorable prior year loss development, compared to 0.2 points in the 2007 third quarter. In addition, the 2008 third quarter acquisition expense ratio reflects changes in the form of reinsurance ceded and the mix of business. The insurance segment’s other operating expense ratio was 16.3% for the 2008 third quarter, compared to 16.0% in the 2007 third quarter. Operating expenses in the 2008 third quarter included $5.7 million of costs related to workforce reductions and the relocation of certain of the insurance segment’s U.S. operations. Such actions were undertaken as part of an expense management plan, which includes office relocation, personnel and other expense saving initiatives, the implementation of which began in response to market conditions. In addition, operating expenses related to the involuntary pool adjustment noted above contributed 0.3 points to the 2008 third quarter operating expense ratio.

14

Reinsurance Segment

	Three Months Ended
	September 30,
(U.S. dollars in thousands)	2008			2007
Gross premiums written	$	228,593		$	286,272
Net premiums written	226,577			234,611
Net premiums earned	291,982			305,945
Underwriting (loss) income	$	(8,368	)	77,023
Loss ratio	72.4		%	42.1		%
Acquisition expense ratio	24.2		%	25.7		%
Other operating expense ratio	6.3		%	7.2		%
Combined ratio	102.9		%	75.0		%

Gross premiums written by the reinsurance segment in the 2008 third quarter were 20.1% lower than in the 2007 third quarter, with reductions in all treaty lines of business. Commencing in 2006, the reinsurance segment’s Bermuda-based reinsurer, 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 renewals, Arch Re Bermuda adjusted its book of business in light of the expiration of the Treaty. Other reductions in the reinsurance segment’s book of business resulted from continued competition which led to non-renewals or lower shares written.

Ceded premiums written by the reinsurance segment were 0.9% of gross premiums written for the 2008 third quarter, compared to 18.0% for the 2007 third quarter. In the 2008 third quarter, Arch Re Bermuda ceded a minimal amount of premiums written under the Treaty to Flatiron Re Ltd., compared to $51.4 million, or 18.0%, in the 2007 third quarter, with the lower level due to the expiration of the Treaty. On an earned basis, Arch Re Bermuda ceded $26.1 million to Flatiron Re Ltd. in the 2008 third quarter, compared to $68.0 million in the 2007 third quarter. Commission income from the Treaty (in excess of the reimbursement of direct acquisition expenses) reduced the reinsurance segment’s acquisition expense ratio by 1.1 points in the 2008 third quarter, compared to 2.6 points in the 2007 third quarter. At September 30, 2008, $35.3 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 third quarter were 3.4% lower than in the 2007 third quarter and included $4.4 million of reinstatement premiums related to Hurricanes Gustav and Ike, while net premiums earned in the 2008 third quarter were 4.6% lower than in the 2007 third quarter. The decrease in net premiums earned in the 2008 third quarter primarily resulted from changes in net premiums written over the previous five quarters, including the mix and type of business written.

The reinsurance segment’s loss ratio was 72.4% in the 2008 third quarter, compared to 42.1% for the 2007 third quarter.  The 2008 third quarter loss ratio reflected approximately 36.3 points of catastrophic activity, primarily related to Hurricanes Gustav and Ike, while the 2007 third quarter loss ratio reflected approximately 6.5 points of catastrophic activity. The loss ratio for the 2008 third quarter also reflected an 18.7 point reduction related to estimated net favorable development in prior year loss reserves, compared to a 17.9 point reduction in the 2007 third quarter. The estimated net favorable development in the 2008 third quarter was primarily in short-tail lines and resulted from better than anticipated claims emergence. The reinsurance segment’s loss ratio in the 2008 third quarter also reflected an increase in expected loss ratios across a number of lines of business primarily due to rate changes and changes in the mix of business.

The underwriting expense ratio for the reinsurance segment was 30.5% in the 2008 third quarter, compared to 32.9% in the 2007 third quarter. The acquisition expense ratio for the 2008 third quarter was 24.2%, compared to 25.7% for the 2007 third quarter. The acquisition expense ratio for the 2008 third quarter included 1.7 points related to favorable prior year loss development, compared to 4.1 points in the 2007 third quarter. In addition, 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 third quarter, compared to 7.2% for the 2007 third quarter. The decrease in the operating expense ratio primarily related to a higher level of premium volume in the reinsurance segment’s property facultative operations for the 2008 third quarter, and included a one-time benefit from a higher level of deferred acquisition costs.

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
Net premiums written	$	692,692		$	694,630		$	2,190,152		$	2,324,270
Decrease (increase) in unearned premiums	40,339			40,899			(43,212		)	(91,836		)
Net premiums earned	733,031			735,529			2,146,940			2,232,434
Net investment income	117,022			118,464			356,335			342,434
Net realized (losses) gains	(105,534		)	14,147			(82,228		)	9,409
Fee income	944			1,610			3,250			5,670
Equity in net income (loss) of investment funds accounted for using the equity method	(1,731		)	(5,283		)	(4,461		)	735
Other income	3,067			2,696			12,071			3,565
Total revenues	746,799			867,163			2,431,907			2,594,247
Expenses
Losses and loss adjustment expenses	548,886			402,695			1,357,928			1,248,419
Acquisition expenses	133,413			131,424			367,278			368,829
Other operating expenses	95,652			95,545			295,417			286,863
Interest expense	6,241			5,524			17,553			16,570
Net foreign exchange (gains) losses	(68,395		)	23,656			(45,106		)	39,848
Total expenses	715,797			658,844			1,993,070			1,960,529
Income before income taxes	31,002			208,319			438,837			633,718
Income tax (benefit) expense	(1,849		)	2,113			11,360			16,645
Net income	32,851			206,206			427,477			617,073
Preferred dividends	6,461			6,461			19,383			19,383
Net income available to common shareholders	$	26,390		$	199,745		$	408,094		$	597,690
Net income per common share
Basic	$	0.44		$	2.87		$	6.50		$	8.30
Diluted	$	0.42		$	2.76		$	6.23		$	8.00
Weighted average common shares and common share equivalents outstanding
Basic	60,109,932			69,561,789			62,790,514			71,980,194
Diluted	62,830,910			72,378,940			65,530,570			74,734,343

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	September 30,			December 31,
	2008			2007
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2008, $7,822,256; 2007, $7,037,272)	$	7,544,831		$	7,137,998
Short-term investments available for sale, at fair value (amortized cost: 2008, $869,000; 2007, $700,262)	863,783			699,036
Investment of funds received under securities lending agreements, at fair value (amortized cost: 2008, $950,327; 2007, $1,503,723)	933,797			1,503,723
Other investments (cost: 2008, $142,546; 2007, $323,950)	142,146			353,694
Investment funds accounted for using the equity method	384,139			235,975
Investment in joint venture (cost: 2008, $100,000)	98,951			—
Total investments	9,967,647			9,930,426
Cash	239,097			239,915
Accrued investment income	82,218			73,862
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value	905,546			1,463,045
Premiums receivable	738,694			729,628
Unpaid losses and loss adjustment expenses recoverable	1,656,848			1,609,619
Paid losses and loss adjustment expenses recoverable	105,491			132,289
Prepaid reinsurance premiums	335,210			480,462
Deferred income tax assets, net	72,118			57,051
Deferred acquisition costs, net	310,916			290,059
Receivable for securities sold	1,099,000			17,359
Other assets	618,017			600,552
Total Assets	$	16,130,802		$	15,624,267
Liabilities
Reserve for losses and loss adjustment expenses	$	7,569,543		$	7,092,452
Unearned premiums	1,653,855			1,765,881
Reinsurance balances payable	214,550			301,309
Senior notes	300,000			300,000
Revolving credit agreement borrowings	100,000			—
Securities lending payable	950,327			1,503,723
Payable for securities purchased	1,138,117			23,155
Other liabilities	687,700			601,936
Total Liabilities	$	12,614,092		11,588,456
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 13,000,000)	130			130
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2008, 60,173,489; 2007, 67,318,466)	602			673
Additional paid-in capital	977,059			1,451,667
Retained earnings	2,836,211			2,428,117
Accumulated other comprehensive (loss) income, net of deferred income tax	(297,292		)	155,224
Total Shareholders’ Equity	3,516,710			4,035,811
Total Liabilities and Shareholders’ Equity	$	16,130,802		$	15,624,267

17

EX-99.2

Exhibit 99.2

	Wessex House, 4th Floor
	45 Reid Street
	Hamilton HM 12 Bermuda
	441-278-9250
	441-278-9255 fax
	Contact:
	John D. Vollaro
	Executive Vice President and
	Chief Financial Officer

Financial Supplement

Financial Information

as of September 30, 2008 (unaudited)

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

This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital Group Ltd. with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10Q.  Please refer to the Company’s website at www.archcapgroup.bm for further information describing Arch Capital Group Ltd.

Arch Capital Group Ltd. and Subsidiaries

Table of Contents

			Page(s)
I.	Financial Highlights		1
II.	Consolidated Financial Statements
	a.	Consolidated Statements of Income	2
	b.	Consolidated Balance Sheets	3
	c.	Consolidated Statements of Changes in Shareholders’ Equity	4
	d.	Consolidated Statements of Comprehensive Income	5
	e.	Consolidated Statements of Cash Flows	6
III.	Segment Information
	a.	Overview	7
	b.	Consolidated Segment Underwriting Results — Quarter and Year-to-Date	8-9
	c.	Insurance Segment Underwriting Results	10-11
	d.	Reinsurance Segment Underwriting Results	12-13
IV.	Other
	a.	Comments on Regulation G	14
	b.	Operating Income Reconciliation	15
	c.	Annualized Operating Return on Average Common Equity	16
	d.	Capital Structure	17

All financial information contained herein is unaudited, except for the consolidated balance sheet as of December 31, 2007 and the consolidated statement of income, changes in shareholders’ equity, comprehensive income, and cash flows for the year ended December 31, 2007.

Arch Capital Group Ltd. and Subsidiaries

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us; and other factors identified in our filings with the U.S. Securities and Exchange Commission.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Arch Capital Group Ltd. and Subsidiaries

Financial Highlights

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

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
Gross premiums written	$	903,533		$	999,159		(9.6	)%	$	2,843,611		$	3,311,983		(14.1	)%
Net premiums written	$	692,692		$	694,630		(0.3	)%	$	2,190,152		$	2,324,270		(5.8	)%
Net premiums earned	$	733,031		$	735,529		(0.3	)%	$	2,146,940		$	2,232,434		(3.8	)%
Underwriting income	$	(38,516	)	$	112,319		(134.3	)%	$	151,260		$	357,212		(57.7	)%
Net investment income	$	117,022		$	118,464		(1.2	)%	$	356,335		$	342,434		4.1	%
Per diluted share	$	1.86		$	1.64		13.8	%	$	5.44		$	4.58		18.7	%
Net income available to common shareholders	$	26,390		$	199,745		(86.8	)%	$	408,094		$	597,690		(31.7	)%
Per diluted share	$	0.42		$	2.76		(84.8	)%	$	6.23		$	8.00		(22.1	)%
After-tax operating income available to common shareholders (1)	$	64,094		$	214,582		(70.1	)%	$	451,452		$	624,938		(27.8	)%
Per diluted share	$	1.02		$	2.96		(65.6	)%	$	6.89		$	8.36		(17.6	)%
Comprehensive (loss) income	$	(250,468	)	$	316,222		(179.2	)%	$	(25,039	)	$	670,631		(103.7	)%
Cash flow from operations	$	382,189		$	426,583		(10.4	)%	$	972,997		$	1,103,586		(11.8	)%
Weighted average common shares and common share equivalents outstanding	62,830,910			72,378,940			(13.2	)%	65,530,570			74,734,343			(12.3	)%
Underwriting ratios:
Loss ratio	74.9		%	54.7		%	20.2	%	63.2		%	55.9		%	7.3	%
Acquisition expense ratio	18.1		%	17.8		%	0.3	%	17.0		%	16.4		%	0.6	%
Other operating expense ratio	12.3		%	12.3		%	0.0	%	12.7		%	11.8		%	0.9	%
Combined ratio	105.3		%	84.8		%	20.5	%	92.9		%	84.1		%	8.8	%
Annualized operating return on average common equity	7.6		%	24.8		%	(17.2	)%	17.4		%	24.5		%	(7.1	)%

(1) See page 14, Comments on Regulation G.

1

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Income

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

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Revenues
Gross premiums written	$	903,533		$	886,926		$	1,053,152		$	828,160		$	999,159		$	1,102,210		$	1,210,614		$	2,843,611		$	3,311,983		$	4,140,143
Net premiums written	$	692,692		$	686,118		$	811,342		$	577,666		$	694,630		$	757,895		$	871,745		$	2,190,152		$	2,324,270		$	2,901,936
Decrease (increase) in unearned premiums	40,339			19,557			(103,108		)	134,550			40,899			(6,483		)	(126,252		)	(43,212		)	(91,836		)	42,714
Net premiums earned	733,031			705,675			708,234			712,216			735,529			751,412			745,493			2,146,940			2,232,434			2,944,650
Net investment income	117,022			117,120			122,193			120,807			118,464			113,923			110,047			356,335			342,434			463,241
Net realized gains (losses)	(105,534		)	(12,669		)	35,975			18,732			14,147			(3,757		)	(981		)	(82,228		)	9,409			28,141
Fee income	944			1,238			1,068			1,866			1,610			2,091			1,969			3,250			5,670			7,536
Equity in net income (loss) of investment funds accounted for using the equity method	(1,731		)	19,583			(22,313		)	(906		)	(5,283		)	3,376			2,642			(4,461		)	735			(171		)
Other income	3,067			4,968			4,036			5,483			2,696			265			604			12,071			3,565			9,048
Total revenues	746,799			835,915			849,193			858,198			867,163			867,310			859,774			2,431,907			2,594,247			3,452,445
Expenses
Losses and loss adjustment expenses	548,886			404,625			404,417			395,751			402,695			425,663			420,061			1,357,928			1,248,419			1,644,170
Acquisition expenses	133,413			119,226			114,639			111,702			131,424			117,277			120,128			367,278			368,829			480,531
Other operating expenses	95,652			102,578			97,187			101,275			95,545			100,505			90,813			295,417			286,863			388,138
Interest expense	6,241			5,788			5,524			5,523			5,524			5,523			5,523			17,553			16,570			22,093
Net foreign exchange (gains) losses	(68,395		)	(298		)	23,587			4,121			23,656			6,450			9,742			(45,106		)	39,848			43,969
Total expenses	715,797			631,919			645,354			618,372			658,844			655,418			646,267			1,993,070			1,960,529			2,578,901
Income before income taxes	31,002			203,996			203,839			239,826			208,319			211,892			213,507			438,837			633,718			873,544
Income tax expense (benefit)	(1,849		)	5,253			7,956			(1,044		)	2,113			6,037			8,495			11,360			16,645			15,601
Net Income	32,851			198,743			195,883			240,870			206,206			205,855			205,012			427,477			617,073			857,943
Preferred dividends	6,461			6,461			6,461			6,461			6,461			6,461			6,461			19,383			19,383			25,844
Net income available to common shareholders	$	26,390		$	192,282		$	189,422		$	234,409		$	199,745		$	199,394		$	198,551		$	408,094		$	597,690		$	832,099
Net income per common share
Basic	$	0.44		$	3.05		$	2.90		$	3.44		$	2.87		$	2.75		$	2.69		$	6.50		$	8.30		$	11.72
Diluted	$	0.42		$	2.92		$	2.78		$	3.31		$	2.76		$	2.65		$	2.59		$	6.23		$	8.00		$	11.28
Weighted average common shares and common share equivalents outstanding
Basic	60,109,932			62,995,550			65,295,516			68,074,208			69,561,789			72,494,823			73,931,996			62,790,514			71,980,194			70,995,672
Diluted	62,830,910			65,748,119			68,019,413			70,901,361			72,378,940			75,254,846			76,640,686			65,530,570			74,734,343			73,762,419

2

Arch Capital Group Ltd. and Subsidiaries

Consolidated Balance Sheets

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

	September 30,			June 30,			March 31,		December 31,		September 30,		June 30,			March 31,
	2008			2008			2008		2007		2007		2007			2007
Assets
Investments:
Fixed maturities available for sale, at fair value	$	7,544,831		$	7,746,296		$	7,591,695	$	7,137,998	$	7,342,238	$	6,923,478		$	6,963,359
Short-term investments available for sale, at fair value	863,783			645,587			631,285		699,036		1,315,903		1,114,485			796,682
Investment of funds received under securities lending agreements, at fair value	933,797			918,207			1,228,868		1,503,723		920,306		1,114,959			1,160,098
Other investments	142,146			295,638			316,252		353,694		280,241		273,830			268,724
Investment funds accounted for using the equity method	384,139			351,879			294,379		235,975		216,917		188,005			153,663
Investment in joint venture	98,951			100,000			—		—		—		—			—
Total investments	9,967,647			10,057,607			10,062,479		9,930,426		10,075,605		9,614,757			9,342,526
Cash	239,097			246,544			258,680		239,915		250,804		245,143			225,249
Accrued investment income	82,218			76,313			73,686		73,862		70,697		71,064			68,012
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value	905,546			890,822			1,190,086		1,463,045		884,375		1,085,757			1,120,957
Premiums receivable	738,694			859,261			880,946		729,628		902,987		1,041,921			954,168
Unpaid losses and loss adjustment expenses recoverable	1,656,848			1,586,201			1,652,117		1,609,619		1,581,909		1,545,820			1,537,176
Paid losses and loss adjustment expenses recoverable	105,491			113,439			110,962		132,289		132,039		131,441			120,883
Prepaid reinsurance premiums	335,210			364,226			419,046		480,462		541,529		544,137			501,287
Deferred income tax assets, net	72,118			66,944			55,645		57,051		64,474		70,688			64,271
Deferred acquisition costs, net	310,916			319,732			311,364		290,059		301,974		309,651			314,686
Receivable for securities sold	1,099,000			1,053,379			671,354		17,359		82,383		54,954			164,124
Other assets	618,017			647,034			668,110		600,552		575,226		578,435			548,532
Total Assets	$	16,130,802		$	16,281,502		$	16,354,475	$	15,624,267	$	15,464,002	$	15,293,768		$	14,961,871
Liabilities
Reserve for losses and loss adjustment expenses	$	7,569,543		$	7,349,083		$	7,319,141	$	7,092,452	$	6,949,449	$	6,782,433		$	6,595,820
Unearned premiums	1,653,855			1,735,371			1,810,324		1,765,881		1,960,228		2,001,736			1,950,264
Reinsurance balances payable	214,550			254,830			322,280		301,309		336,134		382,488			393,658
Senior notes	300,000			300,000			300,000		300,000		300,000		300,000			300,000
Revolving credit agreement borrowings	100,000			100,000			—		—		—		—			—
Securities lending payable	950,327			918,207			1,228,868		1,503,723		920,306		1,114,959			1,160,098
Payable for securities purchased	1,138,117			1,064,224			710,994		23,155		515,218		434,624			216,381
Other liabilities	687,700			673,554			658,324		601,936		607,872		573,461			562,302
Total Liabilities	12,614,092			12,395,269			12,349,931		11,588,456		11,589,207		11,589,701			11,178,523
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares	130			130			130		130		130		130			130
Common shares	602			619			646		673		691		713			737
Additional paid-in capital	977,059			1,089,636			1,269,821		1,451,667		1,577,284		1,716,295			1,910,125
Retained earnings	2,836,211			2,809,821			2,617,539		2,428,117		2,193,708		1,993,963			1,794,569
Accumulated other comprehensive (loss) income, net of deferred income tax	(297,292		)	(13,973		)	116,408		155,224		102,982		(7,034		)	77,787
Total Shareholders’ Equity	3,516,710			3,886,233			4,004,544		4,035,811		3,874,795		3,704,067			3,783,348
Total Liabilities and Shareholders’ Equity	$	16,130,802		$	16,281,502		$	16,354,475	$	15,624,267	$	15,464,002	$	15,293,768		$	14,961,871
Common shares outstanding(1)	60,173,489			61,943,100			64,649,618		67,318,466		69,141,795		71,273,285			73,746,726
Book value per common share	$	53.04		$	57.49		$	56.92	$	55.12	$	51.34	$	47.41		$	46.89

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

3

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(U.S. dollars in thousands)

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Non-Cumulative Preferred Shares
Balance at beginning and end of period	$	130		$	130		$	130		$	130		$	130		$	130		$	130		$	130		$	130		$	130
Common Shares
Balance at beginning of period	619			646			673			691			713			737			743			673			743			743
Common shares issued, net	1			2			0			2			0			5			1			3			6			8
Purchases of common shares under share repurchase program	(18		)	(29		)	(27		)	(20		)	(22		)	(29		)	(7		)	(74		)	(58		)	(78		)
Balance at end of period	602			619			646			673			691			713			737			602			691			673
Additional Paid-in Capital
Balance at beginning of period	1,089,636			1,269,821			1,451,667			1,577,284			1,716,295			1,910,125			1,944,304			1,451,667			1,944,304			1,944,304
Common shares issued	0			3,511			0			2,172			0			296			109			3,511			405			2,577
Exercise of stock options	4,146			5,324			3,749			3,505			1,721			6,376			6,997			13,219			15,094			18,599
Common shares retired	(123,510		)	(201,498		)	(190,278		)	(136,357		)	(145,865		)	(210,871		)	(46,291		)	(515,286		)	(403,027		)	(539,384		)
Amortization of share-based compensation	6,792			12,911			4,600			5,053			5,095			10,151			4,306			24,303			19,552			24,605
Other	(5		)	(433		)	83			10			38			218			700			(355		)	956			966
Balance at end of period	977,059			1,089,636			1,269,821			1,451,667			1,577,284			1,716,295			1,910,125			977,059			1,577,284			1,451,667
Retained Earnings
Balance at beginning of period	2,809,821			2,617,539			2,428,117			2,193,708			1,993,963			1,794,569			1,593,907			2,428,117			1,593,907			1,593,907
Adjustment to adopt SFAS No. 155 (1)	—			—			—			—			—			—			2,111			—			2,111			2,111
Balance at beginning of period, as adjusted	2,809,821			2,617,539			2,428,117			2,193,708			1,993,963			1,794,569			1,596,018			2,428,117			1,596,018			1,596,018
Dividends declared on preferred shares	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,383		)	(19,383		)	(25,844		)
Net income	32,851			198,743			195,883			240,870			206,206			205,855			205,012			427,477			617,073			857,943
Balance at end of period	2,836,211			2,809,821			2,617,539			2,428,117			2,193,708			1,993,963			1,794,569			2,836,211			2,193,708			2,428,117
Accumulated Other Comprehensive (Loss) Income
Balance at beginning of period	(13,973		)	116,408			155,224			102,982			(7,034		)	77,787			51,535			155,224			51,535			51,535
Adjustment to adopt SFAS No. 155 (1)	—			—			—			—			—			—			(2,111		)	—			(2,111		)	(2,111		)
Balance at beginning of period, as adjusted	(13,973		)	116,408			155,224			102,982			(7,034		)	77,787			49,424			155,224			49,424			49,424
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(271,231		)	(131,446		)	(37,577		)	54,354			105,816			(88,100		)	20,587			(440,254		)	38,303			92,657
Foreign currency translation adjustments, net of deferred income tax	(12,088		)	1,065			(1,239		)	(2,112		)	4,200			3,279			7,776			(12,262		)	15,255			13,143
Balance at end of period	(297,292		)	(13,973		)	116,408			155,224			102,982			(7,034		)	77,787			(297,292		)	102,982			155,224
Total Shareholders’ Equity	$	3,516,710		$	3,886,233		$	4,004,544		$	4,035,811		$	3,874,795		$	3,704,067		$	3,783,348		$	3,516,710		$	3,874,795		$	4,035,811

(1) SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.”

4

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income

(U.S. dollars in thousands)

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Comprehensive Income
Net income	$	32,851		$	198,743		$	195,883		$	240,870		$	206,206		$	205,855		$	205,012		$	427,477		$	617,073		$	857,943
Other comprehensive income (loss), net of deferred income tax
Unrealized holding (losses) gains arising during period	(386,052		)	(139,831		)	12,707			80,187			127,082			(94,500		)	22,014			(513,176		)	54,596			134,783
Reclassification of net realized losses (gains), net of income taxes, included in net income	114,821			8,385			(50,284		)	(25,833		)	(21,266		)	6,400			(1,427		)	72,922			(16,293		)	(42,126		)
Foreign currency translation adjustments	(12,088		)	1,065			(1,239		)	(2,112		)	4,200			3,279			7,776			(12,262		)	15,255			13,143
Other comprehensive (loss) income	(283,319		)	(130,381		)	(38,816		)	52,242			110,016			(84,821		)	28,363			(452,516		)	53,558			105,800
Comprehensive (Loss) Income	$	(250,468	)	$	68,362		$	157,067		$	293,112		$	316,222		$	121,034		$	233,375		$	(25,039	)	$	670,631		$	963,743

5

Arch Capital Group Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

(U.S. dollars in thousands)

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Operating Activities
Net income	$	32,851		$	198,743		$	195,883		$	240,870		$	206,206		$	205,855		$	205,012		$	427,477		$	617,073		$	857,943
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses (gains)	106,449			13,704			(33,791		)	(18,732		)	(14,034		)	3,757			1,097			86,362			(9,180		)	(27,912		)
Equity in net (income) loss of investment funds accounted for using the equity method and other income	(1,336		)	(24,286		)	18,277			(4,577		)	2,587			(3,641		)	(3,246		)	(7,345		)	(4,300		)	(8,877		)
Share-based compensation	6,792			12,911			4,600			5,053			5,095			10,151			4,306			24,303			19,552			24,605
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	153,860			95,859			182,498			114,883			129,814			177,331			147,462			432,217			454,607			569,490
Unearned premiums, net of prepaid reinsurance premiums	(51,494		)	(20,133		)	105,497			(133,360		)	(38,940		)	8,418			127,107			33,870			96,585			(36,775		)
Premiums receivable	115,653			21,679			(148,197		)	174,098			140,753			(86,730		)	(203,707		)	(10,865		)	(149,684		)	24,414
Deferred acquisition costs, net	9,229			(8,491		)	(21,319		)	11,940			7,759			4,998			(23,700		)	(20,581		)	(10,943		)	997
Reinsurance balances payable	(36,563		)	(67,451		)	19,677			(35,429		)	(47,758		)	(12,244		)	91,498			(84,337		)	31,496			(3,933		)
Other liabilities	2,140			7,791			40,490			(4,721		)	28,945			441			1,296			50,421			30,682			25,961
Other items, net	44,608			25,937			(29,070		)	(17,155		)	6,156			(34,464		)	56,006			41,475			27,698			10,543
Net Cash Provided By Operating Activities	382,189			256,263			334,545			332,870			426,583			273,872			403,131			972,997			1,103,586			1,436,456
Investing Activities
Purchases of fixed maturity investments	(4,184,587		)	(3,737,610		)	(3,772,652		)	(6,103,826		)	(5,417,802		)	(3,885,436		)	(5,047,868		)	(11,694,849		)	(14,351,106		)	(20,454,932		)
Proceeds from sales of fixed maturity investments	3,970,441			3,521,141			3,523,338			5,280,324			5,231,766			4,080,733			4,326,607			11,014,920			13,639,106			18,919,430
Proceeds from redemptions and maturities of fixed maturity investments	127,312			180,437			136,932			149,535			188,665			121,863			183,984			444,681			494,512			644,047
Purchases of other investments	(38,036		)	(40,837		)	(146,815		)	(313,388		)	(43,870		)	(33,379		)	(151,978		)	(225,688		)	(229,227		)	(542,615		)
Proceeds from sales of other investments	146,388			24,098			65,226			141,697			20			7,555			54,754			235,712			62,329			204,026
Investment in joint venture	—			(100,000		)	—			—			—			—			—			(100,000		)	—			—
Net (purchases) sales of short-term investments	(280,724		)	(13,462		)	74,201			653,433			(226,906		)	(329,880		)	188,663			(219,985		)	(368,123		)	285,310
Change in investment of securities lending collateral	(32,120		)	310,661			274,855			(583,417		)	194,653			45,139			(268,722		)	553,396			(28,930		)	(612,347		)
Purchases of furniture, equipment and other	(1,772		)	(1,939		)	(3,045		)	(15,391		)	(3,607		)	(4,860		)	(4,138		)	(6,756		)	(12,605		)	(27,996		)
Net Cash Provided By (Used For) Investing Activities	(293,098		)	142,489			152,040			(791,033		)	(77,081		)	1,735			(718,698		)	1,431			(794,044		)	(1,585,077		)
Financing Activities
Purchases of common shares under share repurchase program	(123,377		)	(199,910		)	(189,843		)	(136,361		)	(145,732		)	(210,498		)	(44,475		)	(513,130		)	(400,705		)	(537,066		)
Proceeds from common shares issued, net	3,334			5,510			2,540			4,859			1,212			4,282			3,145			11,384			8,639			13,498
Revolving credit agreement borrowings	—			100,000			—			—			—			—			—			100,000			—			—
Change in securities lending collateral	32,120			(310,661		)	(274,855		)	583,417			(194,653		)	(45,139		)	268,722			(553,396		)	28,930			612,347
Excess tax benefits from share-based compensation	502			616			660			634			324			1,610			2,355			1,778			4,289			4,923
Preferred dividends paid	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(6,461		)	(19,383		)	(19,383		)	(25,844		)
Net Cash Used For Financing Activities	(93,882		)	(410,906		)	(467,959		)	446,088			(345,310		)	(256,206		)	223,286			(972,747		)	(378,230		)	67,858
Effects of exchange rate changes on foreign currency cash	(2,656		)	18			139			1,186			1,469			493			513			(2,499		)	2,475			3,661
(Decrease) increase in cash	(7,447		)	(12,136		)	18,765			(10,889		)	5,661			19,894			(91,768		)	(818		)	(66,213		)	(77,102		)
Cash beginning of period	246,544			258,680			239,915			250,804			245,143			225,249			317,017			239,915			317,017			317,017
Cash end of period	$	239,097		$	246,544		$	258,680		$	239,915		$	250,804		$	245,143		$	225,249		$	239,097		$	250,804		$	239,915
Income taxes paid, net	$	7,124		$	2,723		$	2,510		$	746		$	1,236		$	1,285		$	596		$	12,357		$	3,117		$	3,863
Interest paid	$	724		$	11,259		$	0		$	11,025		$	0		$	11,025		$	0		$	11,983		$	11,025		$	22,050

6

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Overview

The Company classifies its businesses into two underwriting segments – insurance and reinsurance – and corporate and other (non-underwriting). The Company’s insurance and reinsurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the 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. Inter-segment insurance 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 specialty product lines: casualty; construction and national accounts; executive assurance; healthcare; professional liability; programs; property, marine and aviation; surety; and other (consisting of collateral protection business, 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).

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, results for corporate and other include dividends on the Company’s non-cumulative preferred shares.

7

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Three Months Ended September 30, 2008 and 2007

(U.S. dollars in thousands)

	Three Months Ended									Three Months Ended
	September 30, 2008									September 30, 2007
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written(1)	$	678,338		$	228,593		$	903,533		$	722,688		$	286,272		$	999,159
Net premiums written	466,115			226,577			692,692			460,019			234,611			694,630
Net premiums earned	$	441,049		$	291,982		$	733,031		$	429,584		$	305,945		$	735,529
Fee income	872			72			944			1,036			574			1,610
Losses and loss adjustment expenses	(337,456		)	(211,430		)	(548,886		)	(273,896		)	(128,799		)	(402,695		)
Acquisition expenses, net	(62,752		)	(70,661		)	(133,413		)	(52,880		)	(78,544		)	(131,424		)
Other operating expenses	(71,861		)	(18,331		)	(90,192		)	(68,548		)	(22,153		)	(90,701		)
Underwriting income	$	(30,148	)	$	(8,368	)	(38,516		)	$	35,296		$	77,023		112,319
Net investment income							117,022									118,464
Net realized gains (losses)							(105,534		)							14,147
Equity in net income (loss) of investment funds accounted for using the equity method							(1,731		)							(5,283		)
Other income							3,067									2,696
Other expenses							(5,460		)							(4,844		)
Interest expense							(6,241		)							(5,524		)
Net foreign exchange gains (losses)							68,395									(23,656		)
Income before income taxes							31,002									208,319
Income tax benefit (expense)							1,849									(2,113		)
Net income							32,851									206,206
Preferred dividends							(6,461		)							(6,461		)
Net income available to common shareholders							$	26,390								$	199,745
Underwriting Ratios
Loss ratio	76.5		%	72.4		%	74.9		%	63.8		%	42.1		%	54.7		%
Acquisition expense ratio(2)	14.0		%	24.2		%	18.1		%	12.1		%	25.7		%	17.8		%
Other operating expense ratio	16.3		%	6.3		%	12.3		%	16.0		%	7.2		%	12.3		%
Combined ratio	106.8		%	102.9		%	105.3		%	91.9		%	75.0		%	84.8		%

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

8

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Nine Months Ended September 30, 2008 and 2007

(U.S. dollars in thousands)

	Nine Months Ended									Nine Months Ended
	September 30, 2008									September 30, 2007
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written(1)	$	1,926,349		$	935,738		$	2,843,611		$	2,068,623		$	1,272,274		$	3,311,983
Net premiums written	1,290,380			899,772			2,190,152			1,340,191			984,079			2,324,270
Net premiums earned	$	1,276,734		$	870,206		$	2,146,940		$	1,275,991		$	956,443		$	2,232,434
Fee income	2,634			616			3,250			3,737			1,933			5,670
Losses and loss adjustment expenses	(887,392		)	(470,536		)	(1,357,928		)	(805,876		)	(442,543		)	(1,248,419		)
Acquisition expenses, net	(170,041		)	(197,237		)	(367,278		)	(147,107		)	(221,722		)	(368,829		)
Other operating expenses	(217,064		)	(56,660		)	(273,724		)	(207,711		)	(55,933		)	(263,644		)
Underwriting income	$	4,871		$	146,389		151,260			$	119,034		$	238,178		357,212
Net investment income							356,335									342,434
Net realized gains (losses)							(82,228		)							9,409
Equity in net income (loss) of investment funds accounted for using the equity method							(4,461		)							735
Other income							12,071									3,565
Other expenses							(21,693		)							(23,219		)
Interest expense							(17,553		)							(16,570		)
Net foreign exchange gains (losses)							45,106									(39,848		)
Income before income taxes							438,837									633,718
Income tax expense							(11,360		)							(16,645		)
Net income							427,477									617,073
Preferred dividends							(19,383		)							(19,383		)
Net income available to common shareholders							$	408,094								$	597,690
Underwriting Ratios
Loss ratio	69.5%			54.1		%	63.2		%	63.2		%	46.3		%	55.9		%
Acquisition expense ratio(2)	13.1%			22.7		%	17.0		%	11.3		%	23.2		%	16.4		%
Other operating expense ratio	17.0%			6.5		%	12.7		%	16.3		%	5.8		%	11.8		%
Combined ratio	99.6%			83.3		%	92.9		%	90.8		%	75.3		%	84.1		%

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

9

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008				2007				2008				2007
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Net premiums written
Property, marine and aviation	$	91,461	19.6	%	$	85,178	18.5	%	$	278,372	21.6	%	$	274,177	20.5	%
Programs	78,045		16.7	%	67,792		14.7	%	205,830		16.0	%	185,269		13.8	%
Construction and national accounts	66,161		14.2	%	54,543		11.9	%	193,124		15.0	%	170,540		12.7	%
Professional liability	70,778		15.2	%	80,708		17.5	%	188,442		14.6	%	203,647		15.2	%
Executive assurance	53,665		11.5	%	46,845		10.2	%	139,574		10.8	%	138,840		10.4	%
Casualty	28,456		6.1	%	46,392		10.1	%	88,160		6.8	%	147,292		11.0	%
Healthcare	11,411		2.4	%	15,952		3.5	%	33,435		2.6	%	49,865		3.7	%
Surety	16,599		3.6	%	13,233		2.9	%	37,672		2.9	%	44,948		3.4	%
Other(1)	49,539		10.6	%	49,376		10.7	%	125,771		9.7	%	125,613		9.4	%
Total	$	466,115	100.0	%	$	460,019	100.0	%	$	1,290,380	100.0	%	$	1,340,191	100.0	%
Net premiums earned
Property, marine and aviation	$	88,903	20.2	%	$	81,233	18.9	%	$	257,191	20.1	%	$	255,303	20.0	%
Programs	71,576		16.2	%	59,518		13.9	%	190,648		14.9	%	172,763		13.5	%
Construction and national accounts	65,710		14.9	%	55,463		12.9	%	180,991		14.2	%	154,403		12.1	%
Professional liability	62,987		14.3	%	67,256		15.7	%	197,997		15.5	%	200,944		15.7	%
Executive assurance	47,237		10.7	%	46,481		10.8	%	136,141		10.7	%	139,267		10.9	%
Casualty	37,351		8.5	%	50,248		11.7	%	117,949		9.2	%	154,481		12.1	%
Healthcare	12,292		2.8	%	16,249		3.8	%	38,874		3.0	%	53,200		4.2	%
Surety	13,891		3.1	%	16,597		3.9	%	39,447		3.1	%	52,323		4.1	%
Other(1)	41,102		9.3	%	36,539		8.5	%	117,496		9.2	%	93,307		7.3	%
Total	$	441,049	100.0	%	$	429,584	100.0	%	$	1,276,734	100.0	%	$	1,275,991	100.0	%
Net premiums written by client location
United States	$	348,306	74.7	%	$	356,246	77.4	%	$	957,715	74.2	%	$	1,037,984	77.5	%
Europe	57,155		12.3	%	57,686		12.5	%	200,112		15.5	%	193,589		14.4	%
Other	60,654		13.0	%	46,087		10.0	%	132,553		10.3	%	108,618		8.1	%
Total	$	466,115	100.0	%	$	460,019	100.0	%	$	1,290,380	100.0	%	$	1,340,191	100.0	%
Net premiums written by underwriting location
United States	354,002		75.9	%	$	353,703	76.9	%	959,440		74.4	%	$	1,026,718	76.6	%
Europe	97,548		20.9	%	92,136		20.0	%	279,413		21.7	%	257,882		19.2	%
Other	14,565		3.1	%	14,180		3.1	%	51,527		4.0	%	55,591		4.1	%
Total	$	466,115	100.0	%	$	460,019	100.0	%	$	1,290,380	100.0	%	$	1,340,191	100.0	%

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

10

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Insurance Segment

(U.S. dollars in thousands)

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Gross premiums written	$	678,338		$	621,663		$	626,348		$	591,679		$	722,688		$	684,725		$	661,210		$	1,926,349		$	2,068,623		$	2,660,302
Net premiums written	466,115			421,501			402,764			377,357			460,019			451,828			428,344			1,290,380			1,340,191			1,717,548
Net premiums earned	$	441,049		$	416,585		$	419,100		$	426,352		$	429,584		$	432,560		$	413,847		$	1,276,734		$	1,275,991		$	1,702,343
Fee income	872			880			882			1,326			1,036			1,276			1,425			2,634			3,737			5,063
Losses and loss adjustment expenses	(337,456		)	(262,633		)	(287,303		)	(271,893		)	(273,896		)	(272,658		)	(259,322		)	(887,392		)	(805,876		)	(1,077,769		)
Acquisition expenses, net	(62,752		)	(55,400		)	(51,889		)	(54,596		)	(52,880		)	(47,532		)	(46,695		)	(170,041		)	(147,107		)	(201,703		)
Other operating expenses	(71,861		)	(71,566		)	(73,637		)	(68,677		)	(68,548		)	(70,269		)	(68,894		)	(217,064		)	(207,711		)	(276,388		)
Underwriting income	$	(30,148	)	$	27,866		$	7,153		$	32,512		$	35,296		$	43,377		$	40,361		$	4,871		$	119,034		$	151,546
Underwriting Ratios
Loss ratio	76.5		%	63.0		%	68.6		%	63.8		%	63.8		%	63.0		%	62.7		%	69.5		%	63.2		%	63.3		%
Acquisition expense ratio	14.0		%	13.1		%	12.2		%	12.6		%	12.1		%	10.8		%	11.1		%	13.1		%	11.3		%	11.7		%
Other operating expense ratio	16.3		%	17.2		%	17.6		%	16.1		%	16.0		%	16.2		%	16.6		%	17.0		%	16.3		%	16.2		%
Combined ratio	106.8		%	93.3		%	98.4		%	92.5		%	91.9		%	90.0		%	90.4		%	99.6		%	90.8		%	91.2		%
Net premiums written
Property, marine and aviation	$	91,461		$	89,674		$	97,237		$	54,790		$	85,178		$	104,226		$	84,773		$	278,372		$	274,177		$	328,967
Programs	78,045			73,202			54,583			50,524			67,792			59,154			58,323			205,830			185,269			235,793
Construction and national accounts	66,161			65,752			61,211			57,396			54,543			55,514			60,483			193,124			170,540			227,936
Professional liability	70,778			63,583			54,081			65,832			80,708			64,584			58,355			188,442			203,647			269,479
Executive assurance	53,665			43,740			42,169			46,511			46,845			47,904			44,091			139,574			138,840			185,351
Casualty	28,456			31,161			28,543			35,975			46,392			57,719			43,181			88,160			147,292			183,267
Healthcare	11,411			11,027			10,997			13,892			15,952			12,383			21,530			33,435			49,865			63,757
Surety	16,599			10,206			10,867			11,113			13,233			12,968			18,747			37,672			44,948			56,061
Other(1)	49,539			33,156			43,076			41,324			49,376			37,376			38,861			125,771			125,613			166,937
Total	$	466,115		$	421,501		$	402,764		$	377,357		$	460,019		$	451,828		$	428,344		$	1,290,380		$	1,340,191		$	1,717,548
Net premiums earned
Property, marine and aviation	$	88,903		$	83,830		$	84,458		79,574			$	81,233		$	92,284		$	81,786		$	257,191		$	255,303		$	334,877
Programs	71,576			62,085			56,987			58,249			59,518			57,036			56,209			190,648			172,763			231,012
Construction and national accounts	65,710			58,166			57,115			58,601			55,463			50,965			47,975			180,991			154,403			213,004
Professional liability	62,987			66,200			68,810			67,281			67,256			65,804			67,884			197,997			200,944			268,225
Executive assurance	47,237			44,496			44,408			44,887			46,481			47,408			45,378			136,141			139,267			184,154
Casualty	37,351			38,292			42,306			47,458			50,248			52,673			51,560			117,949			154,481			201,939
Healthcare	12,292			13,137			13,445			15,256			16,249			17,107			19,844			38,874			53,200			68,456
Surety	13,891			12,057			13,499			14,874			16,597			16,597			19,129			39,447			52,323			67,197
Other(1)	41,102			38,322			38,072			40,172			36,539			32,686			24,082			117,496			93,307			133,479
Total	$	441,049		$	416,585		$	419,100		$	426,352		$	429,584		$	432,560		$	413,847		$	1,276,734		$	1,275,991		$	1,702,343

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

11

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008				2007				2008				2007
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Net premiums written
Casualty (1)	$	82,497	36.4	%	$	103,718	44.2	%	$	275,458	30.6	%	$	358,300	36.4	%
Property excluding property catastrophe (2)	56,105		24.8	%	43,341		18.5	%	237,775		26.4	%	207,638		21.1	%
Property catastrophe	44,591		19.7	%	35,268		15.0	%	203,612		22.6	%	193,441		19.7	%
Other specialty	24,013		10.6	%	33,145		14.1	%	120,386		13.4	%	135,112		13.7	%
Marine and aviation	18,727		8.3	%	17,903		7.6	%	58,866		6.5	%	81,430		8.3	%
Other	644		0.3	%	1,236		0.5	%	3,675		0.4	%	8,158		0.8	%
Total	$	226,577	100.0	%	$	234,611	100.0	%	$	899,772	100.0	%	$	984,079	100.0	%
Net premiums earned
Casualty (1)	$	106,146	36.4	%	$	115,862	37.9	%	$	319,993	36.8	%	$	387,418	40.5	%
Property excluding property catastrophe (2)	68,670		23.5	%	62,699		20.5	%	199,456		22.9	%	200,475		21.0	%
Property catastrophe	57,015		19.5	%	53,703		17.6	%	158,792		18.2	%	126,545		13.2	%
Other specialty	36,388		12.5	%	49,232		16.1	%	110,930		12.7	%	153,856		16.1	%
Marine and aviation	22,395		7.7	%	21,889		7.2	%	76,772		8.8	%	78,532		8.2	%
Other	1,368		0.5	%	2,560		0.8	%	4,263		0.5	%	9,617		1.0	%
Total	$	291,982	100.0	%	$	305,945	100.0	%	$	870,206	100.0	%	$	956,443	100.0	%
Net premiums written
Pro rata	$	149,023	65.8	%	$	185,329	79.0	%	$	532,467	59.2	%	$	634,116	64.4	%
Excess of loss	77,554		34.2	%	49,282		21.0	%	367,305		40.8	%	349,963		35.6	%
Total	$	226,577	100.0	%	$	234,611	100.0	%	$	899,772	100.0	%	$	984,079	100.0	%
Net premiums earned
Pro rata	$	187,656	64.3	%	$	211,169	69.0	%	$	574,802	66.1	%	$	682,423	71.4	%
Excess of loss	104,326		35.7	%	94,776		31.0	%	295,404		33.9	%	274,020		28.6	%
Total	$	291,982	100.0	%	$	305,945	100.0	%	$	870,206	100.0	%	$	956,443	100.0	%
Net premiums written by client location
United States	$	125,650	55.5	%	$	129,079	55.0	%	$	495,935	55.1	%	$	589,526	59.9	%
Europe	52,841		23.3	%	43,481		18.5	%	255,133		28.4	%	205,529		20.9	%
Bermuda	34,354		15.2	%	49,028		20.9	%	109,198		12.1	%	147,720		15.0	%
Other	13,732		6.1	%	13,023		5.6	%	39,506		4.4	%	41,304		4.2	%
Total	$	226,577	100.0	%	$	234,611	100.0	%	$	899,772	100.0	%	$	984,079	100.0	%
Net premiums written by underwriting location
Bermuda	$	131,777	58.2	%	$	131,688	56.1	%	$	512,581	57.0	%	$	588,851	59.8	%
U.S.	86,671		38.3	%	100,208		42.7	%	333,780		37.1	%	380,085		38.6	%
Other	8,129		3.6	%	2,715		1.2	%	53,411		5.9	%	15,143		1.5	%
Total	$	226,577	100.0	%	$	234,611	100.0	%	$	899,772	100.0	%	$	984,079	100.0	%

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

(2) Includes facultative business.

12

Arch Capital Group Ltd. and Subsidiaries

Segment Information — Reinsurance Segment

(U.S. dollars in thousands)

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
Gross premiums written	$	228,593		$	273,318		$	433,827		$	245,371		$	286,272		$	427,348		$	558,654		$	935,738		$	1,272,274		$	1,517,645
Net premiums written	226,577			264,617			408,578			200,309			234,611			306,067			443,401			899,772			984,079			1,184,388
Net premiums earned	$	291,982		$	289,090		$	289,134		$	285,864		$	305,945		$	318,852		$	331,646		$	870,206		$	956,443		$	1,242,307
Fee income	72			358			186			540			574			815			544			616			1,933			2,473
Losses and loss adjustment expenses	(211,430		)	(141,992		)	(117,114		)	(123,858		)	(128,799		)	(153,005		)	(160,739		)	(470,536		)	(442,543		)	(566,401		)
Acquisition expenses, net	(70,661		)	(63,826		)	(62,750		)	(57,106		)	(78,544		)	(69,745		)	(73,433		)	(197,237		)	(221,722		)	(278,828		)
Other operating expenses	(18,331		)	(20,091		)	(18,238		)	(25,126		)	(22,153		)	(19,999		)	(13,781		)	(56,660		)	(55,933		)	(81,059		)
Underwriting income	$	(8,368	)	$	63,539		$	91,218		$	80,314		$	77,023		$	76,918		$	84,237		$	146,389		$	238,178		$	318,492
Underwriting Ratios
Loss ratio	72.4		%	49.1		%	40.5		%	43.3		%	42.1		%	48.0		%	48.5		%	54.1		%	46.3		%	45.6		%
Acquisition expense ratio	24.2		%	22.1		%	21.7		%	20.0		%	25.7		%	21.9		%	22.1		%	22.7		%	23.2		%	22.4		%
Other operating expense ratio	6.3		%	6.9		%	6.3		%	8.8		%	7.2		%	6.3		%	4.2		%	6.5		%	5.8		%	6.5		%
Combined ratio	102.9		%	78.1		%	68.5		%	72.1		%	75.0		%	76.2		%	74.8		%	83.3		%	75.3		%	74.5		%
Net premiums written
Casualty(1)	$	82,497		$	86,974		$	105,987		$	107,909		$	103,718		$	110,108		$	144,474		$	275,458		$	358,300		$	466,209
Property excluding property catastrophe(2)	56,105			85,748			95,922			40,729			43,341			69,351			94,946			237,775			207,638			248,367
Property catastrophe	44,591			52,797			106,224			8,762			35,268			77,514			80,659			203,612			193,441			202,203
Other specialty	24,013			20,693			75,680			13,664			33,145			27,971			73,996			120,386			135,112			148,776
Marine and aviation	18,727			17,975			22,164			29,156			17,903			19,812			43,715			58,866			81,430			110,586
Other	644			430			2,601			89			1,236			1,311			5,611			3,675			8,158			8,247
Total	$	226,577		$	264,617		$	408,578		$	200,309		$	234,611		$	306,067		$	443,401		$	899,772		$	984,079		$	1,184,388
Net premiums earned
Casualty(1)	$	106,146		$	106,199		$	107,648		$	118,160		$	115,862		$	131,114		$	140,442		$	319,993		$	387,418		$	505,578
Property excluding property catastrophe(2)	68,670			67,445			63,341			63,676			62,699			64,734			73,042			199,456			200,475			264,151
Property catastrophe	57,015			51,496			50,281			44,951			53,703			38,152			34,690			158,792			126,545			171,496
Other specialty	36,388			36,058			38,484			30,741			49,232			52,582			52,042			110,930			153,856			184,597
Marine and aviation	22,395			26,946			27,431			25,950			21,889			30,021			26,622			76,772			78,532			104,482
Other	1,368			946			1,949			2,386			2,560			2,249			4,808			4,263			9,617			12,003
Total	$	291,982		$	289,090		$	289,134		$	285,864		$	305,945		$	318,852		$	331,646		$	870,206		$	956,443		$	1,242,307

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

(2) Includes facultative business.

13

Arch Capital Group Ltd. and Subsidiaries

Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to common shareholders, which is defined as net income available to common shareholders, excluding net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, net of income taxes. The presentation of after-tax operating income available to common shareholders is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on the following page.

The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic, and, under applicable GAAP accounting, losses on the Company’s investments can be realized as the result of other-than-temporary declines in value without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

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

14

Arch Capital Group Ltd. and Subsidiaries

Operating Income Reconciliation

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

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

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
After-tax operating income available to common shareholders	$	64,094		$	185,375		$	201,983		$	221,520		$	214,582		$	205,626		$	204,730		$	451,452		$	624,938		$	846,458
Net realized gains (losses), net of tax	(104,418		)	(12,868		)	33,136			18,211			13,879			(2,791		)	786			(84,150		)	11,874			30,085
Equity in net income (loss) of investment funds using the equity method, net of tax	(1,731		)	19,583			(22,313		)	(906		)	(5,283		)	3,376			2,642			(4,461		)	735			(171		)
Net foreign exchange gains (losses), net of tax	68,445			192			(23,384		)	(4,416		)	(23,433		)	(6,817		)	(9,607		)	45,253			(39,857		)	(44,273		)
Net income available to common shareholders	$	26,390		$	192,282		$	189,422		$	234,409		$	199,745		$	199,394		$	198,551		$	408,094		$	597,690		$	832,099
Diluted per common share results:
After-tax operating income available to common shareholders	$	1.02		$	2.82		$	2.97		$	3.12		$	2.96		$	2.73		$	2.67		$	6.89		$	8.36		$	11.47
Net realized gains (losses), net of tax	(1.66		)	(0.20		)	0.48			0.26			0.19			(0.04		)	0.01			(1.28		)	0.16			0.41
Equity in net income (loss) of investment funds using the equity method, net of tax	(0.03		)	0.30			(0.33		)	(0.01		)	(0.07		)	0.05			0.04			(0.07		)	0.01			0.00
Net foreign exchange gains (losses), net of tax	1.09			0.00			(0.34		)	(0.06		)	(0.32		)	(0.09		)	(0.13		)	0.69			(0.53		)	(0.60		)
Net income available to common shareholders	$	0.42		$	2.92		$	2.78		$	3.31		$	2.76		$	2.65		$	2.59		$	6.23		$	8.00		$	11.28
Weighted average common shares and common share equivalents outstanding – diluted	62,830,910			65,748,119			68,019,413			70,901,361			72,378,940			75,254,846			76,640,686			65,530,570			74,734,343			73,762,419

15

Arch Capital Group Ltd. and Subsidiaries

Annualized Operating Return on Average Common Equity

(U.S. dollars in thousands)

The following is a calculation of annualized operating income on average common equity:

	Three Months Ended																					Nine Months Ended						Year Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,			September 30,			September 30,			December 31,
	2008			2008			2008			2007			2007			2007			2007			2008			2007			2007
After-tax operating income available to common shareholders	$	64,094		$	185,375		$	201,983		$	221,520		$	214,582		$	205,626		$	204,730		$	451,452		$	624,938		$	846,458
Annualized after-tax operating incomeavailable to common shareholders (a)	$	256,376		$	741,500		$	807,932		$	886,080		$	858,328		$	822,504		$	818,920		$	601,936		$	833,251		$	846,458
Beginning common shareholders’ equity	$	3,561,233		$	3,679,544		$	3,710,811		$	3,549,795		$	3,379,067		$	3,458,348		$	3,265,619		$	3,710,811		$	3,265,619		$	3,265,619
Ending common shareholders’ equity	3,191,710			3,561,233			3,679,544			3,710,811			3,549,795			3,379,067			3,458,348			3,191,710			3,549,795			3,710,811
Average common shareholders’ equity (b)	$	3,376,472		$	3,620,389		$	3,695,178		$	3,630,303		$	3,464,431		$	3,418,708		$	3,361,984		$	3,451,261		$	3,407,707		$	3,488,215
Annualized operating return on average common equity (a)/(b)	7.6		%	20.5		%	21.9		%	24.4		%	24.8		%	24.1		%	24.4		%	17.4		%	24.5		%	24.3		%

16

Arch Capital Group Ltd. and Subsidiaries

Capital Structure

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

	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2008			2008			2008			2007			2007			2007			2007
Debt:
Senior notes, due May 1, 2034 (7.35%)	$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000
Revolving credit agreement borrowings, due August 30, 2011 (variable)	100,000			100,000			—			—			—			—			—
Total debt	$	400,000		$	400,000		$	300,000		$	300,000		$	300,000		$	300,000		$	300,000
Shareholders’ Equity
Series A non-cumulative preferred shares (8.0%), liquidation preference	$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000		$	200,000
Series B non-cumulative preferred shares (7.875%), liquidation preference	125,000			125,000			125,000			125,000			125,000			125,000			125,000
Preferred shareholders’ equity	325,000			325,000			325,000			325,000			325,000			325,000			325,000
Common shareholders’ equity (a)	3,191,710			3,561,233			3,679,544			3,710,811			3,549,795			3,379,067			3,458,348
Total Shareholders’ Equity	$	3,516,710		$	3,886,233		$	4,004,544		$	4,035,811		$	3,874,795		$	3,704,067		$	3,783,348
Total capital	$	3,916,710		$	4,286,233		$	4,304,544		$	4,335,811		$	4,174,795		$	4,004,067		$	4,083,348
Common shares outstanding(1) (b)	60,173,489			61,943,100			64,649,618			67,318,466			69,141,795			71,273,285			73,746,726
Book value per common share (a)/(b)	$	53.04		$	57.49		$	56.92		$	55.12		$	51.34		$	47.41		$	46.89
Leverage ratios:
Senior notes/total capital	7.7		%	7.0		%	7.0		%	6.9		%	7.2		%	7.5		%	7.3		%
Revolving credit agreement borrowings/total capital	2.6		%	2.3		%	0.0		%	0.0		%	0.0		%	0.0		%	0.0		%
Debt/total capital	10.2		%	9.3		%	7.0		%	6.9		%	7.2		%	7.5		%	7.3		%
Preferred/total capital	8.3		%	7.6		%	7.6		%	7.5		%	7.8		%	8.1		%	8.0		%
Debt and preferred/total capital	18.5		%	16.9		%	14.5		%	14.4		%	15.0		%	15.6		%	15.3		%

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

17