10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-26456

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

Bermuda

(State or other jurisdiction of incorporation or organization)

Not Applicable

(I.R.S. Employer Identification No.)

Wessex House, 5th Floor, 45 Reid Street

Hamilton HM 12, Bermuda

(Address of principal executive offices)

(441) 278-9250

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

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

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

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

The number of the registrant’s common shares (par value, $0.0033 per share) outstanding as of August 1, 2012 was 136,314,789.

ARCH CAPITAL GROUP LTD.

INDEX

	Page No.
PART I. Financial Information
Item 1 — Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets June 30, 2012 (unaudited) and December 31, 2011	3
Consolidated Statements of Income For the three and six month periods ended June 30, 2012 and 2011 (unaudited)	4
Consolidated Statements of Comprehensive Income For the six months ended ended June 30, 2012 and 2011 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the six months ended ended June 30, 2012 and 2011 (unaudited)	6
Consolidated Statements of Cash Flows For the six months ended ended June 30, 2012 and 2011 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	69
Item 4 — Controls and Procedures	69
PART II. Other Information
Item 1 — Legal Proceedings	70
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 5 — Other Information	70
Item 6 — Exhibits	71

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of June 30, 2012, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2012 and June 30, 2011, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2012 and June 30, 2011. These interim financial statements are the responsibility of the Company’s management.

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

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 29, 2012, we expressed an unqualified opinion on those consolidated financial statements.  As discussed in Note 3 to the accompanying consolidated financial statements, the Company changed its method of accounting for costs associated with acquiring or renewing insurance contracts. The accompanying December 31, 2011 consolidated balance sheet reflects this change.

/s/ PricewaterhouseCoopers LLP

New York, NY

August 8, 2012

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	June 30,			December 31,
	2012			2011
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $9,325,208 and $9,165,438)	$	9,556,326		$	9,375,604
Short-term investments available for sale, at fair value (amortized cost: $1,085,961 and $909,121)	1,087,910			904,219
Investment of funds received under securities lending, at fair value (amortized cost: $66,327 and $48,577)	66,424			48,419
Equity securities available for sale, at fair value (cost: $258,983 and $299,058)	260,864			299,584
Other investments available for sale, at fair value (cost: $368,826 and $235,381)	381,576			238,111
Investments accounted for using the fair value option	496,843			366,903
TALF investments, at fair value (amortized cost: $292,841 and $373,040)	307,453			387,702
Investments accounted for using the equity method	331,601			380,507
Total investments	12,488,997			12,001,049
Cash	355,392			351,699
Accrued investment income	72,095			70,739
Investment in joint venture (cost: $100,000)	109,240			107,576
Fixed maturities and short-term investments pledged under securities lending, at fair value	74,032			56,393
Premiums receivable	834,116			501,563
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,191			1,851,584
Contractholder receivables	787,389			748,231
Prepaid reinsurance premiums	313,264			265,696
Deferred acquisition costs, net	272,736			227,884
Receivable for securities sold	821,527			462,891
Other assets	518,744			460,052
Total Assets	$	18,496,723		$	17,105,357
Liabilities
Reserve for losses and loss adjustment expenses	$	8,546,350		$	8,456,210
Unearned premiums	1,815,135			1,411,872
Reinsurance balances payable	184,763			133,866
Contractholder payables	787,389			748,231
Senior notes	300,000			300,000
Revolving credit agreement borrowings	100,000			100,000
TALF borrowings, at fair value (par: $237,095 and $310,868)	235,818			310,486
Securities lending payable	76,383			58,546
Payable for securities purchased	927,962			480,230
Other liabilities	502,607			513,842
Total Liabilities	13,476,407			12,513,283
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares	325,000			325,000
Common shares ($0.0033 par, shares issued: 166,748,110 and 164,636,338)	556			549
Additional paid-in capital	187,013			161,419
Retained earnings	5,167,069			4,796,655
Accumulated other comprehensive income, net of deferred income tax	193,097			153,923
Common shares held in treasury, at cost (shares: 30,456,458 and 30,277,993)	(852,419		)	(845,472		)
Total Shareholders’ Equity	5,020,316			4,592,074
Total Liabilities and Shareholders’ Equity	$	18,496,723		$	17,105,357

See Notes to Consolidated Financial Statements

3

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues
Net premiums written	$	820,233		$	706,543		$	1,683,844		$	1,470,821
Change in unearned premiums	(93,577		)	(63,664		)	(276,876		)	(194,247		)
Net premiums earned	726,656			642,879			1,406,968			1,276,574
Net investment income	73,608			86,671			147,905			174,978
Net realized gains	34,867			45,210			78,988			65,905
Other-than-temporary impairment losses	(2,454		)	(1,969		)	(3,485		)	(5,227		)
Less investment impairments recognized in other comprehensive income, before taxes	503			285			511			863
Net impairment losses recognized in earnings	(1,951		)	(1,684		)	(2,974		)	(4,364		)
Fee income	806			784			1,349			1,599
Equity in net income of investment funds accounted for using the equity method	7,787			5,973			32,613			35,646
Other income (loss)	695			(4,265		)	(7,373		)	302
Total revenues	842,468			775,568			1,657,476			1,550,640
Expenses
Losses and loss adjustment expenses	399,693			431,622			794,900			925,502
Acquisition expenses	128,289			110,639			247,251			219,393
Other operating expenses	117,701			112,842			224,173			215,724
Interest expense	7,439			7,758			14,960			15,479
Net foreign exchange (gains) losses	(31,689		)	18,375			(11,001		)	55,287
Total expenses	621,433			681,236			1,270,283			1,431,385
Income before income taxes	221,035			94,332			387,193			119,255
Income tax expense (benefit)	767			(2,271		)	2,669			(2,821		)
Net income	220,268			96,603			384,524			122,076
Preferred dividends	7,649			6,461			14,110			12,922
Net income available to common shareholders	$	212,619		$	90,142		$	370,414		$	109,154
Net income per common share
Basic	$	1.58		$	0.69		$	2.76		$	0.82
Diluted	$	1.54		$	0.65		$	2.68		$	0.78
Weighted average common shares and common share equivalents outstanding
Basic	134,529,129			131,232,269			134,241,876			132,359,493
Diluted	138,211,736			137,975,599			138,017,490			139,234,931

See Notes to Consolidated Financial Statements

4

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Comprehensive Income
Net income	$	384,524		$	122,076
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	112,923			125,232
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(511		)	(863		)
Reclassification of net realized gains, net of income taxes, included in net income	(71,303		)	(67,858		)
Foreign currency translation adjustments, net of deferred income tax	(1,935		)	2,570
Other comprehensive income	39,174			59,081
Comprehensive Income	$	423,698		$	181,157

See Notes to Consolidated Financial Statements

5

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Non-Cumulative Preferred Shares
Balance at beginning of period	$	325,000		$	325,000
Shares issued - Series C	325,000			—
Shares repurchased - Series A and B	(325,000		)	—
Balance at end of period	325,000			325,000
Common Shares
Balance at beginning of year	549			534
Common shares issued, net	7			7
Balance at end of period	556			541
Additional Paid-in Capital
Balance at beginning of year	161,419			110,325
Common shares issued, net	4,553			3,912
Issue costs on Series C preferred shares	(9,397		)	—
Exercise of stock options	4,822			6,372
Amortization of share-based compensation	23,930			19,505
Other	1,686			1,887
Balance at end of period	187,013			142,001
Retained Earnings
Balance at beginning of year	4,796,655			4,422,553
Cumulative effect of adjustment resulting from adoption of new accounting guidance (1)	—			(36,217		)
Balance at beginning of year, as adjusted	4,796,655			4,386,336
Dividends declared on preferred shares	(14,110		)	(12,922		)
Net income	384,524			122,076
Balance at end of period	5,167,069			4,495,490
Accumulated Other Comprehensive Income
Balance at beginning of year	153,923			204,503
Change in unrealized appreciation in value of investments, net of deferred income tax	41,620			57,374
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(511		)	(863		)
Foreign currency translation adjustments, net of deferred income tax	(1,935		)	2,570
Balance at end of period	193,097			263,584
Common Shares Held in Treasury, at Cost
Balance at beginning of year	(845,472		)	(549,912		)
Shares repurchased for treasury	(6,947		)	(273,674		)
Balance at end of period	(852,419		)	(823,586		)
Total Shareholders’ Equity	$	5,020,316		$	4,403,030

(1) Adoption of accounting guidance regarding costs incurred that can be capitalized by insurance entities.

See Notes to Consolidated Financial Statements

6

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Operating Activities
Net income	$	384,524		$	122,076
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(80,753		)	(71,367		)
Net impairment losses recognized in earnings	2,974			4,364
Equity in net income of investment funds accounted for using the equity method and other income	(18,141		)	18,590
Share-based compensation	23,930			19,505
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	107,670			286,223
Unearned premiums, net of prepaid reinsurance premiums	276,877			194,123
Premiums receivable	(273,735		)	(196,244		)
Deferred acquisition costs, net	(45,390		)	(27,520		)
Reinsurance balances payable	37,129			15,987
Other liabilities	(2,526		)	6,753
Other items, net	(15,291		)	74,057
Net Cash Provided By Operating Activities	397,268			446,547
Investing Activities
Purchases of:
Fixed maturity investments	(7,546,498		)	(7,386,907		)
Equity securities	(110,303		)	(248,947		)
Other investments	(386,243		)	(207,365		)
Proceeds from the sales of:
Fixed maturity investments	6,887,186			6,555,997
Equity securities	198,485			199,650
Other investments	216,964			204,747
Proceeds from redemptions and maturities of fixed maturity investments	598,792			537,410
Net (purchases) sales of short-term investments	(174,607		)	235,676
Change in investment of securities lending collateral	(17,837		)	(77,051		)
Purchase of business, net of cash acquired	28,948			—
Purchases of furniture, equipment and other assets	(10,208		)	(12,348		)
Net Cash Used For Investing Activities	(315,321		)	(199,138		)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,789			—
Repurchase of Series A and B preferred shares	(325,000		)	—
Purchases of common shares under share repurchase program	—			(266,725		)
Proceeds from common shares issued, net	348			1,478
Repayments of borrowings	(73,773		)	(7,614		)
Change in securities lending collateral	17,837			77,051
Other	3,464			3,181
Preferred dividends paid	(17,412		)	(12,922		)
Net Cash Used For Financing Activities	(78,747		)	(205,551		)
Effects of exchange rate changes on foreign currency cash	493			6,403
Increase in cash	3,693			48,261
Cash beginning of year	351,699			362,740
Cash end of period	$	355,392		$	411,001

See Notes to Consolidated Financial Statements

7

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.      General

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

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, including the Company’s audited consolidated financial statements and related notes.

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

2.       Share Transactions

Share Repurchases

The board of directors of ACGL has authorized the investment 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. During the 2012 periods, ACGL did not repurchase any common shares, compared to 0.9 million common shares for an aggregate purchase price of $29.6 million during the 2011 second quarter and 8.9 million common shares for an aggregate purchase price of $266.7 during the six months ended June 30, 2011. At June 30, 2012, $942.0 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

Preferred Share Offering

On April 2, 2012, the Company completed the underwritten public offering of $325 million of its 6.75% Series C non-cumulative preferred shares. Except in specified circumstances relating to certain tax or corporate events, the Series C non-cumulative preferred shares are not redeemable prior to April 2, 2017. The net proceeds from the offering of approximately $316 million and other available funds were used to redeem all of the Company’s $200 million of 8.0% Series A preferred shares and $125 million of 7.875% Series B preferred shares on May 2, 2012. The preferred shares were redeemed at a redemption price equal to $25.00 per share, plus all declared and unpaid dividends to (but excluding) the redemption date.

8

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Share-Based Compensation

During the 2012 second quarter, the Company made a stock grant of 782,248 stock appreciation rights and stock options and 728,864 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2012 second quarter were approximately $9.91 and $38.59 per share, respectively. During the 2011 second quarter, the Company made a stock grant of 697,632 stock appreciation rights and stock options and 727,641 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2011 second quarter were approximately $9.75 and $33.91 per share, respectively. The stock appreciation rights and stock options were valued at the grant date using the Black-Scholes option pricing model. Such values are being amortized over the respective substantive vesting period. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date.

3.      Recent Accounting Pronouncements

Effective January 1, 2012, the Company adopted an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. The impact of the adoption of the new guidance on the consolidated financial statements was as follows:

	As Previously			Effect of			As Currently
	Reported			Change			Reported
December 31, 2010
Deferred acquisition costs, net	$	277,861		$	(50,583	)	$	227,278
Other assets (1)	475,911			14,366			490,277
Retained earnings	4,422,553			(36,217		)	4,386,336
Three Months Ended June 30, 2011
Other operating expenses	$	110,563		$	2,279		$	112,842
Income tax benefit	(1,731		)	(540		)	(2,271		)
Net income	98,342			(1,739		)	96,603
Net income per common share - basic	$	0.70		$	(0.01	)	$	0.69
Net income per common share - diluted	$	0.67		$	(0.02	)	$	0.65
Six Months Ended June 30, 2011
Other operating expenses	$	212,983		$	2,741		$	215,724
Income tax benefit	(2,102		)	(719		)	(2,821		)
Net income	124,098			(2,022		)	122,076
Net income per common share - basic	$	0.84		$	(0.02	)	$	0.82
Net income per common share - diluted	$	0.80		$	(0.02	)	$	0.78

(1) Effect of change equals tax benefit included in “other assets” on the Company’s balance sheet.

9

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Effective January 1, 2012, the Company prospectively adopted an ASU that provides clarification or changes to existing fair value measurement and disclosure requirements, including, for example, additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. See Note 8, “Fair Value,” for the Company’s disclosures on fair value.

Effective January 1, 2012, the Company adopted an ASU that is intended to increase the prominence of other comprehensive income in the financial statements by allowing only two options for reporting comprehensive income: (1) A single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or (2) in a two-statement approach that presents the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The adoption of this ASU did not impact the presentation of the Company’s consolidated financial statements.

In December 2011, the FASB issued an ASU that expands the required disclosures about financial instruments and derivative instruments that are either offset for balance sheet presentation purposes or subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. This ASU is effective for periods beginning on or after January 1, 2013. This new guidance is disclosure-related only and does not amend existing guidance on offsetting on the balance sheet. As such, the Company does not believe that the adoption of this ASU will impact the presentation of its consolidated financial statements.

4.      Commitments and Contingencies

Letter of Credit and Revolving Credit Facilities

As of June 30, 2012, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility (the “Credit Agreement”). The Credit Agreement expires on August 18, 2014. In addition, the Company had access to secured letter of credit facilities of approximately $81 million as of June 30, 2012, which are available on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). At June 30, 2012, the Company had $445.4 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $514.4 million, and had $100.0 million of borrowings outstanding under the Credit Agreement. The Company was in compliance with all covenants contained in the LOC Facilities at June 30, 2012.

Investment Commitments

The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $537.0 million at June 30, 2012.

10

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.      Earnings Per Common Share

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Numerator:
Net income	$	220,268		$	96,603		$	384,524		$	122,076
Preferred dividends	(7,649		)	(6,461		)	(14,110		)	(12,922		)
Net income available to common shareholders	$	212,619		$	90,142		$	370,414		$	109,154
Denominator:
Weighted average common shares outstanding — basic	134,529,129			131,232,269			134,241,876			132,359,493
Effect of dilutive common share equivalents:
Nonvested restricted shares	800,455			931,305			909,524			1,040,514
Stock options (1)	2,882,152			5,812,025			2,866,090			5,834,924
Weighted average common shares and common share equivalents outstanding — diluted	138,211,736			137,975,599			138,017,490			139,234,931
Earnings per common share:
Basic	$	1.58		$	0.69		$	2.76		$	0.82
Diluted	$	1.54		$	0.65		$	2.68		$	0.78

(1)Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2012 second quarter and 2011 second quarter, the number of stock options excluded were 912,056 and 430,758, respectively. For the six months ended June 30, 2012 and 2011, the number of stock options excluded were 688,634 and 223,063, respectively.

11

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.      Segment Information

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:

	Three Months Ended									Three Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	676,090		$	376,981		$	1,051,813		$	635,005		$	277,766		$	911,939
Net premiums written	464,584			355,649			820,233			438,263			268,280			706,543
Net premiums earned	$	446,594		$	280,062		$	726,656		$	410,819		$	232,060		$	642,879
Fee income	628			178			806			702			82			784
Losses and loss adjustment expenses	(290,416		)	(109,277		)	(399,693		)	(301,642		)	(129,980		)	(431,622		)
Acquisition expenses, net	(76,058		)	(52,231		)	(128,289		)	(66,543		)	(44,096		)	(110,639		)
Other operating expenses	(76,617		)	(29,140		)	(105,757		)	(77,774		)	(23,671		)	(101,445		)
Underwriting income (loss)	$	4,131		$	89,592		93,723			$	(34,438	)	$	34,395		(43		)
Net investment income							73,608									86,671
Net realized gains							34,867									45,210
Net impairment losses recognized in earnings							(1,951		)							(1,684		)
Equity in net income of investment funds accounted for using the equity method							7,787									5,973
Other income (loss)							695									(4,265		)
Other expenses							(11,944		)							(11,397		)
Interest expense							(7,439		)							(7,758		)
Net foreign exchange gains (losses)							31,689									(18,375		)
Income before income taxes							221,035									94,332
Income tax (expense) benefit							(767		)							2,271
Net income							220,268									96,603
Preferred dividends							(7,649		)							(6,461		)
Net income available to common shareholders							$	212,619								$	90,142
Underwriting Ratios
Loss ratio	65.0		%	39.0		%	55.0		%	73.4		%	56.0		%	67.1		%
Acquisition expense ratio (2)	16.9		%	18.6		%	17.6		%	16.0		%	19.0		%	17.1		%
Other operating expense ratio	17.2		%	10.4		%	14.6		%	18.9		%	10.2		%	15.8		%
Combined ratio	99.1		%	68.0		%	87.2		%	108.3		%	85.2		%	100.0		%

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

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

12

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the six months ended June 30, 2012 and 2011:

	Six Months Ended									Six Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	1,364,203		$	756,957		$	2,118,469		$	1,269,588		$	608,779		$	1,876,505
Net premiums written	955,264			728,580			1,683,844			887,554			583,267			1,470,821
Net premiums earned	$	888,334		$	518,634		$	1,406,968		$	818,410		$	458,164		$	1,276,574
Fee income	1,158			191			1,349			1,480			119			1,599
Losses and loss adjustment expenses	(593,580		)	(201,320		)	(794,900		)	(599,365		)	(326,137		)	(925,502		)
Acquisition expenses, net	(149,928		)	(97,323		)	(247,251		)	(127,958		)	(91,435		)	(219,393		)
Other operating expenses	(149,987		)	(55,263		)	(205,250		)	(152,403		)	(44,898		)	(197,301		)
Underwriting income (loss)	$	(4,003	)	$	164,919		160,916			$	(59,836	)	$	(4,187	)	(64,023		)
Net investment income							147,905									174,978
Net realized gains							78,988									65,905
Net impairment losses recognized in earnings							(2,974		)							(4,364		)
Equity in net income of investment funds accounted for using the equity method							32,613									35,646
Other income (loss)							(7,373		)							302
Other expenses							(18,923		)							(18,423		)
Interest expense							(14,960		)							(15,479		)
Net foreign exchange gains (losses)							11,001									(55,287		)
Income before income taxes							387,193									119,255
Income tax (expense) benefit							(2,669		)							2,821
Net income							384,524									122,076
Preferred dividends							(14,110		)							(12,922		)
Net income available to common shareholders							$	370,414								$	109,154
Underwriting Ratios
Loss ratio	66.8		%	38.8		%	56.5		%	73.2		%	71.2		%	72.5		%
Acquisition expense ratio (2)	16.7		%	18.8		%	17.5		%	15.5		%	20.0		%	17.1		%
Other operating expense ratio	16.9		%	10.7		%	14.6		%	18.6		%	9.8		%	15.5		%
Combined ratio	100.4		%	68.3		%	88.6		%	107.3		%	101.0		%	105.1		%

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

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

13

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7.      Investment Information

Available For Sale Investments

The following table summarizes the fair value and cost or amortized cost of the Company’s investments classified as available for sale:

	Estimated		Gross		Gross			Cost or		OTTI
	Fair		Unrealized		Unrealized			Amortized		Unrealized
	Value		Gains		Losses			Cost		Losses (2)
At June 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,519,832	$	92,282	$	(11,533	)	$	2,439,083	$	(716	)
Mortgage backed securities	1,670,108		23,743		(18,286		)	1,664,651		(14,772		)
Municipal bonds	1,542,262		67,946		(1,541		)	1,475,857		(65		)
Commercial mortgage backed securities	961,326		31,685		(2,412		)	932,053		(3,259		)
U.S. government and government agencies	1,380,074		29,797		(1,872		)	1,352,149		(207		)
Non-U.S. government securities	986,585		32,558		(17,976		)	972,003		(157		)
Asset backed securities	570,171		17,294		(8,579		)	561,456		(3,876		)
Total	9,630,358		295,305		(62,199		)	9,397,252		(23,052		)
Equity securities	260,864		24,129		(22,248		)	258,983		—
Other investments	381,576		15,512		(2,762		)	368,826		—
Short-term investments	1,087,910		3,279		(1,330		)	1,085,961		—
Total	$	11,360,708	$	338,225	$	(88,539	)	$	11,111,022	$	(23,052	)
At December 31, 2011
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,596,118	$	79,407	$	(29,922	)	$	2,546,633	$	(1,138	)
Mortgage backed securities	1,592,762		27,633		(23,226		)	1,588,355		(20,466		)
Municipal bonds	1,430,565		77,977		(886		)	1,353,474		(105		)
Commercial mortgage backed securities	1,046,326		28,780		(2,904		)	1,020,450		(3,259		)
U.S. government and government agencies	1,451,993		34,811		(3		)	1,417,185		(207		)
Non-U.S. government securities	737,477		33,486		(17,684		)	721,675		—
Asset backed securities	576,757		14,649		(10,078		)	572,186		(3,876		)
Total	9,431,998		296,743		(84,703		)	9,219,958		(29,051		)
Equity securities	299,584		22,870		(22,344		)	299,058		—
Other investments	238,111		8,340		(5,610		)	235,381		—
Short-term investments	904,219		390		(5,292		)	909,121		—
Total	$	10,873,912	$	328,343	$	(117,949	)	$	10,663,518	$	(29,051	)

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

(2)Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.

14

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:

	Less than 12 Months					12 Months or More					Total
	Estimated		Gross			Estimated		Gross			Estimated		Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
At June 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	289,690	$	(8,308	)	$	36,087	$	(3,225	)	$	325,777	$	(11,533	)
Mortgage backed securities	664,985		(7,631		)	72,287		(10,655		)	737,272		(18,286		)
Municipal bonds	187,671		(943		)	16,583		(598		)	204,254		(1,541		)
Commercial mortgage backed securities	74,376		(728		)	20,739		(1,684		)	95,115		(2,412		)
U.S. government and government agencies	373,405		(1,872		)	—		—			373,405		(1,872		)
Non-U.S. government securities	338,862		(16,492		)	10,046		(1,484		)	348,908		(17,976		)
Asset backed securities	102,740		(5,676		)	24,569		(2,903		)	127,309		(8,579		)
Total	2,031,729		(41,650		)	180,311		(20,549		)	2,212,040		(62,199		)
Equity securities	81,062		(12,458		)	28,874		(9,790		)	109,936		(22,248		)
Other investments	27,754		(1,014		)	23,252		(1,748		)	51,006		(2,762		)
Short-term investments	124,398		(1,330		)	—		—			124,398		(1,330		)
Total	$	2,264,943	$	(56,452	)	$	232,437	$	(32,087	)	$	2,497,380	$	(88,539	)
At December 31, 2011
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	781,635	$	(24,977	)	$	47,687	$	(4,945	)	$	829,322	$	(29,922	)
Mortgage backed securities	255,101		(11,988		)	44,606		(11,238		)	299,707		(23,226		)
Municipal bonds	39,156		(537		)	14,988		(349		)	54,144		(886		)
Commercial mortgage backed securities	87,796		(1,676		)	14,582		(1,228		)	102,378		(2,904		)
U.S. government and government agencies	7,059		(3		)	—		—			7,059		(3		)
Non-U.S. government securities	310,182		(16,139		)	20,482		(1,545		)	330,664		(17,684		)
Asset backed securities	260,647		(8,197		)	7,317		(1,881		)	267,964		(10,078		)
Total	1,741,576		(63,517		)	149,662		(21,186		)	1,891,238		(84,703		)
Equity securities	130,045		(22,039		)	1,923		(305		)	131,968		(22,344		)
Other investments	98,605		(3,053		)	22,443		(2,557		)	121,048		(5,610		)
Short-term investments	189,100		(5,292		)	—		—			189,100		(5,292		)
Total	$	2,159,326	$	(93,901	)	$	174,028	$	(24,048	)	$	2,333,354	$	(117,949	)

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

At June 30, 2012, on a lot level basis, approximately 790 security lots out of a total of approximately 4,470 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $3.5 million. At December 31, 2011, on a lot level basis, approximately 1,150 security lots out of a total of approximately 4,520 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $3.0 million.

The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2012				December 31, 2011
	Estimated		Amortized		Estimated		Amortized
Maturity	Fair Value		Cost		Fair Value		Cost
Due in one year or less	$	491,380	$	483,860	$	486,986	$	476,734
Due after one year through five years	3,434,433		3,356,501		2,850,578		2,793,982
Due after five years through 10 years	2,218,284		2,125,636		2,532,834		2,441,800
Due after 10 years	284,656		273,095		345,755		326,451
	6,428,753		6,239,092		6,216,153		6,038,967
Mortgage backed securities	1,670,108		1,664,651		1,592,762		1,588,355
Commercial mortgage backed securities	961,326		932,053		1,046,326		1,020,450
Asset backed securities	570,171		561,456		576,757		572,186
Total	$	9,630,358	$	9,397,252	$	9,431,998	$	9,219,958

Securities Lending Agreements

The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. At June 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $74.0 million and $72.0 million, respectively, compared to $56.4 million and $54.5 million at December 31, 2011, respectively. At June 30, 2012, the portfolio of collateral backing the Company’s securities lending program included approximately $6.0 million fair value of sub-prime securities, compared to $7.3 million at December 31, 2011.

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Value Option

The Company elected to carry certain fixed maturity securities, equity securities and other investments (primarily term loans) at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in net realized gains or losses while interest income, dividends received and distributions from fund investments which are not a return of capital are reflected in net investment income. The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and to address practicality and cost-benefit considerations.

The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New York’s (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in net realized gains or losses while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.

The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:

	June 30,			December 31,
	2012			2011
Fixed maturities	$	242,735		$	147,779
Equity securities	23,118			87,403
Other investments (par: $228,446 and $138,062)	230,990			131,721
Investments accounted for using the fair value option	496,843			366,903
Securities sold but not yet purchased (1)	(9,206		)	(27,178		)
TALF investments	307,453			387,702
TALF borrowings	(235,818		)	(310,486		)
Net assets accounted for using the fair value option	$	559,272		$	416,941

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

17

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Net Investment Income

The components of net investment income were derived from the following sources:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Fixed maturities	$	70,290		$	84,420		$	143,739		$	169,564
Term loan investments (1)	3,557			533			5,856			684
Equity securities	2,425			1,844			4,089			3,391
Short-term investments	760			505			1,132			1,183
Other (2)	2,980			5,774			6,174			12,677
Gross investment income	80,012			93,076			160,990			187,499
Investment expenses	(6,404		)	(6,405		)	(13,085		)	(12,521		)
Net investment income	$	73,608		$	86,671		$	147,905		$	174,978

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

(2)Amounts include dividends on investment funds and other items.

Net Realized Gains (Losses)

Net realized gains (losses) were as follows, excluding other-than-temporary impairment provisions:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Available for sale securities:
Gross gains on investment sales	$	67,936		$	71,578		$	115,948		$	143,295
Gross losses on investment sales	(20,757		)	(15,917		)	(38,693		)	(63,667		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	(4,810		)	(8,483		)	3,407			(8,393		)
Equity securities	(3,589		)	(6,484		)	(202		)	(3,050		)
Other investments	(1,744		)	196			2,009			323
TALF investments	(1,274		)	2,795			(50		)	4,447
TALF borrowings	(176		)	(138		)	895			(285		)
Derivative instruments (1)	277			3,176			(4,392		)	(8,144		)
Other	(996		)	(1,513		)	66			1,379
Net realized gains	$	34,867		$	45,210		$	78,988		$	65,905

(1)See Note 9 for information on the Company’s derivative instruments.

18

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other-Than-Temporary Impairments

The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance. The following table details the OTTI recognized in earnings by asset class:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Fixed maturities:
Corporate bonds	$	1,166	$	—	$	1,362	$	359
Mortgage backed securities	146		1,310		892		2,428
Non-U.S. government securities	261		—		261		—
Asset backed securities	106		—		106		10
U.S. government and government agencies	10		—		10		—
Total	1,689		1,310		2,631		2,797
Investment of funds received under securities lending agreements	6		374		87		1,230
Equity securities	256		—		256		337
Total OTTI recognized in earnings	$	1,951	$	1,684	$	2,974	$	4,364

A description of the methodology and significant inputs used to measure the amount of OTTI in the 2012 second quarter is as follows:

·Mortgage backed securities — the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis includes expected cash flow projections under base case and stress case scenarios which modify the expected default expectations and loss severities and slow down prepayment assumptions. The significant inputs in the models include the expected default rates, delinquency rates and foreclosure costs. The expected recovery values were reduced on a number of mortgage backed securities, primarily as a result of increases in expected default expectations and foreclosure costs. The amortized cost basis of the mortgage backed securities were adjusted down, if required, to the expected recovery value calculated in the OTTI review process;

·Corporate bonds and other fixed maturities — the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain corporate bonds. The amortized cost basis of the corporate bonds was adjusted down, if required, to the expected recovery value calculated in the OTTI review process. In addition, the Company recorded OTTI on a portfolio of global corporate bonds, non-U.S. government securities and U.S. Treasuries due to its intent to liquidate such portfolio in the 2012 third quarter;

·Equity securities — the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. For certain equities which were in an unrealized loss position and where the Company determined that it did not have the intent or ability to hold such securities for a reasonable period of time by which the fair value of the securities would increase and the Company would recover its cost, the cost basis of such securities was adjusted down accordingly;

19

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

·Investment of funds received under securities lending agreements — the Company utilized analysis from its securities lending program manager in order to determine an expected recovery value for certain collateral backing the Company’s securities lending program which was invested in sub-prime securities. The analysis provided expected cash flow projections for the securities using similar criteria as described in the mortgage backed securities section above. The amortized cost basis of the investment of funds received under securities lending agreements was adjusted down, if required, to the expected recovery value calculated in the OTTI review process.

The Company believes that the $23.1 million of OTTI included in accumulated other comprehensive income at June 30, 2012 on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At June 30, 2012, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.

The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Balance at start of period	$	67,086		$	84,858		$	66,545		$	86,040
Credit loss impairments recognized on securities not previously impaired	1,693			1,194			1,905			2,863
Credit loss impairments recognized on securities previously impaired	258			490			1,069			1,164
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	—			—			—			—
Reductions for securities sold during the period	(6,511		)	(256		)	(6,993		)	(3,781		)
Balance at end of period	$	62,526		$	86,286		$	62,526		$	86,286

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company’s insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 4, “Commitments and Contingencies—Letter of Credit and Revolving Credit Facilities,” for further details. The following table details the value of the Company’s restricted assets:

	June 30,		December 31,
	2012		2011
Assets used for collateral or guarantees:
Affiliated transactions	$	4,426,250	$	4,321,535
Third party agreements	684,455		757,669
Deposits with U.S. regulatory authorities	288,163		288,458
Deposits with non-U.S. regulatory authorities	223,134		169,733
Trust funds	81,530		60,558
Total restricted assets	$	5,703,532	$	5,597,953

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.      Fair Value

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:

Level 1:Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2:Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement

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

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value including a review of deep dive reports on selected securities which indicated the use of observable inputs in the pricing process; (iv) comparing the fair value estimates to its knowledge of the current market; (v) a comparison of the pricing services’ fair values to other pricing services’ fair values for the same investments; and (vi) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. At June 30, 2012, the Company obtained an average of 2.8 quotes per investment, compared to 2.8 quotes at December 31, 2011. Where multiple quotes or prices were obtained, a price source hierarchy was maintained in order to determine which price source provided the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. At June 30, 2012 and December 31, 2011, the Company adjusted certain prices (primarily on structured securities) obtained from the pricing services and substituted alternate prices (primarily broker-dealer quotes) for such securities. Such adjustments did not have a material impact on the overall fair value of the Company’s investment portfolio.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. In addition, pricing vendors use model processes, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage backed and asset backed securities. In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $12.41 billion of financial assets and liabilities measured at fair value at June 30, 2012, approximately $1.39 billion, or 11.2%, were priced using non-binding broker-dealer quotes. Of the $11.97 billion of financial assets and liabilities measured at fair value at December 31, 2011, approximately $1.19 billion, or 9.9%, were priced using non-binding broker-dealer quotes.

The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisors and others. The Company determined that Level 1 securities would include highly liquid, recent issue U.S. Treasuries and certain of its short-term investments held in highly liquid money market-type funds where it believes that quoted prices are available in an active market. In addition, the Company determined that exchange-traded equity securities would be included in Level 1.

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

The Company determined that a Euro-denominated corporate bond which consists of an underlying portfolio of fixed income securities for which there is a low level of transparency around inputs to the valuation process should be classified within Level 3 of the valuation hierarchy along with certain other corporate bonds. In addition, the Company determined that certain other investments would be classified within Level 3 of the valuation hierarchy. The Company reviews the classification of its investments each quarter.

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 and included the fixed maturities and short-term investments pledged under securities lending agreements, at fair value.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at June 30, 2012:

			Fair Value Measurement Using:
	Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,519,832	$	—	$	2,427,796	$	92,036
Mortgage backed securities	1,670,108		—		1,670,108		—
Municipal bonds	1,542,262		—		1,542,262		—
Commercial mortgage backed securities	961,326		—		961,326		—
U.S. government and government agencies	1,380,074		1,380,074		—		—
Non-U.S. government securities	986,585		—		986,585		—
Asset backed securities	570,171		—		570,171		—
Total	9,630,358		1,380,074		8,158,248		92,036
Equity securities	260,864		259,648		1,216		—
Other investments	381,576		—		375,190		6,386
Short-term investments	1,087,910		925,234		162,676		—
Fair value option:
Investments accounted for using the fair value option:
Corporate bonds	194,663		—		194,663		—
Non-U.S. government bonds	48,072		—		48,072		—
Equity securities	23,118		23,118		—		—
Other investments	230,990		—		230,990		—
Total	496,843		23,118		473,725		—
TALF investments	307,453		—		307,453		—
Total assets measured at fair value	$	12,165,004	$	2,588,074	$	9,478,508	$	98,422
Liabilities measured at fair value:
Fair value option:
TALF borrowings	$	235,818	$	—	$	235,818	$	—
Securities sold but not yet purchased (2)	9,206		9,206		—		—
Total liabilities measured at fair value	$	245,024	$	9,206	$	235,818	$	—

(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
(2)	Represents the Company’s obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.

23

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2011:

			Fair Value Measurement Using:
	Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,596,118	$	—	$	2,504,027	$	92,091
Mortgage backed securities	1,592,762		—		1,592,762		—
Municipal bonds	1,430,565		—		1,430,565		—
Commercial mortgage backed securities	1,046,326		—		1,046,326		—
U.S. government and government agencies	1,451,993		1,451,993		—		—
Non-U.S. government securities	737,477		—		737,477		—
Asset backed securities	576,757		—		576,757		—
Total	9,431,998		1,451,993		7,887,914		92,091
Equity securities	299,584		299,528		56		—
Other investments	238,111		—		232,987		5,124
Short-term investments	904,219		837,371		66,848		—
Fair value option:
Investments accounted for using the fair value option:
Corporate bonds	122,935		—		122,935		—
Non-U.S. government bonds	24,844		—		24,844		—
Equity securities	87,403		87,403		—		—
Other investments	131,721		—		131,721		—
Total	366,903		87,403		279,500		—
TALF investments	387,702		—		387,702		—
Total assets measured at fair value	$	11,628,517	$	2,676,295	$	8,855,007	$	97,215
Liabilities measured at fair value:
Fair value option:
TALF borrowings	$	310,486	$	—	$	310,486	$	—
Securities sold but not yet purchased (2)	27,178		27,178		—		—
Total liabilities measured at fair value	$	337,664	$	27,178	$	310,486	$	—

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.

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

24

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the 2012 second quarter and 2011 second quarter:

	Fair Value Measurements Using:
	Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Other Investments			Total
Three Months Ended June 30, 2012
Balance at beginning of period	$	96,655		$	6,215		$	102,870
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	(548		)	—			(548		)
Included in other comprehensive income	(4,032		)	171			(3,861		)
Purchases, issuances and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(39		)	—			(39		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	92,036		$	6,386		$	98,422
Three Months Ended June 30, 2011
Balance at beginning of period	$	169,045		$	8,201		$	177,246
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	7,893			1,388			9,281
Included in other comprehensive income	(12,431		)	(1,589		)	(14,020		)
Purchases, issuances and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			(71		)	(71		)
Settlements	(51		)	—			(51		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	164,456		$	7,929		$	172,385

(1)Gains or losses on corporate bonds and other investments were recorded in net realized gains (losses).

25

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the six months ended June 30, 2012 and 2011:

	Fair Value Measurements Using:
	Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Other Investments			Total
Six Months Ended June 30, 2012
Balance at beginning of period	$	92,091		$	5,124		$	97,215
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	1,783			81			1,864
Included in other comprehensive income	(1,759		)	1,262			(497		)
Purchases, issuances and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(79		)	(81		)	(160		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	92,036		$	6,386		$	98,422
Six Months Ended June 30, 2011
Balance at beginning of period	$	153,509		$	7,858		$	161,367
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	13,664			1,709			15,373
Included in other comprehensive income	(2,333		)	(972		)	(3,305		)
Purchases, issuances and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			(666		)	(666		)
Settlements	(384		)	—			(384		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	164,456		$	7,929		$	172,385

(1)Gains or losses on corporate bonds and other investments were recorded in net realized gains (losses).

The amount of total losses for the 2012 second quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2012 was $0.5 million, while the amount of total gains for the six months ended June 30, 2012 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2012 was $1.9 million. The amount of total gains for the 2011 second quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011 was $9.3 million, while the amount of total gains for the six months ended June 30, 2011 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011 was $15.1 million.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at June 30, 2012, due to their respective

26

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At June 30, 2012, the Company’s senior notes are carried at their cost of $300.0 million and have a fair value of $374.1 million. The fair values of these securities were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.

9.Derivative Instruments

The Company’s investment strategy allows for the use of derivative securities. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The fair values of those derivatives are based on quoted market prices. All realized and unrealized contract gains and losses are reflected in the Company’s results of operations. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios. Certain of the Company’s corporate bonds are managed in a global bond portfolio which incorporates the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements on the portfolio’s non-U.S. Dollar denominated holdings. The Company routinely utilizes other foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective.

In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy. The Company did not hold any derivatives which were designated as hedging instruments at June 30, 2012 or December 31, 2011.

The following table summarizes information on the fair values and notional values of the Company’s derivative instruments. The fair value of TBAs is included in fixed maturities while the fair value of all other derivatives is included in other investments in the consolidated balance sheets.

	Asset Derivatives				Liability Derivatives
	Estimated Fair Value		Notional Value		Estimated Fair Value			Notional Value
At June 30, 2012
Futures contracts	$	606	$	100,200	$	(1,080	)	$	385,900
Foreign currency forward contracts	7,346		274,793		(3,000		)	181,832
TBAs	272,555		255,100		(320,270		)	295,800
Other	344		10,235		(352		)	30,381
Total	$	280,851			$	(324,702	)
At December 31, 2011
Futures contracts	$	771	$	364,035	$	(145	)	$	16,275
Foreign currency forward contracts	11,937		352,992		(6,558		)	253,733
TBAs	23,661		23,000		(2,178		)	2,000
Other	4,005		187,613		(2,048		)	309,931
Total	$	40,374			$	(10,929	)

27

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes net realized gains (losses) recorded on the Company’s derivative instruments in the consolidated statements of income:

	Three Months Ended						Six Months Ended
Derivatives not designated as	June 30,						June 30,
hedging instruments	2012			2011			2012			2011
Futures contracts	$	(2,322	)	$	4,774		$	(4,343	)	$	3,373
Foreign currency forward contracts	938			(2,467		)	(943		)	(16,393		)
TBAs	1,419			6,896			1,742			8,502
Other	242			(6,027		)	(848		)	(3,626		)
Total	$	277		$	3,176		$	(4,392	)	$	(8,144	)

10.Income Taxes

ACGL is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to ACGL or any of its operations until March 31, 2035. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda.

ACGL and its non-U.S. subsidiaries will be subject to U.S. federal income tax only to the extent that they derive U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL and its non-U.S. subsidiaries will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors (subject to reduction by any applicable income tax treaty). ACGL and its non-U.S. subsidiaries intend to conduct their operations in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, therefore, will not be required to pay U.S. federal income taxes (other than U.S. excise taxes on insurance and reinsurance premium and withholding taxes on dividends and certain other U.S. source investment income). However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL’s shareholders’ equity and earnings could be materially adversely affected. ACGL has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which ACGL’s subsidiaries and branches are subject to tax are the United States, United Kingdom, Ireland, Canada, Switzerland and Denmark.

The Company’s income tax provision resulted in an effective tax rate on income before income taxes of 0.3% and 0.7% for the 2012 second quarter and six months ended June 30, 2012, compared to (2.4)% for the 2011 periods. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. The Company had a net deferred tax asset of $99.2 million at June 30, 2012, compared to $80.7 million at December 31, 2011. In addition, the Company paid $4.3 million in income taxes, net of recoveries, for the six months ended June 30, 2012, compared to $6.0 million for the 2011 period.

28

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The United States also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers or reinsurers with respect to risks located in the United States. The Company incurs federal excise taxes on certain of its reinsurance transactions, including amounts ceded through intercompany transactions. The Company incurred $4.0 million of federal excise taxes for the six months ended June 30, 2012, compared to $5.0 million in the 2011 period. Such amounts are reflected as acquisition expenses in the Company’s consolidated statements of income.

11.Legal Proceedings

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of June 30, 2012, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

29

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

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 2011 Form 10-K. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

Arch Capital Group Ltd. (“ACGL” and, together with its subsidiaries, “we” or “us”) is a Bermuda public limited liability company with approximately $5.42 billion in capital at June 30, 2012 and, through operations in Bermuda, the United States, Europe and Canada, writes insurance and reinsurance on a worldwide basis. While we are positioned to provide a full range of property and casualty insurance and reinsurance lines, we focus on writing specialty lines of insurance and reinsurance. It is our belief that our underwriting platform, our experienced management team and our strong capital base that is unencumbered by significant pre-2002 risks have enabled us to establish a strong presence in the insurance and reinsurance markets.

Current Outlook

The broad market environment continues to show improvement across the board. From a rate standpoint, almost all lines of business were in positive territory in the 2012 second quarter with rate increases slightly above loss cost trends. In our insurance business, rates were up approximately 4% on a weighted basis. We experienced favorable rate movement on primary lines such as general liability, umbrella liability, auto liability and workers’ compensation. Two exceptions to the overall rate trends were in healthcare and surety which experienced moderate rate reductions during the 2012 second quarter. However, even with this improvement in the rate environment, we believe that longer-tail lines still require substantial additional rate improvement to become attractive. In our reinsurance business, rates continued to improve significantly, on a risk adjusted basis, in property and property catastrophe business, with the best increases to date reflected in international, catastrophe exposed businesses. Such improvements were driven, in part, by the impact of the higher level of catastrophic activity in 2010 and 2011. All other lines remained basically unchanged although our reinsurance operations benefited from the underlying rate increases in primary lines noted above. Our underwriting teams continue to execute a disciplined strategy by emphasizing small and medium-sized accounts over large accounts and focusing more on short-tail business.

Our objective is to achieve an average operating return on average equity of 15% or greater over the insurance cycle, which we believe to be an attractive return to our common shareholders given the risks we assume. We continue to look for opportunities to find acceptable books of business to underwrite without sacrificing underwriting discipline and continue to believe that the most attractive area from a pricing point of view remains catastrophe-exposed business. We expect that catastrophe-exposed business will continue to represent a significant proportion of our overall book, which could increase the volatility of our operating results.

The current economic conditions could continue to have a material impact on the frequency and severity of claims and, therefore, could negatively impact our underwriting returns. In addition, volatility in the financial markets could continue to significantly affect our investment returns, reported results and shareholders’ equity. We consider the potential impact of economic trends in the estimation process for establishing unpaid losses and loss adjustment expenses and in determining our investment strategies.

In addition, the impact of the continuing weakness of the U.S., European countries and other key economies, projected budget deficits for the U.S., European countries and other governments and the consequences associated with possible additional downgrades of securities of the U.S., European countries and other governments by credit rating agencies is inherently unpredictable and could have a material adverse effect

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on financial markets and economic conditions in the U.S. and throughout the world. In turn, this could have a material adverse effect on our business, financial condition and results of operations and, in particular, this could have a material adverse effect on the value of securities in our investment portfolio.

Natural Catastrophe Risk

We monitor our natural catastrophe risk globally for all perils and regions, in each case, where we believe there is significant exposure. Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. Currently, we seek to limit our 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders’ equity. We reserve the right to change this threshold at any time. Based on in-force exposure estimated as of July 1, 2012, our modeled peak zone catastrophe exposure is a windstorm affecting the Gulf of Mexico, with a net probable maximum pre-tax loss of $878 million, followed by windstorms affecting the Northeastern U.S. and Florida Tri-County with net probable maximum pre-tax losses of $846 million and $645 million, respectively. Based on in-force exposure estimated as of April 1, 2012, our modeled peak zone exposure was a windstorm affecting the Gulf of Mexico, with a net probable maximum pre-tax loss of $860 million, followed by windstorms affecting the Northeastern U.S. and Florida Tri-County with net probable maximum pre-tax losses of $826 million and $608 million, respectively. Our exposures to other perils, such as U.S. earthquake and international events, are less than the exposures arising from U.S. windstorms and hurricanes. As of July 1, 2012, our modeled peak zone earthquake exposure (New Madrid earthquake) represented less than 50% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Japan earthquake) is substantially less than both our peak zone windstorm and earthquake exposures. Net probable maximum pre-tax loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. Loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our loss estimates include clash estimates from other zones.

The loss estimates shown above do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer a net loss greater than 25% of our total shareholders’ equity from one or more catastrophic events due to several factors, including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders’ equity exposed to a single catastrophic event. Actual losses may also increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risk Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Natural and Man-Made Catastrophic Events” in our 2011 Form 10-K.

Financial Measures

Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for ACGL’s common shareholders:

Book Value per Common Share

Book value per common share represents total common shareholders’ equity divided by the number of common shares outstanding. Management uses growth in book value per common share as a key measure of the value generated for our common shareholders each period and believes that book value per common share is the key driver of ACGL’s share price over time. Book value per common share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per common share depending on the purchase price.

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Book value per common share was $34.45 at June 30, 2012, compared to $33.33 at March 31, 2012 and $31.76 at December 31, 2011. The 3.4% change for the 2012 second quarter and 8.5% change for the six months ended June 30, 2012 was generated through operating results and total return on investments. We adopted new accounting guidance effective January 1, 2012 concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information. The adoption of the new accounting guidance reduced the reported book value per common share by $0.27 at December 31, 2011. See Note 3, “Recent Accounting Pronouncements,” of the notes accompanying our consolidated financial statements for additional information.

Operating Return on Average Common Equity

Operating return on average common equity (“Operating ROAE”) represents after-tax operating income available to common shareholders divided by the average of beginning and ending common shareholders’ equity during the period. After-tax operating income available to common shareholders, a “non-GAAP measure” as defined in the SEC rules, represents net income available to common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, net of income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders and has set an objective to achieve an average Operating ROAE of 15% or greater over the insurance cycle, which it believes to be an attractive return to common shareholders given the risks we assume. See “Comment on Non-GAAP Financial Measures.”

Our Operating ROAE was 12.3% for the 2012 second quarter, compared to 5.9% for the 2011 second quarter, and 11.4% for the six months ended June 30, 2012, compared to 3.3% for the 2011 period. The higher Operating ROAE for the 2012 periods primarily resulted from improved underwriting results which reflected a lower level of catastrophic events than in the 2011 periods.

Total Return on Investments

Total return on investments includes net investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses generated by our investment portfolio. Total return is calculated on a pre-tax basis and includes the effect of financial market conditions along with foreign currency fluctuations. Management uses total return on investments as a key measure of the return generated to common shareholders on the capital held in the business, and compares the return generated by our investment portfolio against benchmark returns which we measured our portfolio against during the periods. The benchmark return is a weighted average of the benchmarks assigned to each of our investment managers and vary based on the nature of the portfolios under management.

The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices.

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At June 30, 2012, the benchmark return index had an average credit quality of “Aa1” by Moody’s Investors Service (“Moody’s”), an estimated duration of 3.18 years and included weightings to the following indices:

	Weighting
Merrill Lynch Unsubordinated U.S. Treasuries/Agencies, 1-10 Years Index	30.875	%
Merrill Lynch U.S. Corporates and All Yankees, 1-10 Years Index	20.875	%
Merrill Lynch Mortgage Master Index	11.875	%
Barclays Capital CMBS, AAA Index	10.000	%
Merrill Lynch Municipals, 1-10 Years Index	7.125	%
MSCI World Free Index	5.000	%
Merrill Lynch U.S. Treasury Bills, 0-3 Months Index	4.750	%
Merrill Lynch U.S. High Yield Master II Constrained Index	2.375	%
Barclays Capital U.S. High-Yield Corporate Loan Index	2.375	%
Merrill Lynch U.K. Gilts, 1-10 Years Index	2.375	%
Merrill Lynch EMU Direct Government 1-10 Years Index	2.375	%
Total	100.000	%

The following table summarizes the pre-tax total return (before investment expenses) of our investment portfolio compared to the benchmark return against which we measured our portfolio during the periods:

	Arch		Benchmark
	Portfolio (1)		Return
Pre-tax total return (before investment expenses):
2012 second quarter	0.63	%	0.86	%
2011 second quarter	1.65	%	1.93	%
Six months ended June 30, 2012	2.53	%	2.43	%
Six months ended June 30, 2011	3.17	%	2.87	%

(1) Our investment expenses were approximately 0.21% and 0.23% of average invested assets for the 2012 second quarter and 2011 second quarter, respectively, and 0.22% and 0.23% for the six months ended June 30, 2012 and 2011.

For the 2012 second quarter, total return on our portfolio reflected unfavorable returns on equities, reflecting the decline in the S&P 500 index during the period along with underperformance of commodity-related securities. Our portfolio underperformed the benchmark return by 23 basis points for the 2012 second quarter, due in part to an overweighting in certain sector allocations to the benchmark return. Excluding foreign exchange, total return was 1.04% for the 2012 second quarter, compared to 1.54% for the 2011 second quarter, and 2.66% for the six months ended June 30, 2012, compared to 2.69% for the 2011 period.

Comment on Non-GAAP Financial Measures

Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to common shareholders, which is defined as net income available to common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses, net of income taxes. The presentation of after-tax operating income available to common shareholders is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included under “Results of Operations” below.

We believe that net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment

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funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of net impairment 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 our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our 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 our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way we account for our 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, we exclude net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

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

RESULTS OF OPERATIONS

The following table summarizes, on an after-tax basis, our consolidated financial data, including a reconciliation of after-tax operating income available to common shareholders to net income available to common shareholders:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
After-tax operating income available to common shareholders	$	141,400		$	59,739		$	255,060		$	67,315
Net realized gains, net of tax	33,275			44,799			74,148			66,384
Net impairment losses recognized in earnings, net of tax	(1,951		)	(1,684		)	(2,974		)	(4,364		)
Equity in net income of investment funds accounted for using the equity method, net of tax	7,787			5,973			32,613			35,646
Net foreign exchange gains (losses), net of tax	32,108			(18,685		)	11,567			(55,827		)
Net income available to common shareholders	$	212,619		$	90,142		$	370,414		$	109,154

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The increase in after-tax operating income in the 2012 periods compared to the 2011 periods primarily resulted from improved underwriting results which reflected a lower level of catastrophic loss activity. Our results included losses for current year catastrophic events of $7.2 million, net of reinsurance and reinstatement premiums, in the 2012 second quarter, compared to $95.0 million in the 2011 second quarter, and $30.2 million for the six months ended June 30, 2012, compared to $273.7 million for the 2011 period.

Segment Information

We classify our businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). Management measures segment performance based on underwriting income or loss. We do not manage our 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.

Insurance Segment

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

	Three Months Ended June 30,							Six Months Ended June 30,
	2012			2011			% Change	2012			2011			% Change
Gross premiums written	$	676,090		$	635,005		6.5	$	1,364,203		$	1,269,588		7.5
Net premiums written	464,584			438,263			6.0	955,264			887,554			7.6
Net premiums earned	$	446,594		$	410,819		8.7	$	888,334		$	818,410		8.5
Fee income	628			702				1,158			1,480
Losses and loss adjustment expenses	(290,416		)	(301,642		)		(593,580		)	(599,365		)
Acquisition expenses, net	(76,058		)	(66,543		)		(149,928		)	(127,958		)
Other operating expenses	(76,617		)	(77,774		)		(149,987		)	(152,403		)
Underwriting income (loss)	$	4,131		$	(34,438	)	n/m	$	(4,003	)	$	(59,836	)	n/m

					% Point						% Point
Underwriting Ratios					Change						Change
Loss ratio	65.0	%	73.4	%	(8.4	)	66.8	%	73.2	%	(6.4	)
Acquisition expense ratio (1)	16.9	%	16.0	%	0.9		16.7	%	15.5	%	1.2
Other operating expense ratio	17.2	%	18.9	%	(1.7	)	16.9	%	18.6	%	(1.7	)
Combined ratio	99.1	%	108.3	%	(9.2	)	100.4	%	107.3	%	(6.9	)

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

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The components of the insurance segment’s underwriting results are discussed below.

Premiums Written.

The following table sets forth our insurance segment’s net premiums written by major line of business:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Programs	$	92,998	20	$	81,629	19	$	174,614	18	$	156,025	18
Property, energy, marine and aviation	86,390		19	103,296		24	166,209		17	179,714		20
Professional liability	65,198		14	57,906		13	135,759		14	117,291		13
Executive assurance	60,205		13	53,974		12	128,583		13	110,042		12
Construction	49,784		11	42,408		10	83,437		9	73,917		8
Casualty	30,638		7	24,939		6	57,611		6	55,073		6
Travel and accident	20,294		4	19,284		4	43,130		5	40,785		5
Lenders products	20,477		4	21,526		5	42,892		4	42,600		5
National accounts	4,961		1	4,397		1	40,399		4	44,588		5
Surety	12,723		3	9,618		2	24,857		3	19,352		2
Healthcare	7,959		2	8,422		2	18,594		2	17,539		2
Other (1)	12,957		2	10,864		2	39,179		5	30,628		4
Total	$	464,584	100	$	438,263	100	$	955,264	100	$	887,554	100

(1)Includes excess workers’ compensation, employer’s liability, alternative markets and accident and health business.

2012 second quarter versus 2011. Increases in programs, professional liability and construction business were partially offset by a lower level of onshore energy business (included in the ‘property, energy, marine and aviation’ line). The higher level of program business was primarily due to growth in exposures on existing accounts and rate improvements while the higher level of professional liability business primarily resulted from an increase in international small and medium sized accounts. The increase in construction business was primarily due to activity on an existing account which is not expected to recur, while the reduction in onshore energy premiums reflected lower renewals in reaction to market conditions and a strategic shift towards writing business on an excess basis.

Six months ended June 30, 2012 versus 2011. Increases in programs, executive assurance, professional liability and construction business were partially offset by a lower level of onshore energy business. The higher level of program business was primarily due to growth in exposures on existing accounts and rate improvements. The growth in executive assurance business primarily resulted from small and medium sized accounts in the U.K. and the U.S. while the increase in professional liability premiums primarily reflected new business written in international small and medium sized accounts. The increase in construction business was primarily due to activity on an existing account which is not expected to recur, while the reduction in onshore energy premiums reflected lower renewals in reaction to market conditions and a strategic shift towards writing business on an excess basis.

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Net Premiums Earned.

The following table sets forth our insurance segment’s net premiums earned by major line of business:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Programs	$	80,589	18	$	71,934	18	$	154,587	17	$	138,952	17
Property, energy, marine and aviation	77,590		17	76,644		19	156,084		18	150,243		18
Professional liability	68,017		15	57,767		14	131,273		15	125,167		15
Executive assurance	60,856		14	60,488		15	119,622		14	115,058		14
Construction	31,692		7	27,214		7	63,500		7	55,605		7
Casualty	28,102		6	24,829		6	57,167		6	53,256		7
Travel and accident	20,661		5	19,455		5	37,374		4	35,054		4
Lenders products	21,411		5	19,966		5	53,564		6	38,202		5
National accounts	18,415		4	18,166		4	37,551		4	39,328		5
Surety	10,798		2	9,402		2	21,358		2	19,181		2
Healthcare	9,077		2	9,089		2	17,975		2	17,741		2
Other (1)	19,386		5	15,865		3	38,279		5	30,623		4
Total	$	446,594	100	$	410,819	100	$	888,334	100	$	818,410	100

(1)Includes excess workers’ compensation, employer’s liability, alternative markets and accident and health business.

Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Net premiums earned reflect changes in net premiums written over the previous five quarters.

Losses and Loss Adjustment Expenses.

The table below shows the components of the insurance segment’s loss ratio:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Current year	68.9	%	75.2	%	68.8	%	76.0	%
Prior period reserve development	(3.9	)%	(1.8	)%	(2.0	)%	(2.8	)%
Loss ratio	65.0	%	73.4	%	66.8	%	73.2	%

Current Year Loss Ratio.

The insurance segment’s current year loss ratio was 6.3 points lower in the 2012 second quarter compared to the 2011 second quarter, and 7.2 points lower for the six months ended June 30, 2012 compared to the 2011 period, primarily due to a lower level of catastrophic event activity. The 2012 second quarter loss ratio reflected a de minimis level of catastrophic activity, compared to 8.0 points in the 2011 second quarter, which was related to the severe weather that hit the U.S. during April and May 2011. The level of large non-catastrophic loss activity was similar in both periods.

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Prior Period Reserve Development.

2012 second quarter: The insurance segment’s net favorable development of $17.2 million, or 3.9 points, reflected favorable development in short-tail and medium-tail lines which were partially offset by increases in longer-tail lines. Favorable development in short-tail lines primarily consisted of reductions in property (including special risk other than marine) reserves from the 2010 and 2011 accident years (i.e., the year in which a loss occurred) of $4.1 million and $9.8 million, respectively, which was primarily due to a lack of claims activity, and $1.8 million of favorable development in lenders products reserves from the 2011 accident year. In addition, development in medium-tail lines included favorable development in professional liability reserves from the 2009 accident year of $10.8 million, partially offset by adverse development in the 2007 accident year of $6.1 million, along with $4.4 million of favorable development on healthcare reserves spread across all accident years and $2.6 million of favorable development on surety reserves, primarily from the 2007 accident year. Adverse development in longer-tail lines included increases in construction reserves of $1.2 million, $2.8 million and $2.9 million in the 2003, 2007 and 2008 accident years and $7.3 million on executive assurance reserves in the 2011 accident year, primarily due to an increase in loss picks in reaction to recent claims development, partially offset by $2.5 million of favorable development from the 2010 accident year.

2011 second quarter: The insurance segment’s net favorable development of $7.5 million, or 1.8 points, reflected favorable development in short-tailed lines primarily consisting of reductions in property reserves from the 2008 to 2010 accident years of $4.3 million, $3.9 million and $5.4 million, respectively, partially offset by adverse development of $2.6 million from the 2006 accident year. The favorable development in property lines was primarily due to a lack of claims activity in the more recent years.  In addition, favorable development in professional liability reserves from the 2006 accident year of $7.5 million was due to better than expected claims emergence, partially offset by adverse development in the 2007 and 2008 accident years of $1.3 million and $4.5 million, respectively, mainly due to a few large claims. Such amounts were partially offset by adverse development in casualty reserves from the 2004 and 2010 accident years of $5.2 million and $3.1 million, respectively, which was partially offset by favorable development in the 2003 and 2005 accident years of $2.0 million and $2.7 million, respectively. In addition, adverse development in alternative markets business from the 2010 accident year of $3.6 million mainly due to one account, was partially offset by $2.1 million of favorable development from the 2005 to 2008 accident years due to better than expected claims emergence.

Six months ended June 30, 2012: The insurance segment’s net favorable development of $17.7 million, or 2.0 points, reflected favorable development in short-tail and medium-tail lines which were partially offset by increases in longer-tail lines. Favorable development in short-tail lines primarily consisting of reductions in property reserves from the 2007 to 2011 accident years of $2.5 million, $2.2 million, $4.8 million, $9.7 million and $11.7 million, respectively, which was primarily due to a lack of claims activity, and $3.9 million of favorable development in travel and accident reserves, primarily from the 2010 accident year. In addition, development in medium-tail lines included favorable development in professional liability reserves from the 2009 accident year of $9.5 million, partially offset by adverse development in the 2011 accident year of $5.9 million, along with $7.4 million of favorable development on healthcare reserves spread across all accident years. On program business, favorable development of $3.2 million consisted of $6.0 million of favorable development from the 2010 accident year and $4.5 million net development from earlier accident years, partially offset by $7.4 million of adverse development from the 2011 accident year. Adverse development in longer-tail lines included an increase in executive assurance reserves in the 2011 accident year of $9.4 million, primarily due to an increase in loss picks in reaction to recent claims development, and $5.0 million from the 2009 accident year. In addition, adverse development in specialty casualty reserves from the 2004, 2005 and 2007 accident years of $4.5 million, $5.2 million and $4.5 million, respectively, were partially offset by $4.0 million of favorable development in the 2006 accident year. Adverse development in construction reserves from the 2007 to 2009 accident years of $2.5 million, $5.2 million and $3.3 million, respectively, was partially offset by $4.6 million of favorable development in the 2010 accident year.

Six months ended June 30, 2011: The insurance segment’s net favorable development of $22.8 million, or 2.8 points, reflected favorable development in short-tailed lines primarily consisting of reductions in property reserves

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from the 2008 to 2010 accident years of $7.2 million, $10.8 million and $18.5 million, respectively, partially offset by adverse development of $4.1 million from the 2006 accident year. The 2010 accident year amount included $8.0 million of favorable development on the 2010 named catastrophic events. The favorable development in property lines was primarily due to a lack of claims emergence in the more recent years. In addition, there was favorable development of $6.9 million in healthcare reserves, primarily from the 2005 to 2008 accident years. Such amounts were partially offset by adverse development in casualty reserves from the 2004 and 2010 accident years of $5.3 million and $9.4 million, respectively and in professional liability reserves from the 2008 to 2010 accident years of $4.1 million, $2.1 million and $3.9 million, respectively, partially offset by favorable development of $8.5 million from the 2006 accident year. In addition, adverse development in alternative markets business from the 2010 accident year of $6.8 million was partially offset by $6.3 million of favorable development from the 2004 to 2009 accident years.

Underwriting Expenses.

2012 second quarter versus 2011: The insurance segment’s underwriting expense ratio was 34.1% in the 2012 second quarter, compared to 34.9% in the 2011 second quarter. The acquisition expense ratio was 16.9% in the 2012 second quarter, compared to 16.0% in the 2011 second quarter. The comparison of the 2012 second quarter and 2011 second quarter acquisition expense ratios is influenced by, among other things, the mix and type of business written and earned and the level of ceding commissions. The other operating expense ratio was 17.2% for the 2012 second quarter, compared to 18.9% for the 2011 second quarter, with the lower ratio in the 2012 second quarter reflecting the benefits of continued expense management and the higher level of net premiums earned.

Six months ended June 30, 2012 versus 2011: The insurance segment’s underwriting expense ratio was 33.6% for the six months ended June 30, 2012, compared to 34.1% for the 2011 period. The acquisition expense ratio was 16.7% for the six months ended June 30, 2012, compared to 15.5% for the 2011 period. The 2012 second quarter acquisition expense ratio included an increase of 0.5 points related to development in certain prior year loss reserves. The other operating expense ratio was 16.9% for the six months ended June 30, 2012, compared to 18.6% for the 2011 period, with the lower ratio for the six months ended June 30, 2012 reflecting the benefits of continued expense management and the higher level of net premiums earned.

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Reinsurance Segment

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

	Three Months Ended June 30,								Six Months Ended June 30,
	2012			2011			% Change		2012			2011			% Change
Gross premiums written	$	376,981		$	277,766		35.7		$	756,957		$	608,779		24.3
Net premiums written	355,649			268,280			32.6		728,580			583,267			24.9
Net premiums earned	$	280,062		$	232,060		20.7		$	518,634		$	458,164		13.2
Fee income	178			82					191			119
Losses and loss adjustment expenses	(109,277		)	(129,980		)			(201,320		)	(326,137		)
Acquisition expenses, net	(52,231		)	(44,096		)			(97,323		)	(91,435		)
Other operating expenses	(29,140		)	(23,671		)			(55,263		)	(44,898		)
Underwriting income (loss)	$	89,592		$	34,395		160.5		$	164,919		$	(4,187	)	n/m
							% Point								% Point
Underwriting Ratios							Change								Change
Loss ratio	39.0		%	56.0		%	(17.0	)	38.8		%	71.2		%	(32.4	)
Acquisition expense ratio	18.6		%	19.0		%	(0.4	)	18.8		%	20.0		%	(1.2	)
Other operating expense ratio	10.4		%	10.2		%	0.2		10.7		%	9.8		%	0.9
Combined ratio	68.0		%	85.2		%	(17.2	)	68.3		%	101.0		%	(32.7	)

The components of the reinsurance segment’s underwriting results are discussed below.

Premiums Written.

The following table sets forth our reinsurance segment’s net premiums written by major line of business:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Property catastrophe	$	129,224	36	$	108,235	40	$	215,798	30	$	175,196	30
Other specialty (1)	72,261		20	43,937		17	167,723		23	121,582		21
Property excluding property catastrophe (2)	65,734		19	53,938		20	141,227		19	125,088		21
Casualty (3)	43,702		12	40,755		15	127,662		18	112,116		19
Marine and aviation	18,842		5	19,978		7	44,459		6	44,142		8
Other (4)	25,886		8	1,437		1	31,711		4	5,143		1
Total	$	355,649	100	$	268,280	100	$	728,580	100	$	583,267	100
Pro rata	$	144,133	41	$	105,036	39	$	268,879	37	$	210,528	36
Excess of loss	211,516		59	163,244		61	459,701		63	372,739		64
Total	$	355,649	100	$	268,280	100	$	728,580	100	$	583,267	100

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

(2)Includes facultative business.

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

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

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2012 second quarter versus 2011. The growth in net premiums written reflected increases in other specialty, property catastrophe and mortgage business. The growth in other specialty primarily resulted from new business written in U.K. motor while the higher level of property catastrophe primarily resulted from new business and share increases in Florida, Japan and other international risks. The mortgage business primarily resulted from a reinsurance treaty written in the 2012 second quarter which covers newly originated residential mortgages beginning in October 2011. For the 2012 second quarter, such business contributed $21.6 million of premiums written (included in the ‘other’ line), of which $13.5 million related to the period from October 2011 to March 2012.

Six months ended June 30, 2012 versus 2011. The growth in net premiums written reflected increases in all lines of business, primarily in other specialty, property catastrophe and mortgage business as discussed above. Substantial rate improvements in global property catastrophe markets allowed the reinsurance segment to participate in a more meaningful way around the world.

Net Premiums Earned.

The following table sets forth our reinsurance segment’s net premiums earned by major line of business:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Property catastrophe	$	68,992	25	$	59,788	26	$	130,855	25	$	111,430	24
Other specialty (1)	78,207		28	40,511		17	124,355		24	79,480		17
Property excluding property catastrophe (2)	58,720		21	57,524		25	120,352		23	120,530		26
Casualty (3)	48,565		17	51,493		22	94,508		18	99,987		22
Marine and aviation	19,200		7	21,093		9	40,649		8	42,719		9
Other (4)	6,378		2	1,651		1	7,915		2	4,018		2
Total	$	280,062	100	$	232,060	100	$	518,634	100	$	458,164	100
Pro rata	$	124,941	45	$	103,967	45	$	224,866	43	$	210,620	46
Excess of loss	155,121		55	128,093		55	293,768		57	247,544		54
Total	$	280,062	100	$	232,060	100	$	518,634	100	$	458,164	100

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

(2)Includes facultative business.

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

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

Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Net premiums earned reflect changes in net premiums written over the previous five quarters, including the mix and type of business written. In April 2012, we completed the acquisition of the credit and surety reinsurance operations of Ariel Reinsurance Company Ltd. based in Zurich, Switzerland. In the transaction, which was accounted for as a business combination under U.S. GAAP, we acquired $83.1 million of net unearned premiums along with other insurance balances. Under applicable accounting rules for business combinations, the recording of such unearned premiums was not reflected as net premiums written but will result in net premiums earned (primarily over a two year period). Net premiums earned for the 2012 second quarter included $17.3 million related to the acquired net unearned premiums.

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Losses and Loss Adjustment Expenses.

The table below shows the components of the reinsurance segment’s loss ratio:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Current year	55.6	%	77.9	%	58.0	%	91.8	%
Prior period reserve development	(16.6	)%	(21.9	)%	(19.2	)%	(20.6	)%
Loss ratio	39.0	%	56.0	%	38.8	%	71.2	%

Current Year Loss Ratio.

The reinsurance segment’s current year loss ratio was 22.3 points lower in the 2012 second quarter compared to the 2011 second quarter, and 33.8 points lower for the six months ended June 30, 2012 compared to the 2011 period, primarily due to the lower level of current year catastrophic event activity. The 2012 second quarter loss ratio reflected 2.8 points related to current year catastrophic activity, primarily related to U.S. storm activity, while the 2011 second quarter ratio included 26.8 points of catastrophic activity, which was primarily related to the severe weather that hit the U.S. in April and May 2011. The loss ratio for the six months ended June 30, 2012 reflected 4.9 points related to current year catastrophic activity, compared to 43.6 points of catastrophic activity for the 2011 period. In addition, the loss ratios for the 2012 periods included a higher level of non-catastrophic loss activity than in the 2011 periods.

Prior Period Reserve Development.

2012 second quarter: The reinsurance segment’s net favorable development of $46.6 million, or 16.6 points, reflected favorable development of $25.7 million on property catastrophe and property other than property catastrophe reserves, including $3.9 million and $15.8 million from the 2010 and 2011 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), respectively. In addition, there was $9.9 million of favorable development on casualty reserves, including $3.0 million, $3.3 million, $2.2 million and $1.7 million for the 2004 to 2007 underwriting years, respectively, partially offset by adverse development in the 2010 and 2011 underwriting years of $1.9 million and $1.5 million, respectively, which was due, in part, to increases in loss selections based on the reinsurance segment’s view of the insurance environment. The 2012 second quarter loss ratio also benefited from $7.5 million of favorable development on marine and aviation reserves across most underwriting years and $3.2 million of favorable development on other specialty business with widespread favorable development partially offset by $4.5 million adverse development from the 2011 underwriting year. Such amount primarily resulted from increases in loss selections based on the reinsurance segment’s view of economic conditions in certain European countries.

2011 second quarter: The reinsurance segment’s net favorable development of $50.8 million, or 21.9 points, reflected $28.2 million of favorable development in property catastrophe and property other than property catastrophe reserves, including $16.7 million from the 2010 underwriting year and $11.5 million from earlier underwriting years. In addition, there was $14.7 million of favorable development on casualty reserves, including $5.0 million, $8.7 million and $4.8 million for the 2003 to 2005 underwriting years, respectively, and $6.1 million from the 2008 underwriting year, partially offset by adverse development in the 2009 underwriting year of $10.9 million which was primarily due to development on two contracts. The 2011 second quarter loss ratio also benefited from $3.2 million of favorable development on other specialty business and $4.7 million of favorable development from other lines. The reductions in reserves were primarily due to better than expected claims emergence.

Six months ended June 30, 2012: The reinsurance segment’s net favorable development of $99.4 million, or 19.2 points, reflected favorable development of $47.1 million on property catastrophe and property other than

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property catastrophe reserves, including $10.9 million and $24.0 million from the 2010 and 2011 underwriting years, respectively. In addition, there was $30.6 million of favorable development on casualty reserves, including $11.0 million, $8.2 million, $5.9 million, $6.2 million, $4.9 million and $3.4 million for the 2004 to 2009 underwriting years, respectively, partially offset by adverse development in the 2010 and 2011 underwriting years of $4.5 million and $2.1 million, respectively, which was due, in part, to increases in loss selections based on the reinsurance segment’s view of the insurance environment. The loss ratio for the six months ended June 30, 2012 also benefited from $8.5 million of favorable development on marine and aviation reserves across most underwriting years and $12.9 million of favorable development on other specialty business with $2.6 million, $3.4 million and $4.2 million from the 2008 to 2010 underwriting years.

Six months ended June 30, 2011: The reinsurance segment’s net favorable development of $94.2 million, or 20.6 points, reflected $45.7 million of favorable development in property catastrophe and property other than property catastrophe reserves, including $31.8 million from the 2010 underwriting year. Such amount included $13.4 million of favorable development on the 2010 named catastrophic events. In addition, there was $29.2 million of favorable development on casualty reserves, including $7.3 million, $9.5 million, $13.2 million and $9.5 million for the 2002 to 2005 underwriting years, respectively, and $6.9 million from the 2007 underwriting year. Such amounts were partially offset by adverse development in the 2009 and 2010 underwriting years of $12.8 million and $4.3 million, respectively, which was primarily due to development on a small number of contracts. The 2011 loss ratio also benefited from $9.4 million of favorable development on other specialty business, including $1.9 million and $3.7 million from the 2008 and 2009 underwriting years, respectively, and $10.0 million of favorable development from other lines. The reductions in reserves were primarily due to better than expected claims emergence.

Underwriting Expenses.

2012 second quarter versus 2011: The underwriting expense ratio for the reinsurance segment was 29.0% in the 2012 second quarter, compared to 29.2% in the 2011 second quarter. The acquisition expense ratio for the 2012 second quarter was 18.6%, compared to 19.0% for the 2011 second quarter. The comparison of the 2012 second quarter and 2011 second quarter acquisition expense ratios is influenced by, among other things, the mix and type of business written and earned and the level of ceding commissions. The operating expense ratio for the 2012 second quarter was 10.4%, compared to 10.2% in the 2011 second quarter, reflecting an increase in aggregate expenses partially offset by the benefit of the higher level of net premiums earned.

Six months ended June 30, 2012 versus 2011: The underwriting expense ratio for the reinsurance segment was 29.5% for the six months ended June 30, 2012, compared to 29.8% in the 2011 period. The acquisition expense ratio for the six months ended June 30, 2012 was 18.8%, compared to 20.0% for the 2011 period. The operating expense ratio for the six months ended June 30, 2012 was 10.7%, compared to 9.8% for the 2011 period, reflecting an increase in aggregate expenses partially offset by the benefit of the higher level of net premiums earned.

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Other Income or Expense Items

Net Investment Income. The components of net investment income were derived from the following sources:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Fixed maturities	$	70,290		$	84,420		$	143,739		$	169,564
Term loan investments (1)	3,557			533			5,856			684
Equity securities	2,425			1,844			4,089			3,391
Short-term investments	760			505			1,132			1,183
Other (2)	2,980			5,774			6,174			12,677
Gross investment income	80,012			93,076			160,990			187,499
Investment expenses	(6,404		)	(6,405		)	(13,085		)	(12,521		)
Net investment income	$	73,608		86,671			$	147,905		174,978

(1)Included in “investments accounted for using the fair value option” on the consolidated balance sheets.

(2)Amounts include dividends on investment funds and other items. The amount for the six months ended June 30, 2011 includes an initial dividend of $5.5 million received on an investment fund.

The pre-tax investment income yield, calculated based on amortized cost, was 2.47% for the 2012 second quarter, compared to 2.52% for the 2012 first quarter and 3.06% for the 2011 second quarter. The pre-tax investment income yield was 2.49% for the six months ended June 30, 2012, compared to 3.05% for the 2011 period. The decline in yields in the 2012 periods reflects the effects of lower prevailing interest rates available in the market and our investment strategy which puts a priority on total return. Such effects more than offset the benefit of a higher level of investable assets in the 2012 periods. Yields on future investment income may vary based on financial market conditions, investment allocation decisions and other factors.

Other Income (Loss). We record income or loss from our investments in Aeolus LP and Gulf Reinsurance Limited (joint venture) using the equity method on a three month lag basis based on the availability of their financial statements. We recorded income of $0.7 million on such investments in the 2012 second quarter, compared to a loss of $4.3 million in the 2011 second quarter, and a loss of $7.4 million for the six months ended June 30, 2012, compared to $0.3 million of income for the 2011 period. The amount recorded for the six months ended June 30, 2012 included a loss of $8.4 million related to Aeolus LP. As of June 30, 2012, the carrying value of this investment (after taking into account the $83.1 million in cumulative cash distributions received) was $10.9 million with no unfunded capital commitments. Aeolus LP operates as an unrated reinsurance platform that provides collateralized property catastrophe protection to insurers and reinsurers on both an ultimate net loss and industry loss warranty basis.

Equity in Net Income of Investment Funds Accounted for Using the Equity Method. We use the equity method on certain investments (which primarily invest in fixed maturity securities) due to the ownership structure of these investment funds, where we do not have a controlling interest and are not the primary beneficiary. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Such investments, which are typically structured as limited partnerships, are generally recorded on a one month lag with some investments reported on a three month lag based on the availability of reports from the investment funds. Certain of these funds employ leverage to achieve a higher rate of return on their assets under management. While leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Fluctuations in the carrying value of the investment funds accounted for using the equity method may increase the volatility of our reported results of operations. Investment funds accounted for using the equity method (excluding our investment in Aeolus LP) totaled $320.7 million at June 30, 2012, compared to $345.3 million at December 31, 2011. At June 30, 2012,

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our portfolio included $340.4 million of investments in bank loan funds, of which $114.6 million are reflected in the investment funds accounted for using the equity method.

We recorded $7.8 million of equity in net income related to investment funds accounted for using the equity method in the 2012 second quarter, compared to $6.0 million of equity in net income for the 2011 second quarter, and $32.6 million of equity in net income related to investment funds accounted for using the equity method for the six months ended June 30, 2012, compared to $35.6 million of equity in net income for the 2011 period.

Net Realized Gains or Losses. We recorded net realized gains of $34.9 million for the 2012 second quarter, compared to net realized gains of $45.2 million for the 2011 second quarter, and net realized gains of $79.0 million for the six months ended June 30, 2012, compared to net realized gains of $65.9 million for the 2011 period. Currently, our portfolio is actively managed to maximize total return within certain guidelines. In assessing returns under this approach, we include net investment income, net realized gains and losses and the change in unrealized gains and losses generated by our investment portfolio. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily resulted from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations. In addition, net realized gains or losses include changes in the fair value of assets and liabilities accounted for using the fair value option. See note 7, “Investment Information—Net Realized Gains (Losses),” of the notes accompanying our consolidated financial statements for additional information.

Total return on our portfolio under management for the 2012 second quarter was 0.63%, compared to 1.65% for the 2011 second quarter, and 2.53% for the six months ended June 30, 2012, compared to 3.17% for the 2011 period. Excluding foreign exchange, total return was 1.04% for the 2012 second quarter, compared to 1.54% for the 2011 second quarter, and 2.66% for the six months ended June 30, 2012, compared to 2.69% for the 2011 period. For the 2012 second quarter, total return on our portfolio reflected unfavorable returns on equities, reflecting the decline in the S&P 500 index during the period along with underperformance of commodity-related securities. Total return is calculated on a pre-tax basis.

Net Impairment Losses Recognized in Earnings. On a quarterly basis, we perform reviews of our available for sale investments to determine whether declines in fair value below the cost basis are considered other-than-temporary in accordance with applicable accounting guidance regarding the recognition and presentation of other-than-temporary impairments. The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. These factors include (i) an analysis of the liquidity, business prospects and overall financial condition of the issuer, (ii) the time period in which there was a significant decline in value, (iii) the significance of the decline, and (iv) the analysis of specific credit events. We evaluate the unrealized losses of our equity securities by issuer and determine if we can forecast a reasonable period of time by which the fair value of the securities would increase and we would recover our cost. If we are unable to forecast a reasonable period of time in which to recover the cost of our equity securities, we record a net impairment loss in earnings equivalent to the entire unrealized loss. For the 2012 second quarter, we recorded $2.0 million of credit related impairments in earnings, compared to $1.7 million for the 2011 second quarter. For the six months ended June 30, 2012, we recorded $3.0 million of credit related impairments in earnings, compared to $4.4 million for the 2011 period.The OTTI recorded in the 2012 periods resulted, in part, from reductions in estimated recovery values on certain mortgage backed securities following the review of such securities and also included OTTI recorded on a portfolio of global corporate bonds, non-U.S. government securities and U.S. Treasuries due to our intent to liquidate such portfolio in the 2012 third quarter. See note 7, “Investment Information—Other-Than-Temporary Impairments,” of the notes accompanying our consolidated financial statements for additional information.

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Other Expenses. Other expenses, which are included in our other operating expenses and part of corporate and other (non-underwriting), were $11.9 million for the 2012 second quarter, compared to $11.4 million for the 2011 second quarter, and $18.9 million for the six months ended June 30, 2012, compared to $18.4 million for the 2011 period. Such amounts primarily represent certain holding company costs necessary to support our worldwide insurance and reinsurance operations, share based compensation expense and costs associated with operating as a publicly traded company.

Net Foreign Exchange Gains or Losses. Net foreign exchange gains for the 2012 second quarter of $31.7 million consisted of net unrealized gains of $32.4 million and net realized losses of $0.7 million, compared to net foreign exchange losses for the 2011 second quarter of $18.4 million which consisted of net unrealized losses of $18.7 million and net realized gains of $0.3 million. The 2012 second quarter net foreign exchange gains primarily resulted from the strengthening of the U.S. Dollar against the Euro, British Pound Sterling and other major foreign currencies during the period. Net foreign exchange gains for the six months ended June 30, 2012 of $11.0 million consisted of net unrealized gains of $12.2 million and net realized losses of $1.2 million, compared to net foreign exchange losses for the 2011 period of $55.3 million which consisted of net unrealized losses of $55.7 million and net realized gains of $0.4 million.

Net unrealized foreign exchange gains or losses result from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date. Historically, we have held investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. However, changes in the value of such investments due to foreign currency rate movements are reflected as a direct increase or decrease to shareholders’ equity and are not included in the consolidated statements of income. As a result of the current financial and economic environment as well as the potential for additional investment returns, we may not match a portion of our projected liabilities in foreign currencies with investments in the same currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility in our shareholders’ equity.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2011 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Investable Assets

The finance and investment committee of our board of directors establishes our investment policies and sets the parameters for creating guidelines for our investment managers. The finance and investment committee reviews the implementation of the investment strategy on a regular basis. Our current approach stresses preservation of capital, market liquidity and diversification of risk. While maintaining our emphasis on preservation of capital and liquidity, we expect our portfolio to become more diversified and, as a result, we may expand into areas which are not currently part of our investment strategy. Our Chief Investment Officer administers the investment portfolio, oversees our investment managers, formulates investment strategy in conjunction with our finance and investment committee and directly manages certain portions of our fixed income and equity portfolios.

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The following table summarizes our invested assets:

	June 30,			December 31,
	2012			2011
Fixed maturities available for sale, at fair value	$	9,556,326		$	9,375,604
Fixed maturities, at fair value (1)	242,735			147,779
Fixed maturities pledged under securities lending agreements, at fair value (2)	74,032			56,393
Total fixed maturities	9,873,093			9,579,776
Short-term investments available for sale, at fair value	1,087,910			904,219
Cash	355,392			351,699
Equity securities available for sale, at fair value	260,864			299,584
Equity securities, at fair value (1)	23,118			87,403
Other investments available for sale, at fair value	381,576			238,111
Other investments, at fair value (1)	230,990			131,721
TALF investments, at fair value (3)	307,453			387,702
Investments accounted for using the equity method (4)	331,601			380,507
Total cash and investments	12,851,997			12,360,722
Securities sold but not yet purchased (5)	(9,206		)	(27,178		)
Securities transactions entered into but not settled at the balance sheet date	(106,435		)	(17,339		)
Total investable assets	$	12,736,356		$	12,316,205

(1)	Represents securities which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on our balance sheet. Changes in the carrying value of such securities are recorded in net realized gains or losses.
(2)	This table excludes the collateral received and reinvested and includes the fixed maturities and short-term investments pledged under securities lending agreements, at fair value.
(3)	The Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) provides secured financing for certain asset-backed securities and legacy commercial mortgage-backed securities. TALF financing is non-recourse to us, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. We can deliver the collateralized securities to the Federal Reserve in full defeasance of the loan.
(4)	Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investments funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.
(5)	Represents our obligation to deliver equity securities that we did not own at the time of sale. Such amounts are included in “other liabilities” on our balance sheet.

At June 30, 2012, our fixed income portfolio, which includes fixed maturity securities and short-term investments, had average credit quality ratings from Standard & Poor’s Rating Services (“S&P”)/Moody’s of “AA/Aa2” and an average yield to maturity (imbedded book yield), before investment expenses, of 2.76%. At December 31, 2011, our fixed income portfolio had average credit quality ratings from S&P/Moody’s of “AA/Aa1” and an average yield to maturity of 2.98%. Our investment portfolio had an average effective duration of 3.01 years at June 30, 2012, compared to 2.99 years at December 31, 2011. At June 30, 2012, approximately $8.41 billion, or 67%, of our total investments and cash was internally managed, compared to $7.9 billion, or 66%, at December 31, 2011.

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The following table summarizes our fixed maturities by type:

	Estimated		Gross		Gross			Cost or		OTTI
	Fair		Unrealized		Unrealized			Amortized		Unrealized
	Value		Gains		Losses			Cost		Losses (2)
At June 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,714,495	$	92,282	$	(11,533	)	$	2,633,746	$	(716	)
Mortgage backed securities	1,670,108		23,743		(18,286		)	1,664,651		(14,772		)
Municipal bonds	1,542,262		67,946		(1,541		)	1,475,857		(65		)
Commercial mortgage backed securities	961,326		31,685		(2,412		)	932,053		(3,259		)
U.S. government and government agencies	1,380,074		29,797		(1,872		)	1,352,149		(207		)
Non-U.S. government securities	1,034,657		32,558		(17,976		)	1,020,075		(157		)
Asset backed securities	570,171		17,294		(8,579		)	561,456		(3,876		)
Total	$	9,873,093	$	295,305	$	(62,199	)	$	9,639,987	$	(23,052	)
At December 31, 2011
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,719,052	$	79,407	$	(29,922	)	$	2,669,567	$	(1,138	)
Mortgage backed securities	1,592,762		27,633		(23,226		)	1,588,355		(20,466		)
Municipal bonds	1,430,565		77,977		(886		)	1,353,474		(105		)
Commercial mortgage backed securities	1,046,326		28,780		(2,904		)	1,020,450		(3,259		)
U.S. government and government agencies	1,451,993		34,811		(3		)	1,417,185		(207		)
Non-U.S. government securities	762,321		33,486		(17,684		)	746,519		—
Asset backed securities	576,757		14,649		(10,078		)	572,186		(3,876		)
Total	$	9,579,776	$	296,743	$	(84,703	)	$	9,367,736	$	(29,051	)

(1)In securities lending transactions, we receive collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, we have excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.

(2)Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.

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The following table provides the credit quality distribution of our fixed maturities and fixed maturities pledged under securities lending agreements, excluding TALF investments:

	June 30, 2012			December 31, 2011
	Estimated		% of	Estimated		% of
Rating (1)	Fair Value		Total	Fair Value		Total
U.S. government and government agencies (2)	$	3,043,908	30.8	$	3,154,480	32.9
AAA	3,325,996		33.7	3,229,161		33.7
AA	1,505,032		15.2	1,425,249		14.9
A	1,028,772		10.4	884,957		9.2
BBB	428,200		4.3	412,566		4.3
BB	152,982		1.5	140,029		1.5
B	175,613		1.8	165,003		1.7
Lower than B	116,846		1.2	114,672		1.2
Not rated	95,744		1.1	53,659		0.6
Total	$	9,873,093	100.0	$	9,579,776	100.0

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

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

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all fixed maturities and fixed maturities pledged under securities lending agreements which were in an unrealized loss position:

	June 30, 2012						December 31, 2011
Severity of Unrealized Loss	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
0-10%	$	2,034,205	$	(31,543	)	50.7	$	1,692,722	$	(44,803	)	52.9
10-20%	156,893		(22,748		)	36.6	144,523		(20,222		)	23.9
20-30%	15,600		(5,189		)	8.3	38,749		(11,709		)	13.8
30-40%	5,293		(2,679		)	4.3	14,596		(7,413		)	8.8
40-50%	50		(40		)	0.1	619		(445		)	0.5
50-80%	—		—			—	29		(111		)	0.1
Total	$	2,212,041	$	(62,199	)	100.0	$	1,891,238	$	(84,703	)	100.0

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The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for non-investment grade fixed maturities and fixed maturities pledged under securities lending agreements which were in an unrealized loss position:

	June 30, 2012						December 31, 2011
Severity of Unrealized Loss	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
0-10%	$	91,112	$	(3,421	)	5.5	$	143,782	$	(6,418	)	7.6
10-20%	29,018		(4,721		)	7.6	33,926		(5,484		)	6.5
20-30%	14,238		(4,807		)	7.7	26,733		(8,042		)	9.5
30-40%	4,013		(1,984		)	3.2	13,558		(6,905		)	8.2
40-50%	50		(40		)	0.1	619		(445		)	0.5
50-80%	—		—			—	29		(110		)	0.1
Total	$	138,431	$	(14,973	)	24.1	$	218,647	$	(27,404	)	32.4

At June 30, 2012, below-investment grade securities comprised approximately 5.6% of our fixed maturities and fixed maturities pledged under securities lending agreements, compared to 5.0% at December 31, 2011. In accordance with our investment strategy, we invest in high yield fixed income securities which are included in “Corporate bonds.” Upon issuance, these securities are typically rated below investment grade (i.e., rating assigned by the major rating agencies of “BB” or less). At June 30, 2012, corporate bonds represented 33% of the total below investment grade securities at fair value, mortgage backed securities represented 51% of the total and 16% were in other classes. At December 31, 2011, corporate bonds represented 46% of the total below investment grade securities at fair value, mortgage backed securities represented 46% of the total and 8% were in other classes. Unrealized losses include the impact of foreign exchange movements on certain securities denominated in foreign currencies and, as such, the amount of securities in an unrealized loss position fluctuates due to foreign currency movements.

We determine estimated recovery values for our fixed maturities and fixed maturities pledged under securities lending agreements following a review of the business prospects, credit ratings, estimated loss given default factors and information received from asset managers and rating agencies for each security. For structured securities, we utilize underlying data, where available, for each security provided by asset managers and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis provided by the asset managers includes expected cash flow projections under base case and stress case scenarios which modify expected default expectations and loss severities and slow down prepayment assumptions. In the tables above, securities at June 30, 2012 which were in an unrealized loss position of greater than 20% of amortized cost were primarily in mortgage backed and asset backed securities where the fair value for the securities was lower than our expected recovery value.

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The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at June 30, 2012, excluding guaranteed amounts and covered bonds:

	Estimated Fair Value		Credit Rating (1)
General Electric Co.	$	45,395	AA+/A1
Caterpillar Inc.	33,511		A/A2
Abbey National Treasury Svcs	31,810		A/A2
Wells Fargo & Company	29,802		A+/A2
Total SA	29,402		AA-/Aa1
Royal Dutch Shell PLC	28,806		AA/Aa1
HSBC Holdings PLC	27,565		A/Baa1
National Australia Bank Ltd.	27,279		AA-/Aa2
Coca-Cola Company	26,988		A+/Aa3
Verizon Communications Inc	25,843		A-/A3
Total	$	306,401

(1) Ratings as assigned by S&P/Moody’s.

Our portfolio includes investments, such as mortgage-backed securities, which are subject to prepayment risk. At June 30, 2012, our investments in mortgage-backed securities (“MBS”), excluding commercial mortgage-backed securities, amounted to approximately $1.67 billion, or 13.1% of total investable assets, compared to $1.59 billion, or 12.9%, at December 31, 2011.  As with other fixed income investments, the fair value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose us to changes in the prepayment rate on these investments. In periods of declining interest rates, mortgage prepayments generally increase and MBS are prepaid more quickly, requiring us to reinvest the proceeds at the then current market rates. Conversely, in periods of rising rates, mortgage prepayments generally fall, preventing us from taking full advantage of the higher level of rates. However, current economic conditions may curtail prepayment activity as refinancing becomes more difficult, thus limiting prepayments on MBS.

Since 2007, the residential mortgage market in the U.S. has experienced a variety of difficulties. During this time, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the sub-prime sector. In addition, during this period, residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. A continued decline or an extended flattening in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, especially with respect to second homes and investment properties, and with respect to any residential mortgage loans where the aggregate loan amounts (including any subordinate loans) are close to or greater than the related property values. These developments may have a significant adverse effect on the prices of loans and securities, including those in our investment portfolio. The situation continues to have wide ranging consequences, including downward pressure on economic growth and the potential for increased insurance and reinsurance exposures, which could have an adverse impact on our results of operations, financial condition, business and operations. Our portfolio includes commercial mortgage backed securities (“CMBS”). At June 30, 2012, CMBS constituted approximately $961.3 million, or 7.5% of total investable assets, compared to $1.05 billion, or 8.5%, at December 31, 2011. The commercial real estate market has experienced price deterioration, which could lead to increased delinquencies and defaults on commercial real estate mortgages.

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The following table provides information on our MBS and CMBS at June 30, 2012, excluding amounts guaranteed by the U.S. government and TALF investments:

						Estimated Fair Value
	Issuance Year		Amortized Cost		Average Credit Quality	Total		% of Amortized Cost		% of Investable Assets
Non-agency MBS:	2003		$	2,293	AAA	$	2,326	101.4	%	0.0	%
	2004		13,709		BBB+	12,918		94.2	%	0.1	%
	2005		44,324		B-	39,893		90.0	%	0.3	%
	2006		53,445		BBB-	49,370		92.4	%	0.4	%
	2007		41,731		CCC-	40,173		96.3	%	0.3	%
	2008		6,747		CCC	6,613		98.0	%	0.1	%
	2009	(6)	30,151		AAA	32,861		109.0	%	0.3	%
	2010	(6)	28,899		AAA	28,027		97.0	%	0.2	%
	2012	(6)	82,775		AAA	83,027		100.3	%	0.7	%
Total non-agency MBS			$	304,074	BBB+	$	295,208	97.1	%	2.3	%
Non-agency CMBS:	1998		3,452		AAA	3,471		100.6	%	0.0	%
	2002		68		AAA	69		101.5	%	0.0	%
	2004		27,556		AAA	27,375		99.3	%	0.2	%
	2005		40,271		AA+	40,297		100.1	%	0.3	%
	2006		5,160		A-	5,028		97.4	%	0.0	%
	2007		32,415		A	34,358		106.0	%	0.3	%
	2008		616		AAA	616		100.0	%	0.0	%
	2010		238,680		AAA	247,624		103.7	%	1.9	%
	2011		156,477		AAA	165,444		105.7	%	1.3	%
	2012		147,183		AAA	148,110		100.6	%	1.2	%
Total non-agency CMBS			$	651,878	AAA	$	672,392	103.1	%	5.3	%

Additional Statistics:

	Non-Agency MBS				Non-Agency
	Re-REMICs		All Other		CMBS (1)
Weighted average loan age (months)	72		69		36
Weighted average life (months) (2)	23		48		51
Weighted average loan-to-value % (3)	69.9	%	69.0	%	64.7	%
Total delinquencies (4)	19.7	%	21.7	%	3.6	%
Current credit support % (5)	43.3	%	14.4	%	28.2	%

(1)	Loans defeased with government/agency obligations represented approximately 1% of the collateral underlying our CMBS holdings.
(2)	The weighted average life for MBS is based on the interest rates in effect at June 30, 2012. The weighted average life for CMBS reflects the average life of the collateral underlying our CMBS holdings.
(3)	The range of loan-to-values is 30% to 86% on MBS and 27% to 105% on CMBS.
(4)	Total delinquencies includes 60 days and over.
(5)	Current credit support % represents the % for a collateralized mortgage obligation (“CMO”) or CMBS class/tranche from other subordinate classes in the same CMO or CMBS deal.
(6)	Primarily represents Re-REMICs with an average credit quality of “AAA” from Fitch Ratings.

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The following table provides information on our asset backed securities (“ABS”), excluding TALF investments, at June 30, 2012:

				Estimated Fair Value
	Amortized Cost		Average Credit Quality	Total		% of Amortized Cost		% of Investable Assets
Sector:
Credit cards (1)	$	175,092	AA+	$	178,077	101.7	%	1.4	%
Autos (2)	140,224		AAA	139,531		99.5	%	1.1	%
Rate reduction bonds (3)	80,383		AAA	84,014		104.5	%	0.7	%
Equipment (4)	58,961		AA-	60,182		102.1	%	0.5	%
U.K. securitized (5)	31,874		AAA	31,779		99.7	%	0.2	%
Student loans (6)	6,636		AAA	6,773		102.1	%	0.1	%
Other	55,122		AA	55,486		100.7	%	0.4	%
	548,292		AA	555,842		101.4	%	4.4	%
Home equity (7)	$	1,676	AAA	$	1,454	86.8	%	0.0	%
	1,085		A	991		91.3	%	0.0	%
	2,296		BBB	2,446		106.5	%	0.0	%
	3,254		BB to B	3,330		102.3	%	0.0	%
	4,788		CCC to C	6,028		125.9	%	0.0	%
	65		D	80		123.1	%	0.0	%
	13,164		B+	14,329		108.8	%	0.1	%
Total ABS	$	561,456	AA+	$	570,171	101.6	%	4.5	%

The effective duration of the total ABS was 1.5 years at June 30, 2012.

(1) The weighted average credit support % on credit cards is 23.9%.

(2) The weighted average credit support % on autos is 22.0%.

(3) The weighted average credit support % on rate reduction bonds is 6.6%.

(4) The weighted average credit support % on equipment is 5.6%.

(5) The weighted average credit support % on U.K. securitized is 18.0%.

(6) The weighted average credit support % on student loans is 22.7%.

(7) The weighted average credit support % on home equity is 22.8%.

At June 30, 2012, our fixed income portfolio included $61.0 million par value in sub-prime securities with a fair value of $40.5 million and average credit quality ratings from S&P/Moody’s of “A+/B1.” At December 31, 2011, our fixed income portfolio included $40.0 million par value in sub-prime securities with a fair value of $15.4 million and average credit quality ratings from S&P/Moody’s of “BB+/Ba2.” Such amounts were primarily in the home equity sector of our asset backed securities, with the balance in other ABS, MBS and CMBS sectors. We define sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios. In addition, the portfolio of collateral backing our securities lending program contained $6.0 million fair value of sub-prime securities with average credit quality ratings from S&P/Moody’s of “CCC/Caa2” at June 30, 2012, compared to $7.3 million fair value with average credit quality ratings from S&P/Moody’s of “CCC/Caa2” at December 31, 2011.

At June 30, 2012, we held insurance enhanced municipal bonds, net of prerefunded bonds that are escrowed in U.S. government obligations, the fair value of which was $264.2 million, or 2.1% of our total investable assets. These securities had average credit quality ratings from S&P/Moody’s of “AA/Aa2” with and without the insurance enhancement. This is due to the fact that, in cases where the claims paying ratings of the guarantors are below investment grade, those ratings have been withdrawn from the bonds by the relevant rating

53

agencies, and the insured ratings have been equated to the underlying ratings. The ratings were obtained from the individual rating agencies and were assigned a numerical amount with 1 being the highest rating. The average ratings were calculated using the weighted average fair values of the individual bonds. The average ratings with and without the insurance enhancement are substantially the same at June 30, 2012. Guarantors of our insurance enhanced municipal bonds, net of prerefunded bonds that are escrowed in U.S. government obligations, included Assured Guaranty Ltd. ($95.6 million), National Public Finance Guarantee ($87.1 million), the Texas Permanent School Fund ($48.7 million) and Financial Guaranty Insurance Company ($32.8 million). We do not have a significant exposure to insurance enhanced asset-backed or mortgage-backed securities. We do not have any significant investments in companies which guarantee securities at June 30, 2012.

The following table provides information on the fair value of our Eurozone investments at June 30, 2012:

			Financial Corporates		Other		Covered		Bank		Equities and
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		Other		Total
Country (1)
Germany	$	159,511	$	1,271	$	22,482	$	—	$	22,726	$	1,536	$	207,526
Netherlands	7,382		31,873		30,925		30,710		6,692		16,053		123,635
France	—		992		32,519		40,345		4,308		8,639		86,803
Finland	105,015		247		—		—		—		—		105,262
Supranational (5)	45,426		—		—		—		—		—		45,426
Spain	—		—		687		12,240		4,998		213		18,138
Luxembourg	—		—		4,237		—		2,335		23		6,595
Italy	5,986		—		3,417		—		959		114		10,476
Belgium	3,905		—		7,049		—		—		—		10,954
Ireland	—		633		—		—		—		1,682		2,315
Portugal	—		—		627		—		—		—		627
Total	$	327,225	$	35,016	$	101,943	$	83,295	$	42,018	$	28,260	$	617,757

(1) The country allocations set forth in the table are based on various assumptions made by us in assessing the country in which the underlying credit risk resides, including a review of the jurisdiction of organization, business operations and other factors. Based on such analysis, we do not believe that we have any Eurozone investments from Austria, Cyprus, Estonia, Greece, Malta, Slovakia or Slovenia at June 30, 2012.

(2) Sovereign includes securities issued and/or guaranteed by Eurozone governments.

(3) Securities issued by Eurozone banks where the security is backed by a separate group of loans.

(4) Included in corporate bonds.

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

At June 30, 2012, our equity portfolio included $274.8 million fair value of equity securities, compared to $359.8 million at December 31, 2011, net of securities sold but not purchased.. Our equity portfolio primarily consists of publicly traded common stocks in the natural resources, energy and consumer staples sectors. Certain of our equity managers use leverage to achieve a higher rate of return on their assets under management. While leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Accordingly, any event that adversely affects the value of the underlying holdings would be magnified to the extent leverage is used and our potential losses would be magnified.

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The following table provides information on the severity of the unrealized loss position as a percentage of cost for all equity securities classified as available for sale which were in an unrealized loss position:

	June 30, 2012						December 31, 2011
Severity of Unrealized Loss	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses	Estimated Fair Value		Gross Unrealized Losses			% of Total Gross Unrealized Losses
0-10%	$	55,997	$	(1,899	)	8.5	$	74,813	$	(3,651	)	16.3
10-20%	25,874		(4,177		)	18.8	26,791		(4,457		)	19.9
20-30%	12,639		(4,030		)	18.1	21,457		(7,827		)	35.0
30-40%	3,628		(1,959		)	8.8	5,070		(2,645		)	11.9
40-50%	11,524		(9,528		)	42.8	2,345		(1,984		)	8.9
50-70%	522		(655		)	3.0	1,492		(1,780		)	8.0
Total	$	110,184	$	(22,248	)	100.0	$	131,968	$	(22,344	)	100.0

On a quarterly basis, we evaluate the unrealized losses of our equity securities by issuer and forecast a reasonable period of time by which the fair value of the securities would increase and we would recover the cost basis. A substantial portion of the equity securities with unrealized losses were less than 30% under their cost basis at June 30, 2012. For equity securities with a higher level of unrealized losses, available positive and negative evidence is reviewed to determine whether an other-than-temporary impairment should be recorded. At June 30, 2012, we believe that a reasonable period of time exists to allow for recovery of the cost basis of our equity securities.

Other investments totaled $612.6 million at June 30, 2012, compared to $369.8 million at December 31, 2011. Investment funds accounted for using the equity method (excluding our investment in Aeolus LP) totaled $320.7 million at June 30, 2012, compared to $345.3 million at December 31, 2011. Certain of our investment managers may use leverage to achieve a higher rate of return on their assets under management, primarily those included in “other investments available for sale, at fair value,” “investments accounted for using the fair value option” and “investments accounted for using the equity method” on our balance sheet. While leverage presents opportunities for increasing the total return of such investments, it may increase losses as well. Accordingly, any event that adversely affects the value of the underlying holdings would be magnified to the extent leverage is used and our potential losses would be magnified. In addition, the structures used to generate leverage may lead to such investments being required to meet covenants based on market valuations and asset coverage. Market valuation declines could force the sale of investments into a depressed market, which may result in significant additional losses. Alternatively, the levered investments may attempt to deleverage by raising additional equity or potentially changing the terms of the established financing arrangements. We may choose to participate in the additional funding of such investments.

Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See note 9, “Derivative Instruments,” of the notes accompanying our consolidated financial statements for additional disclosures concerning derivatives.

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. See note 8, “Fair Value” of the notes accompanying our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value at June 30, 2012 and December 31, 2011 by level.

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Premiums Receivable and Reinsurance Recoverables

At June 30, 2012, 74.9% of premiums receivable of $834.1 million represented amounts not yet due, while amounts in excess of 90 days overdue were 4.4% of the total. At December 31, 2011, 72.6% of premiums receivable of $501.6 million represented amounts not yet due, while amounts in excess of 90 days overdue were 4.8% of the total. Approximately 2.1% of the $68.2 million of paid losses and loss adjustment expenses recoverable were in excess of 90 days overdue at June 30, 2012, compared to 2.3% of the $33.5 million of paid losses and loss adjustment expenses recoverable at December 31, 2011. At June 30, 2012 and December 31, 2011, our reserves for doubtful accounts were approximately $13.4 million and $14.2 million, respectively.

At June 30, 2012, approximately 87.7% of reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.85 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was approximately 5.0% of our total shareholders’ equity. At December 31, 2011, approximately 90.1% of reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.85 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was approximately 5.4% of our total shareholders’ equity.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Premiums Written
Direct	$	695,743		$	626,978		$	1,405,475		$	1,254,152
Assumed	356,070			284,961			712,994			622,353
Ceded	(231,580		)	(205,396		)	(434,625		)	(405,684		)
Net	$	820,233		$	706,543		$	1,683,844		$	1,470,821
Premiums Earned
Direct	$	633,341		$	587,725		$	1,247,352		$	1,160,731
Assumed	290,680			249,045			550,536			494,180
Ceded	(197,365		)	(193,891		)	(390,920		)	(378,337		)
Net	$	726,656		$	642,879		$	1,406,968		$	1,276,574
Losses and Loss Adjustment Expenses
Direct	$	386,050		$	454,528		$	739,832		$	848,112
Assumed	103,367			144,009			212,784			387,817
Ceded	(89,724		)	(166,915		)	(157,716		)	(310,427		)
Net	$	399,693		$	431,622		$	794,900		$	925,502

Reserves for Losses and Loss Adjustment Expenses

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

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At June 30, 2012 and December 31, 2011, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:

	June 30,		December 31,
	2012		2011
Insurance:
Case reserves	$	1,392,011	$	1,311,740
IBNR reserves	2,828,749		2,783,091
Total net reserves	$	4,220,760	$	4,094,831
Reinsurance:
Case reserves	$	738,831	$	721,032
Additional case reserves	164,323		178,640
IBNR reserves	1,641,425		1,643,660
Total net reserves	$	2,544,579	$	2,543,332
Total:
Case reserves	$	2,130,842	$	2,032,772
Additional case reserves	164,323		178,640
IBNR reserves	4,470,174		4,426,751
Total net reserves	$	6,765,339	$	6,638,163

At June 30, 2012 and December 31, 2011, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

	June 30,		December 31,
	2012		2011
Casualty	$	660,652	$	655,017
Executive assurance	670,773		636,692
Professional liability	636,353		631,991
Property, energy, marine and aviation	576,412		590,098
Programs	557,349		541,113
Construction	425,665		403,109
National accounts	189,972		169,906
Healthcare	137,339		139,825
Surety	82,022		70,680
Travel and accident	34,618		37,645
Lenders products	24,619		12,332
Other	224,986		206,423
Total net reserves	$	4,220,760	$	4,094,831

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At June 30, 2012 and December 31, 2011, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

	June 30,		December 31,
	2012		2011
Casualty	$	1,574,427	$	1,600,887
Property excluding property catastrophe	301,728		336,425
Property catastrophe	231,214		237,804
Marine and aviation	157,367		166,294
Other specialty	228,550		153,455
Other	51,293		48,467
Total net reserves	$	2,544,579	$	2,543,332

Shareholders’ Equity

Our shareholders’ equity was $5.02 billion at June 30, 2012, compared to $4.59 billion at December 31, 2011. The increase for the six months ended June 30, 2012 was primarily attributable to positive underwriting and investment returns.

Book Value per Common Share

The following table presents the calculation of book value per common share at June 30, 2012 and December 31, 2011:

	June 30,			December 31,
(U.S. dollars in thousands, except share data)	2012			2011
Calculation of book value per common share:
Total shareholders’ equity	$	5,020,316		$	4,592,074
Less preferred shareholders’ equity	(325,000		)	(325,000		)
Common shareholders’ equity	$	4,695,316		$	4,267,074
Common shares outstanding (1)	136,291,652			134,358,345
Book value per common share	$	34.45		$	31.76

(1)Excludes the effects of 8,043,017 and 8,706,441 stock options and 323,303 and 298,425 restricted stock units outstanding at June 30, 2012 and December 31, 2011, respectively.

Liquidity and Capital Resources

ACGL is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, ACGL depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to the non-cumulative preferred shares and common shares. ACGL’s readily available cash, short-term investments and marketable securities, excluding amounts held by our regulated insurance and reinsurance subsidiaries, totaled $5.1 million at June 30, 2012, compared to $14.4 million at December 31, 2011. During the six months ended June 30, 2012, ACGL received dividends of $48.0 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda-based reinsurer and insurer.

The ability of our regulated insurance and reinsurance subsidiaries to pay dividends or make distributions or other payments to us is dependent on their ability to meet applicable regulatory standards. Under Bermuda law, Arch Re Bermuda is required to maintain an enhanced capital requirement which must equal or exceed its  minimum solvency margin (i.e., the amount by which the value of its general business assets must exceed its

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general business liabilities) equal to the greatest of (1) $100.0 million, (2) 50% of net premiums written (being gross premiums written less any premiums ceded by Arch Re Bermuda, but Arch Re Bermuda may not deduct more than 25% of gross premiums when computing net premiums written) and (3) 15% of net discounted aggregated losses and loss expense provisions and other insurance reserves. Arch Re Bermuda is prohibited from declaring or paying any dividends during any financial year if it is not in compliance with its enhanced capital requirement, minimum solvency margin or minimum liquidity ratio. In addition, Arch Re Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the Bermuda Monetary Authority (“BMA”) an affidavit stating that it will continue to meet the required margins. In addition, Arch Re Bermuda is prohibited, without prior approval of the BMA, from reducing by 15% or more its total statutory capital, as set out in its previous year’s statutory financial statements. Arch Re Bermuda is required to meet enhanced capital requirements and a target capital level (defined as 120% of the enhanced capital requirements) as calculated using a new risk based capital model called the Bermuda Solvency Capital Requirement (“BSCR”) model. At December 31, 2011, as determined under Bermuda law, Arch Re Bermuda had statutory capital of $2.28 billion and statutory capital and surplus of $4.56 billion, which amounts were in compliance with Arch Re Bermuda’s enhanced capital requirement at such date. Such amounts include ownership interests in U.S. insurance and reinsurance subsidiaries. Accordingly, Arch Re Bermuda can pay approximately $1.09 billion to ACGL during the remainder of 2012 without providing an affidavit to the BMA, as discussed above. In addition to meeting applicable regulatory standards, the ability of our insurance and reinsurance subsidiaries to pay dividends to intermediate parent companies owned by Arch Re Bermuda is also constrained by our dependence on the financial strength ratings of our insurance and reinsurance subsidiaries from independent rating agencies. The ratings from these agencies depend to a large extent on the capitalization levels of our insurance and reinsurance subsidiaries. We believe that ACGL has sufficient cash resources and available dividend capacity to service its indebtedness and other current outstanding obligations.

Our insurance and reinsurance subsidiaries are required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support their operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. Our insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. At June 30, 2012 and December 31, 2011, such amounts approximated $5.70 billion and $5.60 billion, respectively.

Our non-U.S. operations account for a significant percentage of our net premiums written. In the current market environment, the business written in our non-U.S. operations has been more profitable than the business written in our U.S. operations, which has significantly increased the non-U.S. group’s contribution to our overall pre-tax income. Additionally, a significant component of our pre-tax income is generated through our investment performance, especially in this competitive insurance and reinsurance market. We hold a substantial amount of our investable assets in our non-U.S. operations and, accordingly, a large portion of our investment income is produced in our non-U.S. operations. In addition, ACGL, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements beneficial to the ratings of such subsidiaries. Our U.S.-based insurance and reinsurance groups enter into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business. For the 2011 calendar year, the U.S. groups ceded business to Arch Re Bermuda at an aggregate net cession rate (i.e., net of third party reinsurance) of approximately 51%.

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

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The following table summarizes our consolidated cash flows from operating, investing and financing activities:

	Six Months Ended
	June 30,
	2012			2011
Total cash provided by (used for):
Operating activities	$	397,268		$	446,547
Investing activities	(315,321		)	(199,138		)
Financing activities	(78,747		)	(205,551		)
Effects of exchange rate changes on foreign currency cash	493			6,403
Increase in cash	$	3,693		$	48,261

·Cash provided by operating activities for the six months ended June 30, 2012 was lower than in the 2011 period. Paid losses were higher for the 2012 period, including outflows on catastrophic events from 2010 and 2011 and the maturation of our reserves. In addition, receipts from interest and dividend income were lower for the 2012 period due, in part, to changes in investment mix, timing and portfolio yields. The 2012 period also reflected a higher level of cash outflows for operating expenses, primarily due to the timing of certain incentive compensation items. Such amounts were partially offset by a higher level of premium receipts.

·Cash used for investing activities for the six months ended June 30, 2012 was higher than in the 2011 period. The 2012 period included a higher level of purchases and sales of fixed maturity investments than in the 2011 period, an increase in funding for other investments (funding of existing and new investments) and a lower level of securities on loan through our securities lending program, compared to a higher level of securities lending activity in the 2011 period. In addition, during the 2012 period, we sold four individual TALF investments and the related TALF borrowings were extinguished accordingly.

·Cash used for financing activities for the six months ended June 30, 2012 was lower than in the 2011 period. The 2011 period reflected $266.7 million of share repurchases under our share repurchase program while the 2012 period did not include any repurchase activity. During the 2012 second quarter, we issued $325 million liquidation value of Series C non-cumulative preferred shares and repurchased all existing Series A and B non-cumulative preferred shares. In addition, as noted above, the 2012 period cash flows reflected a lower financing inflow for securities on loan through our securities lending program than in the 2011 period. In addition, the 2012 period reflected the repayment of $73.8 million of TALF borrowings.

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

As part of our investment strategy, we seek to establish a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed by us to be adequate to meet our foreseeable payment obligations. However, due to the nature of our operations, cash flows are affected by claim payments that may comprise large payments on a limited number of claims and which can fluctuate from year to year. We believe that our liquid investments and cash flow will provide us with sufficient liquidity in order to meet our claim payment obligations. However, the timing and amounts of actual claim payments related to recorded Loss Reserves vary based on many factors, including large individual losses, changes in the legal environment, as well as general market conditions. The ultimate amount of the claim payments could differ

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materially from our estimated amounts. Certain lines of business written by us, such as excess casualty, have loss experience characterized as low frequency and high severity. The foregoing may result in significant variability in loss payment patterns. The impact of this variability can be exacerbated by the fact that the timing of the receipt of reinsurance recoverables owed to us may be slower than anticipated by us. Therefore, the irregular timing of claim payments can create significant variations in cash flows from operations between periods and may require us to utilize other sources of liquidity to make these payments, which may include the sale of investments or utilization of existing or new credit facilities or capital market transactions. If the source of liquidity is the sale of investments, we may be forced to sell such investments at a loss, which may be material.

Our investments in certain securities, including certain fixed income and structured securities, investments in funds accounted for using the equity method, other investments and our investment in Gulf Reinsurance Limited (joint venture) may be illiquid due to contractual provisions or investment market conditions. If we require significant amounts of cash on short notice in excess of anticipated cash requirements, then we may have difficulty selling these investments in a timely manner or may be forced to sell or terminate them at unfavorable values.

On a consolidated basis, our aggregate investable assets totaled $12.74 billion at June 30, 2012, compared to $12.32 billion at December 31, 2011. The primary goals of our asset liability management process are to satisfy the insurance liabilities, manage the interest rate risk embedded in those insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows, including debt service obligations. Generally, the expected principal and interest payments produced by our fixed income portfolio adequately fund the estimated runoff of our insurance reserves. Although this is not an exact cash flow match in each period, the substantial degree by which the fair value of the fixed income portfolio exceeds the expected present value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, provide assurance of our ability to fund the payment of claims and to service our outstanding debt without having to sell securities at distressed prices or access credit facilities. Our unfunded investment commitments totaled approximately $537.0 million at June 30, 2012.

In August 2011, S&P downgraded the United States’ credit rating from “AAA” to “AA+” with a negative outlook and warned it could lower the credit rating to “AA” within the next two years if it sees less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period that result in a higher general government debt trajectory. In addition, both Moody’s Investors Service and Fitch Ratings have announced the possibility of a downgrade to the United States’ credit rating. The impact of the continuing weakness of the U.S., European countries and other key economies, projected budget deficits for the U.S., European countries and other governments and the consequences associated with possible additional downgrades of securities of the U.S., European countries and other governments by credit rating agencies is inherently unpredictable and could have a material adverse effect on financial markets and economic conditions in the U.S. and throughout the world. In turn, this could have a material adverse effect on our business, financial condition and results of operations and, in particular, this could have a material adverse effect on the value and liquidity of securities in our investment portfolio. Our investment portfolio as of June 30, 2012 included $1.38 billion of obligations of the U.S. government and government agencies at fair value and $1.54 billion of municipal bonds at fair value. Please refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of other risks relating to our business and investment portfolio.

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

We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. The future capital requirements of our business will depend on many

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

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

The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Authorizations have consisted of a $1.0 billion authorization in February 2007, a $500.0 million authorization in May 2008, a $1.0 billion authorization in November 2009 and a $1.0 billion authorization in February 2011. Since the inception of the share repurchase program through June 30, 2012, ACGL has repurchased 104.8 million common shares for an aggregate purchase price of $2.56 billion. At June 30, 2012, $942.0 million of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 2012. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. We will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, we will consider share repurchases on an opportunistic basis.

To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. We can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all. Adverse developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result in realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial position and our businesses, and may also limit our access to capital required to operate our business.

If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our operating subsidiaries, which could place those operating subsidiaries at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our operating subsidiaries are able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of bank credit and letters of credit. In addition, under certain of the reinsurance agreements assumed by our reinsurance operations, upon the occurrence of a ratings downgrade or other specified triggering event with respect to our reinsurance operations, such as a reduction in surplus by specified amounts during specified periods, our ceding company clients may be provided with certain rights, including, among other things, the right to terminate the subject reinsurance agreement and/or to require that our reinsurance operations post additional collateral.

In addition to common share capital, we depend on external sources of finance to support our underwriting activities, which can be in the form (or any combination) of debt securities, preference shares, common equity and bank credit facilities providing loans and/or letters of credit. As noted above, equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our

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shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities.

We purchased asset-backed and commercial mortgage-backed securities under the FRBNY’s TALF program. As of June 30, 2012, we had $307.5 million of securities under TALF which are reflected as “TALF investments, at fair value” and $235.8 million of secured financing from the FRBNY which is reflected as “TALF borrowings, at fair value.” As of December 31, 2011, we had $387.7 million of TALF investments, at fair value and $310.5 million of TALF borrowings, at fair value. During the six months ended June 30, 2012, we sold certain TALF investments and the related TALF borrowings were extinguished accordingly.

In August 2011, we entered into a three-year agreement for a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility. Under the terms of the agreement, Arch Reinsurance Company (“Arch Re U.S.”) and Arch Re Bermuda are limited to issuing $100 million of unsecured letters of credit as part of the unsecured revolving loan. In addition, we have access to secured letter of credit facilities of approximately $81 million, which are available on a limited basis and for limited purposes. Refer to note 4, “Commitments and Contingencies—Letter of Credit and Revolving Credit Facilities,” of the notes accompanying our consolidated financial statements for a discussion of our available facilities, applicable covenants on such facilities and available capacity.

In March 2012, ACGL and Arch Capital Group (U.S.) Inc. filed a universal shelf registration statement with the SEC. This registration statement allows for the possible future offer and sale by us of various types of securities, including unsecured debt securities, preference shares, common shares, warrants, share purchase contracts and units and depositary shares. The shelf registration statement enables us to efficiently access the public debt and/or equity capital markets in order to meet our future capital needs. The shelf registration statement also allows selling shareholders to resell common shares that they own in one or more offerings from time to time. We will not receive any proceeds from any shares offered by the selling shareholders. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

In April 2012, ACGL completed the underwritten public offering of $325 million of its 6.75% Series C non-cumulative preferred shares. The net proceeds from the offering of approximately $316 million and other available funds were used to redeem all of ACGL’s $200 million of 8.0% Series A preferred shares and $125 million of 7.875% Series B preferred shares. The preferred shares were redeemed at a redemption price equal to $25.00 per share, plus all declared and unpaid dividends to (but excluding) the redemption date. Except in specified circumstances relating to certain tax or corporate events, the Series C non-cumulative preferred shares are not redeemable prior to April 2, 2017. Dividends on the Series C preferred shares are non-cumulative. Consequently, in the event dividends are not declared on the Series C preferred shares for any dividend period, holders of preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. Holders of Series C preferred shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of ACGL’s board of directors. Any such dividends will be payable from the date of original issue on a non-cumulative basis, quarterly in arrears on the last day of each period. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 6.75% of the $25.00 liquidation preference per annum.

At June 30, 2012, ACGL’s capital of $5.42 billion consisted of $300.0 million of senior notes, representing 5.5% of the total, $100.0 million of revolving credit agreement borrowings due in August 2014, representing 1.8% of the total, $325.0 million of preferred shares, representing 6.0% of the total, and common shareholders’ equity of $4.70 billion, representing the balance. At December 31, 2011, ACGL’s capital of $4.99 billion consisted of $300.0 million of senior notes, representing 6.0% of the total, $100.0 million of revolving credit agreement borrowings due in August 2014, representing 2.0% of the total, $325.0 million of preferred shares, representing 6.5% of the total, and common shareholders’ equity of $4.27 billion, representing the balance. The

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increase in capital during the six months ended June 30, 2012 was primarily attributable to positive underwriting and investment returns.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2011 Form 10-K.

Market Sensitive Instruments and Risk Management

In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of June 30, 2012. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. An analysis of material changes in market risk exposures at June 30, 2012 that affect the quantitative and qualitative disclosures presented in our 2011 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management”) were as follows:

Investment Market Risk

Fixed Income Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments which invest in fixed income securities and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our interest rate sensitive securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, in recent months interest rate movements in many credit sectors have exhibited a much lower correlation to changes in U.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables.

The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on the portfolio at June 30, 2012 and December 31, 2011:

	Interest Rate Shift in Basis Points
(U.S. dollars in millions)	-100			-50			-		50			100
At June 30, 2012
Total fair value	$	12,007.9		$	11,856.6		$	11,713.8	$	11,514.5		$	11,341.8
Change from base	2.51		%	1.22		%	—		(1.70		)%	(3.18		)%
Change in unrealized value	$	294.1		$	142.8		$	—	$	(199.3	)	$	(372.0	)
At December 31, 2011
Total fair value	$	11,320.9		$	11,215.5		$	11,067.5	$	10,905.6		$	10,743.4
Change from base	2.29		%	1.34		%	—		(1.46		)%	(2.93		)%
Change in unrealized value	$	253.4		$	148.0		$	—	$	(161.9	)	$	(324.1	)

In addition, we consider the effect of credit spread movements on the fair value of our fixed maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments and investment funds accounted for using the equity method which invest in fixed income securities and the corresponding change in unrealized appreciation. As credit spreads widen, the fair value of our fixed income securities falls, and the converse is also true.

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The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on the portfolio at June 30, 2012 and December 31, 2011:

	Credit Spread Shift in Basis Points
(U.S. dollars in millions)	-100			-50			-		50			100
At June 30, 2012
Total fair value	$	11,942.7		$	11,836.4		$	11,713.8	$	11,597.0		$	11,481.1
Change from base	1.95		%	1.05		%	—		(1.00		)%	(1.99		)%
Change in unrealized value	$	228.9		$	122.6		$	—	$	(116.8	)	$	(232.7	)
At December 31, 2011
Total fair value	$	11,297.6		$	11,189.3		$	11,067.5	$	10,952.5		$	10,836.4
Change from base	2.08		%	1.10		%	—		(1.04		)%	(2.09		)%
Change in unrealized value	$	230.1		$	121.8		$	—	$	(115.0	)	$	(231.1	)

Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR attempts to take into account a broad cross-section of risks facing a portfolio by utilizing relevant securities volatility data skewed towards the most recent months and quarters. VaR measures the amount of a portfolio at risk for outcomes 1.65 standard deviations from the mean based on normal market conditions over a one year time horizon and is expressed as a percentage of the portfolio’s initial value. In other words, 95% of the time, should the risks taken into account in the VaR model perform per their historical tendencies, the portfolio’s loss in any one year period is expected to be less than or equal to the calculated VaR, stated as a percentage of the measured portfolio’s initial value. As of June 30, 2012, our portfolio’s VaR was estimated to be 2.92%, compared to an estimated 3.23% at December 31, 2011.

Equity Securities, Privately Held Securities and Other Investments. Our investment portfolio includes an allocation to equity securities, privately held securities and certain other investments.  At June 30, 2012 and December 31, 2011, the fair value of our investments in equity securities, privately held securities and certain other investments totaled $446.9 million and $508.5 million, respectively. These securities are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately $44.7 million and $50.8 million at June 30, 2012 and December 31, 2011, respectively, and would have decreased book value per common share by approximately $0.33 and $0.38, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $44.7 million and $50.8 million at June 30, 2012 and December 31, 2011, respectively, and would have increased book value per common share by approximately $0.33 and $0.38, respectively.

Investment-Related Derivatives. Derivative instruments may be used to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. The fair values of those derivatives are based on quoted market prices. See note 9, “Derivative Instruments,” of the notes accompanying our consolidated financial statements for additional disclosures concerning derivatives. At June 30, 2012, the notional value of the net long position of derivative instruments (excluding to-be-announced mortgage backed securities which are included in the fixed income securities analysis above and foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $526.7 million, compared to $877.9 million at December 31, 2011. A 100 basis point depreciation of the underlying exposure to these derivative instruments at June 30, 2012 and December 31, 2011 would have resulted in a reduction in net income of approximately $5.3 million and $8.8 million, respectively, and would have decreased book value per common share by $0.04 and $0.07, respectively. A 100 basis point appreciation of the underlying exposure to these derivative instruments at June 30, 2012 and December 31, 2011 would have resulted in an increase in net income of approximately $5.3 million and $8.8 million, respectively, and would have increased book value per common share by $0.04 and $0.07, respectively.

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For further discussion on investment activity, please refer to “—Financial Condition, Liquidity and Capital Resources—Financial Condition—Investable Assets.”

Foreign Currency Exchange Risk

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than the U.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. We may also utilize foreign currency forward contracts and currency options as part of our investment strategy. See Note 9, “Derivative Instruments,” of the notes accompanying our consolidated financial statements for additional information.

The following table provides a summary of our net foreign currency exchange exposures, as well as foreign currency derivatives in place to manage these exposures, at June 30, 2012 and December 31, 2011:

	June 30,			December 31,
(U.S. dollars in thousands, except per share data)	2012			2011
Assets, net of insurance liabilities, denominated in foreign currencies, excluding shareholders’ equity and derivatives	$	125,402		$	143,731
Shareholders’ equity denominated in foreign currencies (1)	249,109			247,135
Net foreign currency forward contracts outstanding (2)	(59,635		)	(16,569		)
Net exposures denominated in foreign currencies	$	314,876		$	374,327
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	(31,488	)	$	(37,433	)
Book value per common share	$	(0.23	)	$	(0.28	)
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	31,488		$	37,433
Book value per common share	$	0.23		$	0.28

(1) Represents capital contributions held in the foreign currencies of our operating units.

(2) Notional value of the outstanding foreign currency forward contracts in U.S. Dollars.

As a result of the current financial and economic environment as well as the potential for additional investment returns, we may not match a portion of our projected liabilities in foreign currencies with investments in the same currencies, which would increase our exposure to foreign currency fluctuations and increase the volatility in our results of operations. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “—Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,”

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“expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.

Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:

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

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

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

·general economic and market conditions (including inflation, interest rates, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate;

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

·developments in the world’s financial and capital markets and our access to such markets;

·our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;

·the loss of key personnel;

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

·accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through June 30, 2012;

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

·severity and/or frequency of losses;

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

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

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

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

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

·our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;

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·the impact of the continued weakness of the U.S., European countries or other key economies, projected budget deficits for the U.S., European countries and other governments and the consequences associated with possible additional downgrades of securities of the U.S., European countries and other governments by credit rating agencies, and the resulting effect on the value of securities in our investment portfolio as well as the uncertainty in the market generally;

·losses relating to aviation business and business produced by a certain managing underwriting agency for which we 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 our periodic reports filed with the SEC;

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

·changes in the political environment of certain countries in which we operates, underwrites business or invests;

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

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

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

Other Financial Information

The consolidated financial statements as of June 30, 2012 and for the three month periods ended June 30, 2012 and 2011 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report (dated August 8, 2012) is included on page 2. The report of PricewaterhouseCoopers LLP states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to applicable Exchange Act Rules as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to information being recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to ACGL and its consolidated subsidiaries.

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

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Changes in Internal Controls Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of June 30, 2012, we were not a party to any litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.

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

The following table summarizes our purchases of our common shares for the 2012 second quarter:

	Issuer Purchases of Equity Securities
(U.S. dollars in thousands, except share data) Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs
4/1/2012-4/30/2012	2,159	$	38.90	—	$	941,967
5/1/2012-5/31/2012	156,362	39.10		—	$	941,967
6/1/2012-6/30/2012	13,634	37.71		—	$	941,967
Total	172,155	$	38.99	—	$	941,967

(1)Includes repurchases by ACGL of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair value, as determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights were exercised.

(2)The board of directors of ACGL has authorized the investment 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

Item 5.  Other Information

In accordance with Section 10a(i)(2) of the Securities Exchange Act of 1934, as amended, we are responsible for disclosing non-audit services to be provided by our independent auditor, PricewaterhouseCoopers LLP, which are approved by the Audit Committee of our board of directors. During the 2012 second quarter, the Audit Committee approved engagements of PricewaterhouseCoopers LLP for permitted non-audit services, substantially all of which consisted of tax services, tax consulting and tax compliance.

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Item 6.  Exhibits

Exhibit No.	Description
10.1	Restricted Share Agreements with Arch Capital Group Ltd. substantially in the form signed by the Non-Employee Directors of Arch Capital Group Ltd. for May 9, 2012 grants
10.2	Employment Agreement, dated as of July 25, 2012, between Arch Capital Group Ltd. and Mark D. Lyons (a)
10.3	Employment Agreement, dated as of June 5, 2009, between Arch Insurance Group Inc. and David McElroy
10.4	Amendment, dated as of July 25, 2012, to the Employment Agreement, dated as of June 5, 2009, between Arch Insurance Group Inc. and David McElroy
10.5	Resignation Letter of John Hele, dated July 24, 2012 (a)
15	Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial information from Arch Capital Group Ltd.’s Quarterly Report for the quarter ended June 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the three and six month periods ended June 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the six month periods ended June 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six month periods ended June 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements.*

(a)Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on July 30, 2012, and incorporated by reference.

* This exhibit will not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r) , or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that Arch Capital Group Ltd. specifically incorporates it by reference.

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SIGNATURES

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

	ARCH CAPITAL GROUP LTD.
	(REGISTRANT)
	/s/ Constantine Iordanou
Date: August 8, 2012	Constantine Iordanou
	President and Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors
	/s/ John C.R. Hele
Date: August 8, 2012	John C.R. Hele
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Restricted Share Agreements with Arch Capital Group Ltd. substantially in the form signed by the Non-Employee Directors of Arch Capital Group Ltd. for May 9, 2012 grants
10.2	Employment Agreement, dated as of July 25, 2012, between Arch Capital Group Ltd. and Mark D. Lyons (a)
10.3	Employment Agreement, dated as of June 5, 2009, between Arch Insurance Group Inc. and David McElroy
10.4	Amendment, dated as of July 25, 2012, to the Employment Agreement, dated as of June 5, 2009, between Arch Insurance Group Inc. and David McElroy
10.5	Resignation Letter of John Hele, dated July 24, 2012 (a)
15	Accountants’ Awareness Letter (regarding unaudited interim financial information)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial information from Arch Capital Group Ltd.’s Quarterly Report for the quarter ended June 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the three and six month periods ended June 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the six month periods ended June 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six month periods ended June 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements.*

(b)Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on July 30, 2012, and incorporated by reference.

* This exhibit will not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r) , or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that Arch Capital Group Ltd. specifically incorporates it by reference.

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EX-10.1

Exhibit 10.1

ARCH CAPITAL GROUP LTD.
Restricted Share Agreement

THIS AGREEMENT, dated as of May 9, 2012, between Arch Capital Group Ltd. (the “Company”), a Bermuda company, and               (the “Director”).

WHEREAS, the following terms reflect the Company’s 2012 Long Term Incentive and Share Award Plan (the “Plan”);

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto agree as follows.

1.Award of Shares.  Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Director is hereby awarded 1,944 Restricted Shares (the “Award”), subject to the terms and conditions herein set forth.  Capitalized terms used herein and not defined shall have the meanings set forth in the Plan.  In the event of any conflict between this Agreement and the Plan, the Plan shall control.

2.Terms and Conditions.  It is understood and agreed that the Award of Restricted Shares evidenced hereby is subject to the following terms and conditions:

(a)Vesting of Award.  Subject to Section 2(b) below and the other terms and conditions of this Agreement, this Award shall become vested on May 8, 2013.  Unless otherwise provided by the Company, all dividends and other amounts receivable in connection with any adjustments to the Shares under Section 4(c) of the Plan shall be subject to the vesting schedule in this Section 2(a).  Notwithstanding the foregoing, if a Change in Control occurs and the Director ceases to be a director of the Company for any reason, then the Restricted Shares shall become immediately vested in full upon such termination of service.

“Change in Control” shall mean:

(A)any person (within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than a Permitted Person, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power or value of all the then outstanding Voting Securities; or

(B)the individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “Board”) together with those who become directors subsequent to such date and whose recommendation, election or nomination for

election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or

(C)the consummation of a merger, consolidation, recapitalization, liquidation, sale or disposition by the Company of all or substantially all of the Company’s assets, or reorganization of the Company, other than any such transaction which would (x) result in more than 50% of the total voting power and value represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the former shareholders of the Company and (y) not otherwise be deemed a Change in Control under subparagraphs (A) or (B) of this paragraph.

“Permitted Persons” means (A) the Company; (B) any Related Party; or (C) any group (as defined in Rule 13b-3 under the Exchange Act) comprised of any or all of the foregoing.

“Related Party” means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) any entity, 50% or more of the voting power of which is owned directly or indirectly by the shareholders of the Company in substantially the same proportion as their ownership of Voting Securities immediately prior to the transaction.

“Voting Security” means any security of the Company which carries the right to vote generally in the election of directors.

(b)Termination of Service; Forfeiture of Unvested Shares.  Except as otherwise set forth in Section 2(a) above, in the event the Director ceases to be a director of the Company prior to the date the Restricted Shares otherwise become vested due to his or her death or Permanent Disability (as defined in the Company’s Incentive Compensation Plan), the Restricted Shares shall become immediately vested in full upon such termination of service.  If the Director ceases to be a director of the Company for any other reason prior to the date the Restricted Shares become vested, the Award shall be forfeited by the Director and become the property of the Company.

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(c)Certificates.  Each certificate issued in respect of Restricted Shares awarded hereunder shall be issued in book entry format with the Company’s transfer agent and shall bear a legend disclosing the restrictions on transferability imposed on such Restricted Shares by this Agreement (the “Restrictive Legend”).  Upon the vesting of Restricted Shares pursuant to Section 2(a) hereof and the satisfaction of any withholding tax liability pursuant to Section 5 hereof, such vested Shares, not bearing the Restrictive Legend, shall be delivered to the Director.

(d)Rights of a Stockholder.  Prior to the time a Restricted Share is fully vested hereunder, the Director shall have no right to transfer, pledge, hypothecate or otherwise encumber such Restricted Shares.  During such period, the Director shall have all other rights of a stockholder, including, but not limited to, the right to vote and to receive dividends (subject to Section 2(a) hereof) at the time paid on such Restricted Shares.

(e)No Right to Continued Services.  This Award shall not confer upon the Director any right with respect to continuance of services with the Company nor shall this Award interfere with the right of the Company to terminate the Director’s services at any time.

3.Transfer of Shares.  The Shares delivered hereunder, or any interest therein, may be sold, assigned, pledged, hypothecated, encumbered, or transferred or disposed of in any other manner, in whole or in part, only in compliance with the terms, conditions and restrictions as set forth in the governing instruments of the Company, applicable United States federal and state securities laws or any other applicable laws or regulations and the terms and conditions hereof.

4.Expenses of Issuance of Shares.  The issuance of stock certificates hereunder shall be without charge to the Director.  The Company shall pay, and indemnify the Director from and against any issuance, stamp or documentary taxes (other than transfer taxes) or charges imposed by any governmental body, agency or official (other than income taxes) or by reason of the issuance of Shares.

5.Withholding.  No later than the date of vesting of (or the date of an election by the Director under Section 83(b) of the Code with respect to) the Award granted hereunder, the Director shall make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld at such time with respect to such Award and the Company shall, to the extent permitted or required by law, have the right to deduct from any payment of any kind otherwise due to the Director, federal, state and local taxes of any kind required by law to be withheld at such time.

6.References.  References herein to rights and obligations of the Director shall apply, where appropriate, to the Director’s legal representative or estate without regard to whether specific reference to such legal representative or estate is contained in a particular provision of this Agreement.

7.Notices.  Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally

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or by courier, or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently by similar process give notice of:

If to the Company:

Arch Capital Group Ltd.
Wessex House

45 Reid Street
Hamilton HM 12, Bermuda
Attn.:  Secretary

If to the Director:

To the last address delivered to the Company by the
Director in the manner set forth herein.

8.Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws.

9.Entire Agreement.  This Agreement and the Plan constitute the entire agreement among the parties relating to the subject matter hereof, and any previous agreement or understanding among the parties with respect thereto is superseded by this Agreement and the Plan.

10.Counterparts.  This Agreement may be executed in two counterparts, each of which shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

ARCH CAPITAL GROUP LTD.
By:	/s/ Dawna Ferguson
	Dawna Ferguson
	Secretary
[/s/ Director’s signature]

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EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (“Agreement”), dated as of June 5, 2009 between Arch Insurance Group Inc., a Delaware corporation (the “Company”), and David McElroy (the “Executive”).

The parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

SECTION 1.01. Definitions. For purposes of this Agreement, the following terms have the meanings set forth below:

“Accounting Firm” has the meaning set forth in Section 12.10(b).

“Affiliate” means any Person, directly or indirectly, through one or more intermediaries, Controlling, Controlled by, or under common Control with the Company.  For purposes hereof, (a) “Control” means the ownership, directly or indirectly, of (i) in the case of a corporation, Voting Securities (as defined below) representing 50% or more of the total voting power or value of all the then outstanding Voting Securities of such corporation or (ii) in the case of a partnership, limited liability company, association or other business entity (“Business Entity”), 50% or more of the partnership or other similar ownership interest of such Business Entity; and (b) “Voting Security” means any security of a corporation which carries the right to vote generally in the election of directors.  For purposes of the definition of “Control,” (x) a Person will be deemed to have a 50% or more ownership interest in a Business Entity if such Person is allocated 50% or more of Business Entity gains or losses or controls the managing director or member or general partner of such Business Entity; and (y) “Controlling” and “Controlled” have meanings correlative thereto.

“Base Salary” has the meaning set forth in Section 4.01.

“Cause” means (a) theft or embezzlement by the Executive with respect to the Company or its Affiliates; (b) intentional malfeasance or gross negligence in the performance of the Executive’s duties; (c) the conviction of the Executive of any felony or any crime involving moral turpitude; (d) willful or prolonged absence from work by the Executive (other than by reason of disability due to physical or mental illness) or failure, neglect or refusal by the Executive to perform his duties and responsibilities without the same being corrected within ten (10) days after being given written notice thereof; (e) continued and habitual use of alcohol by the Executive to an extent which materially impairs the Executive’s performance of his duties; (f) the Executive’s use of illegal drugs; or (g) the material breach by the Executive of any of the covenants contained in this Agreement.

“Code” has the meaning set forth in Section 12.09.

“Confidential Information” means information that is not generally known to the public and that was or is used, developed or obtained by the Company or its Affiliates in connection with their business. It shall not include information (a) required to be disclosed by court or administrative order, (b) lawfully obtainable from other sources or which is in the public domain through no fault of the Executive; or (c) the disclosure of which is consented to in writing by the Company.

“Date of Termination” has the meaning set forth in Section 5.06 and Section 5.02.

“Employment Period” has the meaning set forth in Section 2.01 and Section 5.02.

“Good Reason” means, without the Executive’s written consent and subject to the timely notice requirement and the Company’s opportunity to cure set forth in Section 5.05 below, (a) the material diminution of any material duties or responsibilities of the Executive or a material adverse change in the Executive’s title or reporting responsibilities; or (b) a material reduction in the Executive’s Base Salary.

“Intellectual Property” has the meaning set forth in Section 7.01.

“Notice of Termination” has the meaning set forth in Section 5.05.

“Nonsolicitation Period” has the meaning set forth in Section 9.01.

“Parent” means Arch Capital Group Ltd., a Bermuda company.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, an estate, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

“Permanent Disability” means those circumstances where the Executive is unable to continue to perform the usual customary duties of his assigned job or as otherwise assigned in accordance with the provisions of this Agreement for a period of six (6) consecutive months in any twelve (12) month period because of physical, mental or emotional incapacity resulting from injury, sickness or disease. Any questions as to the existence of a Permanent Disability shall be determined by a qualified, independent physician selected by the Company and approved by the Executive (which approval shall not be unreasonably withheld). The determination of any such physician shall be final and conclusive for all purposes of this Agreement.

“Reimbursable Expenses” has the meaning set forth in Section 4.04.

“Start Date” has the meaning set forth in Section 2.01.

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ARTICLE 2

EMPLOYMENT

SECTION 2.01. Employment. The Company shall employ the Executive, and the Executive shall accept employment with the Company, for the period beginning on June 8, 2009 (the “Start Date”) and ending as provided in Section 5.01 (the “Employment Period”).  If the Executive fails to satisfy the condition set forth in the preceding sentence, he shall forfeit all rights hereunder.

ARTICLE 3

POSITION AND DUTIES

SECTION 3.01. Position and Duties. During the Employment Period, the Executive shall serve as Senior Executive Vice President of the Company and President of the Financial and Professional Liability Products Division of the Company and shall have such responsibilities, powers and duties as may from time to time be prescribed by the Chairman and Chief Executive Officer of the Company; provided that such responsibilities, powers and duties are substantially consistent with those customarily assigned to individuals serving in such position at comparable companies or as may be reasonably required by the conduct of the business of the Company.  During the Employment Period the Executive shall devote substantially all of his working time and efforts to the business and affairs of the Company. The Executive shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or for-profit organization not related to the business of the Company or its Affiliates, whether for compensation or otherwise, without prior written consent of the Company.

ARTICLE 4

BASE SALARY AND BENEFITS

SECTION 4.01. Base Salary. During the Employment Period, the Executive’s base salary will be $450,000 per annum (the “Base Salary”). The Base Salary will be payable bi-monthly on the 15th and last working day of each month in arrears. Annually during the Employment Period the Company shall review with the Executive his job performance and compensation, and if deemed appropriate by the Company, in its discretion, the Executive’s Base Salary may be increased.

SECTION 4.02. Bonuses. In addition to the Base Salary, the Executive shall be eligible to participate in an annual bonus plan on terms set forth from time to time by the Board of Directors of the Company.  The Executive’s target annual bonus will be 100% of his Base Salary.

SECTION 4.03. Benefits. In addition to the Base Salary, and any bonuses payable to the Executive pursuant to this Agreement, the Executive shall be entitled to the following benefits during the Employment Period:

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(a) such major medical, life insurance and disability insurance coverage as is, or may during the Employment Period be, provided generally for other senior executive officers of the Company as set forth from time to time in the applicable plan documents;

(b) a maximum of 37 days of paid time-off (PTO days) per year (pro-rated for partial years) during the term of the Employment Period; and

(c) benefits under any plan or arrangement available generally for the senior executive officers of the Company, including the Executive Supplemental Non-Qualified Savings and Retirement Plan, subject to and consistent with the terms and conditions and overall administration of such plans as set forth from time to time in the applicable plan documents.

SECTION 4.04. Expenses. The Company shall reimburse the Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses (“Reimbursable Expenses”), subject to the Company’s requirements with respect to reporting and documentation of expenses.

SECTION 4.05.  Sign-On Share-Based Awards.  Subject to approval by the Board of Directors of Parent (“Board Approval”), on the Start Date, Parent shall grant to the Executive a share-settled share appreciation right (“SAR”) with respect to 7,500 of Parent’s common shares at an exercise price equal to the closing market price on the Start Date.  The other terms of the SAR shall be as set forth in the form of SAR Agreement attached hereto as Exhibit A.  Subject to Board Approval, on the Start Date, Parent shall also grant to the Executive 7,500 restricted common shares of Parent on the terms set forth in the form of Restricted Share Agreement attached hereto as Exhibit B.

SECTION 4.06.  Other Bonus Payments.  The Executive will be entitled to cash payments equal to the cash payment amounts (if any) he would have received from The Hartford, the employer for whom the Executive last worked prior to his employment by the Company, under the HFP Plans (as defined below) for accident years 2000 through 2008 as and when such payments would have been determined pursuant to the HFP Plans and regularly paid under such HFP Plans, but only to the extent that such bonuses are not paid by The Hartford; provided, however, that (a) each amount payable under this Section 4.06 (if any) will be objectively determined under the HFP Plans and will be based on the financial performance of the Hartford Financial Products division of The Hartford (“HFP”) for the applicable accident years as supported by a review of publicly available data, including, without limitation, applicable Schedules P, all as mutually agreed upon by the Company and the Executive, and any such amounts shall be paid by the Company without reduction for The Hartford’s refusal or inability to pay, including as a result of any restrictions imposed under the Troubled Asset Relief Program, (b) payment by the Company of any amount under this Section 4.06 (if any) shall be conditioned upon the Company receiving from the Executive documentary or other support for the amount of, and timing with respect to, any such payment, including, without limitation, the Documents (as defined below), which support shall be reasonably satisfactory to the Company in

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the good faith exercise of its discretion, (c) payment by the Company of any amount under this Section 4.06 (if any) shall be conditioned upon the Executive being employed by the Company at the time of such payment, unless the Executive’s employment with the Company shall have terminated due to an Unjustified Termination or death or Permanent Disability, and (d) the first possible payment under this Section 4.06 shall be on or after March 1, 2010.  For purposes hereof, (i) the “HFP Plans” mean the HFP 2007 Annual Incentive & Profit Contribution Plan (the “2007 Plan”) and the predecessor incentive compensation plan for HFP (the “Predecessor Plan”) and; and (ii) “Documents” mean letters dated May 2007, March 2008 and March 2009 relating to the Predecessor Plan and 2008 and 2009 Total Direct Compensation Statements relating to the 2007 Plan.  The Company is not requesting, and does not desire or expect the Executive to provide to it, any confidential or proprietary information of The Hartford in connection with this Section 4.06 (or otherwise).  The Executive represents that the most recent actuarial estimate by The Hartford of the value of Executive’s future cash payments under the HFP Plans is $3,425,000.

ARTICLE 5

TERM AND TERMINATION

SECTION 5.01. Term. The Employment Period will terminate on the fifth anniversary of the Start Date; provided that (a) the Employment Period shall terminate prior to such date upon the Executive’s death or Permanent Disability, (b) the Employment Period may be terminated by the Company for any reason prior to such date, and (c) the Employment Period may be terminated by the Executive at any time prior to such date, if such termination shall be for Good Reason. In addition, this Agreement will be automatically extended on the same terms and conditions for successive one year periods following the original term until either the Company or the Executive, at least ninety (90) days prior to the expiration of the original term or any extended term, shall give written notice of their intention not to renew the Agreement.

SECTION 5.02. Unjustified Termination. Except as otherwise provided in Section 12.09, if the Employment Period shall be terminated (i) at the end of the Employment Period due to the Company giving written notice of non-extension pursuant to Section 5.01 above, or (ii) prior to the expiration of the original term (or the Employment Period as extended pursuant to Section 5.01) by the Executive for Good Reason or by the Company not for Cause (such terminations under clauses (i) and (ii) of this Section 5.02 are collectively referred to as “Unjustified Terminations”), the Executive shall be paid solely (except as additionally provided in Section 5.04 below or the Company’s Incentive Compensation Plan or successor plan) his Base Salary earned through the date of termination of employment and an amount equal to the sum of (A) his annual Base Salary and (B) a pro-rated portion of the Executive’s target annual bonus based on the number of days elapsed in the calendar year through the Date of Termination, provided the Executive shall be entitled to such payments only if the Executive has not breached and does not breach the provisions of Sections 6.01, 7.01, 8.01 or 9.01 and the Executive has entered into a general release of claims reasonably satisfactory to the Company on or before the date that is fifty (50) days following the Date of Termination and does not revoke such release prior to the end of the statutory seven (7) day revocation period (it being understood that such general release will not require the Executive to release his rights under Sections 5.02

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and 5.04 of this Agreement and will not contain any employment restrictions or non-solicitation obligations other than those set forth in this Agreement).  Subject to Section 12.09 below, such amounts will be paid in twelve (12) equal installments, the first two (2) of which shall be paid on the date that is two (2) months following the Date of Termination and the next ten (10) of which will be paid in ten (10) equal monthly installments commencing on the date that is three (3) months following the Date of Termination and continuing on each of the next nine (9) monthly anniversaries of the Date of Termination.  In addition, promptly following an Unjustified Termination, the Executive shall also be reimbursed for all Reimbursable Expenses incurred by the Executive prior to such Unjustified Termination.  Notwithstanding any provision hereof to the contrary, in order for the Executive to terminate the Employment Period for Good Reason, such termination of employment must occur no later than sixty (60) days after the date the Executive gives written notice in accordance with Section 5.05 below to the Company of the occurrence of the event or condition that constitutes Good Reason.  Notwithstanding any provision of this Agreement to the contrary, for purposes of this Section 5.02 and the last sentence of Section 5.04, the Executive will be deemed to have terminated his employment on the date of his “separation from service” (within the meaning of Treasury Regulation Section 1.409A-1(h)) with the Company, the Employment Period will be deemed to have ended on the date of his “separation from service” with the Company, and the Date of Termination will be deemed to be the date of his “separation from service” with the Company.

SECTION 5.03. Justified Termination. If the Employment Period shall be terminated (i) prior to the expiration of the original term (or the Employment Period as extended pursuant to Section 5.01) (a) by the Company for Cause, (b) as a result of the Executive’s resignation or leaving of his employment, other than for Good Reason or (c) as a result of the death or Permanent Disability of the Executive, or (ii) at the end of the Employment Period as a result of the Executive’s provision of written notice not to extend the Employment Period under Section 5.01 (such terminations under clauses (i) and (ii) of this Section 5.03 are collectively referred to as “Justified Terminations”), the Executive shall be entitled to receive solely (except as additionally provided in Section 5.04 below or the Company’s Incentive Compensation Plan or successor plan) his Base Salary earned through the date of termination of employment and reimbursement of all Reimbursable Expenses incurred by the Executive prior to such Justified Termination.

SECTION 5.04. Benefits. Except as otherwise required by mandatory provisions of law, all of the Executive’s rights to fringe and other benefits under this Agreement or otherwise, if any, accruing after the termination of the Employment Period as a result of a Justified Termination will cease upon such Justified Termination.  Notwithstanding the foregoing, if such Justified Termination is a result of a Permanent Disability or if the Employment Period is terminated as a result of an Unjustified Termination, the Executive shall continue to receive his major medical insurance coverage benefits from the Company’s plan in effect at the time of such termination for a period equal to the lesser of (i) twelve (12) months after the Date of Termination, and (ii) until the Executive is provided by another employer with benefits substantially comparable (with no pre-existing condition limitations) to the benefits provided by such plan.

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SECTION 5.05.  Notice of Termination and Opportunity to Cure.  Any termination by the Company for Permanent Disability or Cause or without Cause or by the Executive for Good Reason shall be communicated by written Notice of Termination to the other party hereto.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the date the termination is to take effect (consistent with the terms of this Agreement), the specific termination provision in this Agreement relied upon and, for a termination for Permanent Disability or for Cause or for a resignation for Good Reason, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated.  It shall be a condition precedent to the Executive’s right to terminate employment for Good Reason that (i) the Executive shall first have given the Company written notice that an event or condition constituting Good Reason has occurred within ninety (90) days after such occurrence, and any failure to give such written notice within such period will result in a waiver by the Executive of his right to terminate for Good Reason as a result of such event or condition, and (ii) a period of thirty (30) days from and after the giving of such written notice shall have elapsed without the Company having effectively cured or remedied such occurrence during such 30-day period, unless such occurrence cannot be cured or remedied within thirty (30) days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed an additional fifteen (15) days) provided that the Company has made and continues to make a diligent effort to effect such remedy or cure.

SECTION 5.06.  Date of Termination.  “Date of Termination” shall mean (a) if the Employment Period is terminated as a result of a Permanent Disability, five (5) days after a Notice of Termination is given, (b) if the Employment Period is terminated by the Executive for Good Reason, the date specified in the Notice of Termination consistent with the terms hereof, (c) if the Employment Period terminates due to expiration of the term of this Agreement, the date the term expires, and (d) if the Employment Period is terminated for any other reason (including for Cause), the date designated by the Company in the Notice of Termination.

ARTICLE 6

CONFIDENTIAL INFORMATION

SECTION 6.01. Nondisclosure and Nonuse of Confidential Information. The Executive will not disclose or use at any time during or after the Employment Period any Confidential Information of which the Executive is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by the Executive’s performance of duties assigned to the Executive pursuant to this Agreement. Under all circumstances and at all times, the Executive will take all reasonably appropriate steps to safeguard Confidential Information in his possession and to protect it against disclosure, misuse, espionage, loss and theft.

ARTICLE 7

INTELLECTUAL PROPERTY

SECTION 7.01. Ownership of Intellectual Property. In the event that the Executive as part of his activities on behalf of the Company or its Affiliates generates, authors or contributes

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to any invention, design, new development, device, product, method of process (whether or not patentable or reduced to practice or comprising Confidential Information), any copyrightable work (whether or not comprising Confidential Information) or any other form of Confidential Information relating directly or indirectly to the business of the Company or its Affiliates as now or hereinafter conducted (collectively, “Intellectual Property”), the Executive acknowledges that such Intellectual Property is the sole and exclusive property of the Company and its Affiliates and hereby assigns all right title and interest in and to such Intellectual Property to the Company and its Affiliates. Any copyrightable work prepared in whole or in part by the Executive during the Employment Period will be deemed “a work made for hire” under Section 201(b) of the United States Copyright Act of 1976, as amended, and the Company and its Affiliates will own all of the rights comprised in the copyright therein. The Executive will promptly and fully disclose all Intellectual Property and will cooperate with the Company and its Affiliates to protect the interests of the Company and its Affiliates in and rights to such Intellectual Property (including providing reasonable assistance in securing patent protection and copyright registrations and executing all documents as reasonably requested by the Company or its Affiliates, whether such requests occur prior to or after termination of Executive’s employment hereunder).

ARTICLE 8

DELIVERY OF MATERIALS UPON TERMINATION OF EMPLOYMENT

SECTION 8.01. Delivery of Materials upon Termination of Employment. As requested by the Company, from time to time and upon the termination of the Executive’s employment with the Company for any reason, the Executive will promptly deliver to the Company all property of the Company and its Affiliates in the Executive’s possession or within his control, including, without limitation, all copies and embodiments, in whatever form or medium, of all Confidential Information or Intellectual Property (including written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information or Intellectual Property), irrespective of the location or form of such property and, if requested by the Company, will provide the Company with written confirmation that all such property have been delivered to the Company.

ARTICLE 9

NONSOLICITATION

SECTION 9.01. Nonsolicitation.  The Executive acknowledges that during his employment with the Company, he will become familiar with trade secrets and other Confidential Information concerning the Company, its Affiliates and their respective predecessors, and that his services will be of special, unique and extraordinary value to the Company.  The Executive hereby agrees that (a) during the Employment Period and for a period of one (1) year after the date of termination of employment (the “Nonsolicitation Period”) the Executive will not, directly or indirectly, induce or attempt to induce any employee of the Company or its Affiliates to leave the employ of the Company or its Affiliates, or in any way

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interfere with the relationship between the Company or its Affiliates and any employee thereof or otherwise employ or receive the services of any individual who was an employee of the Company or its Affiliates at any time during such Nonsolicitation Period or within the six-month period prior thereto, and (b) during the Nonsolicitation Period, the Executive will not induce or attempt to induce any customer, supplier, client, insured, reinsured, reinsurer, broker, agent, licensee or other business relation of the Company or its Affiliates to cease doing business with the Company or its Affiliates.

SECTION 9.02. Enforcement. If, at the enforcement of Section 9.01, a court holds that the duration or scope stated therein are unreasonable under circumstances then existing, the parties agree that the maximum duration and scope reasonable under such circumstances will be substituted for the stated duration or scope and that the court will be permitted to revise the restrictions contained in this Article 9 to cover the maximum duration and scope permitted by law.

ARTICLE 10

EQUITABLE RELIEF

SECTION 10.01. Equitable Relief. The Executive acknowledges that (a) the covenants contained herein are reasonable, (b) the Executive’s services are unique, and (c) a breach or threatened breach by him of any of his covenants and agreements with the Company and its Affiliates contained in Sections 6.01, 7.01, 8.01 or 9.01 could cause irreparable harm to the Company or its Affiliates for which they would have no adequate remedy at law. Accordingly, and in addition to any remedies which the Company and its Affiliates may have at law, in the event of an actual or threatened breach by the Executive of his covenants and agreements contained in Sections 6.01, 7.01, 8.01 or 9.01, the Company and its Affiliates shall have the absolute right to apply to any court of competent jurisdiction for such injunctive or other equitable relief as such court may deem necessary or appropriate in the circumstances.

ARTICLE 11

EXECUTIVE REPRESENTATIONS

SECTION 11.01. Executive Representations. The Executive hereby represents and warrants to the Company that (a) the execution, delivery and performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which he is bound, (b) the Executive is not a party to or bound by any employment agreement, noncompetition agreement or confidentiality agreement with any other Person that affects his right or ability to perform the duties contemplated by this Agreement, (c) the Executive did not, while working for any employer other than the Company:  solicit clients, or potential clients, of such employer, for the Company; or take any type of information that is proprietary information of such employer, and (d) upon the execution and delivery of this Agreement by the Company, this Agreement will be the valid and binding obligation of the Executive, enforceable in accordance with its terms.

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ARTICLE 12

MISCELLANEOUS

SECTION 12.01. Remedies. The Company will have all rights and remedies set forth in this Agreement, all rights and remedies which the Company has been granted at any time under any other agreement or contract and all of the rights which the Company has under any law. The Company will be entitled to enforce such rights specifically, without posting a bond or other security, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. There are currently no disciplinary or grievance procedures in place, there is no collective agreement in place, and there is no probationary period.

SECTION 12.02. Consent to Amendments. The provisions of this Agreement may be amended or waived only by a written agreement executed and delivered by the Company and the Executive. No other course of dealing between the parties to this Agreement or any delay in exercising any rights hereunder will operate as a waiver of any rights of any such parties.

SECTION 12.03. Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not, provided that the Executive may not assign his rights or delegate his obligations under this Agreement without the written consent of the Company.

SECTION 12.04. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

SECTION 12.05. Counterparts. This Agreement may be executed simultaneously in two counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.

SECTION 12.06. Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

SECTION 12.07. Notices.  All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and shall be delivered personally by hand, by electronic transmission (with a copy following by hand or by overnight courier), by registered or certified mail, postage prepaid, return receipt requested, or by overnight courier service (charges prepaid).  Communications delivered personally by hand shall be deemed received on the date when delivered personally to the recipient; communications sent by electronic means shall be deemed received one (1) business day after the sending thereof; communications sent by registered or certified mail shall be deemed received four (4) business days after the sending thereof; and communications delivered by overnight courier shall be

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deemed received one (1) business day after the date when sent to the recipient.  Such notices, demands and other communications will be sent to the Executive and to the Company at the addresses set forth below.

If to the Executive:	To the last address delivered to the Company by the Executive in the manner set forth herein.
If to the Company:	Arch Insurance Group Inc.
	300 Plaza III, 3rd Floor
	Jersey City, New Jersey 07311
	Attn: General Counsel

or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party.

SECTION 12.08. Withholding. The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

SECTION 12.09.  It is intended that this Agreement will comply with Sections 409A and 457A of the Internal Revenue Code of 1986, as amended (the “Code”) (and any regulations and guidelines issued thereunder), to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent.  If an amendment of the Agreement is necessary in order for it to comply with Section 409A or Section 457A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible.  No action or failure to act, pursuant to this Section 12.09 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Executive from the obligation to pay any taxes, interest or penalties pursuant to Section 409A or Section 457A of the Code.

Notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of his “separation from service” (within the meaning of Treasury Regulation Section 1.409A-1(h)) to be a “specified employee” within the meaning of that term under Section 409A(a)(2)(B) of the Code, then with regard to any payment that is required to be delayed pursuant to Section 409A(a)(2)(B) of the Code (after taking into account the applicable provisions of Treasury Regulation Section 1.409A-1(b)(9)(iii)), the portion, if any, of such payment so required to be delayed shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of his “separation from service” or (ii) the date of his death (the “Delay Period”).  Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments due under this Agreement shall be paid in accordance with the normal payment dates specified for them herein.  Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Section 409A of the Code.  In no case will compliance with this Section by the Company constitute a breach of the Company’s obligations under this

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Agreement.

With respect to any reimbursement or in-kind benefit arrangements of the Company and its subsidiaries that constitute deferred compensation for purposes of Section 409A, except as otherwise permitted by Section 409A, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided, under any such arrangement in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, under such arrangement in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.

SECTION 12.10.  Excess Parachute Payments.

(a)Notwithstanding any other provision of this Agreement, in the event that the amount of payments or other benefits payable to the Executive under this Agreement (including, without limitation, the acceleration of any payment or the accelerated vesting of any payment or other benefit), together with any payments, awards or benefits payable under any other plan, program, arrangement or agreement maintained by the Company or one of its Affiliates, would constitute an “excess parachute payment” (within the meaning of Section 280G of the Code), the payments under Section 5.02 of this Agreement shall be reduced (by the minimum possible amounts) until no amount payable to the Executive under this Agreement constitutes an “excess parachute payment” (within the meaning of Section 280G of the Code); provided, however, that no such reduction shall be made if the net after-tax payment (after taking into account federal, state, local or other income, employment and excise taxes) to which the Executive would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account federal, state, local or other income, employment and excise taxes) to the Executive resulting from the receipt of such payments with such reduction.

(b)All determinations required to be made under this Section 12.10, including whether a payment would result in an “excess parachute payment” and the assumptions to be utilized in arriving at such determinations, shall be made by an accounting firm designated by the Company (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive as requested by the Company or the Executive.  All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company.  Absent manifest error, all determinations made by the Accounting Firm under this Section 12.10 shall be final and binding upon the Company and the Executive.

SECTION 12.11.  Indemnification.  Provided that (i) the Executive’s representations to the Company contained in Section 11.01 are true and complete, and (ii) that the Executive at all times has complied with the Company’s instructions not to take any type of information that is proprietary information of any employer other than the Company, the Company will indemnify the Executive and hold the Executive harmless against any liability, including reasonable attorneys’ fees, incurred by the Executive as a result of a claim by The Hartford, the Executive’s former employer, arising out of the Executive’s conduct or actions taken in preparation for, or in

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connection with, the Executive’s commencement of employment with the Company.  At the Company’s option, it may, with counsel of its choice, assume the defense of any such claim.  Any settlement of any such claim, regardless of by whom defended, must be approved in advance by the Company.

SECTION 12.12.  Attorneys’ Fees.  The Company will pay the reasonable attorneys’ fees billed by Friedman Kaplan Seiler & Adelman LLP and incurred in connection with the Executive’s commencement of employment with the Company, including in connection with the negotiation of this Agreement.

SECTION 12.13. No Third Party Beneficiary. This Agreement will not confer any rights or remedies upon any person other than the Company and its Affiliates, the Executive and their respective heirs, executors, successors and assigns.

SECTION 12.14. Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof.

SECTION 12.15. Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. Any reference to any federal, state, local or foreign statute or law will be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The use of the word “including” in this Agreement means including without limitation and is intended by the parties to be by way of example rather than limitation.

SECTION 12.16. Survival. Sections 6.01, 7.01, 8.01 and Articles 9, 10, 11 and 12 will survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period.

SECTION 12.17. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

SECTION 12.18. Jurisdiction. The parties agree to the nonexclusive jurisdiction of the federal and state courts situated in New York County, New York, for the resolution of any dispute arising under this Agreement or under any share-based award agreements between the Company and the Executive.

13

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

ARCH INSURANCE GROUP INC.
By:	/s/ Mark D. Lyons
Printed Name: Mark D. Lyons
Title: Chairman and Chief Executive Officer
/s/ David McElroy
Name:  David McElroy

14

Exhibit A

Form of SAR Agreement

Exhibit B

Form of Restricted Share Agreement

EX-10.4

EXHIBIT 10.4

AMENDMENT TO EMPLOYMENT AGREEMENT

Amendment (“Amendment”), dated July 25, 2012, to the Employment Agreement, dated as of June 5, 2009 (the “Agreement”), among, Arch Insurance Group Inc., a Delaware corporation (the “Company”) and David McElroy (the “Executive”).  Capitalized terms used without definition herein have the meanings given to them in the Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties have agreed to amend the Agreement as follows:

1.The first sentence of Section 3.01 shall be hereby amended and restated as follows:

“During the Employment Period, the Executive shall serve as Chairman and Chief Executive Officer of the Company and shall have such responsibilities, powers and duties as may from time to time be prescribed by the Board of Directors of the Company; provided that such responsibilities, powers and duties are substantially consistent with those customarily assigned to individuals serving in such position at comparable companies or as may be reasonably required by the conduct of the business of the Company.”

2.The first sentence of Section 4.01 shall be hereby amended and restated as follows:

“During the Employment Period, the Executive’s base salary will be $600,000 per annum (the “Base Salary”).”

3.SECTION 4.07 shall be hereby added to the Agreement as follows:

“SECTION 4.07.  Retention Shared-Based Awards.  Subject to approval (“Board Approval”) by the Board of Directors of Arch Capital Group Ltd. (“Parent”), the Parent shall grant to the Executive share appreciation rights with respect to 25,000 of the Company’s common shares at an exercise price equal to the closing market price on the date of such Board Approval (the “Grant Date”), which award will vest in full on the fifth anniversary of the Grant Date.  Subject to Board Approval, on the Grant Date, the Company shall also grant to the Executive 25,000 restricted common share units of the Company, which will vest in full on the fifth anniversary of the Grant Date and the shares under such award would not be transferred to him until his separation from service, as provided in the applicable award agreement.  The other terms of such share-based awards shall be as set forth in the applicable award agreements as approved by the Board of Directors of the Company.”

5.SECTION 5.01 shall be hereby amended and restated as follows:

“SECTION 5.01.  Term.  The Employment Period will terminate on third anniversary of the date hereof; provided that (a) the Employment Period shall terminate prior to such date upon the Executive’s death or Permanent Disability, (b) the Employment

Period may be terminated by the Companies for any reason prior to such date, and (c) the Employment Period may be terminated by the Executive at any time prior to such date, if such termination shall be for Good Reason.  In addition, this Agreement will be automatically extended on the same terms and conditions for successive one year periods following the original term until either the Companies or the Executive, at least ninety (90) days prior to the expiration of the original term or any extended term, shall give written notice of their intention not to renew the Agreement.”

6.ARTICLE 9 shall be hereby amended as restated as follows:

“ARTICLE 9

NONCOMPETITION AND NONSOLICITATION

SECTION 9.01. Noncompetition. The Executive acknowledges that during his employment with the Company, he will become familiar with trade secrets and other Confidential Information concerning the Company and its Affiliates and their respective predecessors, and that his services will be of special, unique and extraordinary value to the Company.  In addition, the Executive hereby agrees that at any time during the Employment Period, and for a period ending two (2) year after the termination of the Executive’s employment  (the “Noncompetition Period”), he will not directly or indirectly own, manage, control, participate in, consult with, render services for or in any manner engage in any business competing with the businesses of the Company or its Affiliates as such businesses exist or are in process as of the date of termination, within any geographical area in which the Company or its Affiliates engage or plan to engage in such businesses.  It shall not be considered a violation of this Section 9.01 for the Executive to be a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as the Executive has no active participation in the business of such corporation.

SECTION 9.02. Nonsolicitation. The Executive acknowledges that during his employment with the Company, he will become familiar with trade secrets and other Confidential Information concerning the Company, its Affiliates and their respective predecessors, and that his services will be of special, unique and extraordinary value to the Company.  The Executive hereby agrees that (a) during the Employment Period and for a period of two (2) year after the date of termination of employment (the “Nonsolicitation Period”) the Executive will not, directly or indirectly, induce or attempt to induce any employee of the Company or its Affiliates to leave the employ of the Company or its Affiliates, or in any way interfere with the relationship between the Company or its Affiliates and any employee thereof or otherwise employ or receive the services of any individual who was an employee of the Company or its Affiliates at the Date of Termination or within the six-month period prior thereto, and (b) during the Nonsolicitation Period, the Executive will not induce or attempt to induce any customer, supplier, client, insured, reinsured, reinsurer, broker, licensee or other business relation of

2

the Company or its Affiliates to cease doing business with the Company or its Affiliates.

SECTION 9.03. Enforcement. If, at the enforcement of Sections 9.01 or 9.02, a court holds that the duration or scope stated therein are unreasonable under circumstances then existing, the parties agree that the maximum duration and scope reasonable under such circumstances will be substituted for the stated duration or scope and that the court will be permitted to revise the restrictions contained in this Article 9 to cover the maximum duration and scope permitted by law.”

7.All other provisions of the Agreement shall remain in full force and effect.  This amendment shall be governed by and construed in accordance with the laws of New York, without giving effect to principles of conflict of laws, and may be executed in two or more counterparts, each of which shall constitute one and the same instrument.

3

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.

ARCH INSURANCE GROUP INC.
By:	/s/ Mark D. Lyons
Printed Name:	Mark D. Lyons
Title:	Chairman and Chief Executive Officer
/s/ David McElroy
David McElroy

4

EX-15

Exhibit 15

August 8, 2012

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

Commissioners:

We are aware that our report dated August 8, 2012 on our review of interim financial information of Arch Capital Group Ltd. and its subsidiaries (the “Company”) for the three-month periods ended June 30, 2012 and June 30, 2011 and included in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2012 is incorporated by reference in the Registration Statement on Forms S-3 (Registration No. 333-158309, Registration No. 333-34499, Registration No. 333-82612, Registration No. 333-110190, Registration No. 333-117099, RegistrationNo. 333-135421 and Registration No. 333-180329) and in the Registration Statements on Forms S-8 (Registration No. 033-99974, Registration No. 333-86145, Registration No. 333-72182, Registration No. 333-82772, Registration No. 333-98971, Registration No. 333-124422 and Registration No. 333-142835).

Very truly yours,

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017

T: (646) 471 3000, F: (646) 471 8320, www.pwc.com/us

EX-31.1

Exhibit 31.1

Certification
of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Constantine Iordanou, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	August 8, 2012
By:	/s/ Constantine Iordanou
Name:	Constantine Iordanou
Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification
of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, John C.R. Hele, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:	August 8, 2012
By:	/s/ John C.R. Hele
Name:	John C.R. Hele
Title:	Executive Vice President, Chief Financial Officer
	and Treasurer

EX-32.1

Exhibit 32.1

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

In connection with the Quarterly Report of Arch Capital Group Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Constantine Iordanou, as President and Chief Executive Officer of the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: August 8, 2012

/s/ Constantine Iordanou

Constantine Iordanou

President and Chief Executive Officer

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

EX-32.2

Exhibit 32.2

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

In connection with the Quarterly Report of Arch Capital Group Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John C.R. Hele, as Executive Vice President, Chief Financial Officer and Treasurer of the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Date: August 8, 2012

/s/ John C.R. Hele

John C.R. Hele

Executive Vice President,

Chief Financial Officer and Treasurer

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

XML

Investment Information (Details - Restricted Assets) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Restricted Assets [Line Items]
Total restricted assets	$ 5,703,532	$ 5,597,953
Collateral or guarantees - affiliated transactions
Restricted Assets [Line Items]
Total restricted assets	4,426,250	4,321,535
Collateral or guarantees - third party agreements
Restricted Assets [Line Items]
Total restricted assets	684,455	757,669
Deposits with US regulatory authorities
Restricted Assets [Line Items]
Total restricted assets	288,163	288,458
Deposits with non-US regulatory authorities
Restricted Assets [Line Items]
Total restricted assets	223,134	169,733
Trust funds
Restricted Assets [Line Items]
Total restricted assets	$ 81,530	$ 60,558

XML

Investment Information (Details - Maturity Profile of Available For Sale Securities) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Estimated Fair Value:
Estimated fair value	$ 11,360,708		$ 10,873,912
Amortized Cost:
Amortized cost	11,111,022		10,663,518
Fixed maturities and fixed maturities pledged under securities lending agreements
Estimated Fair Value:
Due in one year or less	491,380		486,986
Due after one year through five years	3,434,433		2,850,578
Due after five years through 10 years	2,218,284		2,532,834
Due after 10 years	284,656		345,755
Subtotal	6,428,753		6,216,153
Estimated fair value	9,630,358	[1]	9,431,998	[1]
Amortized Cost:
Due in one year or less	483,860		476,734
Due after one year through five years	3,356,501		2,793,982
Due after five years through 10 years	2,125,636		2,441,800
Due after 10 years	273,095		326,451
Subtotal	6,239,092		6,038,967
Amortized cost	9,397,252	[1]	9,219,958	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Estimated Fair Value:
Securities without single maturity date	1,670,108		1,592,762
Estimated fair value	1,670,108	[1]	1,592,762	[1]
Amortized Cost:
Securities without single maturity date	1,664,651		1,588,355
Amortized cost	1,664,651	[1]	1,588,355	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Estimated Fair Value:
Securities without single maturity date	961,326		1,046,326
Estimated fair value	961,326	[1]	1,046,326	[1]
Amortized Cost:
Securities without single maturity date	932,053		1,020,450
Amortized cost	932,053	[1]	1,020,450	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Estimated Fair Value:
Securities without single maturity date	570,171		576,757
Estimated fair value	570,171	[1]	576,757	[1]
Amortized Cost:
Securities without single maturity date	561,456		572,186
Amortized cost	$ 561,456	[1]	$ 572,186	[1]

[1] In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For the purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.

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Derivative Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Derivative Instruments

Summarized information on the fair value and notional values and their financial statement impact

		Asset Derivatives				Liability Derivatives
		Estimated Fair Value		Notional Value		Estimated Fair Value		Notional Value
At June 30, 2012
Futures contracts		$	606	$	100,200	$	(1,080)	$	385,900
Foreign currency forward contracts			7,346		274,793		(3,000)		181,832
TBAs			272,555		255,100		(320,270)		295,800
Other			344		10,235		(352)		30,381
	Total	$	280,851			$	(324,702)
At December 31, 2011
Futures contracts		$	771	$	364,035	$	(145)	$	16,275
Foreign currency forward contracts			11,937		352,992		(6,558)		253,733
TBAs			23,661		23,000		(2,178)		2,000
Other			4,005		187,613		(2,048)		309,931
	Total	$	40,374			$	(10,929)

		Three Months Ended				Six Months Ended
Derivatives not designated as		June 30,				June 30,
hedging instruments		2012		2011		2012		2011
Futures contracts		$	(2,322)	$	4,774	$	(4,343)	$	3,373
Foreign currency forward contracts			938		(2,467)		(943)		(16,393)
TBAs			1,419		6,896		1,742		8,502
Other			242		(6,027)		(848)		(3,626)
	Total	$	277	$	3,176	$	(4,392)	$	(8,144)

XML

Fair Value (Details - Level 3 Rollforward) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	$ 102,870		$ 177,246		$ 97,215		$ 161,367
Total realized and unrealized investment gains (losses) included in earnings	(548)	[1]	9,281	[1]	1,864	[1]	15,373	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	(3,861)		(14,020)		(497)		(3,305)
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		(71)		0		(666)
Settlements	(39)		(51)		(160)		(384)
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	98,422		172,385		98,422		172,385
Corporate bonds
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	96,655		169,045		92,091		153,509
Total realized and unrealized investment gains (losses) included in earnings	(548)	[1]	7,893	[1]	1,783	[1]	13,664	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	(4,032)		(12,431)		(1,759)		(2,333)
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		0		0		0
Settlements	(39)		(51)		(79)		(384)
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	92,036		164,456		92,036		164,456
Other Investments
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	6,215		8,201		5,124		7,858
Total realized and unrealized investment gains (losses) included in earnings	0	[1]	1,388	[1]	81	[1]	1,709	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	171		(1,589)		1,262		(972)
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		(71)		0		(666)
Settlements	0		0		(81)		0
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	$ 6,386		$ 7,929		$ 6,386		$ 7,929

[1] Gains or losses on corporate bonds and other investments were recorded in net realized gains (losses).

XML

Investment Information (Details - Other Than Temporary Impairments Recognized In Earnings) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	$ 1,951	$ 1,684	$ 2,974	$ 4,364
Fixed maturities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	1,689	1,310	2,631	2,797
Fixed maturities | Corporate bonds
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	1,166	0	1,362	359
Fixed maturities | Mortgage backed securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	146	1,310	892	2,428
Fixed maturities | Non-US government securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	261	0	261	0
Fixed maturities | Asset backed securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	106	0	106	10
Fixed maturities | US government and government agencies
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	10	0	10	0
Investment of funds received under securities lending arrangements
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	6	374	87	1,230
Equity securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	$ 256	$ 0	$ 256	$ 337

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Share Transactions

6 Months Ended

Jun. 30, 2012

Stockholders' Equity Note [Abstract]

Share Transactions

2.       Share Transactions

Share Repurchases

The board of directors of ACGL has authorized the investment 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. During the 2012 periods, ACGL did not repurchase any common shares, compared to 0.9 million common shares for an aggregate purchase price of $29.6 million during the 2011 second quarter and 8.9 million common shares for an aggregate purchase price of $266.7 during the six months ended June 30, 2011.At June 30, 2012, $942.0 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

Preferred Share Offering

On April 2, 2012, the Company completed the underwritten public offering of $325 million of its 6.75% Series C non-cumulative preferred shares. Except in specified circumstances relating to certain tax or corporate events, the Series C non-cumulative preferred shares are not redeemable prior to April 2, 2017. The net proceeds from the offering of approximately $316 million and other available funds were used to redeem all of the Company's $200 million of 8.0% Series A preferred shares and $125 million of 7.875% Series B preferred shares on May 2, 2012. The preferred shares were redeemed at a redemption price equal to $25.00 per share, plus all declared and unpaid dividends to (but excluding) the redemption date.

Share-Based Compensation

During the 2012 second quarter, the Company made a stock grant of 782,248 stock appreciation rights and stock options and 728,864 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2012 second quarter were approximately $9.91 and $38.59 per share, respectively. During the 2011 second quarter, the Company made a stock grant of 697,632 stock appreciation rights and stock options and 727,641 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2011 second quarter were approximately $9.75 and $33.91 per share, respectively. The stock appreciation rights and stock options were valued at the grant date using the Black-Scholes option pricing model. Such values are being amortized over the respective substantive vesting period. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date.

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Fair Value (Details - Text Items) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 quotes	Jun. 30, 2011	Dec. 31, 2011 quotes
Fair Value Disclosures Text Items [Abstract]
Average quotes per investment			2.8		2.8
Total assets and liabilities measured at fair value	$ 12,410,000,000		$ 12,410,000,000		$ 11,970,000,000
Total assets and liabilities measured at fair value priced using non binding broker quotes	1,390,000,000		1,390,000,000		1,190,000,000
Percentage of total assets and liabilities measured at fair value priced using non-binding broker quotes			11.20%		9.90%
Fair value, assets measured on recurring basis, gain (loss) included in net realized gains (losses)	500,000	9,300,000	1,900,000	15,100,000
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fair value of senior notes	374,100,000		374,100,000
Carrying value of senior notes	$ 300,000,000		$ 300,000,000		$ 300,000,000

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Earnings Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Numerator:
Net income	$ 220,268		$ 96,603		$ 384,524		$ 122,076
Preferred dividends	(7,649)		(6,461)		(14,110)		(12,922)
Net income available to common shareholders	$ 212,619		$ 90,142		$ 370,414		$ 109,154
Denominator
Weighted average common shares outstanding - basic	134,529,129		131,232,269		134,241,876		132,359,493
Nonvested restricted shares	800,455		931,305		909,524		1,040,514
Stock options	2,882,152	[1]	5,812,025	[1]	2,866,090	[1]	5,834,924	[1]
Weighted average common shares and common share equivalents outstanding diluted	138,211,736		137,975,599		138,017,490		139,234,931
Earnings per common share:
Basic	$ 1.58		$ 0.69		$ 2.76		$ 0.82
Diluted	$ 1.54		$ 0.65		$ 2.68		$ 0.78
Stock Options
Notes:
Antidilutive securities excluded from computation of earnings per share, amount	912,056		430,758		688,634		223,063

[1] Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive.

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Commitment and Contingencies (Details) (USD $)	6 Months Ended
	Jun. 30, 2012
Investment commitments:
Estimated investment commitments	$ 537,000,000
Other secured letter of credit facilities
Letter of credit and revolving credit facilities:
Line of credit facilitiy, maximum borrowing capacity	81,000,000
Credit Agreement
Letter of credit and revolving credit facilities:
Line of credit facility, amount outstanding	100,000,000
Maturity date of facility	2014-08-18
Unsecured revolving loan and letter of credit facility
Letter of credit and revolving credit facilities:
Line of credit facilitiy, maximum borrowing capacity	300,000,000
Secured letter of credit facility
Letter of credit and revolving credit facilities:
Line of credit facilitiy, maximum borrowing capacity	500,000,000
LOC Facilities
Letter of credit and revolving credit facilities:
Line of credit facility, amount outstanding	445,400,000
Investments pledged as collateral	$ 514,400,000

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Derivative Instruments (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended						3 Months Ended		6 Months Ended						3 Months Ended		6 Months Ended						3 Months Ended		6 Months Ended						3 Months Ended		6 Months Ended
	Jun. 30, 2012 Net realized gains (losses)	Jun. 30, 2011 Net realized gains (losses)	Jun. 30, 2012 Net realized gains (losses)	Jun. 30, 2011 Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument	Dec. 31, 2011 Not designated as hedging instrument	Jun. 30, 2012 Not designated as hedging instrument Futures contracts	Dec. 31, 2011 Not designated as hedging instrument Futures contracts	Jun. 30, 2012 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Futures contracts Other investments	Dec. 31, 2011 Not designated as hedging instrument Futures contracts Other investments	Jun. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts	Dec. 31, 2011 Not designated as hedging instrument Foreign currency forward contracts	Jun. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Other investments	Dec. 31, 2011 Not designated as hedging instrument Foreign currency forward contracts Other investments	Jun. 30, 2012 Not designated as hedging instrument TBA	Dec. 31, 2011 Not designated as hedging instrument TBA	Jun. 30, 2012 Not designated as hedging instrument TBA Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument TBA Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument TBA Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument TBA Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument TBA Fixed maturities	Dec. 31, 2011 Not designated as hedging instrument TBA Fixed maturities	Jun. 30, 2012 Not designated as hedging instrument Other	Dec. 31, 2011 Not designated as hedging instrument Other	Jun. 30, 2012 Not designated as hedging instrument Other Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Other Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Other Net realized gains (losses)	Jun. 30, 2011 Not designated as hedging instrument Other Net realized gains (losses)	Jun. 30, 2012 Not designated as hedging instrument Other Other investments	Dec. 31, 2011 Not designated as hedging instrument Other Other investments
Asset Derivatives
Estimated Fair Value					$ 280,851	$ 40,374							$ 606	$ 771							$ 7,346	$ 11,937							$ 272,555	$ 23,661							$ 344	$ 4,005
Notional Value							100,200	364,035							274,793	352,992							255,100	23,000							10,235	187,613
Liabilities Derivatives
Estimated Fair Value					(324,702)	(10,929)							(1,080)	(145)							(3,000)	(6,558)							(320,270)	(2,178)							(352)	(2,048)
Notional Value							385,900	16,275							181,832	253,733							295,800	2,000							30,381	309,931
Derivative Instruments, Gain (Loss) Recognized in Income, Net [Abstract]
Net realized gains or losses recorded on derivative instruments	$ 277	$ 3,176	$ (4,392)	$ (8,144)					$ (2,322)	$ 4,774	$ (4,343)	$ 3,373					$ 938	$ (2,467)	$ (943)	$ (16,393)					$ 1,419	$ 6,896	$ 1,742	$ 8,502					$ 242	$ (6,027)	$ (848)	$ (3,626)

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Segment Reporting Information [Line Items]
Gross premiums written	$ 1,051,813	[1]	$ 911,939	[1]	$ 2,118,469	[1]	$ 1,876,505	[1]
Net premiums written	820,233		706,543		1,683,844		1,470,821
Net premiums earned	726,656		642,879		1,406,968		1,276,574
Fee income	806		784		1,349		1,599
Losses and loss adjustment expenses	(399,693)		(431,622)		(794,900)		(925,502)
Acquisition expenses, net	(128,289)		(110,639)		(247,251)		(219,393)
Other operating expenses	(105,757)		(101,445)		(205,250)		(197,301)
Underwriting income (loss)	93,723		(43)		160,916		(64,023)
Net investment income	73,608		86,671		147,905		174,978
Net realized gains	34,867		45,210		78,988		65,905
Net impairment losses recognized in earnings	(1,951)		(1,684)		(2,974)		(4,364)
Equity in net income of investment funds accounted for using the equity method	7,787		5,973		32,613		35,646
Other income (loss)	695		(4,265)		(7,373)		302
Other expenses	(11,944)		(11,397)		(18,923)		(18,423)
Interest expense	(7,439)		(7,758)		(14,960)		(15,479)
Net foreign exchange gains (losses)	31,689		(18,375)		11,001		(55,287)
Income before income taxes	221,035		94,332		387,193		119,255
Income tax (expense) benefit	(767)		2,271		(2,669)		2,821
Net income	220,268		96,603		384,524		122,076
Preferred dividends	(7,649)		(6,461)		(14,110)		(12,922)
Net income available to common shareholders	212,619		90,142		370,414		109,154
Underwriting ratios:
Loss ratio	55.00%		67.10%		56.50%		72.50%
Acquisition expense ratio	17.60%	[2]	17.10%	[2]	17.50%	[2]	17.10%	[2]
Other operating expense ratio	14.60%		15.80%		14.60%		15.50%
Combined ratio	87.20%		100.00%		88.60%		105.10%
Insurance
Segment Reporting Information [Line Items]
Gross premiums written	676,090	[1]	635,005	[1]	1,364,203	[1]	1,269,588	[1]
Net premiums written	464,584		438,263		955,264		887,554
Net premiums earned	446,594		410,819		888,334		818,410
Fee income	628		702		1,158		1,480
Losses and loss adjustment expenses	(290,416)		(301,642)		(593,580)		(599,365)
Acquisition expenses, net	(76,058)		(66,543)		(149,928)		(127,958)
Other operating expenses	(76,617)		(77,774)		(149,987)		(152,403)
Underwriting income (loss)	4,131		(34,438)		(4,003)		(59,836)
Underwriting ratios:
Loss ratio	65.00%		73.40%		66.80%		73.20%
Acquisition expense ratio	16.90%	[2]	16.00%	[2]	16.70%	[2]	15.50%	[2]
Other operating expense ratio	17.20%		18.90%		16.90%		18.60%
Combined ratio	99.10%		108.30%		100.40%		107.30%
Reinsurance
Segment Reporting Information [Line Items]
Gross premiums written	376,981	[1]	277,766	[1]	756,957	[1]	608,779	[1]
Net premiums written	355,649		268,280		728,580		583,267
Net premiums earned	280,062		232,060		518,634		458,164
Fee income	178		82		191		119
Losses and loss adjustment expenses	(109,277)		(129,980)		(201,320)		(326,137)
Acquisition expenses, net	(52,231)		(44,096)		(97,323)		(91,435)
Other operating expenses	(29,140)		(23,671)		(55,263)		(44,898)
Underwriting income (loss)	$ 89,592		$ 34,395		$ 164,919		$ (4,187)
Underwriting ratios:
Loss ratio	39.00%		56.00%		38.80%		71.20%
Acquisition expense ratio	18.60%	[2]	19.00%	[2]	18.80%	[2]	20.00%	[2]
Other operating expense ratio	10.40%		10.20%		10.70%		9.80%
Combined ratio	68.00%		85.20%		68.30%		101.00%

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

[2] The acquisition expense ratio is adjusted to include policy-related fee income.

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Investment Information (Details - Summary of Available For Sale Securities) (USD $) In Thousands, unless otherwise specified	6 Months Ended		12 Months Ended
	Jun. 30, 2012		Dec. 31, 2011
Available for sale securities:
Estimated fair value	$ 11,360,708		$ 10,873,912
Gross unrealized gains	338,225		328,343
Gross unrealized losses	(88,539)		(117,949)
Cost or amortized cost	11,111,022		10,663,518
OTTI unrealized losses	(23,052)	[1]	(29,051)	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements
Available for sale securities:
Estimated fair value	9,630,358	[2]	9,431,998	[2]
Gross unrealized gains	295,305	[2]	296,743	[2]
Gross unrealized losses	(62,199)	[2]	(84,703)	[2]
Cost or amortized cost	9,397,252	[2]	9,219,958	[2]
OTTI unrealized losses	(23,052)	[1],[2]	(29,051)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Available for sale securities:
Estimated fair value	2,519,832	[2]	2,596,118	[2]
Gross unrealized gains	92,282	[2]	79,407	[2]
Gross unrealized losses	(11,533)	[2]	(29,922)	[2]
Cost or amortized cost	2,439,083	[2]	2,546,633	[2]
OTTI unrealized losses	(716)	[1],[2]	(1,138)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Available for sale securities:
Estimated fair value	1,670,108	[2]	1,592,762	[2]
Gross unrealized gains	23,743	[2]	27,633	[2]
Gross unrealized losses	(18,286)	[2]	(23,226)	[2]
Cost or amortized cost	1,664,651	[2]	1,588,355	[2]
OTTI unrealized losses	(14,772)	[1],[2]	(20,466)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Available for sale securities:
Estimated fair value	1,542,262	[2]	1,430,565	[2]
Gross unrealized gains	67,946	[2]	77,977	[2]
Gross unrealized losses	(1,541)	[2]	(886)	[2]
Cost or amortized cost	1,475,857	[2]	1,353,474	[2]
OTTI unrealized losses	(65)	[1],[2]	(105)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Available for sale securities:
Estimated fair value	961,326	[2]	1,046,326	[2]
Gross unrealized gains	31,685	[2]	28,780	[2]
Gross unrealized losses	(2,412)	[2]	(2,904)	[2]
Cost or amortized cost	932,053	[2]	1,020,450	[2]
OTTI unrealized losses	(3,259)	[1],[2]	(3,259)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Available for sale securities:
Estimated fair value	1,380,074	[2]	1,451,993	[2]
Gross unrealized gains	29,797	[2]	34,811	[2]
Gross unrealized losses	(1,872)	[2]	(3)	[2]
Cost or amortized cost	1,352,149	[2]	1,417,185	[2]
OTTI unrealized losses	(207)	[1],[2]	(207)	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Available for sale securities:
Estimated fair value	986,585	[2]	737,477	[2]
Gross unrealized gains	32,558	[2]	33,486	[2]
Gross unrealized losses	(17,976)	[2]	(17,684)	[2]
Cost or amortized cost	972,003	[2]	721,675	[2]
OTTI unrealized losses	(157)	[1],[2]	0	[1],[2]
Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Available for sale securities:
Estimated fair value	570,171	[2]	576,757	[2]
Gross unrealized gains	17,294	[2]	14,649	[2]
Gross unrealized losses	(8,579)	[2]	(10,078)	[2]
Cost or amortized cost	561,456	[2]	572,186	[2]
OTTI unrealized losses	(3,876)	[1],[2]	(3,876)	[1],[2]
Equity securities
Available for sale securities:
Estimated fair value	260,864		299,584
Gross unrealized gains	24,129		22,870
Gross unrealized losses	(22,248)		(22,344)
Cost or amortized cost	258,983		299,058
OTTI unrealized losses	0	[1]	0	[1]
Other investments
Available for sale securities:
Estimated fair value	381,576		238,111
Gross unrealized gains	15,512		8,340
Gross unrealized losses	(2,762)		(5,610)
Cost or amortized cost	368,826		235,381
OTTI unrealized losses	0	[1]	0	[1]
Short-term investments
Available for sale securities:
Estimated fair value	1,087,910		904,219
Gross unrealized gains	3,279		390
Gross unrealized losses	(1,330)		(5,292)
Cost or amortized cost	1,085,961		909,121
OTTI unrealized losses	$ 0	[1]	$ 0	[1]

[1] Represents the total other-than-temporary impairments ("OTTI") recognized in accumulated other comprehensive income ("AOCI"). It does not include the change in fair value subsequent to the impairment measurement.

[2] In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For the purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.

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General

6 Months Ended

Jun. 30, 2012

General

General

1.        General

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

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2011, including the Company's audited consolidated financial statements and related notes.

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company's net income, shareholders' equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

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Investment Information (Details - Aging of Available For Sale Securities in an Unrealized Loss Position) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Available for sale securities:
Estimated Fair Value - Less than 12 months	$ 2,264,943	$ 2,159,326
Gross Unrealized Losses - Less than 12 months	(56,452)	(93,901)
Estimated Fair Value - 12 months or more	232,437	174,028
Gross Unrealized Losses - 12 months or more	(32,087)	(24,048)
Estimated Fair Value	2,497,380	2,333,354
Gross Unrealized Losses	(88,539)	(117,949)
Fixed maturities and fixed maturities pledged under securities lending agreements
Available for sale securities:
Estimated Fair Value - Less than 12 months	2,031,729	1,741,576
Gross Unrealized Losses - Less than 12 months	(41,650)	(63,517)
Estimated Fair Value - 12 months or more	180,311	149,662
Gross Unrealized Losses - 12 months or more	(20,549)	(21,186)
Estimated Fair Value	2,212,040	1,891,238
Gross Unrealized Losses	(62,199)	(84,703)
Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Available for sale securities:
Estimated Fair Value - Less than 12 months	289,690	781,635
Gross Unrealized Losses - Less than 12 months	(8,308)	(24,977)
Estimated Fair Value - 12 months or more	36,087	47,687
Gross Unrealized Losses - 12 months or more	(3,225)	(4,945)
Estimated Fair Value	325,777	829,322
Gross Unrealized Losses	(11,533)	(29,922)
Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	664,985	255,101
Gross Unrealized Losses - Less than 12 months	(7,631)	(11,988)
Estimated Fair Value - 12 months or more	72,287	44,606
Gross Unrealized Losses - 12 months or more	(10,655)	(11,238)
Estimated Fair Value	737,272	299,707
Gross Unrealized Losses	(18,286)	(23,226)
Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Available for sale securities:
Estimated Fair Value - Less than 12 months	187,671	39,156
Gross Unrealized Losses - Less than 12 months	(943)	(537)
Estimated Fair Value - 12 months or more	16,583	14,988
Gross Unrealized Losses - 12 months or more	(598)	(349)
Estimated Fair Value	204,254	54,144
Gross Unrealized Losses	(1,541)	(886)
Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	74,376	87,796
Gross Unrealized Losses - Less than 12 months	(728)	(1,676)
Estimated Fair Value - 12 months or more	20,739	14,582
Gross Unrealized Losses - 12 months or more	(1,684)	(1,228)
Estimated Fair Value	95,115	102,378
Gross Unrealized Losses	(2,412)	(2,904)
Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Available for sale securities:
Estimated Fair Value - Less than 12 months	373,405	7,059
Gross Unrealized Losses - Less than 12 months	(1,872)	(3)
Estimated Fair Value - 12 months or more	0	0
Gross Unrealized Losses - 12 months or more	0	0
Estimated Fair Value	373,405	7,059
Gross Unrealized Losses	(1,872)	(3)
Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	338,862	310,182
Gross Unrealized Losses - Less than 12 months	(16,492)	(16,139)
Estimated Fair Value - 12 months or more	10,046	20,482
Gross Unrealized Losses - 12 months or more	(1,484)	(1,545)
Estimated Fair Value	348,908	330,664
Gross Unrealized Losses	(17,976)	(17,684)
Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	102,740	260,647
Gross Unrealized Losses - Less than 12 months	(5,676)	(8,197)
Estimated Fair Value - 12 months or more	24,569	7,317
Gross Unrealized Losses - 12 months or more	(2,903)	(1,881)
Estimated Fair Value	127,309	267,964
Gross Unrealized Losses	(8,579)	(10,078)
Equity securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	81,062	130,045
Gross Unrealized Losses - Less than 12 months	(12,458)	(22,039)
Estimated Fair Value - 12 months or more	28,874	1,923
Gross Unrealized Losses - 12 months or more	(9,790)	(305)
Estimated Fair Value	109,936	131,968
Gross Unrealized Losses	(22,248)	(22,344)
Other investments
Available for sale securities:
Estimated Fair Value - Less than 12 months	27,754	98,605
Gross Unrealized Losses - Less than 12 months	(1,014)	(3,053)
Estimated Fair Value - 12 months or more	23,252	22,443
Gross Unrealized Losses - 12 months or more	(1,748)	(2,557)
Estimated Fair Value	51,006	121,048
Gross Unrealized Losses	(2,762)	(5,610)
Short-term investments
Available for sale securities:
Estimated Fair Value - Less than 12 months	124,398	189,100
Gross Unrealized Losses - Less than 12 months	(1,330)	(5,292)
Estimated Fair Value - 12 months or more	0	0
Gross Unrealized Losses - 12 months or more	0	0
Estimated Fair Value	124,398	189,100
Gross Unrealized Losses	$ (1,330)	$ (5,292)

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Investment Information (Details - Text Items) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2012 lots	Dec. 31, 2011 lots
Continuous unrealized loss qualitative disclosures:
Total number of lots held	4,470	4,520
Number of lots in an unrealized loss position	790	1,150
Largest single unrealized loss from a single lot	$ 3,500,000	$ 3,000,000
Securities lending agreements:
Fair value of fixed maturities and short-term investments pledged	74,000,000	56,400,000
Amortized cost of fixed maturities and short-term investments pledged	72,000,000	54,500,000
Sub-prime securities held in collateral account	6,000,000	7,300,000
Available for sale securities, other details
OTTI unrealized losses at current fair value	9,200,000	18,000,000
Portion of OTTI not related to credit losses	$ 23,100,000

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UNAUDITED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $9,325,208 and $9,165,438)	$ 9,556,326	$ 9,375,604
Short-term investments available for sale, at fair value (amortized cost: $1,085,961 and $909,121)	1,087,910	904,219
Investment of funds received under securities lending, at fair value (amortized cost: $66,327 and $48,577)	66,424	48,419
Equity securities available for sale, at fair value (cost: $258,983 and $299,058)	260,864	299,584
Other investments available for sale, at fair value (cost: $368,826 and $235,381)	381,576	238,111
Investments accounted for using the fair value option	496,843	366,903
TALF investments, at fair value (amortized cost: $292,841 and $373,040)	307,453	387,702
Investment funds accounted for using the equity method	331,601	380,507
Total investments	12,488,997	12,001,049
Cash	355,392	351,699
Accrued investment income	72,095	70,739
Investment in joint venture (cost: $100,000)	109,240	107,576
Fixed maturities and short-term investments pledged under securities lending, at fair value	74,032	56,393
Premiums receivable	834,116	501,563
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,191	1,851,584
Contractholder receivables	787,389	748,231
Prepaid reinsurance premiums	313,264	265,696
Deferred acquisition costs, net	272,736	227,884
Receivable for securities sold	821,527	462,891
Other assets	518,744	460,052
Total Assets	18,496,723	17,105,357
Liabilities
Reserve for losses and loss adjustment expenses	8,546,350	8,456,210
Unearned premiums	1,815,135	1,411,872
Reinsurance balances payable	184,763	133,866
Contractholder payables	787,389	748,231
Senior notes	300,000	300,000
Revolving credit agreement borrowings	100,000	100,000
TALF borrowings, at fair value (par: $237,095 and $310,868)	235,818	310,486
Securities lending payable	76,383	58,546
Payable for securities purchased	927,962	480,230
Other liabilities	502,607	513,842
Total Liabilities	13,476,407	12,513,283
Shareholders' Equity
Non-cumulative preferred shares	325,000	325,000
Common shares ($0.0033 par, shares issued: 166,748,110 and 164,636,338)	556	549
Additional paid-in capital	187,013	161,419
Retained earnings	5,167,069	4,796,655
Accumulated other comprehensive income, net of deferred income tax	193,097	153,923
Common shares held in treasury, at cost (shares: 30,456,458 and 30,277,993)	(852,419)	(845,472)
Total Shareholders Equity	5,020,316	4,592,074
Total Liabilities and Shareholders Equity	$ 18,496,723	$ 17,105,357

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Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income Taxes
Effective tax rate on income before income taxes	0.30%	(2.40%)	0.70%	(2.40%)
Net deferred tax asset	$ 99,200,000	$ 80,700,000	$ 99,200,000	$ 80,700,000
Income taxes paid, net of recoveries			4,300,000	6,000,000
Federal excise taxes incurred			$ 4,000,000	$ 5,000,000

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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (USD $)		Total	Non-Cumulative Preferred Shares	Common Shares	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income	Common Shares Held in Treasury, at Cost
Balance as of at Dec. 31, 2010			$ 325,000,000	$ 534,000	$ 110,325,000	$ 4,422,553,000	$ 204,503,000	$ (549,912,000)
Balance at beginning of year, as adjusted at Dec. 31, 2010		4,386,336,000				4,386,336,000
Cumulative effect of adjustment resulting from adoption of new accounting guidance at Dec. 31, 2010	[1]					(36,217,000)
Shares issued - Series C			0
Shares repurchased - Series A and B			0
Common shares issued, net				7,000	3,912,000
Issue costs on Series C preferred shares					0
Exercise of stock options					6,372,000
Amortization of share-based compensation					19,505,000
Other					1,887,000
Preferred dividends		(12,922,000)				(12,922,000)
Net income		122,076,000				122,076,000
Change in unrealized appreciation in value of investments, net of deferred income tax							57,374,000
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax		(863,000)					(863,000)
Foreign currency translation adjustments, net of deferred income tax		2,570,000					2,570,000
Shares repurchased for treasury								(273,674,000)
Balance as of at Jun. 30, 2011		4,403,030,000	325,000,000	541,000	142,001,000	4,495,490,000	263,584,000	(823,586,000)
Balance as of at Dec. 31, 2011		4,592,074,000	325,000,000	549,000	161,419,000	4,796,655,000	153,923,000	(845,472,000)
Balance at beginning of year, as adjusted at Dec. 31, 2011						4,796,655,000
Cumulative effect of adjustment resulting from adoption of new accounting guidance at Dec. 31, 2011	[1]					0
Shares issued - Series C			325,000,000
Shares repurchased - Series A and B			(325,000,000)
Common shares issued, net				7,000	4,553,000
Issue costs on Series C preferred shares					9,397,000
Exercise of stock options					4,822,000
Amortization of share-based compensation					23,930,000
Other					1,686,000
Preferred dividends		(14,110,000)				(14,110,000)
Net income		384,524,000				384,524,000
Change in unrealized appreciation in value of investments, net of deferred income tax							41,620,000
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax		(511,000)					(511,000)
Foreign currency translation adjustments, net of deferred income tax		(1,935,000)					(1,935,000)
Shares repurchased for treasury								(6,947,000)
Balance as of at Jun. 30, 2012		$ 5,020,316,000	$ 325,000,000	$ 556,000	$ 187,013,000	$ 5,167,069,000	$ 193,097,000	$ (852,419,000)

[1] Adoption of accounting guidance regarding costs incurred that can be capitalized by insurance entities.

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Investment Information (Details - Net Investment Income) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Investment Income, Net [Abstract]
Gross investment income	$ 80,012		$ 93,076		$ 160,990		$ 187,499
Investment expenses	(6,404)		(6,405)		(13,085)		(12,521)
Net investment income	73,608		86,671		147,905		174,978
Fixed maturities
Investment Income, Net [Abstract]
Gross investment income	70,290		84,420		143,739		169,564
Term loan investments
Investment Income, Net [Abstract]
Gross investment income	3,557	[1]	533	[1]	5,856	[1]	684	[1]
Equity securities
Investment Income, Net [Abstract]
Gross investment income	2,425		1,844		4,089		3,391
Short-term investments
Investment Income, Net [Abstract]
Gross investment income	760		505		1,132		1,183
Other investment income
Investment Income, Net [Abstract]
Gross investment income	$ 2,980	[2]	$ 5,774	[2]	$ 6,174	[2]	$ 12,677	[2]

[1] Included in "investments accounted for using the fair value option" on the Company's consolidated balance sheets.

[2] Amounts include dividends on investment funds and other items.

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2012

Segment Information

Segment Information

		Three Months Ended						Three Months Ended
		June 30, 2012						June 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	676,090	$	376,981	$	1,051,813	$	635,005	$	277,766	$	911,939
Net premiums written			464,584		355,649		820,233		438,263		268,280		706,543
Net premiums earned		$	446,594	$	280,062	$	726,656	$	410,819	$	232,060	$	642,879
Fee income			628		178		806		702		82		784
Losses and loss adjustment
	expenses		(290,416)		(109,277)		(399,693)		(301,642)		(129,980)		(431,622)
Acquisition expenses, net			(76,058)		(52,231)		(128,289)		(66,543)		(44,096)		(110,639)
Other operating expenses			(76,617)		(29,140)		(105,757)		(77,774)		(23,671)		(101,445)
Underwriting income (loss)		$	4,131	$	89,592		93,723	$	(34,438)	$	34,395		(43)
Net investment income							73,608						86,671
Net realized gains							34,867						45,210
Net impairment losses
	recognized in earnings						(1,951)						(1,684)
Equity in net income of
	investment funds
	accounted for using
	the equity method						7,787						5,973
Other income (loss)							695						(4,265)
Other expenses							(11,944)						(11,397)
Interest expense							(7,439)						(7,758)
Net foreign exchange gains
	(losses)						31,689						(18,375)
Income before income taxes							221,035						94,332
Income tax (expense) benefit							(767)						2,271
Net income							220,268						96,603
Preferred dividends							(7,649)						(6,461)
Net income available to
	common shareholders					$	212,619					$	90,142
Underwriting Ratios
Loss ratio			65.0%		39.0%		55.0%		73.4%		56.0%		67.1%
Acquisition expense ratio (2)			16.9%		18.6%		17.6%		16.0%		19.0%		17.1%
Other operating expense ratio			17.2%		10.4%		14.6%		18.9%		10.2%		15.8%
Combined ratio			99.1%		68.0%		87.2%		108.3%		85.2%		100.0%

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

		Six Months Ended						Six Months Ended
		June 30, 2012						June 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	1,364,203	$	756,957	$	2,118,469	$	1,269,588	$	608,779	$	1,876,505
Net premiums written			955,264		728,580		1,683,844		887,554		583,267		1,470,821
Net premiums earned		$	888,334	$	518,634	$	1,406,968	$	818,410	$	458,164	$	1,276,574
Fee income			1,158		191		1,349		1,480		119		1,599
Losses and loss adjustment
	expenses		(593,580)		(201,320)		(794,900)		(599,365)		(326,137)		(925,502)
Acquisition expenses, net			(149,928)		(97,323)		(247,251)		(127,958)		(91,435)		(219,393)
Other operating expenses			(149,987)		(55,263)		(205,250)		(152,403)		(44,898)		(197,301)
Underwriting income (loss)		$	(4,003)	$	164,919		160,916	$	(59,836)	$	(4,187)		(64,023)
Net investment income							147,905						174,978
Net realized gains							78,988						65,905
Net impairment losses
	recognized in earnings						(2,974)						(4,364)
Equity in net income of
	investment funds
	accounted for using
	the equity method						32,613						35,646
Other income (loss)							(7,373)						302
Other expenses							(18,923)						(18,423)
Interest expense							(14,960)						(15,479)
Net foreign exchange gains
	(losses)						11,001						(55,287)
Income before income taxes							387,193						119,255
Income tax (expense) benefit							(2,669)						2,821
Net income							384,524						122,076
Preferred dividends							(14,110)						(12,922)
Net income available to
	common shareholders					$	370,414					$	109,154
Underwriting Ratios
Loss ratio			66.8%		38.8%		56.5%		73.2%		71.2%		72.5%
Acquisition expense ratio (2)			16.7%		18.8%		17.5%		15.5%		20.0%		17.1%
Other operating expense ratio			16.9%		10.7%		14.6%		18.6%		9.8%		15.5%
Combined ratio			100.4%		68.3%		88.6%		107.3%		101.0%		105.1%

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

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Investment Information (Details - Net Realized Gains and Losses) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Available for sale securities, Gross gains on investment sales	$ 67,936		$ 71,578		$ 115,948		$ 143,295
Available for sale securities, Gross losses on investment sales	(20,757)		(15,917)		(38,693)		(63,667)
Derivative instruments	277	[1]	3,176	[1]	(4,392)	[1]	(8,144)	[1]
Other investments	(996)		(1,513)		66		1,379
Net realized gains (losses)	34,867		45,210		78,988		65,905
Fixed maturities
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Change in fair value of assets and liabilities accounted for using the fair value option	(4,810)		(8,483)		3,407		(8,393)
Equity securities
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Change in fair value of assets and liabilities accounted for using the fair value option	(3,589)		(6,484)		(202)		(3,050)
Other investments
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Change in fair value of assets and liabilities accounted for using the fair value option	(1,744)		196		2,009		323
TALF investments
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Change in fair value of assets and liabilities accounted for using the fair value option	(1,274)		2,795		(50)		4,447
TALF borrowings
Gain (Loss) on Investments, Excluding Other than Temporary Impairments [Abstract]
Change in fair value of assets and liabilities accounted for using the fair value option	$ (176)		$ (138)		$ 895		$ (285)

[1] See Note 9 for information on the Company's derivative instruments.

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value

Financial assets and liabilities measured at fair value by level

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,519,832	$	-	$	2,427,796	$	92,036
	Mortgage backed securities			1,670,108		-		1,670,108		-
	Municipal bonds			1,542,262		-		1,542,262		-
	Commercial mortgage backed securities			961,326		-		961,326		-
	U.S. government and government agencies			1,380,074		1,380,074		-		-
	Non-U.S. government securities			986,585		-		986,585		-
	Asset backed securities			570,171		-		570,171		-
		Total		9,630,358		1,380,074		8,158,248		92,036
	Equity securities			260,864		259,648		1,216		-
	Other investments			381,576		-		375,190		6,386
	Short-term investments			1,087,910		925,234		162,676		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			194,663		-		194,663		-
	Non-U.S. government bonds			48,072		-		48,072		-
	Equity securities			23,118		23,118		-		-
	Other investments			230,990		-		230,990		-
		Total		496,843		23,118		473,725		-
	TALF investments			307,453		-		307,453		-
		Total assets measured at fair value	$	12,165,004	$	2,588,074	$	9,478,508	$	98,422
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	235,818	$	-	$	235,818	$	-
	Securities sold but not yet purchased (2)			9,206		9,206		-		-
		Total liabilities measured at fair value	$	245,024	$	9,206	$	235,818	$	-

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
• Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,596,118	$	-	$	2,504,027	$	92,091
	Mortgage backed securities			1,592,762		-		1,592,762		-
	Municipal bonds			1,430,565		-		1,430,565		-
	Commercial mortgage backed securities			1,046,326		-		1,046,326		-
	U.S. government and government agencies			1,451,993		1,451,993		-		-
	Non-U.S. government securities			737,477		-		737,477		-
	Asset backed securities			576,757		-		576,757		-
		Total		9,431,998		1,451,993		7,887,914		92,091
	Equity securities			299,584		299,528		56		-
	Other investments			238,111		-		232,987		5,124
	Short-term investments			904,219		837,371		66,848		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			122,935		-		122,935		-
	Non-U.S. government bonds			24,844		-		24,844		-
	Equity securities			87,403		87,403		-		-
	Other investments			131,721		-		131,721		-
		Total		366,903		87,403		279,500		-
	TALF investments			387,702		-		387,702		-
		Total assets measured at fair value	$	11,628,517	$	2,676,295	$	8,855,007	$	97,215
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	310,486	$	-	$	310,486	$	-
	Securities sold but not yet purchased (2)			27,178		27,178		-		-
		Total liabilities measured at fair value	$	337,664	$	27,178	$	310,486	$	-

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
• Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

Reconciliation of beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Three Months Ended June 30, 2012
Balance at beginning of period			$	96,655	$	6,215	$	102,870
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		(548)		-		(548)
		Included in other comprehensive income		(4,032)		171		(3,861)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(39)		-		(39)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	92,036	$	6,386	$	98,422
Three Months Ended June 30, 2011
Balance at beginning of period			$	169,045	$	8,201	$	177,246
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		7,893		1,388		9,281
		Included in other comprehensive income		(12,431)		(1,589)		(14,020)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(71)		(71)
		Settlements		(51)		-		(51)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	164,456	$	7,929	$	172,385

(1)        Gains or losses on corporate bondsand other investments were recorded in net realized gains (losses).

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Six Months Ended June 30, 2012
Balance at beginning of period			$	92,091	$	5,124	$	97,215
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		1,783		81		1,864
		Included in other comprehensive income		(1,759)		1,262		(497)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		0		0
		Settlements		(79)		(81)		(160)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	92,036	$	6,386	$	98,422
Six Months Ended June 30, 2011
Balance at beginning of period			$	153,509	$	7,858	$	161,367
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		13,664		1,709		15,373
		Included in other comprehensive income		(2,333)		(972)		(3,305)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(666)		(666)
		Settlements		(384)		-		(384)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	164,456	$	7,929	$	172,385

• Gains or losses on corporate bondsand other investments were recorded in net realized gains (losses).

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Operating Activities
Net income	$ 384,524	$ 122,076
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(80,753)	(71,367)
Net impairment losses recognized in earnings	2,974	4,364
Equity in net income of investment funds accounted for using the equity method and other income	(18,141)	18,590
Share-based compensation	23,930	19,505
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expense recoverable	107,670	286,223
Unearned premiums, net of prepaid reinsurance premiums	276,877	194,123
Premiums receivable	(273,735)	(196,244)
Deferred acquisition costs, net	(45,390)	(27,520)
Reinsurance balances payable	37,129	15,987
Other liabilities	(2,526)	6,753
Other items, net	(15,291)	74,057
Net Cash Provided By Operating Activities	397,268	446,547
Investing Activities
Purchases of fixed maturity investments	(7,546,498)	(7,386,907)
Purchases of equity securities	(110,303)	(248,947)
Purchases of other investments	(386,243)	(207,365)
Proceeds from the sales of fixed maturity investments	6,887,186	6,555,997
Proceeds from the sales of equity securities	198,485	199,650
Proceeds from the sales of other investments	216,964	204,747
Proceeds from redemptions and maturities of fixed maturity investments	598,792	537,410
Net (purchases) sales of short-term investments	(174,607)	235,676
Change in investment of securities lending collateral	(17,837)	(77,051)
Purchase of business, net of cash acquired	28,948	0
Purchases of furniture, equipment and other assets	(10,208)	(12,348)
Net Cash Provided By (Used For) Investing Activities	(315,321)	(199,138)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,789	0
Repurchase of Series A and B preferred shares	(325,000)	0
Purchases of common shares under share repurchase program	0	(266,725)
Proceeds from common shares issued, net	348	1,478
Repayments of borrowings	(73,773)	(7,614)
Change in securities lending collateral	17,837	77,051
Other	3,464	3,181
Preferred dividends paid	(17,412)	(12,922)
Net Cash Used For Financing Activities	(78,747)	(205,551)
Effects of exchange rate changes on foreign currency cash	493	6,403
Increase in cash	3,693	48,261
Cash beginning of year	351,699	362,740
Cash end of period	$ 355,392	$ 411,001

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UNAUDITED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Assets
Fixed maturities available for sale, at amortized cost	$ 9,325,208	$ 9,165,438
Short-term investments available for sale, at amortized cost	1,085,961	909,121
Investment of funds received under securities lending agreements, amortized cost	66,327	48,577
Equity securities (cost)	258,983	299,058
Other investments (cost)	368,826	235,381
TALF investments amortized cost	292,841	373,040
Investment in joint venture cost	100,000	100,000
Liabilities
TALF borrowings,at par	$ 237,095	$ 310,868
Shareholders' Equity
Common shares par	$ 0.0033	$ 0.0033
Common shares (issued)	166,748,110	164,636,338
Common shares held in treasury (shares)	30,456,458	30,277,993

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Income Taxes

6 Months Ended

Jun. 30, 2012

Income Taxes

Income Taxes

10.        Income Taxes

ACGL is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to ACGL or any of its operations until March 31, 2035. This undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda.

ACGL and its non-U.S. subsidiaries will be subject to U.S. federal income tax only to the extent that they derive U.S. source income that is subject to U.S. withholding tax or income that is effectively connected with the conduct of a trade or business within the U.S. and is not exempt from U.S. tax under an applicable income tax treaty with the U.S. ACGL and its non-U.S. subsidiaries will be subject to a withholding tax on dividends from U.S. investments and interest from certain U.S. payors (subject to reduction by any applicable income tax treaty). ACGL and its non-U.S. subsidiaries intend to conduct their operations in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, therefore, will not be required to pay U.S. federal income taxes (other than U.S. excise taxes on insurance and reinsurance premium and withholding taxes on dividends and certain other U.S. source investment income). However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If ACGL or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL's shareholders' equity and earnings could be materially adversely affected. ACGL has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which ACGL's subsidiaries and branches are subject to tax are the United States, United Kingdom, Ireland, Canada, Switzerland and Denmark.

The Company's income tax provision resulted in an effective tax rate on income before income taxes of 0.3%and 0.7% for the 2012 second quarter and six months ended June 30, 2012,compared to (2.4)%for the 2011 periods. The Company's effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. The Company had a net deferred tax asset of $99.2 million at June 30, 2012, compared to $80.7 million at December 31, 2011. In addition, the Company paid $4.3 million in income taxes, net of recoveries, for the six months ended June 30, 2012, compared to $6.0 million for the 2011 period.

The United States also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers or reinsurers with respect to risks located in the United States. The Company incurs federal excise taxes on certain of its reinsurance transactions, including amounts ceded through intercompany transactions. The Company incurred $4.0million of federal excise taxes for the six months ended June 30, 2012, compared to $5.0 million in the 2011 period. Such amounts are reflected as acquisition expenses in the Company's consolidated statements of income.

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DOCUMENT AND ENTITY INFORMATION	6 Months Ended
	Jun. 30, 2012	Aug. 01, 2012
Document And Entity Information [Abstract]
Document type	10-Q
Document period end date	Jun. 30, 2012
Amendment flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Entity registrant name	ARCH CAPITAL GROUP LTD.
Entity central index key	0000947484
Entity current reporting status	Yes
Entity voluntary filers	No
Current fiscal year end date	--12-31
Entity filer category	Large Accelerated Filer
Entity well known seasoned issuer	Yes
Entity common stock shares outstanding		136,314,789

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Legal Proceedings

6 Months Ended

Jun. 30, 2012

Disclosure Legal Proceedings [Abstract]

Legal Proceedings

11.       Legal Proceedings

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of June 30, 2012, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company's results of operations and financial condition and liquidity.

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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues
Net premiums written	$ 820,233	$ 706,543	$ 1,683,844	$ 1,470,821
Change in unearned premiums	(93,577)	(63,664)	(276,876)	(194,247)
Net premiums earned	726,656	642,879	1,406,968	1,276,574
Net investment income	73,608	86,671	147,905	174,978
Net realized gains	34,867	45,210	78,988	65,905
Other-than-temporary impairment losses	(2,454)	(1,969)	(3,485)	(5,227)
Less investment impairments recognized in other comprehensive income, before taxes	503	285	511	863
Net impairment losses recognized in earnings	(1,951)	(1,684)	(2,974)	(4,364)
Fee income	806	784	1,349	1,599
Equity in net income of investment funds accounted for using the equity method	7,787	5,973	32,613	35,646
Other income (loss)	695	(4,265)	(7,373)	302
Total revenues	842,468	775,568	1,657,476	1,550,640
Expenses
Losses and loss adjustment expenses	399,693	431,622	794,900	925,502
Acquisition expenses	128,289	110,639	247,251	219,393
Other operating expenses	117,701	112,842	224,173	215,724
Interest expense	7,439	7,758	14,960	15,479
Net foreign exchange (gains) losses	(31,689)	18,375	(11,001)	55,287
Total expenses	621,433	681,236	1,270,283	1,431,385
Income before income taxes	221,035	94,332	387,193	119,255
Income tax expense (benefit)	767	(2,271)	2,669	(2,821)
Net income	220,268	96,603	384,524	122,076
Preferred dividends	7,649	6,461	14,110	12,922
Net income available to common shareholders	$ 212,619	$ 90,142	$ 370,414	$ 109,154
Net income per common share:
Basic	$ 1.58	$ 0.69	$ 2.76	$ 0.82
Diluted	$ 1.54	$ 0.65	$ 2.68	$ 0.78
Weighted average common shares and common share equivalents outstanding
Basic	134,529,129	131,232,269	134,241,876	132,359,493
Diluted	138,211,736	137,975,599	138,017,490	139,234,931

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Earnings Per Common Share

6 Months Ended

Jun. 30, 2012

Earnings Per Common Share

Earnings Per Common Share

5.        Earnings Per Common Share

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

			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
Numerator:
Net income			$	220,268	$	96,603	$	384,524	$	122,076
Preferred dividends				(7,649)		(6,461)		(14,110)		(12,922)
Net income available to common shareholders			$	212,619	$	90,142	$	370,414	$	109,154
Denominator:
	Weighted average common shares outstanding – basic			134,529,129		131,232,269		134,241,876		132,359,493
	Effect of dilutive common share equivalents:
		Nonvested restricted shares		800,455		931,305		909,524		1,040,514
		Stock options (1)		2,882,152		5,812,025		2,866,090		5,834,924
	Weighted average common shares and common share
		equivalents outstanding – diluted		138,211,736		137,975,599		138,017,490		139,234,931
Earnings per common share:
	Basic		$	1.58	$	0.69	$	2.76	$	0.82
	Diluted		$	1.54	$	0.65	$	2.68	$	0.78

• Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2012 second quarter and 2011 second quarter, the number of stock options excluded were 912,056 and 430,758, respectively.For the six months ended June 30, 2012 and 2011, the number of stock options excluded were 688,634 and 223,063, respectively.

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Commitment and Contingencies

6 Months Ended

Jun. 30, 2012

Commitments And Contingencies

Commitments And Contingencies

4.       Commitments and Contingencies

Letter of Credit and Revolving Credit Facilities

As of June 30, 2012, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility (the “Credit Agreement”). The Credit Agreement expires on August 18, 2014.In addition, the Company had access to secured letter of credit facilities of approximately $81 million as of June 30, 2012, which are available on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”).At June 30, 2012, the Company had $445.4 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $514.4 million, and had $100.0 million of borrowings outstanding under the Credit Agreement. The Company was in compliance with all covenants contained in the LOC Facilities at June 30, 2012.

Investment Commitments

The Company's investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $537.0 million at June 30, 2012.

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Investment Information (Tables)

6 Months Ended

Jun. 30, 2012

Investment Information [Abstract]

Summary of fair value and cost or amortized cost of available for sale securities

		Estimated		Gross		Gross		Cost or		OTTI
		Fair		Unrealized		Unrealized		Amortized		Unrealized
		Value		Gains		Losses		Cost		Losses (2)
At June 30, 2012
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,519,832	$	92,282	$	(11,533)	$	2,439,083	$	(716)
Mortgage backed securities			1,670,108		23,743		(18,286)		1,664,651		(14,772)
Municipal bonds			1,542,262		67,946		(1,541)		1,475,857		(65)
Commercial mortgage backed securities			961,326		31,685		(2,412)		932,053		(3,259)
U.S. government and government agencies			1,380,074		29,797		(1,872)		1,352,149		(207)
Non-U.S. government securities			986,585		32,558		(17,976)		972,003		(157)
Asset backed securities			570,171		17,294		(8,579)		561,456		(3,876)
	Total		9,630,358		295,305		(62,199)		9,397,252		(23,052)
Equity securities			260,864		24,129		(22,248)		258,983		-
Other investments			381,576		15,512		(2,762)		368,826		-
Short-term investments			1,087,910		3,279		(1,330)		1,085,961		-
	Total	$	11,360,708	$	338,225	$	(88,539)	$	11,111,022	$	(23,052)
At December 31, 2011
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,596,118	$	79,407	$	(29,922)	$	2,546,633	$	(1,138)
Mortgage backed securities			1,592,762		27,633		(23,226)		1,588,355		(20,466)
Municipal bonds			1,430,565		77,977		(886)		1,353,474		(105)
Commercial mortgage backed securities			1,046,326		28,780		(2,904)		1,020,450		(3,259)
U.S. government and government agencies			1,451,993		34,811		(3)		1,417,185		(207)
Non-U.S. government securities			737,477		33,486		(17,684)		721,675		-
Asset backed securities			576,757		14,649		(10,078)		572,186		(3,876)
	Total		9,431,998		296,743		(84,703)		9,219,958		(29,051)
Equity securities			299,584		22,870		(22,344)		299,058		-
Other investments			238,111		8,340		(5,610)		235,381		-
Short-term investments			904,219		390		(5,292)		909,121		-
	Total	$	10,873,912	$	328,343	$	(117,949)	$	10,663,518	$	(29,051)

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”
• Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.

Summary of available for sale securities in a continual unrealized loss position

		Less than 12 Months				12 Months or More				Total
		Estimated		Gross		Estimated		Gross		Estimated		Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
At June 30, 2012
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	289,690	$	(8,308)	$	36,087	$	(3,225)	$	325,777	$	(11,533)
Mortgage backed securities			664,985		(7,631)		72,287		(10,655)		737,272		(18,286)
Municipal bonds			187,671		(943)		16,583		(598)		204,254		(1,541)
Commercial mortgage backed
	securities		74,376		(728)		20,739		(1,684)		95,115		(2,412)
U.S. government and
	government agencies		373,405		(1,872)		-		-		373,405		(1,872)
Non-U.S. government securities			338,862		(16,492)		10,046		(1,484)		348,908		(17,976)
Asset backed securities			102,740		(5,676)		24,569		(2,903)		127,309		(8,579)
	Total		2,031,729		(41,650)		180,311		(20,549)		2,212,040		(62,199)
Equity securities			81,062		(12,458)		28,874		(9,790)		109,936		(22,248)
Other investments			27,754		(1,014)		23,252		(1,748)		51,006		(2,762)
Short-term investments			124,398		(1,330)		-		-		124,398		(1,330)
	Total	$	2,264,943	$	(56,452)	$	232,437	$	(32,087)	$	2,497,380	$	(88,539)
At December 31, 2011
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	781,635	$	(24,977)	$	47,687	$	(4,945)	$	829,322	$	(29,922)
Mortgage backed securities			255,101		(11,988)		44,606		(11,238)		299,707		(23,226)
Municipal bonds			39,156		(537)		14,988		(349)		54,144		(886)
Commercial mortgage backed
	securities		87,796		(1,676)		14,582		(1,228)		102,378		(2,904)
U.S. government and
	government agencies		7,059		(3)		-		-		7,059		(3)
Non-U.S. government securities			310,182		(16,139)		20,482		(1,545)		330,664		(17,684)
Asset backed securities			260,647		(8,197)		7,317		(1,881)		267,964		(10,078)
	Total		1,741,576		(63,517)		149,662		(21,186)		1,891,238		(84,703)
Equity securities			130,045		(22,039)		1,923		(305)		131,968		(22,344)
Other investments			98,605		(3,053)		22,443		(2,557)		121,048		(5,610)
Short-term investments			189,100		(5,292)		-		-		189,100		(5,292)
	Total	$	2,159,326	$	(93,901)	$	174,028	$	(24,048)	$	2,333,354	$	(117,949)

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

Contractual maturities of the Company's fixed maturities and fixed maturities pledged under securities lending arrangements

		June 30, 2012				December 31, 2011
		Estimated		Amortized		Estimated		Amortized
Maturity		Fair Value		Cost		Fair Value		Cost
Due in one year or less		$	491,380	$	483,860	$	486,986	$	476,734
Due after one year through five years			3,434,433		3,356,501		2,850,578		2,793,982
Due after five years through 10 years			2,218,284		2,125,636		2,532,834		2,441,800
Due after 10 years			284,656		273,095		345,755		326,451
			6,428,753		6,239,092		6,216,153		6,038,967
Mortgage backed securities			1,670,108		1,664,651		1,592,762		1,588,355
Commercial mortgage backed securities			961,326		932,053		1,046,326		1,020,450
Asset backed securities			570,171		561,456		576,757		572,186
	Total	$	9,630,358	$	9,397,252	$	9,431,998	$	9,219,958

Summary of assets and liabilities accounted for using the fair value option

		June 30,		December 31,
		2012		2011
Fixed maturities		$	242,735	$	147,779
Equity securities			23,118		87,403
Other investments (par: $228,446 and $138,062)			230,990		131,721
	Investments accounted for using the fair value option		496,843		366,903
Securities sold but not yet purchased (1)			(9,206)		(27,178)
TALF investments			307,453		387,702
TALF borrowings			(235,818)		(310,486)
	Net assets accounted for using the fair value option	$	559,272	$	416,941

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

Net investment income

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Fixed maturities		$	70,290	$	84,420	$	143,739	$	169,564
Term loan investments (1)			3,557		533		5,856		684
Equity securities			2,425		1,844		4,089		3,391
Short-term investments			760		505		1,132		1,183
Other (2)			2,980		5,774		6,174		12,677
	Gross investment income		80,012		93,076		160,990		187,499
Investment expenses			(6,404)		(6,405)		(13,085)		(12,521)
	Net investment income	$	73,608	$	86,671	$	147,905	$	174,978

• Included in “investments accounted for using the fair value option” on the Company's consolidated balance sheets.
• Amounts include dividends on investment funds and other items.

Net realized gains (losses)

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Available for sale securities:
	Gross gains on investment sales	$	67,936	$	71,578	$	115,948	$	143,295
	Gross losses on investment sales		(20,757)		(15,917)		(38,693)		(63,667)
Change in fair value of assets and liabilities
accounted for using the fair value option:
	Fixed maturities		(4,810)		(8,483)		3,407		(8,393)
	Equity securities		(3,589)		(6,484)		(202)		(3,050)
	Other investments		(1,744)		196		2,009		323
	TALF investments		(1,274)		2,795		(50)		4,447
	TALF borrowings		(176)		(138)		895		(285)
Derivative instruments (1)			277		3,176		(4,392)		(8,144)
Other			(996)		(1,513)		66		1,379
	Net realized gains	$	34,867	$	45,210	$	78,988	$	65,905

• See Note 9 for information on the Company's derivative instruments.

Other than temporary impairments

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Fixed maturities:
	Corporate bonds	$	1,166	$	-	$	1,362	$	359
	Mortgage backed securities		146		1,310		892		2,428
	Non-U.S. government securities		261		-		261		-
	Asset backed securities		106		-		106		10
	U.S. government and government agencies		10		-		10		-
	Total		1,689		1,310		2,631		2,797
Investment of funds received under
securities lending agreements			6		374		87		1,230
Equity securities			256		-		256		337
	Total OTTI recognized in earnings	$	1,951	$	1,684	$	2,974	$	4,364

Rollforward of the amount related to credit losses recognized in earnings for which a portion was recognized in AOCI

			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
Balance at start of period			$	67,086	$	84,858	$	66,545	$	86,040
	Credit loss impairments recognized on securities
		not previously impaired		1,693		1,194		1,905		2,863
	Credit loss impairments recognized on securities
		previously impaired		258		490		1,069		1,164
	Reductions for increases in cash flows expected to
		be collected that are recognized over the remaining
		life of the security		-		-		-		-
	Reductions for securities sold during the period			(6,511)		(256)		(6,993)		(3,781)
Balance at end of period			$	62,526	$	86,286	$	62,526	$	86,286

Restricted assets

		June 30,		December 31,
		2012		2011
Assets used for collateral or guarantees:
	Affiliated transactions	$	4,426,250	$	4,321,535
	Third party agreements		684,455		757,669
Deposits with U.S. regulatory authorities			288,163		288,458
Deposits with non-U.S. regulatory authorities			223,134		169,733
Trust funds			81,530		60,558
	Total restricted assets	$	5,703,532	$	5,597,953

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Significant Accounting Policies

Basis of Accounting [Text Block]

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of ACGL and its wholly owned subsidiaries (together with ACGL, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

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Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value

Fair Value

8.        Fair Value

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:

Level 1:       Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2:       Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

Level 3:       Inputs to the valuation methodology are unobservable and significant to the fair value measurement

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

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value including a review of deep dive reports on selected securities which indicated the use of observable inputs in the pricing process; (iv) comparing the fair value estimates to its knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. At June 30, 2012, the Company obtained an average of 2.8 quotes per investment, compared to 2.8 quotes at December 31, 2011. Where multiple quotes or prices were obtained, a price source hierarchy was maintained in order to determine which price source provided the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. At June 30, 2012 and December 31, 2011, the Company adjusted certain prices (primarily on structured securities) obtained from the pricing services and substituted alternate prices (primarily broker-dealer quotes) for such securities. Such adjustments did not have a material impact on the overall fair value of the Company's investment portfolio.

The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. In addition, pricing vendors use model processes, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage backed and asset backed securities. In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $12.41 billion of financial assets and liabilities measured at fair value at June 30, 2012, approximately $1.39billion, or 11.2%, were priced using non-binding broker-dealer quotes. Of the $11.97 billion of financial assets and liabilities measured at fair value at December 31, 2011, approximately $1.19 billion, or 9.9%, were priced using non-binding broker-dealer quotes.

The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisors and others.The Company determined that Level 1 securities would include highly liquid, recent issue U.S. Treasuries and certain of its short-term investments held in highly liquid money market-type funds where it believes that quoted prices are available in an active market. In addition, the Company determined that exchange-traded equity securities would be included in Level 1.

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

The Company determined that aEuro-denominated corporate bond which consists of an underlying portfolio of fixed income securities for which there is a low level of transparency around inputs to the valuation process should be classified within Level 3 of the valuation hierarchyalong with certain other corporate bonds. In addition, the Company determined that certain other investments would be classified within Level 3 of the valuation hierarchy. The Company reviews the classification of its investments each quarter.

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 and included the fixed maturities and short-term investments pledged under securities lending agreements, at fair value.

The following table presents the Company's financial assets and liabilities measured at fair value by level at June 30, 2012:

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,519,832	$	-	$	2,427,796	$	92,036
	Mortgage backed securities			1,670,108		-		1,670,108		-
	Municipal bonds			1,542,262		-		1,542,262		-
	Commercial mortgage backed securities			961,326		-		961,326		-
	U.S. government and government agencies			1,380,074		1,380,074		-		-
	Non-U.S. government securities			986,585		-		986,585		-
	Asset backed securities			570,171		-		570,171		-
		Total		9,630,358		1,380,074		8,158,248		92,036
	Equity securities			260,864		259,648		1,216		-
	Other investments			381,576		-		375,190		6,386
	Short-term investments			1,087,910		925,234		162,676		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			194,663		-		194,663		-
	Non-U.S. government bonds			48,072		-		48,072		-
	Equity securities			23,118		23,118		-		-
	Other investments			230,990		-		230,990		-
		Total		496,843		23,118		473,725		-
	TALF investments			307,453		-		307,453		-
		Total assets measured at fair value	$	12,165,004	$	2,588,074	$	9,478,508	$	98,422
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	235,818	$	-	$	235,818	$	-
	Securities sold but not yet purchased (2)			9,206		9,206		-		-
		Total liabilities measured at fair value	$	245,024	$	9,206	$	235,818	$	-

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
• Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

The following table presents the Company's financial assets and liabilities measured at fair value by level at December 31, 2011:

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,596,118	$	-	$	2,504,027	$	92,091
	Mortgage backed securities			1,592,762		-		1,592,762		-
	Municipal bonds			1,430,565		-		1,430,565		-
	Commercial mortgage backed securities			1,046,326		-		1,046,326		-
	U.S. government and government agencies			1,451,993		1,451,993		-		-
	Non-U.S. government securities			737,477		-		737,477		-
	Asset backed securities			576,757		-		576,757		-
		Total		9,431,998		1,451,993		7,887,914		92,091
	Equity securities			299,584		299,528		56		-
	Other investments			238,111		-		232,987		5,124
	Short-term investments			904,219		837,371		66,848		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			122,935		-		122,935		-
	Non-U.S. government bonds			24,844		-		24,844		-
	Equity securities			87,403		87,403		-		-
	Other investments			131,721		-		131,721		-
		Total		366,903		87,403		279,500		-
	TALF investments			387,702		-		387,702		-
		Total assets measured at fair value	$	11,628,517	$	2,676,295	$	8,855,007	$	97,215
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	310,486	$	-	$	310,486	$	-
	Securities sold but not yet purchased (2)			27,178		27,178		-		-
		Total liabilities measured at fair value	$	337,664	$	27,178	$	310,486	$	-

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
• Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the 2012 second quarter and 2011 second quarter:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Three Months Ended June 30, 2012
Balance at beginning of period			$	96,655	$	6,215	$	102,870
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		(548)		-		(548)
		Included in other comprehensive income		(4,032)		171		(3,861)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(39)		-		(39)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	92,036	$	6,386	$	98,422
Three Months Ended June 30, 2011
Balance at beginning of period			$	169,045	$	8,201	$	177,246
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		7,893		1,388		9,281
		Included in other comprehensive income		(12,431)		(1,589)		(14,020)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(71)		(71)
		Settlements		(51)		-		(51)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	164,456	$	7,929	$	172,385

(1)        Gains or losses on corporate bondsand other investments were recorded in net realized gains (losses).

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the six months ended June 30, 2012 and 2011:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Six Months Ended June 30, 2012
Balance at beginning of period			$	92,091	$	5,124	$	97,215
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		1,783		81		1,864
		Included in other comprehensive income		(1,759)		1,262		(497)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		0		0
		Settlements		(79)		(81)		(160)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	92,036	$	6,386	$	98,422
Six Months Ended June 30, 2011
Balance at beginning of period			$	153,509	$	7,858	$	161,367
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		13,664		1,709		15,373
		Included in other comprehensive income		(2,333)		(972)		(3,305)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(666)		(666)
		Settlements		(384)		-		(384)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	164,456	$	7,929	$	172,385

• Gains or losses on corporate bondsand other investments were recorded in net realized gains (losses).

The amount of total lossesfor the 2012 second quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2012 was $0.5million, while the amount of total gainsfor the six months ended June 30, 2012 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2012 was $1.9million. The amount of total gains for the 2011 second quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011was $9.3million, while the amount of total gains for the six months ended June 30, 2011 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011 was $15.1million.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at June 30, 2012, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At June 30, 2012, the Company's senior notes are carried at their cost of $300.0 million and have a fair value of $374.1 million. The fair values of these securities were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.

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Segment Information

6 Months Ended

Jun. 30, 2012

Segment Information

Segment Information

6.       Segment Information

The following table summarizes the Company's underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:

		Three Months Ended						Three Months Ended
		June 30, 2012						June 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	676,090	$	376,981	$	1,051,813	$	635,005	$	277,766	$	911,939
Net premiums written			464,584		355,649		820,233		438,263		268,280		706,543
Net premiums earned		$	446,594	$	280,062	$	726,656	$	410,819	$	232,060	$	642,879
Fee income			628		178		806		702		82		784
Losses and loss adjustment
	expenses		(290,416)		(109,277)		(399,693)		(301,642)		(129,980)		(431,622)
Acquisition expenses, net			(76,058)		(52,231)		(128,289)		(66,543)		(44,096)		(110,639)
Other operating expenses			(76,617)		(29,140)		(105,757)		(77,774)		(23,671)		(101,445)
Underwriting income (loss)		$	4,131	$	89,592		93,723	$	(34,438)	$	34,395		(43)
Net investment income							73,608						86,671
Net realized gains							34,867						45,210
Net impairment losses
	recognized in earnings						(1,951)						(1,684)
Equity in net income of
	investment funds
	accounted for using
	the equity method						7,787						5,973
Other income (loss)							695						(4,265)
Other expenses							(11,944)						(11,397)
Interest expense							(7,439)						(7,758)
Net foreign exchange gains
	(losses)						31,689						(18,375)
Income before income taxes							221,035						94,332
Income tax (expense) benefit							(767)						2,271
Net income							220,268						96,603
Preferred dividends							(7,649)						(6,461)
Net income available to
	common shareholders					$	212,619					$	90,142
Underwriting Ratios
Loss ratio			65.0%		39.0%		55.0%		73.4%		56.0%		67.1%
Acquisition expense ratio (2)			16.9%		18.6%		17.6%		16.0%		19.0%		17.1%
Other operating expense ratio			17.2%		10.4%		14.6%		18.9%		10.2%		15.8%
Combined ratio			99.1%		68.0%		87.2%		108.3%		85.2%		100.0%

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

The following tablesummarizes the Company's underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the six months ended June 30, 2012 and 2011:

		Six Months Ended						Six Months Ended
		June 30, 2012						June 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	1,364,203	$	756,957	$	2,118,469	$	1,269,588	$	608,779	$	1,876,505
Net premiums written			955,264		728,580		1,683,844		887,554		583,267		1,470,821
Net premiums earned		$	888,334	$	518,634	$	1,406,968	$	818,410	$	458,164	$	1,276,574
Fee income			1,158		191		1,349		1,480		119		1,599
Losses and loss adjustment
	expenses		(593,580)		(201,320)		(794,900)		(599,365)		(326,137)		(925,502)
Acquisition expenses, net			(149,928)		(97,323)		(247,251)		(127,958)		(91,435)		(219,393)
Other operating expenses			(149,987)		(55,263)		(205,250)		(152,403)		(44,898)		(197,301)
Underwriting income (loss)		$	(4,003)	$	164,919		160,916	$	(59,836)	$	(4,187)		(64,023)
Net investment income							147,905						174,978
Net realized gains							78,988						65,905
Net impairment losses
	recognized in earnings						(2,974)						(4,364)
Equity in net income of
	investment funds
	accounted for using
	the equity method						32,613						35,646
Other income (loss)							(7,373)						302
Other expenses							(18,923)						(18,423)
Interest expense							(14,960)						(15,479)
Net foreign exchange gains
	(losses)						11,001						(55,287)
Income before income taxes							387,193						119,255
Income tax (expense) benefit							(2,669)						2,821
Net income							384,524						122,076
Preferred dividends							(14,110)						(12,922)
Net income available to
	common shareholders					$	370,414					$	109,154
Underwriting Ratios
Loss ratio			66.8%		38.8%		56.5%		73.2%		71.2%		72.5%
Acquisition expense ratio (2)			16.7%		18.8%		17.5%		15.5%		20.0%		17.1%
Other operating expense ratio			16.9%		10.7%		14.6%		18.6%		9.8%		15.5%
Combined ratio			100.4%		68.3%		88.6%		107.3%		101.0%		105.1%

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

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Investment Information

6 Months Ended

Jun. 30, 2012

Investment Information [Abstract]

Investment Information

7.        Investment Information

Available For SaleInvestments

The following table summarizes the fair value and cost or amortized cost of the Company's investments classified as available for sale:

		Estimated		Gross		Gross		Cost or		OTTI
		Fair		Unrealized		Unrealized		Amortized		Unrealized
		Value		Gains		Losses		Cost		Losses (2)
At June 30, 2012
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,519,832	$	92,282	$	(11,533)	$	2,439,083	$	(716)
Mortgage backed securities			1,670,108		23,743		(18,286)		1,664,651		(14,772)
Municipal bonds			1,542,262		67,946		(1,541)		1,475,857		(65)
Commercial mortgage backed securities			961,326		31,685		(2,412)		932,053		(3,259)
U.S. government and government agencies			1,380,074		29,797		(1,872)		1,352,149		(207)
Non-U.S. government securities			986,585		32,558		(17,976)		972,003		(157)
Asset backed securities			570,171		17,294		(8,579)		561,456		(3,876)
	Total		9,630,358		295,305		(62,199)		9,397,252		(23,052)
Equity securities			260,864		24,129		(22,248)		258,983		-
Other investments			381,576		15,512		(2,762)		368,826		-
Short-term investments			1,087,910		3,279		(1,330)		1,085,961		-
	Total	$	11,360,708	$	338,225	$	(88,539)	$	11,111,022	$	(23,052)
At December 31, 2011
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,596,118	$	79,407	$	(29,922)	$	2,546,633	$	(1,138)
Mortgage backed securities			1,592,762		27,633		(23,226)		1,588,355		(20,466)
Municipal bonds			1,430,565		77,977		(886)		1,353,474		(105)
Commercial mortgage backed securities			1,046,326		28,780		(2,904)		1,020,450		(3,259)
U.S. government and government agencies			1,451,993		34,811		(3)		1,417,185		(207)
Non-U.S. government securities			737,477		33,486		(17,684)		721,675		-
Asset backed securities			576,757		14,649		(10,078)		572,186		(3,876)
	Total		9,431,998		296,743		(84,703)		9,219,958		(29,051)
Equity securities			299,584		22,870		(22,344)		299,058		-
Other investments			238,111		8,340		(5,610)		235,381		-
Short-term investments			904,219		390		(5,292)		909,121		-
	Total	$	10,873,912	$	328,343	$	(117,949)	$	10,663,518	$	(29,051)

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”
• Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:

		Less than 12 Months				12 Months or More				Total
		Estimated		Gross		Estimated		Gross		Estimated		Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
At June 30, 2012
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	289,690	$	(8,308)	$	36,087	$	(3,225)	$	325,777	$	(11,533)
Mortgage backed securities			664,985		(7,631)		72,287		(10,655)		737,272		(18,286)
Municipal bonds			187,671		(943)		16,583		(598)		204,254		(1,541)
Commercial mortgage backed
	securities		74,376		(728)		20,739		(1,684)		95,115		(2,412)
U.S. government and
	government agencies		373,405		(1,872)		-		-		373,405		(1,872)
Non-U.S. government securities			338,862		(16,492)		10,046		(1,484)		348,908		(17,976)
Asset backed securities			102,740		(5,676)		24,569		(2,903)		127,309		(8,579)
	Total		2,031,729		(41,650)		180,311		(20,549)		2,212,040		(62,199)
Equity securities			81,062		(12,458)		28,874		(9,790)		109,936		(22,248)
Other investments			27,754		(1,014)		23,252		(1,748)		51,006		(2,762)
Short-term investments			124,398		(1,330)		-		-		124,398		(1,330)
	Total	$	2,264,943	$	(56,452)	$	232,437	$	(32,087)	$	2,497,380	$	(88,539)
At December 31, 2011
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	781,635	$	(24,977)	$	47,687	$	(4,945)	$	829,322	$	(29,922)
Mortgage backed securities			255,101		(11,988)		44,606		(11,238)		299,707		(23,226)
Municipal bonds			39,156		(537)		14,988		(349)		54,144		(886)
Commercial mortgage backed
	securities		87,796		(1,676)		14,582		(1,228)		102,378		(2,904)
U.S. government and
	government agencies		7,059		(3)		-		-		7,059		(3)
Non-U.S. government securities			310,182		(16,139)		20,482		(1,545)		330,664		(17,684)
Asset backed securities			260,647		(8,197)		7,317		(1,881)		267,964		(10,078)
	Total		1,741,576		(63,517)		149,662		(21,186)		1,891,238		(84,703)
Equity securities			130,045		(22,039)		1,923		(305)		131,968		(22,344)
Other investments			98,605		(3,053)		22,443		(2,557)		121,048		(5,610)
Short-term investments			189,100		(5,292)		-		-		189,100		(5,292)
	Total	$	2,159,326	$	(93,901)	$	174,028	$	(24,048)	$	2,333,354	$	(117,949)

• In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

At June 30, 2012, on a lot level basis, approximately 790 security lots out of a total of approximately 4,470 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company's fixed maturity portfolio was $3.5 million. At December 31, 2011, on a lot level basis, approximately 1,150 security lots out of a total of approximately 4,520 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company's fixed maturity portfolio was $3.0 million.

The contractual maturities of the Company's fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are management's best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		June 30, 2012				December 31, 2011
		Estimated		Amortized		Estimated		Amortized
Maturity		Fair Value		Cost		Fair Value		Cost
Due in one year or less		$	491,380	$	483,860	$	486,986	$	476,734
Due after one year through five years			3,434,433		3,356,501		2,850,578		2,793,982
Due after five years through 10 years			2,218,284		2,125,636		2,532,834		2,441,800
Due after 10 years			284,656		273,095		345,755		326,451
			6,428,753		6,239,092		6,216,153		6,038,967
Mortgage backed securities			1,670,108		1,664,651		1,592,762		1,588,355
Commercial mortgage backed securities			961,326		932,053		1,046,326		1,020,450
Asset backed securities			570,171		561,456		576,757		572,186
	Total	$	9,630,358	$	9,397,252	$	9,431,998	$	9,219,958

Securities Lending Agreements

The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities.At June 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $74.0 million and $72.0 million, respectively, compared to $56.4million and $54.5million at December 31, 2011, respectively.At June 30, 2012, the portfolio of collateral backing the Company's securities lending program included approximately $6.0 million fair value of sub-prime securities, compared to $7.3 million at December 31, 2011.

Fair Value Option

The Company elected to carry certain fixed maturity securities, equity securities and other investments (primarily term loans) at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in net realized gains or losses while interest income, dividends received and distributions from fund investments which are not a return of capital are reflected in net investment income.The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and to address practicality and cost-benefit considerations.

The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New York's (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in net realized gains or losses while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.

The following table summarizes the Company's assets and liabilities which are accounted for using the fair value option:

		June 30,		December 31,
		2012		2011
Fixed maturities		$	242,735	$	147,779
Equity securities			23,118		87,403
Other investments (par: $228,446 and $138,062)			230,990		131,721
	Investments accounted for using the fair value option		496,843		366,903
Securities sold but not yet purchased (1)			(9,206)		(27,178)
TALF investments			307,453		387,702
TALF borrowings			(235,818)		(310,486)
	Net assets accounted for using the fair value option	$	559,272	$	416,941

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

Net Investment Income

The components of net investment income were derived from the following sources:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Fixed maturities		$	70,290	$	84,420	$	143,739	$	169,564
Term loan investments (1)			3,557		533		5,856		684
Equity securities			2,425		1,844		4,089		3,391
Short-term investments			760		505		1,132		1,183
Other (2)			2,980		5,774		6,174		12,677
	Gross investment income		80,012		93,076		160,990		187,499
Investment expenses			(6,404)		(6,405)		(13,085)		(12,521)
	Net investment income	$	73,608	$	86,671	$	147,905	$	174,978

• Included in “investments accounted for using the fair value option” on the Company's consolidated balance sheets.
• Amounts include dividends on investment funds and other items.

Net Realized Gains (Losses)

Net realized gains (losses) were as follows, excluding other-than-temporary impairment provisions:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Available for sale securities:
	Gross gains on investment sales	$	67,936	$	71,578	$	115,948	$	143,295
	Gross losses on investment sales		(20,757)		(15,917)		(38,693)		(63,667)
Change in fair value of assets and liabilities
accounted for using the fair value option:
	Fixed maturities		(4,810)		(8,483)		3,407		(8,393)
	Equity securities		(3,589)		(6,484)		(202)		(3,050)
	Other investments		(1,744)		196		2,009		323
	TALF investments		(1,274)		2,795		(50)		4,447
	TALF borrowings		(176)		(138)		895		(285)
Derivative instruments (1)			277		3,176		(4,392)		(8,144)
Other			(996)		(1,513)		66		1,379
	Net realized gains	$	34,867	$	45,210	$	78,988	$	65,905

• See Note 9 for information on the Company's derivative instruments.

Other-Than-Temporary Impairments

The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance. The following table details the OTTI recognized in earnings by asset class:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
Fixed maturities:
	Corporate bonds	$	1,166	$	-	$	1,362	$	359
	Mortgage backed securities		146		1,310		892		2,428
	Non-U.S. government securities		261		-		261		-
	Asset backed securities		106		-		106		10
	U.S. government and government agencies		10		-		10		-
	Total		1,689		1,310		2,631		2,797
Investment of funds received under
securities lending agreements			6		374		87		1,230
Equity securities			256		-		256		337
	Total OTTI recognized in earnings	$	1,951	$	1,684	$	2,974	$	4,364

A description of the methodology and significant inputs used to measure the amount of OTTI in the 2012 second quarteris as follows:

• Mortgage backed securities – the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis includes expected cash flow projections under base case and stress case scenarios which modifythe expected default expectations and loss severities and slow down prepayment assumptions. The significant inputs in the models include the expected default rates, delinquency rates and foreclosure costs. The expected recovery values were reduced on a number of mortgage backed securities, primarily as a result of increases in expected default expectations and foreclosure costs. The amortized cost basis of the mortgage backed securities were adjusted down, if required, to the expected recovery value calculated in the OTTI review process;
• Corporate bonds and other fixed maturities– the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain corporate bonds. The amortized cost basis of the corporate bonds was adjusted down, if required, to the expected recovery value calculated in the OTTI review process. In addition, the Company recorded OTTI on a portfolio of global corporate bonds, non-U.S. government securities and U.S. Treasuries due to its intent to liquidate such portfolio in the 2012 third quarter;
• Equity securities – the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. For certain equities which were in an unrealized loss position and where the Company determined that it did not have the intent or ability to hold such securities for a reasonable period of time by which the fair value of the securities would increase and the Company would recover its cost, the cost basis of such securities was adjusted down accordingly;
• Investment of funds received under securities lending agreements – the Company utilized analysis from its securities lending program manager in order to determine an expected recovery value for certain collateral backing the Company's securities lending program which was invested in sub-prime securities. The analysis provided expected cash flow projections for the securities using similar criteria as described in the mortgage backed securities section above. The amortized cost basis of the investment of funds received under securities lending agreements was adjusted down, if required, to the expected recovery value calculated in the OTTI review process.

The Company believes that the $23.1 million of OTTI included in accumulated other comprehensive income at June 30, 2012on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At June 30, 2012, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.

The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:

			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
Balance at start of period			$	67,086	$	84,858	$	66,545	$	86,040
	Credit loss impairments recognized on securities
		not previously impaired		1,693		1,194		1,905		2,863
	Credit loss impairments recognized on securities
		previously impaired		258		490		1,069		1,164
	Reductions for increases in cash flows expected to
		be collected that are recognized over the remaining
		life of the security		-		-		-		-
	Reductions for securities sold during the period			(6,511)		(256)		(6,993)		(3,781)
Balance at end of period			$	62,526	$	86,286	$	62,526	$	86,286

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company's insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 4, “Commitments and Contingencies—Letter of Credit and Revolving Credit Facilities,” for further details. The following table details the value of the Company's restricted assets:

		June 30,		December 31,
		2012		2011
Assets used for collateral or guarantees:
	Affiliated transactions	$	4,426,250	$	4,321,535
	Third party agreements		684,455		757,669
Deposits with U.S. regulatory authorities			288,163		288,458
Deposits with non-U.S. regulatory authorities			223,134		169,733
Trust funds			81,530		60,558
	Total restricted assets	$	5,703,532	$	5,597,953

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Derivative Instruments

6 Months Ended

Jun. 30, 2012

Derivative Instruments

Derivative Instruments

9.        Derivative Instruments

The Company's investment strategy allows for the use of derivative securities. The Company's derivative instruments are recorded on its consolidated balance sheets at fair value. The fair values of those derivatives are based on quoted market prices. All realized and unrealized contract gains and losses are reflected in the Company's results of operations.The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios. Certain of the Company's corporate bonds are managed in a global bond portfolio which incorporates the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements on the portfolio's non-U.S. Dollar denominated holdings. The Company routinely utilizes other foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective.

In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company's position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.The Company did not hold any derivatives which were designated as hedging instruments at June 30, 2012 or December 31, 2011.

The following table summarizes information on the fair values and notional values of the Company's derivative instruments. The fair value of TBAs is included in fixed maturities while the fair value of all other derivatives is included in other investments in the consolidated balance sheets.

		Asset Derivatives				Liability Derivatives
		Estimated Fair Value		Notional Value		Estimated Fair Value		Notional Value
At June 30, 2012
Futures contracts		$	606	$	100,200	$	(1,080)	$	385,900
Foreign currency forward contracts			7,346		274,793		(3,000)		181,832
TBAs			272,555		255,100		(320,270)		295,800
Other			344		10,235		(352)		30,381
	Total	$	280,851			$	(324,702)
At December 31, 2011
Futures contracts		$	771	$	364,035	$	(145)	$	16,275
Foreign currency forward contracts			11,937		352,992		(6,558)		253,733
TBAs			23,661		23,000		(2,178)		2,000
Other			4,005		187,613		(2,048)		309,931
	Total	$	40,374			$	(10,929)

The following table summarizes net realized gains (losses)recorded on the Company's derivative instruments in the consolidated statements of income:

		Three Months Ended				Six Months Ended
Derivatives not designated as		June 30,				June 30,
hedging instruments		2012		2011		2012		2011
Futures contracts		$	(2,322)	$	4,774	$	(4,343)	$	3,373
Foreign currency forward contracts			938		(2,467)		(943)		(16,393)
TBAs			1,419		6,896		1,742		8,502
Other			242		(6,027)		(848)		(3,626)
	Total	$	277	$	3,176	$	(4,392)	$	(8,144)

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Investment Information (Details - Fair Value Option) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	$ 496,843		$ 366,903
Securities sold not yet purchased	(9,206)	[1]	(27,178)	[1]
TALF investments	307,453		387,702
TALF borrowings	(235,818)		(310,486)
Net assets accounted for using the fair value option	559,272		416,941
Fixed maturities
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	242,735		147,779
Equity securities
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	23,118		87,403
Other investments - fair value option
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	230,990		131,721
Other investments par	$ 228,446		$ 138,062

[1] Represents the Company's obligation to deliver equity securities that it did not own at the time of sale. Such amounts are included in "other liabilities" on the Company's consolidated balance sheets.

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Earnings Per Common Share (Tables)

6 Months Ended

Jun. 30, 2012

Earnings Per Common Share

Computation of basic and diluted earnings per common share

			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2012		2011		2012		2011
Numerator:
Net income			$	220,268	$	96,603	$	384,524	$	122,076
Preferred dividends				(7,649)		(6,461)		(14,110)		(12,922)
Net income available to common shareholders			$	212,619	$	90,142	$	370,414	$	109,154
Denominator:
	Weighted average common shares outstanding – basic			134,529,129		131,232,269		134,241,876		132,359,493
	Effect of dilutive common share equivalents:
		Nonvested restricted shares		800,455		931,305		909,524		1,040,514
		Stock options (1)		2,882,152		5,812,025		2,866,090		5,834,924
	Weighted average common shares and common share
		equivalents outstanding – diluted		138,211,736		137,975,599		138,017,490		139,234,931
Earnings per common share:
	Basic		$	1.58	$	0.69	$	2.76	$	0.82
	Diluted		$	1.54	$	0.65	$	2.68	$	0.78

• Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2012 second quarter and 2011 second quarter, the number of stock options excluded were 912,056 and 430,758, respectively.For the six months ended June 30, 2012 and 2011, the number of stock options excluded were 688,634 and 223,063, respectively.

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Share Transactions (Details) (USD $)	6 Months Ended		3 Months Ended						6 Months Ended		0 Months Ended			6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Stock Appreciation Rights And Options	Jun. 30, 2011 Stock Appreciation Rights And Options	Jun. 30, 2012 Restricted Shares And Restricted Stock Units	Jun. 30, 2011 Restricted Shares And Restricted Stock Units	Jun. 30, 2012 Shares repurchased for treasury	Jun. 30, 2011 Shares repurchased for treasury	Jun. 30, 2012 Shares repurchased for treasury	Jun. 30, 2011 Shares repurchased for treasury	May 02, 2012 Series A non-cumulative preferred shares	May 02, 2012 Series B non-cumulative preferred shares	Apr. 02, 2012 Series C non-cumulative preferred shares	Jun. 30, 2012 Common Shares
Share repurchases:
Treasury stock, shares, cumulative amount acquired														104,800,000
Treasury stock, aggregate purchase price, cumulative														$ 2,560,000,000
Treasury stock, shares, acquired							0	900,000	0	8,900,000
Treasury stock, value, acquired, cost method							0	29,600,000	0	266,700,000
Stock repurchase program, remaining authorized repurchase amount														942,000,000
Preferred share offering:
Proceeds from issuance of Series C preferred shares, net	315,789,000	0											316,000,000
Preferred shares, dividend rate, percentage											8.00%	7.875%	6.75%
Shares issued - Series C													325,000,000
Shares redeemed during the period, value											$ 200,000,000	$ 125,000,000
Preferred shares, redemption price per share											$ 25.00	$ 25.00
Share-based compensation:
Share-based compensation, grants in period, shares			782,248	697,632	728,864	727,641
Weighted average grant date fair value of awards granted in period			$ 9.91	$ 9.75	$ 38.59	$ 33.91

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Fair Value (Details - Fair Value Hierarchy) (Fair value measurements - recurring, USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Assets measured at fair value
Total assets measured at fair value	$ 12,165,004		$ 11,628,517
Liabilities measured at fair value
Total liabilities measured at fair value	245,024		337,664
Fixed maturities and fixed maturities pledged under securities lending agreements
Assets measured at fair value
Total assets measured at fair value	9,630,358	[1]	9,431,998	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	2,519,832	[1]	2,596,118	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	1,670,108	[1]	1,592,762	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Assets measured at fair value
Total assets measured at fair value	1,542,262	[1]	1,430,565	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	961,326	[1]	1,046,326	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Assets measured at fair value
Total assets measured at fair value	1,380,074	[1]	1,451,993	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	986,585	[1]	737,477	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Assets measured at fair value
Total assets measured at fair value	570,171	[1]	576,757	[1]
Equity securities
Assets measured at fair value
Total assets measured at fair value	260,864		299,584
Other investments
Assets measured at fair value
Total assets measured at fair value	381,576		238,111
Short-term investments
Assets measured at fair value
Total assets measured at fair value	1,087,910		904,219
Fair value option investments
Assets measured at fair value
Total assets measured at fair value	496,843		366,903
Fair value option investments | Fixed maturities | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	194,663		122,935
Fair value option investments | Fixed maturities | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	48,072		24,844
Fair value option investments | Equity securities, other
Assets measured at fair value
Total assets measured at fair value	23,118		87,403
Fair value option investments | Other investments - fair value option
Assets measured at fair value
Total assets measured at fair value	230,990		131,721
TALF investments
Assets measured at fair value
Total assets measured at fair value	307,453		387,702
TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	235,818		310,486
Securities sold but not yet purchased
Liabilities measured at fair value
Total liabilities measured at fair value	9,206	[2]	27,178	[2]
Quoted Prices in Active Markets for Identical Assets ( Level 1)
Assets measured at fair value
Total assets measured at fair value	2,588,074		2,676,295
Liabilities measured at fair value
Total liabilities measured at fair value	9,206		27,178
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements
Assets measured at fair value
Total assets measured at fair value	1,380,074	[1]	1,451,993	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Assets measured at fair value
Total assets measured at fair value	1,380,074	[1]	1,451,993	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Equity securities
Assets measured at fair value
Total assets measured at fair value	259,648		299,528
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Other investments
Assets measured at fair value
Total assets measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Short-term investments
Assets measured at fair value
Total assets measured at fair value	925,234		837,371
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments
Assets measured at fair value
Total assets measured at fair value	23,118		87,403
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments | Fixed maturities | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments | Fixed maturities | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments | Equity securities, other
Assets measured at fair value
Total assets measured at fair value	23,118		87,403
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments | Other investments - fair value option
Assets measured at fair value
Total assets measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | TALF investments
Assets measured at fair value
Total assets measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	0		0
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Securities sold but not yet purchased
Liabilities measured at fair value
Total liabilities measured at fair value	9,206	[2]	27,178	[2]
Significant Other Observable Inputs ( Level 2)
Assets measured at fair value
Total assets measured at fair value	9,478,508		8,855,007
Liabilities measured at fair value
Total liabilities measured at fair value	235,818		310,486
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements
Assets measured at fair value
Total assets measured at fair value	8,158,248	[1]	7,887,914	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	2,427,796	[1]	2,504,027	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	1,670,108	[1]	1,592,762	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Assets measured at fair value
Total assets measured at fair value	1,542,262	[1]	1,430,565	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	961,326	[1]	1,046,326	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	986,585	[1]	737,477	[1]
Significant Other Observable Inputs ( Level 2) | Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Assets measured at fair value
Total assets measured at fair value	570,171	[1]	576,757	[1]
Significant Other Observable Inputs ( Level 2) | Equity securities
Assets measured at fair value
Total assets measured at fair value	1,216		56
Significant Other Observable Inputs ( Level 2) | Other investments
Assets measured at fair value
Total assets measured at fair value	375,190		232,987
Significant Other Observable Inputs ( Level 2) | Short-term investments
Assets measured at fair value
Total assets measured at fair value	162,676		66,848
Significant Other Observable Inputs ( Level 2) | Fair value option investments
Assets measured at fair value
Total assets measured at fair value	473,725		279,500
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Fixed maturities | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	194,663		122,935
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Fixed maturities | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	48,072		24,844
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Equity securities, other
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Other investments - fair value option
Assets measured at fair value
Total assets measured at fair value	230,990		131,721
Significant Other Observable Inputs ( Level 2) | TALF investments
Assets measured at fair value
Total assets measured at fair value	307,453		387,702
Significant Other Observable Inputs ( Level 2) | TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	235,818		310,486
Significant Other Observable Inputs ( Level 2) | Securities sold but not yet purchased
Liabilities measured at fair value
Total liabilities measured at fair value	0	[2]	0	[2]
Significant Unobservable Inputs (Level 3)
Assets measured at fair value
Total assets measured at fair value	98,422		97,215
Liabilities measured at fair value
Total liabilities measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements
Assets measured at fair value
Total assets measured at fair value	92,036	[1]	92,091	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	92,036	[1]	92,091	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Municipal bonds
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Commercial mortgage backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | US government and government agencies
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Fixed maturities and fixed maturities pledged under securities lending agreements | Asset backed securities
Assets measured at fair value
Total assets measured at fair value	0	[1]	0	[1]
Significant Unobservable Inputs (Level 3) | Equity securities
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Other investments
Assets measured at fair value
Total assets measured at fair value	6,386		5,124
Significant Unobservable Inputs (Level 3) | Short-term investments
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fair value option investments
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fair value option investments | Fixed maturities | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fair value option investments | Fixed maturities | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fair value option investments | Equity securities, other
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Fair value option investments | Other investments - fair value option
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | TALF investments
Assets measured at fair value
Total assets measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	0		0
Significant Unobservable Inputs (Level 3) | Securities sold but not yet purchased
Liabilities measured at fair value
Total liabilities measured at fair value	$ 0	[2]	$ 0	[2]

[1] In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For the purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.

[2] Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in "other liabilities" on the Company's consolidated balance sheets.

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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Net income	$ 384,524	$ 122,076
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	112,923	125,232
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(511)	(863)
Reclassification of net realized gains, net of income taxes, included in net income	(71,303)	(67,858)
Foreign currency translation adjustments, net of deferred income tax	(1,935)	2,570
Other comprehensive income	39,174	59,081
Comprehensive Income	$ 423,698	$ 181,157

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2012

Recent Accounting Pronouncements

Recent Accounting Pronouncements

3.       Recent Accounting Pronouncements

Effective January 1, 2012, the Company adopted an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. The impact of the adoption of the new guidance on the consolidated financial statements was as follows:

	As Previously		Effect of		As Currently
	Reported		Change		Reported
December 31, 2010
Deferred acquisition costs, net	$	277,861	$	(50,583)	$	227,278
Other assets (1)		475,911		14,366		490,277
Retained earnings		4,422,553		(36,217)		4,386,336
Three Months Ended June 30, 2011
Other operating expenses	$	110,563	$	2,279	$	112,842
Income tax benefit		(1,731)		(540)		(2,271)
Net income		98,342		(1,739)		96,603
Net income per common share - basic	$	0.70	$	(0.01)	$	0.69
Net income per common share - diluted	$	0.67	$	(0.02)	$	0.65
Six Months Ended June 30, 2011
Other operating expenses	$	212,983	$	2,741	$	215,724
Income tax benefit		(2,102)		(719)		(2,821)
Net income		124,098		(2,022)		122,076
Net income per common share - basic	$	0.84	$	(0.02)	$	0.82
Net income per common share - diluted	$	0.80	$	(0.02)	$	0.78
(1) Effect of change equals tax benefit included in "other assets" on the Company's balance sheet.

Effective January 1, 2012, the Company prospectively adopted an ASU that provides clarification or changes to existing fair value measurement and disclosure requirements, including, for example, additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. See Note 8,“Fair Value,” for the Company's disclosures on fair value.

Effective January 1, 2012, the Company adopted an ASU that is intended to increase the prominence of other comprehensive income in the financial statements by allowing only two options for reporting comprehensive income: (1) A single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or (2) in a two-statement approach that presents the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The adoption of this ASU did not impact the presentation of the Company's consolidated financial statements.

In December 2011, the FASB issued an ASU that expands the required disclosures about financial instruments and derivative instruments that areeitheroffset for balance sheet presentation purposes or subject to an enforceable master netting arrangement or similar arrangement,regardless of whether they are offset for balance sheet presentation purposes. This ASU is effective for periods beginning onor after January 1, 2013. This new guidance is disclosure-related only and does not amend existing guidance on offsetting on the balance sheet. As such, the Company does not believe that the adoption of this ASU will impact the presentation of its consolidated financial statements.

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Recent Accounting Pronouncements (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Dec. 31, 2010
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Deferred acquisition costs, net	$ 272,736		$ 272,736		$ 227,884	$ 227,278
Other assets	518,744		518,744		460,052	490,277	[1]
Retained earnings						4,386,336
Other operating expenses	117,701	112,842	224,173	215,724
Income tax benefit	767	(2,271)	2,669	(2,821)
Net income	220,268	96,603	384,524	122,076
Net income per common share - basic	$ 1.58	$ 0.69	$ 2.76	$ 0.82
Net income per common share - diluted	$ 1.54	$ 0.65	$ 2.68	$ 0.78
Accounting Standards Update 2010-26 | As previously reported
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Deferred acquisition costs, net						277,861
Other assets						475,911	[1]
Retained earnings						4,422,553
Other operating expenses		110,563		212,983
Income tax benefit		(1,731)		(2,102)
Net income		98,342		124,098
Net income per common share - basic		$ 0.70		$ 0.84
Net income per common share - diluted		$ 0.67		$ 0.80
Accounting Standards Update 2010-26 | Effect of change
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Deferred acquisition costs, net						(50,583)
Other assets						14,366	[1]
Retained earnings						(36,217)
Other operating expenses		2,279		2,741
Income tax benefit		(540)		(719)
Net income		$ (1,739)		$ (2,022)
Net income per common share - basic		$ (0.01)		$ (0.02)
Net income per common share - diluted		$ (0.02)		$ (0.02)

[1] Effect of change equals tax benefit included in "other assets" on the Company's balance sheet.

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Investment Information (Details - Other Than Temporary Impairments Rollforward) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Rollforward:
Balance at start of period	$ 67,086	$ 84,858	$ 66,545	$ 86,040
Credit loss impairments recognized on securities not previously impaired	1,693	1,194	1,905	2,863
Credit loss impairments recognized on securities previously impaired	258	490	1,069	1,164
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	0	0	0	0
Reductions for securities sold during the period	(6,511)	(256)	(6,993)	(3,781)
Balance at end of period	$ 62,526	$ 86,286	$ 62,526	$ 86,286

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Recent Accounting Pronouncements (Tables)

6 Months Ended

Jun. 30, 2012

Recent Accounting Pronouncements

Impact of adoption of new accounting guidance

	As Previously		Effect of		As Currently
	Reported		Change		Reported
December 31, 2010
Deferred acquisition costs, net	$	277,861	$	(50,583)	$	227,278
Other assets (1)		475,911		14,366		490,277
Retained earnings		4,422,553		(36,217)		4,386,336
Three Months Ended June 30, 2011
Other operating expenses	$	110,563	$	2,279	$	112,842
Income tax benefit		(1,731)		(540)		(2,271)
Net income		98,342		(1,739)		96,603
Net income per common share - basic	$	0.70	$	(0.01)	$	0.69
Net income per common share - diluted	$	0.67	$	(0.02)	$	0.65
Six Months Ended June 30, 2011
Other operating expenses	$	212,983	$	2,741	$	215,724
Income tax benefit		(2,102)		(719)		(2,821)
Net income		124,098		(2,022)		122,076
Net income per common share - basic	$	0.84	$	(0.02)	$	0.82
Net income per common share - diluted	$	0.80	$	(0.02)	$	0.78
(1) Effect of change equals tax benefit included in "other assets" on the Company's balance sheet.