10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
Or
o	TRANSITION 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 November 1, 2012 was 136,550,744.

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
September 30, 2012 (unaudited) and December 31, 2011	3
Consolidated Statements of Income
For the three and nine month periods ended September 30, 2012 and 2011 (unaudited)	4
Consolidated Statements of Comprehensive Income
For the nine months ended ended September 30, 2012 and 2011 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity
For the nine months ended ended September 30, 2012 and 2011 (unaudited)	6
Consolidated Statements of Cash Flows
For the nine months ended ended September 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	31
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	70
Item 4 — Controls and Procedures	70
PART II. Other Information
Item 1 — Legal Proceedings	71
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 5 — Other Information	71
Item 6 — Exhibits	72

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 September 30, 2012, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2012 and September 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

November 9, 2012

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	September 30,			December 31,
	2012			2011
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $9,616,883 and $9,165,438)	$	9,944,186		$	9,375,604
Short-term investments available for sale, at fair value (amortized cost: $840,457 and $909,121)	845,158			904,219
Investment of funds received under securities lending, at fair value (amortized cost: $25,651 and $48,577)	26,279			48,419
Equity securities available for sale, at fair value (cost: $297,506 and $299,058)	312,371			299,584
Other investments available for sale, at fair value (cost: $455,149 and $235,381)	477,857			238,111
Investments accounted for using the fair value option	698,068			366,903
TALF investments, at fair value (amortized cost: $255,615 and $373,040)	270,206			387,702
Investments accounted for using the equity method	339,587			380,507
Total investments	12,913,712			12,001,049
Cash	422,440			351,699
Accrued investment income	68,069			70,739
Investment in joint venture (cost: $100,000)	109,363			107,576
Fixed maturities and short-term investments pledged under securities lending, at fair value	34,769			56,393
Premiums receivable	773,172			501,563
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,733,830			1,851,584
Contractholder receivables	849,352			748,231
Prepaid reinsurance premiums	302,513			265,696
Deferred acquisition costs, net	279,171			227,884
Receivable for securities sold	894,318			462,891
Other assets	509,048			460,052
Total Assets	$	18,889,757		$	17,105,357
Liabilities
Reserve for losses and loss adjustment expenses	$	8,562,328		$	8,456,210
Unearned premiums	1,815,524			1,411,872
Reinsurance balances payable	172,016			133,866
Contractholder payables	849,352			748,231
Senior notes	300,000			300,000
Revolving credit agreement borrowings	100,000			100,000
TALF borrowings, at fair value (par: $186,291 and $310,868)	185,223			310,486
Securities lending payable	35,707			58,546
Payable for securities purchased	1,012,060			480,230
Other liabilities	508,753			513,842
Total Liabilities	13,540,963			12,513,283
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares	325,000			325,000
Common shares ($0.0033 par, shares issued: 167,004,690 and 164,636,338)	556			549
Additional paid-in capital	200,607			161,419
Retained earnings	5,351,241			4,796,655
Accumulated other comprehensive income, net of deferred income tax	324,132			153,923
Common shares held in treasury, at cost (shares: 30,464,512 and 30,277,993)	(852,742		)	(845,472		)
Total Shareholders’ Equity	5,348,794			4,592,074
Total Liabilities and Shareholders’ Equity	$	18,889,757		$	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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues
Net premiums written	$	755,249		$	691,381		$	2,439,093		$	2,162,202
Change in unearned premiums	(6,558		)	(9,332		)	(283,434		)	(203,579		)
Net premiums earned	748,691			682,049			2,155,659			1,958,623
Net investment income	73,221			82,753			221,126			257,731
Net realized gains	60,391			30,199			139,379			96,104
Other-than-temporary impairment losses	(2,644		)	(5,180		)	(6,129		)	(10,407		)
Less investment impairments recognized in other comprehensive income, before taxes	265			2,441			776			3,304
Net impairment losses recognized in earnings	(2,379		)	(2,739		)	(5,353		)	(7,103		)
Fee income	1,077			848			2,426			2,447
Equity in net income (loss) of investment funds accounted for using the equity method	24,330			(30,549		)	56,943			5,097
Other income (loss)	(532		)	2,432			(7,905		)	2,734
Total revenues	904,799			764,993			2,562,275			2,315,633
Expenses
Losses and loss adjustment expenses	443,871			423,984			1,238,771			1,349,486
Acquisition expenses	128,065			120,205			375,316			339,598
Other operating expenses	113,429			106,321			337,602			322,045
Interest expense	7,378			8,125			22,338			23,604
Net foreign exchange losses (gains)	16,959			(60,040		)	5,958			(4,753		)
Total expenses	709,702			598,595			1,979,985			2,029,980
Income before income taxes	195,097			166,398			582,290			285,653
Income tax expense (benefit)	5,441			(2,357		)	8,110			(5,178		)
Net income	189,656			168,755			574,180			290,831
Preferred dividends	5,484			6,461			19,594			19,383
Net income available to common shareholders	$	184,172		$	162,294		$	554,586		$	271,448
Net income per common share
Basic	$	1.36		$	1.23		$	4.12		$	2.06
Diluted	$	1.33		$	1.18		$	4.01		$	1.96
Weighted average common shares and common share equivalents outstanding
Basic	135,067,360			131,560,851			134,519,046			132,090,354
Diluted	138,696,934			137,140,929			138,235,995			138,542,558

See Notes to Consolidated Financial Statements

4

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
	2012			2011
Comprehensive Income
Net income	$	574,180		$	290,831
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	277,656			53,371
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(776		)	(3,303		)
Reclassification of net realized gains, net of income taxes, included in net income	(118,714		)	(98,565		)
Foreign currency translation adjustments, net of deferred income tax	12,043			(9,430		)
Other comprehensive income	170,209			(57,927		)
Comprehensive Income	$	744,389		$	232,904

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)
	Nine Months Ended
	September 30,
	2012			2011
Non-Cumulative Preferred Shares
Balance at beginning of year	$	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			10
Balance at end of period	556			544
Additional Paid-in Capital
Balance at beginning of year	161,419			110,325
Common shares issued, net	4,561			3,910
Issue costs on Series C preferred shares	(9,398		)	—
Exercise of stock options	7,619			9,379
Amortization of share-based compensation	34,659			25,286
Other	1,747			1,982
Balance at end of period	200,607			150,882
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	(19,594		)	(19,383		)
Net income	574,180			290,831
Balance at end of period	5,351,241			4,657,784
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	158,942			(45,194		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(776		)	(3,303		)
Foreign currency translation adjustments, net of deferred income tax	12,043			(9,430		)
Balance at end of period	324,132			146,576
Common Shares Held in Treasury, at Cost
Balance at beginning of year	(845,472		)	(549,912		)
Shares repurchased for treasury	(7,270		)	(294,975		)
Balance at end of period	(852,742		)	(844,887		)
Total Shareholders’ Equity	$	5,348,794		$	4,435,899

(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)
	Nine Months Ended
	September 30,
	2012			2011
Operating Activities
Net income	$	574,180		$	290,831
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(142,703		)	(100,982		)
Net impairment losses recognized in earnings	5,353			7,103
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	(37,318		)	50,324
Share-based compensation	34,659			25,286
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	180,016			334,620
Unearned premiums, net of prepaid reinsurance premiums	283,433			204,042
Premiums receivable	(204,854		)	(114,044		)
Deferred acquisition costs, net	(51,222		)	(26,082		)
Reinsurance balances payable	19,171			(3,381		)
Other liabilities	21,664			12,678
Other items, net	49,572			76,076
Net Cash Provided By Operating Activities	731,951			756,471
Investing Activities
Purchases of:
Fixed maturity investments	(12,670,073		)	(10,116,781		)
Equity securities	(215,921		)	(343,062		)
Other investments	(700,308		)	(373,814		)
Proceeds from the sales of:
Fixed maturity investments	11,522,538			8,855,624
Equity securities	264,417			311,117
Other investments	329,093			396,514
Proceeds from redemptions and maturities of fixed maturity investments	867,080			738,081
Net sales of short-term investments	72,139			112,465
Change in investment of securities lending collateral	22,840			3,325
Purchase of business, net of cash acquired	28,948			—
Purchases of furniture, equipment and other assets	(13,894		)	(15,526		)
Net Cash Used For Investing Activities	(493,141		)	(432,057		)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,763			—
Repurchase of Series A and B preferred shares	(325,000		)	—
Purchases of common shares under share repurchase program	—			(287,558		)
Proceeds from common shares issued, net	1,604			3,087
Repayments of borrowings	(124,577		)	(11,839		)
Change in securities lending collateral	(22,840		)	(3,325		)
Other	4,479			3,999
Preferred dividends paid	(22,897		)	(19,383		)
Net Cash Used For Financing Activities	(173,468		)	(315,019		)
Effects of exchange rate changes on foreign currency cash	5,399			(2,240		)
Increase in cash	70,741			7,155
Cash beginning of year	351,699			362,740
Cash end of period	$	422,440		$	369,895

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 0.7 million common shares for an aggregate purchase price of $20.8 million during the 2011 third quarter and 9.6 million common shares for an aggregate purchase price of $287.6 during the nine months ended September 30, 2011. At September 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)

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 September 30, 2011
Other operating expenses	$	105,998		$	323		$	106,321
Income tax benefit	(2,267		)	(90		)	(2,357		)
Net income	168,988			(233		)	168,755
Net income per common share - basic	$	1.24		$	(0.01	)	$	1.23
Net income per common share - diluted	$	1.19		$	(0.01	)	$	1.18
Nine Months Ended September 30, 2011
Other operating expenses	$	318,981		$	3,064		$	322,045
Income tax benefit	(4,369		)	(809		)	(5,178		)
Net income	293,086			(2,255		)	290,831
Net income per common share - basic	$	2.07		$	(0.01	)	$	2.06
Net income per common share - diluted	$	1.98		$	(0.02	)	$	1.96

(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 September 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 September 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 September 30, 2012, the Company had $444.8 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $518.7 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 September 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 $528.0 million at September 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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Numerator:
Net income	$	189,656		$	168,755		$	574,180		$	290,831
Preferred dividends	(5,484		)	(6,461		)	(19,594		)	(19,383		)
Net income available to common shareholders	$	184,172		$	162,294		$	554,586		$	271,448
Denominator:
Weighted average common shares outstanding — basic	135,067,360			131,560,851			134,519,046			132,090,354
Effect of dilutive common share equivalents:
Nonvested restricted shares	723,538			750,289			847,959			952,898
Stock options (1)	2,906,036			4,829,789			2,868,990			5,499,306
Weighted average common shares and common share equivalents outstanding — diluted	138,696,934			137,140,929			138,235,995			138,542,558
Earnings per common share:
Basic	$	1.36		$	1.23		$	4.12		$	2.06
Diluted	$	1.33		$	1.18		$	4.01		$	1.96

(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 third quarter and 2011 third quarter, the number of stock options excluded were 621,556 and 698,912, respectively. For the nine months ended September 30, 2012 and 2011, the number of stock options excluded were 860,088 and 385,444, 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
	September 30, 2012									September 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	658,599		$	279,751		$	936,764		$	634,280		$	227,837		$	860,289
Net premiums written	483,356			271,893			755,249			472,986			218,395			691,381
Net premiums earned	$	456,341		$	292,350		$	748,691		$	437,970		$	244,079		$	682,049
Fee income	645			432			1,077			661			187			848
Losses and loss adjustment expenses	(307,155		)	(136,716		)	(443,871		)	(290,608		)	(133,376		)	(423,984		)
Acquisition expenses, net	(73,663		)	(54,402		)	(128,065		)	(76,763		)	(43,442		)	(120,205		)
Other operating expenses	(75,379		)	(29,001		)	(104,380		)	(77,801		)	(22,340		)	(100,141		)
Underwriting income (loss)	$	789		$	72,663		73,452			$	(6,541	)	$	45,108		38,567
Net investment income							73,221									82,753
Net realized gains							60,391									30,199
Net impairment losses recognized in earnings							(2,379		)							(2,739		)
Equity in net income (loss) of investment funds accounted for using the equity method							24,330									(30,549		)
Other income (loss)							(532		)							2,432
Other expenses							(9,049		)							(6,180		)
Interest expense							(7,378		)							(8,125		)
Net foreign exchange gains (losses)							(16,959		)							60,040
Income before income taxes							195,097									166,398
Income tax (expense) benefit							(5,441		)							2,357
Net income							189,656									168,755
Preferred dividends							(5,484		)							(6,461		)
Net income available to common shareholders							$	184,172								$	162,294
Underwriting Ratios
Loss ratio	67.3		%	46.8		%	59.3		%	66.4		%	54.6		%	62.2		%
Acquisition expense ratio (2)	16.0		%	18.6		%	17.0		%	17.4		%	17.8		%	17.5		%
Other operating expense ratio	16.5		%	9.9		%	13.9		%	17.8		%	9.2		%	14.7		%
Combined ratio	99.8		%	75.3		%	90.2		%	101.6		%	81.6		%	94.4		%

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

(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 nine months ended September 30, 2012 and 2011:

	Nine Months Ended									Nine Months Ended
	September 30, 2012									September 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	2,022,802		$	1,036,708		$	3,055,233		$	1,903,868		$	836,616		$	2,736,794
Net premiums written	1,438,620			1,000,473			2,439,093			1,360,540			801,662			2,162,202
Net premiums earned	$	1,344,675		$	810,984		$	2,155,659		$	1,256,380		$	702,243		$	1,958,623
Fee income	1,803			623			2,426			2,141			306			2,447
Losses and loss adjustment expenses	(900,735		)	(338,036		)	(1,238,771		)	(889,973		)	(459,513		)	(1,349,486		)
Acquisition expenses, net	(223,591		)	(151,725		)	(375,316		)	(204,721		)	(134,877		)	(339,598		)
Other operating expenses	(225,366		)	(84,264		)	(309,630		)	(230,204		)	(67,238		)	(297,442		)
Underwriting income (loss)	$	(3,214	)	$	237,582		234,368			$	(66,377	)	$	40,921		(25,456		)
Net investment income							221,126									257,731
Net realized gains							139,379									96,104
Net impairment losses recognized in earnings							(5,353		)							(7,103		)
Equity in net income of investment funds accounted for using the equity method							56,943									5,097
Other income (loss)							(7,905		)							2,734
Other expenses							(27,972		)							(24,603		)
Interest expense							(22,338		)							(23,604		)
Net foreign exchange gains (losses)							(5,958		)							4,753
Income before income taxes							582,290									285,653
Income tax (expense) benefit							(8,110		)							5,178
Net income							574,180									290,831
Preferred dividends							(19,594		)							(19,383		)
Net income available to common shareholders							$	554,586								$	271,448
Underwriting Ratios
Loss ratio	67.0		%	41.7		%	57.5		%	70.8		%	65.4		%	68.9		%
Acquisition expense ratio (2)	16.5		%	18.7		%	17.3		%	16.1		%	19.2		%	17.2		%
Other operating expense ratio	16.8		%	10.4		%	14.4		%	18.3		%	9.6		%	15.2		%
Combined ratio	100.3		%	70.8		%	89.2		%	105.2		%	94.2		%	101.3		%

(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 September 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,707,999	$	113,295	$	(7,039	)	$	2,601,743	$	(113	)
Mortgage backed securities	1,873,874		42,374		(7,439		)	1,838,939		(9,342		)
Municipal bonds	1,579,872		74,558		(730		)	1,506,044		(17		)
Commercial mortgage backed securities	824,162		42,745		(1,838		)	783,255		(3,498		)
U.S. government and government agencies	1,131,358		28,015		(1,520		)	1,104,863		(19		)
Non-U.S. government securities	1,026,432		37,927		(11,193		)	999,698		—
Asset backed securities	835,258		25,400		(6,093		)	815,951		(3,459		)
Total	9,978,955		364,314		(35,852		)	9,650,493		(16,448		)
Equity securities	312,371		29,744		(14,879		)	297,506		—
Other investments	477,857		24,737		(2,029		)	455,149		—
Short-term investments	845,158		5,439		(738		)	840,457		—
Total	$	11,614,341	$	424,234	$	(53,498	)	$	11,243,605	$	(16,448	)
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 September 30, 2012, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $1.1 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 September 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	199,075	$	(2,673	)	$	67,200	$	(4,366	)	$	266,275	$	(7,039	)
Mortgage backed securities	280,362		(5,268		)	42,033		(2,171		)	322,395		(7,439		)
Municipal bonds	46,307		(248		)	9,802		(482		)	56,109		(730		)
Commercial mortgage backed securities	9,901		(451		)	14,632		(1,387		)	24,533		(1,838		)
U.S. government and government agencies	123,700		(1,520		)	—		—			123,700		(1,520		)
Non-U.S. government securities	153,052		(1,103		)	126,123		(10,090		)	279,175		(11,193		)
Asset backed securities	27,932		(71		)	90,149		(6,022		)	118,081		(6,093		)
Total	840,329		(11,334		)	349,939		(24,518		)	1,190,268		(35,852		)
Equity securities	60,326		(5,985		)	43,562		(8,894		)	103,888		(14,879		)
Other investments	56,778		(1,027		)	27,539		(1,002		)	84,317		(2,029		)
Short-term investments	80,420		(738		)	—		—			80,420		(738		)
Total	$	1,037,853	$	(19,084	)	$	421,040	$	(34,414	)	$	1,458,893	$	(53,498	)
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 September 30, 2012, on a lot level basis, approximately 590 security lots out of a total of approximately 4,440 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 $3.1 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.

	September 30, 2012				December 31, 2011
	Estimated		Amortized		Estimated		Amortized
Maturity	Fair Value		Cost		Fair Value		Cost
Due in one year or less	$	471,678	$	462,425	$	486,986	$	476,734
Due after one year through five years	3,664,256		3,556,156		2,850,578		2,793,982
Due after five years through 10 years	2,083,013		1,978,601		2,532,834		2,441,800
Due after 10 years	226,714		215,166		345,755		326,451
	6,445,661		6,212,348		6,216,153		6,038,967
Mortgage backed securities	1,873,874		1,838,939		1,592,762		1,588,355
Commercial mortgage backed securities	824,162		783,255		1,046,326		1,020,450
Asset backed securities	835,258		815,951		576,757		572,186
Total	$	9,978,955	$	9,650,493	$	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 September 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $34.8 million and $33.6 million, respectively, compared to $56.4 million and $54.5 million at December 31, 2011, respectively. At September 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:

	September 30,			December 31,
	2012			2011
Fixed maturities	$	306,424		$	147,779
Equity securities	28,405			87,403
Other investments (par: $354,835 and $138,062)	363,239			131,721
Investments accounted for using the fair value option	698,068			366,903
Securities sold but not yet purchased (1)	(8,017		)	(27,178		)
TALF investments (2)	270,206			387,702
TALF borrowings (2)	(185,223		)	(310,486		)
Net assets accounted for using the fair value option	$	775,034		$	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.

(2)See Note 12, “Subsequent Events.”

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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Fixed maturities	$	68,203		$	82,686		$	211,942		$	252,250
Term loan investments (1)	4,876			881			10,732			1,565
Equity securities	2,009			1,796			6,098			5,187
Short-term investments	485			430			1,617			1,613
Other (2)	3,794			3,383			9,968			16,060
Gross investment income	79,367			89,176			240,357			276,675
Investment expenses	(6,146		)	(6,423		)	(19,231		)	(18,944		)
Net investment income	$	73,221		$	82,753		$	221,126		$	257,731

(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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Available for sale securities:
Gross gains on investment sales	$	70,510		$	61,008		$	186,458		$	204,303
Gross losses on investment sales	(20,672		)	(21,503		)	(59,365		)	(85,170		)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	5,322			(4,366		)	8,729			(12,759		)
Equity securities	1,466			(28,993		)	1,264			(32,043		)
Other investments	3,810			(3,755		)	5,819			(3,432		)
TALF investments	(21		)	(2,130		)	(71		)	2,317
TALF borrowings	(209		)	79			686			(206		)
Derivative instruments (1)	297			36,179			(4,095		)	28,035
Other	(112		)	(6,320		)	(46		)	(4,941		)
Net realized gains	$	60,391		$	30,199		$	139,379		$	96,104

(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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Fixed maturities:
Mortgage backed securities	$	1,511	$	1,192	$	2,403	$	3,620
Corporate bonds	150		16		1,512		375
Non-U.S. government securities	—		—		261		—
Commercial mortgage backed securities	211		—		211		—
Asset backed securities	—		—		106		10
U.S. government and government agencies	—		—		10		—
Total	1,872		1,208		4,503		4,005
Investment of funds received under securities lending agreements	—		393		87		1,623
Equity securities	507		1,138		763		1,475
Total OTTI recognized in earnings	$	2,379	$	2,739	$	5,353	$	7,103

19

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A description of the methodology and significant inputs used to measure the amount of OTTI in the 2012 third 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 in the 2012 second quarter due to its intent to liquidate such portfolio;

·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 $16.4 million of OTTI included in accumulated other comprehensive income at September 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 September 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.

20

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance at start of period	$	62,526		$	86,286		$	66,545		$	86,040
Credit loss impairments recognized on securities not previously impaired	747			272			2,652			3,135
Credit loss impairments recognized on securities previously impaired	1,632			1,328			2,701			2,492
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	(1,709		)	(530		)	(8,702		)	(4,311		)
Balance at end of period	$	63,196		$	87,356		$	63,196		$	87,356

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:

	September 30,		December 31,
	2012		2011
Assets used for collateral or guarantees:
Affiliated transactions	$	4,285,238	$	4,321,535
Third party agreements	727,485		757,669
Deposits with U.S. regulatory authorities	289,929		288,458
Deposits with non-U.S. regulatory authorities	233,868		169,733
Trust funds	92,021		60,558
Total restricted assets	$	5,628,541	$	5,597,953

21

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 September 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 September 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 $12.78 billion of financial assets and liabilities measured at fair value at September 30, 2012, approximately $2.07 billion, or 16.2%, 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.

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 September 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	$	2,707,999	$	—	$	2,613,370	$	94,629
Mortgage backed securities	1,873,874		—		1,873,874		—
Municipal bonds	1,579,872		—		1,579,872		—
Commercial mortgage backed securities	824,162		—		824,162		—
U.S. government and government agencies	1,131,358		1,131,358		—		—
Non-U.S. government securities	1,026,432		—		1,026,432		—
Asset backed securities	835,258		—		835,258		—
Total	9,978,955		1,131,358		8,752,968		94,629
Equity securities	312,371		312,288		83		—
Other investments	477,857		—		473,061		4,796
Short-term investments	845,158		759,868		85,290		—
Fair value option:
Investments accounted for using the fair value option:
Corporate bonds	234,453		—		234,453		—
Non-U.S. government bonds	71,971		—		71,971		—
Equity securities	28,405		28,405		—		—
Other investments	363,239		—		363,239		—
Total	698,068		28,405		669,663		—
TALF investments	270,206		—		270,206		—
Total assets measured at fair value	$	12,582,615	$	2,231,919	$	10,251,271	$	99,425
Liabilities measured at fair value:
Fair value option:
TALF borrowings	$	185,223	$	—	$	185,223	$	—
Securities sold but not yet purchased (2)	8,017		8,017		—		—
Total liabilities measured at fair value	$	193,240	$	8,017	$	185,223	$	—

(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 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.

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 2012 third quarter and 2011 third quarter:

	Fair Value Measurements Using:
	Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Other Investments			Total
Three Months Ended September 30, 2012
Balance at beginning of period	$	92,036		$	6,386		$	98,422
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	1,402			1,627			3,029
Included in other comprehensive income	1,229			(1,590		)	(361		)
Purchases, issuances, sales and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(38		)	(1,627		)	(1,665		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	94,629		$	4,796		$	99,425
Three Months Ended September 30, 2011
Balance at beginning of period	$	164,456		$	7,929		$	172,385
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	(5,742		)	—			(5,742		)
Included in other comprehensive income	(17,317		)	(1,929		)	(19,246		)
Purchases, issuances, sales and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(376		)	—			(376		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	141,021		$	6,000		$	147,021

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

26

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 nine months ended September 30, 2012 and 2011:

	Fair Value Measurements Using:
	Significant Unobservable Inputs (Level 3)
	Corporate Bonds			Other Investments			Total
Nine Months Ended September 30, 2012
Balance at beginning of period	$	92,091		$	5,124		$	97,215
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	3,185			1,708			4,893
Included in other comprehensive income	(530		)	(328		)	(858		)
Purchases, issuances, sales and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	(117		)	(1,708		)	(1,825		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	94,629		$	4,796		$	99,425
Nine Months Ended September 30, 2011
Balance at beginning of period	$	153,509		$	7,858		$	161,367
Total gains or (losses) (realized/unrealized)
Included in earnings (1)	507			1,709			2,216
Included in other comprehensive income	(3,763		)	(2,901		)	(6,664		)
Purchases, issuances, sales and settlements
Purchases	—			—			—
Issuances	—			—			—
Sales	—			(666		)	(666		)
Settlements	(9,232		)	—			(9,232		)
Transfers in and/or out of Level 3	—			—			—
Balance at end of period	$	141,021		$	6,000		$	147,021

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

The amount of total gains for the 2012 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012 was $3.0 million, while the amount of total gains for the nine months ended September 30, 2012 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012 was $4.9 million. The amount of total losses for the 2011 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011 was $5.7 million, while the amount of total gains for the nine months ended September 30, 2011 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011 was $1.9 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 September 30, 2012, due to their

27

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

At September 30, 2012, the Company’s senior notes are carried at their cost of $300.0 million and have a fair value of $386.5 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 September 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 available for sale, at fair value” while the fair value of all other derivatives is included in “other investments available for sale, at fair value” in the consolidated balance sheets.

	Asset Derivatives				Liability Derivatives
	Estimated Fair Value		Notional Value		Estimated Fair Value			Notional Value
At September 30, 2012
Futures contracts	$	40	$	70,000	$	(10	)	$	53,600
Foreign currency forward contracts	789		86,910		(1,466		)	138,293
TBAs	483,977		444,650		(554,902		)	509,550
Other	471		6,336		(326		)	27,888
Total	$	485,277			$	(556,704	)
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	)

28

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					Nine Months Ended
Derivatives not designated as	September 30,					September 30,
hedging instruments	2012			2011		2012			2011
Futures contracts	$	(245	)	$	12,142	$	(4,588	)	$	15,515
Foreign currency forward contracts	737			12,155		(206		)	(4,238		)
TBAs	1,140			2,554		2,882			11,056
Other	(1,335		)	9,328		(2,183		)	5,702
Total	$	297		$	36,179	$	(4,095	)	$	28,035

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 2.8% and 1.4% for the 2012 third quarter and nine months ended September 30, 2012, compared to (1.4)% and (1.8)% for the 2011 third quarter and nine months ended September 30, 2011. 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 $93.6 million at September 30, 2012, compared to $80.7 million at December 31, 2011. In addition, the Company paid $4.1 million in income taxes, net of recoveries, for the nine months ended September 30, 2012, compared to $9.6 million for the 2011 period.

29

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 $6.2 million of federal excise taxes for the nine months ended September 30, 2012, compared to $7.3 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 September 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.

12.Subsequent Events

Subsequent to September 30, 2012, the Company sold all investments it held under the FRBNY’s TALF program (reflected as “TALF investments, at fair value”) and the related secured financing from the FRBNY was extinguished accordingly (reflected as “TALF borrowings, at fair value”).

On October 29, 2012, Hurricane Sandy made landfall on the eastern coast of the United States. It is too early to reasonably estimate losses for this recent event given the significant unknowns, the early stage of the damage assessment process and the unusual nature of the event.

30

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 $5.75 billion in capital at September 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, changes for most lines continued to maintain or slightly improve in the 2012 third quarter. In our insurance business, rates were up approximately 3.5% on a weighted basis. We experienced favorable rate movement on primary lines such as general liability, umbrella liability, auto liability and workers’ compensation. An exception to the overall rate trend was in healthcare which experienced a moderate rate reduction during the 2012 third 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. We expected that additional capacity in 2012 would put pressure on rates for the upcoming renewal season. However, the impact of Hurricane Sandy has the potential to change that scenario. 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

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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 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 October 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 $880 million, followed by windstorms affecting the Northeastern U.S. and Florida Tri-County with net probable maximum pre-tax losses of $857 million and $653 million, respectively. Based on in-force exposure estimated as of July 1, 2012, our modeled peak zone exposure was a windstorm affecting the Gulf of Mexico, with a net probable maximum pre-tax loss of $876 million, followed by windstorms affecting the Northeastern U.S. and Florida Tri-County with net probable maximum pre-tax losses of $849 million and $646 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 October 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,

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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.

Book value per common share was $36.79 at September 30, 2012, compared to $34.45 at June 30, 2012 and $31.76 at December 31, 2011. The 6.8% change for the 2012 third quarter and 15.8% change for the nine months ended September 30, 2012 were 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 9.9% for the 2012 third quarter, compared to 10.5% for the 2011 third quarter, and 10.8% for the nine months ended September 30, 2012, compared to 5.6% for the 2011 period. The lower Operating ROAE for the 2012 third quarter primarily resulted from a higher level of average equity compared to the 2011 third quarter while the higher return for the nine months ended September 30, 2012 reflected improved underwriting results which reflected a lower level of catastrophic events than in the 2011 period.

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 September 30, 2012, the benchmark return index had an average credit quality of “Aa1” by Moody’s Investors Service (“Moody’s”), an estimated duration of 3.19 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 third quarter	2.45	%	1.86	%
2011 third quarter	(0.23	)%	0.46	%
Nine months ended September 30, 2012	5.04	%	4.34	%
Nine months ended September 30, 2011	2.97	%	3.34	%

(1)  Our investment expenses were approximately 0.21% and 0.22% of average invested assets for the 2012 third quarter and 2011

third quarter, respectively, and 0.22% for each of the nine months ended September 30, 2012 and 2011.

For the 2012 third quarter, total return on our portfolio reflected tighter spreads on many fixed income securities, a significant rally in mortgages and strong returns on equities and alternative assets. Our portfolio outperformed the benchmark return by 59 basis points for the 2012 third quarter, due in part to an overweighting in certain sector allocations to the benchmark return. Excluding foreign exchange, total return was 2.17% for the 2012 third quarter, compared to 0.38% for the 2011 third quarter, and 4.89% for the nine months ended September 30, 2012, compared to 3.11% 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

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realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, 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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
After-tax operating income available to common shareholders	$	120,247		$	107,176		$	375,307		$	174,491
Net realized gains, net of tax	58,904			28,458			133,052			94,842
Net impairment losses recognized in earnings, net of tax	(2,379		)	(2,739		)	(5,353		)	(7,103		)
Equity in net income (loss) of investment funds accounted for using the equity method, net of tax	24,330			(30,549		)	56,943			5,097
Net foreign exchange (losses) gains, net of tax	(16,930		)	59,948			(5,363		)	4,121
Net income available to common shareholders	$	184,172		$	162,294		$	554,586		$	271,448

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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 $27.7 million, net of reinsurance and reinstatement premiums, in the 2012 third quarter, compared to $59.6 million in the 2011 third quarter, and $57.9 million for the nine months ended September 30, 2012, compared to $333.3 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 September 30,							Nine Months Ended September 30,
	2012			2011			% Change	2012			2011			% Change
Gross premiums written	$	658,599		$	634,280		3.8	$	2,022,802		$	1,903,868		6.2
Net premiums written	483,356			472,986			2.2	1,438,620			1,360,540			5.7
Net premiums earned	$	456,341		$	437,970		4.2	$	1,344,675		$	1,256,380		7.0
Fee income	645			661				1,803			2,141
Losses and loss adjustment expenses	(307,155		)	(290,608		)		(900,735		)	(889,973		)
Acquisition expenses, net	(73,663		)	(76,763		)		(223,591		)	(204,721		)
Other operating expenses	(75,379		)	(77,801		)		(225,366		)	(230,204		)
Underwriting income (loss)	$	789		$	(6,541	)	n/m	$	(3,214	)	$	(66,377	)	n/m

					% Point						% Point
Underwriting Ratios					Change						Change
Loss ratio	67.3	%	66.4	%	0.9		67.0	%	70.8	%	(3.8	)
Acquisition expense ratio (1)	16.0	%	17.4	%	(1.4	)	16.5	%	16.1	%	0.4
Other operating expense ratio	16.5	%	17.8	%	(1.3	)	16.8	%	18.3	%	(1.5	)
Combined ratio	99.8	%	101.6	%	(1.8	)	100.3	%	105.2	%	(4.9	)

(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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Programs	$	98,052	20	$	79,086	17	$	272,666	19	$	235,111	17
Property, energy, marine and aviation	92,266		19	114,631		24	258,475		18	294,345		22
Professional liability	68,923		14	66,484		14	204,682		14	183,775		14
Executive assurance	63,059		13	62,328		13	191,642		13	172,370		13
Construction	23,481		5	23,576		5	106,918		7	97,493		7
Casualty	23,662		5	30,563		6	81,273		6	85,636		6
Travel and accident	22,017		5	17,404		4	65,147		5	58,189		4
Lenders products	20,257		4	22,551		5	63,149		4	65,151		5
National accounts	22,483		5	17,275		4	62,882		4	61,863		5
Surety	14,958		3	10,389		2	39,815		3	29,741		2
Healthcare	8,722		2	8,810		2	27,316		2	26,349		2
Other (1)	25,476		5	19,889		4	64,655		5	50,517		3
Total	$	483,356	100	$	472,986	100	$	1,438,620	100	$	1,360,540	100

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

2012 third quarter versus 2011. Increases in programs, national accounts and surety business were partially offset by a lower level of onshore energy (included in the ‘property, energy, marine and aviation’ line) and casualty business. The higher level of program business was primarily due to an earlier 2012 bound program that has gained traction, rate increase impacts and increased customer penetration within existing programs. Growth in national accounts primarily resulted from new business, a large account advancing their renewal date, rate increases and audit premiums whereas the increase in surety primarily resulted from expansion into the commercial surety area. The reduction in onshore energy premiums reflected a strategic shift towards writing more on an excess basis and utilizing smaller capacity per account while the decline in casualty business, while achieving rate increases, reflected moving up higher on excess programs and binding smaller accounts.

Nine months ended September 30, 2012 versus 2011. Increases in programs, professional liability, executive assurance and construction business were partially offset by a lower level of onshore energy and casualty business. The higher level of program business was due, in part, to rate increase impacts and increased customer penetration within existing programs. The increase in professional liability premiums primarily reflected new business written in international small and medium sized accounts while the growth in executive assurance business primarily resulted from small and medium sized accounts in the U.K. and the U.S. The increase in construction business was primarily due to non-recurring activity on an existing account. The reduction in onshore energy and casualty business resulted from the factors described above.

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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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Programs	$	83,978	18	$	73,561	17	$	238,565	18	$	212,513	17
Property, energy, marine and aviation	77,862		17	92,288		21	233,946		17	242,531		19
Professional liability	66,299		15	64,403		15	197,572		15	189,570		15
Executive assurance	61,599		13	56,783		13	181,221		14	171,841		14
Construction	32,409		7	28,590		7	95,909		7	84,195		7
Casualty	27,175		6	30,305		7	84,342		6	83,561		7
Travel and accident	21,826		5	19,051		4	59,200		4	54,105		4
Lenders products	20,271		4	18,293		4	73,835		5	56,495		4
National accounts	21,919		5	19,642		4	59,470		4	58,970		5
Surety	12,643		3	10,091		2	34,001		3	29,272		2
Healthcare	9,565		2	9,340		2	27,540		2	27,081		2
Other (1)	20,795		5	15,623		4	59,074		5	46,246		4
Total	$	456,341	100	$	437,970	100	$	1,344,675	100	$	1,256,380	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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Current year	69.6	%	67.6	%	69.1	%	73.0	%
Prior period reserve development	(2.3	)%	(1.2	)%	(2.1	)%	(2.2	)%
Loss ratio	67.3	%	66.4	%	67.0	%	70.8	%

Current Year Loss Ratio.

The insurance segment’s current year loss ratio was 2.0 points higher in the 2012 third quarter compared to the 2011 third quarter, and 3.9 points lower for the nine months ended September 30, 2012 compared to the 2011 period, primarily due to the level of catastrophic activity in each period. The 2012 third quarter loss ratio reflected 3.1 points of catastrophic activity (primarily related to Hurricane Isaac), compared to 1.6 points in the 2011 third quarter. The loss ratio for the nine months ended September 30, 2012 reflected 1.4 points of catastrophic activity, compared to 6.4 points in the 2011 period. The level of large non-catastrophic loss activity was similar in both periods.

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Prior Period Reserve Development.

2012 third quarter: The insurance segment’s net favorable development of $10.3 million, or 2.3 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 2007 to 2010 accident years (i.e., the year in which a loss occurred) of $2.2 million, $4.7 million, $4.3 million and $2.2 million, respectively, which was primarily due to a lower than expected level of claims activity, partially offset by $4.1 million of adverse development from the 2011 accident year. In addition, development in medium-tail lines included favorable development in professional liability reserves from the 2005, 2006, 2007, 2009 and 2010 accident years of $1.4 million, $4.3 million, $3.4 million, $5.3 million and $3.0 million, partially offset by adverse development in the 2011 accident year of $2.4 million, favorable development of $2.5 million on healthcare reserves spread across all accident years, partially offset by $1.4 million of adverse development in marine reserves, with $3.6 million of adverse development from the 2011 accident year partially offset by favorable development from earlier years. Adverse development in longer-tail lines included increases in casualty reserves from the 2003, 2004, 2005 and 2008 accident years of $1.2 million, $1.8 million, $3.9 million and $2.4 million, respectively, partially offset by favorable development in the 2007 and 2010 accident years of $2.2 million and $1.0 million, respectively. In addition, executive assurance reserves increased in the 2007, 2009, 2010 and 2011 accident years by $3.8 million, $1.4 million, $1.1 million and $1.0 million, respectively, partially offset by $2.3 million of favorable development from the 2004 accident year.

2011 third quarter: The insurance segment’s net favorable development of $5.3 million, or 1.2 points, reflected favorable development in short-tailed lines primarily consisting of reductions in property and marine reserves from the 2008 to 2010 accident years of $3.6 million, $4.7 million and $4.0 million, respectively. The favorable development in property lines was primarily due to a lower than expected level of claims activity in the more recent years. The 2011 third quarter results included favorable development in surety business of $1.4 million and $1.6 million from the 2008 and 2009 accident years, respectively, along with $2.8 million of favorable development on healthcare reserves, spread across the 2004 to 2008 accident years. In addition, favorable development in executive assurance business from the 2010 accident year of $6.4 million was substantially offset by $5.8 million of adverse development from the 2008 accident year. Such amounts were partially offset by adverse development in professional liability reserves from the 2005, 2007 and 2010 accident years of $7.4 million, $4.1 million and $3.8 million, respectively, combined with favorable development in the 2006 and 2009 accident years of $4.8 million and $1.6 million, respectively. In addition, adverse development on program business from the 2002 and 2003 accident years contributed $1.4 million and $2.4 million, respectively. These changes were based on the most recent actuarial analyses.

Nine months ended September 30, 2012: The insurance segment’s net favorable development of $28.0 million, or 2.1 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 reserves from the 2006 to 2011 accident years of $0.9 million, $4.7 million, $6.9 million, $9.1 million, $11.9 million and $7.6 million, respectively, which was primarily due to a lower than expected level of claims activity. In addition, favorable development included $4.2 million on 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 2005 to 2010 accident years of $2.3 million, $4.7 million, $1.3 million, $3.0 million, $14.8 million and $1.3 million, respectively, partially offset by adverse development in the 2011 accident year of $8.3 million, along with $9.9 million of favorable development on healthcare reserves spread across all accident years and $2.0 million of favorable development on surety reserves, primarily from the 2007 and 2008 accident years. On marine and program business, favorable development on earlier accident years was substantially offset by adverse development in the 2011 accident year. Adverse development in longer-tail lines included an increase in executive assurance reserves in the 2007, 2009 and 2011 accident years of $5.2 million, $6.4 million and $10.4 million, respectively, primarily due to an increase in loss picks in reaction to recent claims development. In addition, adverse development in specialty casualty reserves from the 2004, 2005, 2007 and 2008 accident years of $6.2 million, $9.1 million, $2.4 million and $5.9 million, respectively, were partially

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offset by favorable development in the 2009 and 2010 accident years of $2.9 million and $2.8 million, respectively. Adverse development in construction reserves from the 2007 to 2009 accident years of $4.0 million, $5.3 million and $3.4 million, respectively, was partially offset by $4.5 million of favorable development in the 2010 accident year.

Nine months ended September 30, 2011: The insurance segment’s net favorable development of $28.1 million, or 2.2 points, reflected favorable development in short-tailed lines primarily consisting of reductions in property and marine reserves from the 2008 to 2010 accident years of $11.6 million, $16.9 million and $22.6 million (including $9.8 million of favorable development on the 2010 named catastrophic events), respectively, partially offset by adverse development of $4.3 million from the 2006 accident year. The favorable development in property lines was primarily due to a lower than expected level of claims activity in the more recent years. There was favorable development of $9.7 million in healthcare reserves, spread across the 2004 to 2008 accident years, and favorable development in surety business of $2.7 million and $3.2 million from the 2004 and 2008 accident years, respectively. In addition, there was $14.1 million of favorable development in executive assurance reserves, spread across a number of accident years, partially offset by adverse development from the 2006 and 2008 accident years of $1.5 million and $11.0 million, respectively. Such amounts were partially offset by adverse development in casualty reserves from the 2004 and 2010 accident years of $5.0 million and $9.1 million, respectively, and in professional liability reserves from the 2005, 2007, 2008 and 2010 accident years of $5.9 million, $4.4 million, $6.6 million and $7.8 million, respectively, partially offset by favorable development of $13.2 million from the 2006 accident year. In addition, adverse development on program business from the 2003 and 2004 accident years contributed $4.4 million and $4.6 million, respectively, while adverse development in alternative markets business from the 2003 and 2010 accident years of $1.5 million and $8.0 million, respectively, was partially offset by $8.1 million of favorable development spread across the 2004 to 2009 accident years.

Underwriting Expenses.

2012 third quarter versus 2011: The insurance segment’s underwriting expense ratio was 32.5% in the 2012 third quarter, compared to 35.2% in the 2011 third quarter. The acquisition expense ratio was 16.0% in the 2012 third quarter, compared to 17.4% in the 2011 third quarter. The 2012 third quarter acquisition expense ratio included a decrease of 0.6 points related to development in certain prior year loss reserves, compared to an increase of 1.1 points in the 2011 third quarter. The other operating expense ratio was 16.5% for the 2012 third quarter, compared to 17.8% for the 2011 third quarter, with the lower ratio in the 2012 third quarter reflecting the benefits of continued expense management resulting in lower absolute operating expense dollars and the higher level of net premiums earned.

Nine months ended September 30, 2012 versus 2011: The insurance segment’s underwriting expense ratio was 33.3% for the nine months ended September 30, 2012, compared to 34.4% for the 2011 period. The acquisition expense ratio was 16.5% for the nine months ended September 30, 2012, compared to 16.1% for the 2011 period. The comparison of the 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 16.8% for the nine months ended September 30, 2012, compared to 18.3% for the 2011 period, with the lower ratio for the nine months ended September 30, 2012 reflecting the benefits of continued expense management resulting in lower absolute operating expense dollars 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 September 30,							Nine Months Ended September 30,
	2012			2011			% Change	2012			2011			% Change
Gross premiums written	$	279,751		$	227,837		22.8	$	1,036,708		$	836,616		23.9
Net premiums written	271,893			218,395			24.5	1,000,473			801,662			24.8
Net premiums earned	$	292,350		$	244,079		19.8	$	810,984		$	702,243		15.5
Fee income	432			187				623			306
Losses and loss adjustment expenses	(136,716		)	(133,376		)		(338,036		)	(459,513		)
Acquisition expenses, net	(54,402		)	(43,442		)		(151,725		)	(134,877		)
Other operating expenses	(29,001		)	(22,340		)		(84,264		)	(67,238		)
Underwriting income	$	72,663		$	45,108		61.1	$	237,582		$	40,921		480.6

					% Point						% Point
Underwriting Ratios					Change						Change
Loss ratio	46.8	%	54.6	%	(7.8	)	41.7	%	65.4	%	(23.7	)
Acquisition expense ratio	18.6	%	17.8	%	0.8		18.7	%	19.2	%	(0.5	)
Other operating expense ratio	9.9	%	9.2	%	0.7		10.4	%	9.6	%	0.8
Combined ratio	75.3	%	81.6	%	(6.3	)	70.8	%	94.2	%	(23.4	)

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Property catastrophe	$	50,196	18	$	59,961	27	$	265,994	27	$	235,157	29
Other specialty (1)	70,412		26	40,882		19	238,135		24	162,464		20
Property excluding property catastrophe (2)	68,627		25	64,495		30	209,854		21	189,583		24
Casualty (3)	38,273		14	34,873		16	165,935		17	146,989		18
Marine and aviation	19,152		7	17,037		8	63,611		6	61,179		8
Other (4)	25,233		10	1,147		—	56,944		5	6,290		1
Total	$	271,893	100	$	218,395	100	$	1,000,473	100	$	801,662	100
Pro rata	$	170,556	63	$	99,884	46	$	439,435	44	$	310,412	39
Excess of loss	101,337		37	118,511		54	561,038		56	491,250		61
Total	$	271,893	100	$	218,395	100	$	1,000,473	100	$	801,662	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 third quarter versus 2011. The growth in net premiums written reflected increases in mortgage and U.K. motor business. The reinsurance segment’s mortgage business primarily resulted from a reinsurance treaty written in the 2012 second quarter covering newly originated residential mortgages, while growth in U.K. motor was primarily due to new business written emanating from one significant client. Growth in property and casualty writings was offset by a lower level of property catastrophe business, as the 2011 third quarter included $5.7 million of adjustment premiums on a treaty which did not recur in the 2012 third quarter.

Nine months ended September 30, 2012 versus 2011. The growth in net premiums written reflected increases in all lines of business, primarily in U.K. motor and mortgage business as discussed above, along with growth in property catastrophe business, reflecting substantial rate improvements in global property catastrophe markets which has 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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	Amount		%	Amount		%	Amount		%	Amount		%
Property catastrophe	$	69,059	24	$	64,910	27	$	199,914	25	$	176,340	25
Other specialty (1)	87,330		30	48,722		20	211,685		26	128,202		18
Property excluding property catastrophe (2)	63,572		22	62,565		26	183,924		23	183,095		26
Casualty (3)	48,669		17	49,066		20	143,177		18	149,053		21
Marine and aviation	16,853		6	17,739		7	57,502		7	60,458		9
Other (4)	6,867		1	1,077		—	14,782		1	5,095		1
Total	$	292,350	100	$	244,079	100	$	810,984	100	$	702,243	100
Pro rata	$	140,111	48	$	110,091	45	$	364,977	45	$	320,711	46
Excess of loss	152,239		52	133,988		55	446,007		55	381,532		54
Total	$	292,350	100	$	244,079	100	$	810,984	100	$	702,243	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 approximately $84 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 included approximately $18 million for the 2012 third quarter and $35 million for the year to date period related to the acquired net unearned premiums. The remaining acquired unearned premiums were approximately $49 million at September 30, 2012.

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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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Current year	60.6	%	78.5	%	58.9	%	87.1	%
Prior period reserve development	(13.8	)%	(23.9	)%	(17.2	)%	(21.7	)%
Loss ratio	46.8	%	54.6	%	41.7	%	65.4	%

Current Year Loss Ratio.

The reinsurance segment’s current year loss ratio was 17.9 points lower in the 2012 third quarter compared to the 2011 third quarter, and 28.2 points lower for the nine months ended September 30, 2012 compared to the 2011 period, primarily due to the lower level of current year catastrophic event activity. The 2012 third quarter loss ratio reflected 4.6 points related to current year catastrophic activity (primarily related to Hurricane Isaac), while the 2011 third quarter ratio included 21.6 points of catastrophic activity. The loss ratio for the nine months ended September 30, 2012 reflected 4.8 points related to current year catastrophic activity, compared to 35.9 points of catastrophic activity for the 2011 period. In addition, the loss ratio for the nine months ended September 30, 2012 included a higher level of non-catastrophic loss activity than in the 2011 period.

Prior Period Reserve Development.

2012 third quarter: The reinsurance segment’s net favorable development of $40.2 million, or 13.8 points, reflected favorable development of $16.5 million on property catastrophe and property other than property catastrophe reserves, including $4.9 million and $7.9 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 $11.5 million of favorable development on casualty reserves, including $4.6 million, $1.0 million, $3.1 million, $4.5 million and $5.7 million, for the 2003, 2004, 2005, 2006 and 2008 underwriting years, respectively, partially offset by adverse development in the 2002 underwriting year of $6.0 million. The 2012 third quarter loss ratio also benefited from $4.5 million of favorable development on marine and aviation reserves and $6.9 million of favorable development on other specialty business across most underwriting years.

2011 third quarter: The reinsurance segment’s net favorable development of $58.3 million, or 23.9 points, reflected $24.5 million of favorable development on casualty reserves, including $4.0 million, $5.1 million, $8.5 million, $6.0 million and $4.3 million for the 2002 to 2006 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), respectively, and $3.6 million from the 2009 underwriting year, partially offset by adverse development in the 2008 underwriting year of $7.4 million which was due, in part, to increases in loss selections based on the reinsurance segment’s view of the current insurance environment. In addition, there was favorable development of $21.1 million on property catastrophe and property other than property catastrophe reserves, including $3.6 million, $3.1 million, $5.6 million and $7.4 million from the 2007 to 2010 underwriting years, respectively. The 2011 third quarter loss ratio also benefited from $8.4 million of favorable development on other specialty business and $4.2 million of favorable development on marine and aviation business. Such amounts were widely spread across underwriting years and were primarily due to better than expected claims emergence.

Nine months ended September 30, 2012: The reinsurance segment’s net favorable development of $139.6 million, or 17.2 points, reflected favorable development of $63.7 million on property catastrophe and property other than property catastrophe reserves, including $15.7 million and $31.9 million from the 2010 and 2011 underwriting years, respectively. In addition, there was $42.1 million of favorable development on casualty

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reserves, including $7.9 million, $12.0 million, $11.3 million, $10.4 million, $5.9 million, $10.5 million and $3.4 million for the 2003 to 2009 underwriting years, respectively, partially offset by adverse development in the 2002, 2010 and 2011 underwriting years of $11.6 million, $5.7 million and $2.1 million, respectively. The loss ratio for the nine months ended September 30, 2012 also benefited from $19.8 million of favorable development on other specialty business, with $4.0 million, $4.2 million and $7.3 million from the 2008 to 2010 underwriting years, and $13.0 million of favorable development on marine and aviation reserves across most underwriting years.

Nine months ended September 30, 2011: The reinsurance segment’s net favorable development of $152.5 million, or 21.7 points, reflected $66.7 million of favorable development in property catastrophe and property other than property catastrophe reserves, including $6.5 million, $19.3 million and $39.1 million from the 2007, 2009 and 2010 underwriting years, respectively. In addition, there was $53.7 million of favorable development on casualty reserves, including $11.3 million, $14.6 million, $21.7 million and $15.5 million for the 2002 to 2005 underwriting years, respectively, and $6.6 million from the 2007 underwriting year. Such amounts were partially offset by adverse development on casualty reserves in the 2008 to 2010 underwriting years of $6.0 million, $9.2 million and $3.7 million, respectively, which was due, in part, to increases in loss selections based on the reinsurance segment’s view of the current insurance environment. The 2011 loss ratio also benefited from $17.8 million of favorable development on other specialty business and $11.3 million of favorable development from marine and aviation business. Such amounts were widely spread across underwriting years and were primarily due to better than expected claims emergence.

Underwriting Expenses.

2012 third quarter versus 2011: The underwriting expense ratio for the reinsurance segment was 28.5% in the 2012 third quarter, compared to 27.0% in the 2011 third quarter. The acquisition expense ratio for the 2012 third quarter was 18.6%, compared to 17.8% for the 2011 third quarter. The comparison of the 2012 third quarter and 2011 third 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 third quarter was 9.9%, compared to 9.2% in the 2011 third quarter, reflecting an increase in aggregate expenses due, in part, to selected expansion of the reinsurance segment’s operating platform, partially offset by the benefit of the higher level of net premiums earned.

Nine months ended September 30, 2012 versus 2011: The underwriting expense ratio for the reinsurance segment was 29.1% for the nine months ended September 30, 2012, compared to 28.8% in the 2011 period. The acquisition expense ratio for the nine months ended September 30, 2012 was 18.7%, compared to 19.2% for the 2011 period. The operating expense ratio for the nine months ended September 30, 2012 was 10.4%, compared to 9.6% for the 2011 period, , reflecting an increase in aggregate expenses due, in part, to selected expansion of the reinsurance segment’s operating platform, 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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Fixed maturities	$	68,203		$	82,686		$	211,942		$	252,250
Term loan investments (1)	4,876			881			10,732			1,565
Equity securities	2,009			1,796			6,098			5,187
Short-term investments	485			430			1,617			1,613
Other (2)	3,794			3,383			9,968			16,060
Gross investment income	79,367			89,176			240,357			276,675
Investment expenses	(6,146		)	(6,423		)	(19,231		)	(18,944		)
Net investment income	$	73,221		82,753			$	221,126		257,731

(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 nine months ended September 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 and on an annualized basis, was 2.45% for the 2012 third quarter, compared to 2.55% for the 2012 second quarter and 2.83% for the 2011 third quarter. The pre-tax investment income yield was 2.51% for the nine months ended September 30, 2012, compared to 2.98% 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 a loss of $0.5 million on such investments in the 2012 third quarter, compared to income of $2.4 million in the 2011 third quarter, and a loss of $7.9 million for the nine months ended September 30, 2012, compared to $2.7 million of income for the 2011 period. The amount recorded for the nine months ended September 30, 2012 included a loss of $9.5 million related to Aeolus LP. As of September 30, 2012, the carrying value of this investment (after taking into account the $84.7 million in cumulative cash distributions received) was $8.1 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)

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totaled $331.4 million at September 30, 2012, compared to $345.3 million at December 31, 2011. At September 30, 2012, our portfolio included $374.1 million of investments in bank loan funds, of which $106.0 million are reflected in the investment funds accounted for using the equity method.

We recorded $24.3 million of equity in net income related to investment funds accounted for using the equity method in the 2012 third quarter, compared to $30.5 million of equity in net losses for the 2011 third quarter, and $56.9 million of equity in net income related to investment funds accounted for using the equity method for the nine months ended September 30, 2012, compared to $5.1 million of equity in net income for the 2011 period.

Net Realized Gains or Losses. We recorded net realized gains of $60.4 million for the 2012 third quarter, compared to net realized gains of $30.2 million for the 2011 third quarter, and net realized gains of $139.4 million for the nine months ended September 30, 2012, compared to net realized gains of $96.1 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 third quarter was 2.45%, compared to (0.23)% for the 2011 third quarter, and 5.04% for the nine months ended September 30, 2012, compared to 2.97% for the 2011 period. Excluding foreign exchange, total return was 2.17% for the 2012 third quarter, compared to 0.38% for the 2011 third quarter, and 4.89% for the nine months ended September 30, 2012, compared to 3.11% for the 2011 period. For the 2012 third quarter, total return on our portfolio reflected tightening spreads, a significant rally in mortgages and strong returns on equities and alternative investments. 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 third quarter, we recorded $2.4 million of credit related impairments in earnings, compared to $2.7 million for the 2011 third quarter. For the nine months ended September 30, 2012, we recorded $5.4 million of credit related impairments in earnings, compared to $7.1 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 the liquidation of 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 $9.0 million for the 2012 third quarter, compared to $6.2 million for the 2011 third quarter, and $28.0 million for the nine months ended September 30, 2012, compared to $24.6 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 losses for the 2012 third quarter of $17.0 million consisted of net unrealized losses of $17.2 million and net realized gains of $0.2 million, compared to net foreign exchange gains for the 2011 third quarter of $60.0 million which consisted of net unrealized gains of $62.8 million and net realized losses of $2.8 million. The 2012 third quarter net foreign exchange losses primarily resulted from the weakening of the U.S. Dollar against the Euro, British Pound Sterling and other major foreign currencies during the period. Net foreign exchange losses for the nine months ended September 30, 2012 of $6.0 million consisted of net unrealized losses of $5.0 million and net realized losses of $1.0 million, compared to net foreign exchange gains for the 2011 period of $4.8 million which consisted of net unrealized gains of $7.1 million and net realized losses of $2.3 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:

	September 30,			December 31,
	2012			2011
Fixed maturities available for sale, at fair value	$	9,944,186		$	9,375,604
Fixed maturities, at fair value (1)	306,424			147,779
Fixed maturities pledged under securities lending agreements, at fair value (2)	34,769			56,393
Total fixed maturities	10,285,379			9,579,776
Short-term investments available for sale, at fair value	845,158			904,219
Cash	422,440			351,699
Equity securities available for sale, at fair value	312,371			299,584
Equity securities, at fair value (1)	28,405			87,403
Other investments available for sale, at fair value	477,857			238,111
Other investments, at fair value (1)	363,239			131,721
TALF investments, at fair value (3)	270,206			387,702
Investments accounted for using the equity method (4)	339,587			380,507
Total cash and investments	13,344,642			12,360,722
Securities sold but not yet purchased (5)	(8,017		)	(27,178		)
Securities transactions entered into but not settled at the balance sheet date	(117,742		)	(17,339		)
Total investable assets	$	13,218,883		$	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 September 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 2.80%. 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 2.90 years at September 30, 2012, compared to 2.99 years at December 31, 2011. At September 30, 2012, approximately $8.60 billion, or 66%, 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 September 30, 2012
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds	$	2,942,452	$	113,295	$	(7,039	)	$	2,836,196	$	(113	)
Mortgage backed securities	1,873,874		42,374		(7,439		)	1,838,939		(9,342		)
Municipal bonds	1,579,872		74,558		(730		)	1,506,044		(17		)
Commercial mortgage backed securities	824,162		42,745		(1,838		)	783,255		(3,498		)
U.S. government and government agencies	1,131,358		28,015		(1,520		)	1,104,863		(19		)
Non-U.S. government securities	1,098,403		37,927		(11,193		)	1,071,669		—
Asset backed securities	835,258		25,400		(6,093		)	815,951		(3,459		)
Total	$	10,285,379	$	364,314	$	(35,852	)	$	9,956,917	$	(16,448	)
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 September 30, 2012, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $1.1 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:

	September 30, 2012			December 31, 2011
	Estimated		% of	Estimated		% of
Rating (1)	Fair Value		Total	Fair Value		Total
U.S. government and government agencies (2)	$	2,837,828	27.6	$	3,154,480	32.9
AAA	3,388,660		32.9	3,229,161		33.7
AA	1,770,851		17.2	1,425,249		14.9
A	1,158,492		11.3	884,957		9.2
BBB	503,890		4.9	412,566		4.3
BB	157,183		1.5	140,029		1.5
B	203,416		2.0	165,003		1.7
Lower than B	143,518		1.4	114,672		1.2
Not rated	121,541		1.2	53,659		0.6
Total	$	10,285,379	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:

	September 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%	$	1,095,576	$	(21,165	)	59.1	$	1,692,722	$	(44,803	)	52.9
10-20%	84,892		(11,807		)	32.9	144,523		(20,222		)	23.9
20-30%	9,754		(2,836		)	7.9	38,749		(11,709		)	13.8
30-40%	—		—			—	14,596		(7,413		)	8.8
40-50%	46		(44		)	0.1	619		(445		)	0.5
50-80%	—		—			—	29		(111		)	0.1
Total	$	1,190,268	$	(35,852	)	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:

	September 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%	$	78,606	$	(2,684	)	7.5	$	143,782	$	(6,418	)	7.6
10-20%	12,996		(2,116		)	5.9	33,926		(5,484		)	6.5
20-30%	2,731		(786		)	2.2	26,733		(8,042		)	9.5
30-40%	—		—			—	13,558		(6,905		)	8.2
40-50%	46		(44		)	0.1	619		(445		)	0.5
50-80%	—		—			—	29		(110		)	0.1
Total	$	94,379	$	(5,630	)	15.7	$	218,647	$	(27,404	)	32.4

At September 30, 2012, below-investment grade securities comprised approximately 6.1% 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 September 30, 2012, corporate bonds represented 42% of the total below investment grade securities at fair value, mortgage backed securities represented 40% of the total and 18% 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 September 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 September 30, 2012, excluding guaranteed amounts and covered bonds:

	Estimated Fair Value		Credit Rating (1)
General Electric Co.	$	64,755	AA+/A1
AT&T Inc.	33,870		A-/A2
Abbey National Treasury Svcs	31,620		A+/A2
Wells Fargo & Company	29,157		A+/A2
Royal Dutch Shell PLC	28,720		AA/Aa1
Merck & Co Inc.	27,574		AA/A1
Total SA	26,968		AA-/Aa1
Verizon Communications Inc.	26,401		A-/A3
Berkshire Hathaway Inc.	25,659		A/A2
Deere & Co.	25,606		A/A2
Total	$	320,330

(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 September 30, 2012, our investments in mortgage-backed securities (“MBS”), excluding commercial mortgage-backed securities, amounted to approximately $1.87 billion, or 14.2% 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 September 30, 2012, CMBS constituted approximately $824.2 million, or 6.2% 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 September 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		$	2,200	AAA	$	2,321	105.5	%	0.0	%
	2004		13,098		BBB+	12,991		99.2	%	0.1	%
	2005		44,436		B-	45,161		101.6	%	0.3	%
	2006		60,492		BB-	60,892		100.7	%	0.5	%
	2007		39,719		CC+	43,417		109.3	%	0.3	%
	2008		6,522		CC+	6,750		103.5	%	0.1	%
	2009	(6)	27,752		AAA	30,309		109.2	%	0.2	%
	2010	(6)	26,562		AAA	26,174		98.5	%	0.2	%
	2012	(6)	112,965		AAA	113,909		100.8	%	0.9	%
Total non-agency MBS			$	333,746	BBB+	$	341,924	102.5	%	2.6	%
Non-agency CMBS:	1998		1,086		AAA	1,088		100.2	%	0.0	%
	2004		4,477		AAA	4,423		98.8	%	0.0	%
	2005		29,277		AAA	29,951		102.3	%	0.2	%
	2006		2,861		A	3,084		107.8	%	0.0	%
	2007		28,104		A	29,937		106.5	%	0.2	%
	2008		662		AAA	647		97.7	%	0.0	%
	2010		138,458		AAA	149,716		108.1	%	1.1	%
	2011		154,331		AAA	165,905		107.5	%	1.3	%
	2012		255,059		AAA	264,891		103.9	%	2.0	%
Total non-agency CMBS			$	614,315	AAA	$	649,642	105.8	%	4.9	%

	Non-Agency MBS				Non-Agency
Additional Statistics:	Re-REMICs		All Other		CMBS (1)
Weighted average loan age (months)	77		73		26
Weighted average life (months) (2)	18		49		63
Weighted average loan-to-value % (3)	70.7	%	68.9	%	61.1	%
Total delinquencies (4)	23.0	%	20.2	%	1.5	%
Current credit support % (5)	52.5	%	14.0	%	26.5	%

(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 September 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 29% to 86% on MBS and 27% to 103% 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 September 30, 2012:

				Estimated Fair Value
	Amortized Cost		Average Credit Quality	Total		% of Amortized Cost		% of Investable Assets
Sector:
Credit cards (1)	$	370,499	AAA	$	377,091	101.8	%	2.9	%
Autos (2)	100,325		AAA	99,975		99.7	%	0.8	%
Equipment (3)	134,169		A+	137,985		102.8	%	1.0	%
Rate reduction bonds (4)	79,109		AAA	83,227		105.2	%	0.6	%
U.K. securitized (5)	50,041		AAA	51,736		103.4	%	0.4	%
Commodities (6)	35,000		AAA	35,349		101.0	%	0.3	%
Other	34,035		AA	34,451		101.2	%	0.3	%
	803,178		AA+	819,814		102.1	%	6.2	%
Home equity (7)	$	1,597	AAA	$	1,466	91.8	%	0.0	%
	1,013		A	948		93.6	%	0.0	%
	2,244		BBB	2,437		108.6	%	0.0	%
	3,132		BB to B	3,581		114.3	%	0.0	%
	4,722		CCC to C	6,933		146.8	%	0.1	%
	65		D	79		121.5	%	0.0	%
	12,773		B+	15,444		120.9	%	0.1	%
Total ABS	$	815,951	AA+	$	835,258	102.4	%	6.3	%

The effective duration of the total ABS was 2.3 years at September 30, 2012.

(1) The weighted average credit support % on credit cards is 20.1%.

(2) The weighted average credit support % on autos is 25.9%.

(3) The weighted average credit support % on equipment is 6.7%.

(4) The weighted average credit support % on rate reduction bonds is 6.2%.

(5) The weighted average credit support % on U.K. securitized is 19.2%.

(6) The weighted average credit support % on commodities is 6.4%.

(7) The weighted average credit support % on home equity is 22.2%.

At September 30, 2012, our fixed income portfolio included $58.7 million par value in sub-prime securities with a fair value of $40.3 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-/Caa3” at September 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 September 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 $262.2 million, or 2.0% 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

54

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 September 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. ($91.2 million), National Public Finance Guarantee ($122.3 million) and the Texas Permanent School Fund ($48.7 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 September 30, 2012.

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

			Financial		Other		Covered		Bank		Equities and
	Sovereign (2)		Corporates		Corporates		Bonds (3)		Loans (4)		Other			Total
Country (1)
Germany	$	145,055	$	—	$	10,417	$	—	$	17,573	$	6,669		$	179,714
Netherlands	—		37,466		51,048		—		7,217		16,981			112,712
Finland	101,895		246		—		—		—		—			102,141
France	—		6,664		26,359		20,358		4,896		12,371			70,648
Supranational (5)	40,484		—		—		—		—		—			40,484
Spain	—		—		—		13,198		3,503		286			16,987
Luxembourg	—		1,742		5,431		—		3,383		508			11,064
Belgium	2,000		—		7,203		—		—		—			9,203
Italy	5,401		—		1,242		—		882		(110		)	7,415
Ireland	1,138		967		1,429		—		—		1,017			4,551
Austria	—		3,339		—		—		—		—			3,339
Total	$	295,973	$	50,424	$	103,129	$	33,556	$	37,454	$	37,722		$	558,258

(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 Cyprus, Estonia, Greece, Malta, Portugal, Slovakia or Slovenia at September 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 September 30, 2012, our equity portfolio included $332.8 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:

	September 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%	$	73,657	$	(2,735	)	18.4	$	74,813	$	(3,651	)	16.3
10-20%	11,033		(1,944		)	13.1	26,791		(4,457		)	19.9
20-30%	4,302		(1,507		)	10.1	21,457		(7,827		)	35.0
30-40%	12,764		(6,931		)	46.6	5,070		(2,645		)	11.9
40-50%	1,689		(1,300		)	8.7	2,345		(1,984		)	8.9
50-80%	443		(462		)	3.1	1,492		(1,780		)	8.0
Total	$	103,888	$	(14,879	)	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 September 30, 2012. For equity securities with unrealized losses between 30% to 40%, such amounts primarily related to shares we hold of a leading commodities producer and marketer. For such holdings, available positive and negative evidence was reviewed and, following such review, no other-than-temporary impairment was recorded. At September 30, 2012, we believe that a reasonable period of time exists to allow for recovery of the cost basis of our equity securities that are in an unrealized loss position.

Other investments totaled $841.1 million at September 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 $331.4 million at September 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 September 30, 2012 and December 31, 2011 by level.

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Premiums Receivable and Reinsurance Recoverables

At September 30, 2012, 76.3% of premiums receivable of $773.2 million represented amounts not yet due, while amounts in excess of 90 days overdue were 5.6% 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 4.6% of the $36.9 million of paid losses and loss adjustment expenses recoverable were in excess of 90 days overdue at September 30, 2012, compared to 2.3% of the $33.5 million of paid losses and loss adjustment expenses recoverable at December 31, 2011. At September 30, 2012 and December 31, 2011, our reserves for doubtful accounts were approximately $13.8 million and $14.2 million, respectively.

At September 30, 2012, approximately 87.5% of reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.73 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 4.4% 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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Premiums Written
Direct	$	677,516		$	614,227		$	2,082,991		$	1,868,379
Assumed	259,248			246,062			972,242			868,415
Ceded	(181,515		)	(168,908		)	(616,140		)	(574,592		)
Net	$	755,249		$	691,381		$	2,439,093		$	2,162,202
Premiums Earned
Direct	$	658,256		$	603,758		$	1,905,608		$	1,764,489
Assumed	294,089			267,592			844,625			761,772
Ceded	(203,654		)	(189,301		)	(594,574		)	(567,638		)
Net	$	748,691		$	682,049		$	2,155,659		$	1,958,623
Losses and Loss Adjustment Expenses
Direct	$	383,436		$	363,121		$	1,123,268		$	1,211,233
Assumed	126,558			131,212			339,342			519,029
Ceded	(66,123		)	(70,349		)	(223,839		)	(380,776		)
Net	$	443,871		$	423,984		$	1,238,771		$	1,349,486

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 September 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:

	September 30,		December 31,
	2012		2011
Insurance:
Case reserves	$	1,369,495	$	1,311,740
IBNR reserves	2,894,804		2,783,091
Total net reserves	$	4,264,299	$	4,094,831
Reinsurance:
Case reserves	$	757,986	$	721,032
Additional case reserves	150,545		178,640
IBNR reserves	1,692,602		1,643,660
Total net reserves	$	2,601,133	$	2,543,332
Total:
Case reserves	$	2,127,481	$	2,032,772
Additional case reserves	150,545		178,640
IBNR reserves	4,587,406		4,426,751
Total net reserves	$	6,865,432	$	6,638,163

At September 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:

	September 30,		December 31,
	2012		2011
Executive assurance	$	689,702	$	636,692
Casualty	651,425		655,017
Professional liability	643,218		631,991
Programs	568,424		541,113
Property, energy, marine and aviation	564,449		590,098
Construction	423,611		403,109
National accounts	196,715		169,906
Healthcare	136,319		139,825
Surety	91,237		70,680
Travel and accident	37,507		37,645
Lenders products	27,384		12,332
Other	234,308		206,423
Total net reserves	$	4,264,299	$	4,094,831

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At September 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:

	September 30,		December 31,
	2012		2011
Casualty	$	1,577,385	$	1,600,887
Property excluding property catastrophe	311,565		336,425
Other specialty	270,746		153,455
Property catastrophe	227,548		237,804
Marine and aviation	161,962		166,294
Other	51,927		48,467
Total net reserves	$	2,601,133	$	2,543,332

Shareholders’ Equity

Our shareholders’ equity was $5.35 billion at September 30, 2012, compared to $4.59 billion at December 31, 2011. The increase for the nine months ended September 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 September 30, 2012 and December 31, 2011:

	September 30,			December 31,
(U.S. dollars in thousands, except share data)	2012			2011
Calculation of book value per common share:
Total shareholders’ equity	$	5,348,794		$	4,592,074
Less preferred shareholders’ equity	(325,000		)	(325,000		)
Common shareholders’ equity	$	5,023,794		$	4,267,074
Common shares outstanding (1)	136,540,178			134,358,345
Book value per common share	$	36.79		$	31.76

(1)Excludes the effects of 7,835,519 and 8,706,441 stock options and 365,224 and 298,425 restricted stock units outstanding at September 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 $3.5 million at September 30, 2012, compared to $14.4 million at December 31, 2011. During the nine months ended September 30, 2012, ACGL received dividends of $58.0 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

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minimum solvency margin (i.e., the amount by which the value of its general business assets must exceed its general business liabilities) equal to the greatest of (1) $100.0 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 $1.08 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 September 30, 2012 and December 31, 2011, such amounts approximated $5.63 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

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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.

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

	Nine Months Ended
	September 30,
	2012			2011
Total cash provided by (used for):
Operating activities	$	731,951		$	756,471
Investing activities	(493,141		)	(432,057		)
Financing activities	(173,468		)	(315,019		)
Effects of exchange rate changes on foreign currency cash	5,399			(2,240		)
Increase in cash	$	70,741		$	7,155

·Cash provided by operating activities for the nine months ended September 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 nine months ended September 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 certain TALF investments and the related TALF borrowings were extinguished accordingly.

·Cash used for financing activities for the nine months ended September 30, 2012 was lower than in the 2011 period. The 2011 period reflected $287.6 million of share repurchases under our share repurchase program while the 2012 period did not include any repurchase activity. In 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 $124.6 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

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

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 $13.22 billion at September 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 $528.0 million at September 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 September 30, 2012 included $1.13 billion of obligations of the U.S. government and government agencies at fair value and $1.58 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.

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

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

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 September 30, 2012, ACGL has repurchased 104.8 million common shares for an aggregate purchase price of $2.56 billion. At September 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

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available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities.

We purchased asset-backed and commercial mortgage-backed securities under the FRBNY’s TALF program. As of September 30, 2012, we had $270.2 million of securities under TALF which are reflected as “TALF investments, at fair value” and $185.2 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 nine months ended September 30, 2012, we sold certain TALF investments and the related TALF borrowings were extinguished accordingly. Subsequent to September 30, 2012, we sold all remaining 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 September 30, 2012, ACGL’s capital of $5.75 billion consisted of $300.0 million of senior notes, representing 5.2% of the total, $100.0 million of revolving credit agreement borrowings due in August 2014, representing 1.7% of the total, $325.0 million of preferred shares, representing 5.7% of the total, and common shareholders’ equity of $5.02 billion, representing the balance. At December 31, 2011, ACGL’s capital of $4.99

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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 increase in capital during the nine months ended September 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 September 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 September 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 September 30, 2012 and December 31, 2011:

	Interest Rate Shift in Basis Points
(U.S. dollars in millions)	-100			-50			-		50			100
At September 30, 2012
Total fair value	$	12,417.1		$	12,265.6		$	12,089.5	$	11,916.8		$	11,744.9
Change from base	2.71		%	1.46		%	—		(1.43		)%	(2.85		)%
Change in unrealized value	$	327.6		$	176.1		$	—	$	(172.7	)	$	(344.6	)
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

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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.

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 September 30, 2012 and December 31, 2011:

	Credit Spread Shift in Basis Points
(U.S. dollars in millions)	-100			-50			-		50			100
At September 30, 2012
Total fair value	$	12,302.6		$	12,209.9		$	12,089.5	$	11,975.8		$	11,863.0
Change from base	1.76		%	1.00		%	—		(0.94		)%	(1.87		)%
Change in unrealized value	$	213.1		$	120.4		$	—	$	(113.7	)	$	(226.5	)
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 September 30, 2012, our portfolio’s VaR was estimated to be 2.79%, 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 September 30, 2012 and December 31, 2011, the fair value of our investments in equity securities, privately held securities and certain other investments totaled $536.0 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 $53.6 million and $50.8 million at September 30, 2012 and December 31, 2011, respectively, and would have decreased book value per common share by approximately $0.39 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 $53.6 million and $50.8 million at September 30, 2012 and December 31, 2011, respectively, and would have increased book value per common share by approximately $0.39 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 September 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 $157.8 million, compared to $877.9 million at December 31, 2011. A 100 basis point depreciation of the underlying exposure to these derivative instruments at September 30, 2012 and December 31, 2011 would have resulted in a reduction in net income of approximately $1.6 million and $8.8 million, respectively, and would have decreased book value per common share by $0.01 and $0.07, respectively. A 100 basis point appreciation of the underlying exposure to these derivative instruments at September 30, 2012 and December 31, 2011 would have resulted in an increase in net

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income of approximately $1.6 million and $8.8 million, respectively, and would have increased book value per common share by $0.01 and $0.07, respectively.

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 September 30, 2012 and December 31, 2011:

	September 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	$	162,719		$	143,731
Shareholders’ equity denominated in foreign currencies (1)	256,663			247,135
Net foreign currency forward contracts outstanding (2)	(59,052		)	(16,569		)
Net exposures denominated in foreign currencies	$	360,330		$	374,327
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	(36,033	)	$	(37,433	)
Book value per common share	$	(0.26	)	$	(0.28	)
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	36,033		$	37,433
Book value per common share	$	0.26		$	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

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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,” “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 September 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;

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

·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 September 30, 2012 and for the three month and nine month periods ended September 30, 2012 and 2011 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report (dated November 9, 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 September 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 September 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 third quarter:

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

	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs
7/1/2012-7/31/2012	2,102	$	39.37	—	$	941,967
8/1/2012-8/31/2012	2,534	39.65		—	$	941,967
9/1/2012-9/30/2012	3,418	40.72		—	$	941,967
Total	8,054	$	40.03	—	$	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 third 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 Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Constantine Iordanou, Marc Grandisson, W. Preston Hutchings and Louis T. Petrillo for May 9, 2012 grants
10.2	Restricted Share Unit Agreement, dated as of May 9, 2012, between Arch Capital Group Ltd. and Mark D. Lyons
10.3	Share Appreciation Right Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Constantine Iordanou, Marc Grandisson, Mark D. Lyons, W. Preston Hutchings and Louis T. Petrillo for May 9, 2012 grants
10.4	Share Appreciation Right Agreement, dated as of February 25, 2010, between Arch Capital Group Ltd. and Constantine Iordanou
10.5	Share Appreciation Right Agreement, dated as of February 29, 2012, between Arch Capital Group Ltd. and Constantine Iordanou
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 September 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the three and nine month periods ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the nine month periods ended September 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements.*

* 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: November 9, 2012	Constantine Iordanou
	President and Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors
	/s/ Mark D. Lyons
Date: November 9, 2012	Mark D. Lyons
	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 Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Constantine Iordanou, Marc Grandisson, W. Preston Hutchings and Louis T. Petrillo for May 9, 2012 grants
10.2	Restricted Share Unit Agreement, dated as of May 9, 2012, between Arch Capital Group Ltd. and Mark D. Lyons
10.3	Share Appreciation Right Agreement with Arch Capital Group Ltd. substantially in the form signed by each of Constantine Iordanou, Marc Grandisson, Mark D. Lyons, W. Preston Hutchings and Louis T. Petrillo for May 9, 2012 grants
10.4	Share Appreciation Right Agreement, dated as of February 25, 2010, between Arch Capital Group Ltd. and Constantine Iordanou
10.5	Share Appreciation Right Agreement, dated as of February 29, 2012, between Arch Capital Group Ltd. and Constantine Iordanou
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 September 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the three and nine month periods ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the nine month periods ended September 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements.*

* 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 “Employee”).

WHEREAS, the Employee has been granted the following award under 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 Employee is hereby awarded        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 in three equal annual installments on the first, second and third anniversaries of the date hereof.  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).

(b)           Termination of Service; Forfeiture of Unvested Shares.

(i)            In the event the Employee ceases to be an employee 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 on the date hereof), the Restricted Shares shall become immediately vested in full upon such termination of employment.

(ii)           In the event of termination of employment (other than by the Company for Cause, as such term is defined in the Company’s Incentive Compensation Plan on the date hereof) after the attainment of Retirement Age (as defined in the Company’s Incentive Compensation Plan on the date hereof), the Restricted Shares shall continue to vest on the schedule set forth in Section 2(a) above so long as the Employee does not engage in any activity in competition with any activity of the Company or any of its Subsidiaries other than serving on the board of directors (or similar governing body) of another company or as a consultant for no more than 26 weeks per calendar year

(“Competitive Activity”).  In the event the Employee engages in a Competitive Activity, any unvested Restricted Shares shall be forfeited by the Employee and become the property of the Company.

(iii)          In the event the Employee ceases to be an employee of the Company after a Change in Control (as defined below) due to termination (A) by the Company not for Cause or (B) by the Employee for Good Reason (as defined in the Employment Agreement, dated as of             , between the Employee and             ), in either case, on or before the second anniversary of the occurrence of the Change in Control, the Restricted Shares, to the extent not already vested, shall become immediately vested in full upon such termination of employment.

(iv)          If the Employee ceases to be an Employee of the Company for any other reason prior to the date the Restricted Shares become vested, the Award shall be forfeited by the Employee and become the property of the Company; provided that, in the event of a Redundancy (as defined below), the Committee, in its sole discretion, may, in accordance with its authority under the Plan, determine that the Restricted Shares, to the extent not vested, shall become vested upon such termination of employment.

(v)           For purposes of this Agreement, service with any of the Company’s Subsidiaries (as defined in the Plan) shall be considered to be service with the Company.

(vii)         “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

2

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.

(vii)         “Redundancy” shall mean termination of employment by the Company due to its need to reduce the size of its workforce, including due to closure of a business or a particular workplace or change in business process.  Whether a termination of employment is due to a “redundancy” shall be determined by the Committee in its sole and absolute discretion, such determination being final and binding on all parties hereto and all persons claiming through, in the name of or on behalf of such parties.

(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 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 Employee.

(d)           Rights of a Stockholder.  Prior to the time a Restricted Share is fully vested hereunder, the Employee shall have no right to transfer, pledge, hypothecate or otherwise encumber such Restricted Share.  During such period, the Employee shall have all other rights of a stockholder, including, but not limited to, the right to vote and to

3

receive dividends (subject to Section 2(a) hereof) at the time paid on such Restricted Shares.

(e)           No Right to Continued Employment.  This Award shall not confer upon the Employee any right with respect to continuance of employment by the Company nor shall this Award interfere with the right of the Company to terminate the Employee’s employment 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 Employee.  The Company shall pay 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 Employee under Section 83(b) of the Code with respect to) the Award granted hereunder, the Employee shall pay to the Company or 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 Employee, 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 Employee shall apply, where appropriate, to the Employee’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 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, 4th Floor

45 Reid Street

Hamilton HM 12 Bermuda

Attn.: Secretary

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If to the Employee:

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

8.             Governing Law.  This Agreement shall be governed by and construed in accordance with the laws 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
	Name: Dawna Ferguson
	Title: Secretary
/s/ Employee Signature

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EX-10.2

Exhibit 10.2

ARCH CAPITAL GROUP LTD.

Restricted Share Unit Agreement

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

WHEREAS, the Employee has been granted the following award under 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 Share Units.  Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Employee is hereby awarded 18,000 Restricted Share Units (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 Share Units 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 in three equal annual installments on the first, second and third anniversaries of the date hereof.  Unless otherwise provided by the Company, all amounts receivable in connection with any adjustments to the Shares under Section 4(c) of the Plan or Section 2(e) below shall be subject to the vesting schedule in this Section 2(a).

(b)Termination of Service; Forfeiture of Unvested Share Units.

(i)In the event the Employee ceases to be an employee of the Company prior to the date the Restricted Share Units otherwise become vested due to his or her death or Permanent Disability (as defined in the Company’s Incentive Compensation Plan on the date hereof), the Restricted Share Units shall become immediately vested in full upon such termination of employment.

(ii)In the event of termination of employment (other than by the Company for Cause, as such term is defined in the Company’s Incentive Compensation Plan on

the date hereof) after the attainment of Retirement Age (as defined in the Company’s Incentive Compensation Plan on the date hereof), the Restricted Share Units shall continue to vest on the schedule set forth in Section 2(a) above so long as the Employee does not engage in any activity in competition with any activity of the Company or any of its Subsidiaries other than serving on the board of directors (or similar governing body) of another company or as a consultant for no more than 26 weeks per calendar year (“Competitive Activity”).  In the event the Employee engages in a Competitive Activity, any unvested Restricted Share Units shall be forfeited by the Employee and become the property of the Company.

(iii)In the event the Employee ceases to be an employee of the Company after a Change in Control (as defined below) due to termination (A) by the Company not for Cause or (B) by the Employee for Good Reason (as defined in the Employment Agreement, dated as of August 1, 2006, as amended, between the Employee and Arch Insurance Group Inc.), in either case, on or before the second anniversary of the occurrence of the Change in Control, the Restricted Share Units, to the extent not already vested, shall become immediately vested in full upon such termination of employment.

(iv)If the Employee ceases to be an Employee of the Company for any other reason prior to the date the Restricted Share Units become vested, the unvested Restricted Share Units shall be forfeited by the Employee and become the property of the Company; provided that, in the event of a Redundancy (as defined below), the Committee, in its sole discretion, may, in accordance with its authority under the Plan, determine that the Restricted Share Units, to the extent not vested, shall become vested upon such termination of employment.

(v)For purposes of this Agreement, service with any of the Company’s Subsidiaries (as defined in the Plan) shall be considered to be service with the Company.

(vi)“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

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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.

(vii)“Redundancy” shall mean termination of employment by the Company due to its need to reduce the size of its workforce, including due to closure of a business or a particular workplace or change in business process.  Whether a termination of employment is due to a “redundancy” shall be determined by the Committee in its sole and absolute discretion, such determination being final and binding on all parties hereto and all persons claiming through, in the name of or on behalf of such parties.

(c)Distribution of Shares.  At the time the Employee ceases to be an employee of the Company for any reason prior to attaining Retirement Age, the Company shall distribute to the Employee (or his or her heirs in the event of the Employee’s death) a number of

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Shares equal to the number of vested Restricted Share Units then held by the Employee.  In the event the Employee ceases to be an employee of the Company after attaining Retirement Age, a number of Shares equal to the number of vested Restricted Share Units held by the Employee will be distributed by the Company to the Employee (or his or her heirs in the event of the Employee’s death) at the later of (i) the time the Employee ceases to be an employee of the Company, and (ii) the date the Restricted Share Units are scheduled to vest pursuant to the schedule set forth in Section 2(a) above (without regard to any acceleration of such vesting), so long as the Restricted Share Units are not forfeited before such time as provided in Section 2(b).

(d)Rights and Restrictions.  The Restricted Share Units shall not be transferable, other than pursuant to will or the laws of descent and distribution.  Prior to vesting of the Restricted Share Units and delivery of the Shares to the Employee following his termination of employment, the Employee shall not have any rights or privileges of a shareholder as to the Shares subject to the Award.  Specifically, the Employee shall not have the right to receive dividends or the right to vote such Shares prior to vesting of the Award and delivery of the Shares.

(e)Anti-dilution Adjustments.  For the avoidance of doubt, the terms of Section 4(c) of the Plan, relating to anti-dilution adjustments, will apply for the Restricted Share Units.

(f)Dividend Equivalents.  As of each date on which a cash dividend is paid on Shares, there shall be granted to the Employee that number of additional Restricted Share Units (including fractional units) determined by (i) multiplying the amount of such dividend per Share by the number of Restricted Share Units held by the Employee, and (ii) dividing the total so determined by the Fair Market Value of a Share on the date of payment of such cash dividend.  The Restricted Share Units granted pursuant to this Section 2(f) will have the same terms and conditions (including vesting dates) as the Restricted Share Units with respect to which they are granted.

(g)No Right to Continued Employment.  This Award shall not confer upon the Employee any right with respect to continuance of employment by the Company nor shall this Award interfere with the right of the Company to terminate the Employee’s employment 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 Employee.  The Company shall pay 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.

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5.Withholding.  The Employee shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld with respect to the 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 Employee, federal, state and local taxes of any kind required by law to be withheld.

6.References.  References herein to rights and obligations of the Employee shall apply, where appropriate, to the Employee’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 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, 4th Floor

45 Reid Street

Hamilton HM 12 Bermuda

Attn.: Secretary

If to the Employee:

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

8.Governing Law.  This Agreement shall be governed by and construed in accordance with the laws 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.

11.Section 409A.  It is intended that this Agreement and the Award will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder), to the extent the Agreement and Award are subject thereto, and the Agreement shall be

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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, 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.  Notwithstanding any provision of this Agreement to the contrary, for purposes of this Agreement, the Employee’s employment will be deemed to have terminated on the date of the Employee’s “separation from service” (within the meaning of Treas. Reg. Section 1.409A-1(h)) with the Company.  Notwithstanding any provision to the contrary in this Agreement, if the Employee is deemed on the date of his or her “separation from service” (within the meaning of Treas. Reg. Section 1.409A-1(h)) to be a “specified employee” (within the meaning of Treas. Reg. Section 1.409A-1(i)), 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 any applicable exceptions to such requirement), such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of the Employee’s “separation from service,” or (ii) the date of the Employee’s death (the “Delay Period”).  Upon the expiration of the Delay Period, all payments delayed pursuant hereto (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid to the Employee 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.  No action or failure to act, pursuant to this Section 11 shall subject the Company to any claim, liability, or expense, and the Company shall not have any obligation to indemnify or otherwise protect the Employee from the obligation to pay any taxes, interest or penalties pursuant to Section 409A of the Code.

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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
	Name: Dawna Ferguson
	Title: Secretary
/s/ Mark D. Lyons
Mark D. Lyons

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EX-10.3

Exhibit 10.3

ARCH CAPITAL GROUP LTD.

Share Appreciation Right Agreement

AGREEMENT, made and entered into this 9th day of May, 2012, by and between Arch Capital Group Ltd. (the “Company”), a Bermuda company, and            (the “SAR Holder”).

WHEREAS, the SAR Holder has been granted the following award under 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, and for other good and valuable consideration, the Company and the SAR Holder agree as follows:

(a)Grant.  Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Company hereby grants to the SAR Holder a Share Appreciation Right (the “SAR”) with respect to            Shares.  The SAR represents a right to be paid, upon exercise of the SAR, an amount measured by (x) the difference between the Fair Market Value per Share on the date of exercise and the exercise price per Share of the SAR, multiplied by (y) the number of Shares with respect to which the SAR is exercised, with such amount to be paid in the form of Shares valued at their Fair Market Value on the date of exercise.  The SAR is granted as of May 9, 2012 (the “Date of Grant”), and such grant is subject to the terms and conditions herein and the terms and conditions of the Plan.  In the event there is any conflict between the terms of the Plan and this Agreement, the terms of the Plan shall control.  Capitalized terms used herein but not defined shall have the meanings given to them in the Plan.

(b)Exercise Price.  The exercise price of the SAR shall be equal to $38.58 per Share.

(c)Status of Shares.  Upon issue, the shares received upon exercise of the SAR shall rank equally in all respects with the other Shares.

(d)Term of SAR.  The SAR may be exercised only during the period (the “SAR Period”) set forth in paragraph (f) below and shall remain exercisable until the tenth anniversary of the Date of Grant.  Thereafter, the SAR Holder shall cease to have any rights in respect thereof.  The right to exercise the SAR shall be subject to sooner termination as provided in paragraph (j) below.

(e)No Rights of Shareholder.  The SAR Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or in equity.

(f)Exercisability.  Except as otherwise set forth in paragraph (j) below, the SAR shall become exercisable in three equal annual installments on the first, second and third

anniversaries of the Date of Grant, in each case subject to paragraph (j) below.  Subject to paragraph (j) below, the SAR may be exercised at any time or from time to time during the SAR Period in regard to all or any portion of the SAR which is then exercisable, as may be adjusted pursuant to paragraph (g) below.

(g)Anti-dilution Adjustment.  For the avoidance of doubt, the terms of Section 4(c) of the Plan, relating to anti-dilution adjustments, will apply to the SAR.

(h)Nontransferability.  The SAR, or any interest therein, may not be assigned or otherwise transferred, disposed of or encumbered by the SAR Holder, other than by will or by the laws of descent and distribution.  During the lifetime of the SAR Holder, the SAR shall be exercisable only by the SAR Holder or by his or her guardian or legal representative.  Notwithstanding the foregoing, the SAR may be transferred by the SAR Holder to members of his or her “immediate family” or to a trust or other entity established for the exclusive benefit of solely one or more members of the SAR Holder’s “immediate family.”  Any SAR held by the transferee will continue to be subject to the same terms and conditions that were applicable to the SAR immediately prior to the transfer, except that the SAR will be transferable by the transferee only by will or the laws of descent and distribution.  For purposes hereof, “immediate family” means the SAR Holder’s children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings (including half brother and sisters), in laws, and relationships arising because of legal adoption.

(i)Exercise of SAR.  In order to exercise the SAR, the SAR Holder shall submit to the Company an instrument specifying the whole number of Shares in respect of which the SAR is being exercised. Shares will be issued accordingly by the Company within 30 days. The payment upon a SAR exercise shall be solely the number of whole Shares calculated in paragraph (a) above.  Fractional Shares shall be rounded down to the nearest whole Share with no cash consideration being paid upon exercise. Anything to the contrary herein notwithstanding, the Company shall not be obligated to issue any Shares hereunder if the issuance of such Shares would violate the provision of any applicable law, in which event the Company shall, as soon as practicable, take whatever action it reasonably can so that such Shares may be issued without resulting in such violations of law.

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(j)Termination of Service.

1.In the event the SAR Holder ceases to be an employee of the Company due to his death or Permanent Disability (as defined in the Company’s Incentive Compensation Plan on the date hereof), the SAR, to the extent not already exercisable in full, shall become immediately exercisable in full and shall continue to be exercisable by the SAR Holder (or his Beneficiary or estate in the event of his death) for a period of three years following such termination of employment (but not beyond the SAR Period).

2.In the event of termination of employment (other than by the Company for Cause, as such term is defined in the Company’s Incentive Compensation Plan on the date hereof) after the attainment of Retirement Age (as defined in the Company’s Incentive Compensation Plan on the date hereof), the SAR shall continue to become exercisable on the schedule set forth in paragraph (f) above so long as the SAR Holder does not engage in any activity in competition with any activity of the Company or any of its Subsidiaries other than serving on the board of directors (or similar governing body) of another company or as a consultant for no more than 26 weeks per calendar year (“Competitive Activity”) and shall continue to be exercisable by the SAR Holder (or his Beneficiary or estate in the event of his death) for the remainder of the SAR Period.  In the event the SAR Holder engages in a Competitive Activity, (A) the SAR, to the extent then exercisable, may be exercised for 30 days following the date on which the SAR Holder engages in such Competitive Activity (but not beyond the SAR Period) and (B) the SAR, to the extent then not exercisable, shall be immediately forfeited.

3.In the event the SAR Holder ceases to be an employee of the Company after a Change in Control (as defined below) due to termination (A) by the Company not for Cause or (B) by the SAR Holder for Good Reason (as defined in the Employment Agreement, dated as of           , between the SAR Holder and           ), in either case, on or before the second anniversary of the occurrence of the Change in Control, the SAR, to the extent not already exercisable in full, shall become immediately exercisable in full and shall continue to be exercisable by the SAR Holder for a period of 90 days following such termination of employment (but not beyond the SAR Period).

4.In the event that the SAR Holder ceases to be an employee of the Company for any other reason, except due to a termination of the SAR Holder’s employment by the Company for Cause, (A) the SAR, to the extent then exercisable, may be exercised for 90 days following termination of employment (but not beyond the SAR Period) and (B) the SAR, to the extent then not exercisable, shall be immediately forfeited; provided that, in the event of a Redundancy (as defined below), the Committee, in its sole discretion, may, in accordance with its authority under the Plan, determine that the SAR, to the extent not exercisable, shall become exercisable and shall continue to be exercisable by the SAR Holder for a period of 90 days following such termination of employment (but not beyond the SAR Period).

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5.In the event of a termination of the SAR Holder’s employment for Cause, the SAR shall immediately cease to be exercisable and shall be immediately forfeited.

6.For purposes of this SAR, service with any of the Company’s Subsidiaries (as defined in the Plan) shall be considered to be service with the Company.

7.“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.

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

8.“Redundancy” shall mean termination of employment by the Company due to its need to reduce the size of its workforce, including due to closure of a business or a particular workplace or change in business process.  Whether a termination of employment is due to a “redundancy” shall be determined by the Committee in its sole and absolute discretion, such determination being final and binding on all parties hereto and all persons claiming through, in the name of or on behalf of such parties.

(k)Obligations as to Capital.  The Company agrees that it will at all times maintain authorized and unissued share capital sufficient to fulfill all of its obligations under the SAR.

(l)Transfer of Shares.  The SAR, the Shares issued hereunder, or any interest in either, 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 and the terms and conditions hereof.

(m)Expenses of Issuance of Shares.  The issuance of stock certificates upon the exercise of the SAR in whole or in part, shall be without charge to the SAR Holder.  The Company shall pay any issuance, stamp or documentary taxes (other than transfer taxes) or charges imposed by any governmental body, agency or official (other than income taxes) by reason of the exercise of the SAR in whole or in part or the resulting issuance of Shares hereunder.

(n)Withholding.  No later than the date of exercise of the SAR granted hereunder, the SAR Holder shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such SAR 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 SAR Holder, federal, state and local taxes of any kind required by law to be withheld upon the exercise of such SAR.

(o)References.  References herein to rights and obligations of the SAR Holder shall apply, where appropriate, to the SAR Holder’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 SAR.

(p)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 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:

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If to the Company:

Arch Capital Group Ltd.:

Wessex House

45 Reid Street

Hamilton HM 12 Bermuda

Attn:  Secretary

If to the SAR Holder:

The last address delivered to the Company by the SAR Holder in the manner set forth herein.

(q)Governing Law.  This agreement shall be governed by and construed in accordance with the laws of New York, without giving effect to principles of conflict of laws thereof.

(r)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.

(s)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 of Grant.

ARCH CAPITAL GROUP LTD.
By:	/s/ Dawna Ferguson
	Name: Dawna Ferguson
	Title: Secretary
/s/ Employee Signature

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EX-10.4

Exhibit 10.4

ARCH CAPITAL GROUP LTD.
Share Appreciation Right Agreement

AGREEMENT, made and entered into this 25th day of February, 2010, by and between Arch Capital Group Ltd. (the “Company”), a Bermuda company, and Constantine Iordanou (the “SAR Holder”).

WHEREAS, the SAR Holder has been granted the following award under the Company’s 2007 Long Term Incentive and Share Award Plan (the “Plan”);

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good and valuable consideration, the Company and the SAR Holder agree as follows:

(a)           Grant.  Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Company hereby grants to the SAR Holder a Share Appreciation Right (the “SAR”) with respect to 70,751 Shares.  The SAR represents a right to be paid, upon exercise of the SAR, an amount measured by (x) the difference between the Fair Market Value per Share on the date of exercise and the exercise price per Share of the SAR, multiplied by (y) the number of Shares with respect to which the SAR is exercised, with such amount to be paid in the form of Shares valued at their Fair Market Value on the date of exercise.  The SAR is granted as of February 25, 2010 (the “Date of Grant”), and such grant is subject to the terms and conditions herein and the terms and conditions of the Plan.  In the event there is any conflict between the terms of the Plan and this Agreement, the terms of the Plan shall control.  Capitalized terms used herein but not defined shall have the meanings given to them in the Plan.

(b)           Exercise Price.  The exercise price of the SAR shall be equal to $74.00 per Share.

(c)           Status of Shares.  Upon issue, the shares received upon exercise of the SAR shall rank equally in all respects with the other Shares.

(d)           Term of SAR.  The SAR may be exercised only during the period (the “SAR Period”) set forth in paragraph (f) below and shall remain exercisable until the tenth anniversary of the Date of Grant.  Thereafter, the SAR Holder shall cease to have any rights in respect thereof.  The right to exercise the SAR shall be subject to sooner termination as provided in paragraph (j) below.

(e)           No Rights of Shareholder.  The SAR Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or in equity.

(f)            Exercisability.  The SAR shall be fully exercisable on the Date of Grant.  The SAR may be exercised at any time or from time to time during the SAR Period in regard to all of the SAR, as may be adjusted pursuant to paragraph (g) below.

(g)           Adjustments for Recapitalization and Dividends.  In the event that, prior to the expiration of the SAR, any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the SAR Holder and preserve the value of the SAR, (i) there shall automatically be substituted for each Share subject to the unexercised SAR the number and kind of shares, other securities or other consideration (including cash) into which each outstanding Share shall be changed or for which each such Share shall be exchanged, and (ii) the exercise price shall be increased or decreased proportionately so that the aggregate purchase price for the Shares subject to the unexercised SAR shall remain the same as immediately prior to such event.

(h)           Nontransferability.  The SAR, or any interest therein, may not be assigned or otherwise transferred, disposed of or encumbered by the SAR Holder, other than by will or by the laws of descent and distribution.  During the lifetime of the SAR Holder, the SAR shall be exercisable only by the SAR Holder or by his or her guardian or legal representative.  Notwithstanding the foregoing, the SAR may be transferred by the SAR Holder to members of his or her “immediate family ” or to a trust or other entity established for the exclusive benefit of solely one or more members of the SAR Holder’s “immediate family.”  Any SAR held by the transferee will continue to be subject to the same terms and conditions that were applicable to the SAR immediately prior to the transfer, except that the SAR will be transferable by the transferee only by will or the laws of descent and distribution.  For purposes hereof, “immediate family” means the SAR Holder’s children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings (including half brother and sisters), in laws, and relationships arising because of legal adoption.

(i)            Exercise of SAR.  In order to exercise the SAR, the SAR Holder shall submit to the Company an instrument specifying the whole number of Shares in respect of which the SAR is being exercised. Shares will be issued accordingly by the Company, and a share certificate dispatched to the SAR Holder within 30 days. The payment upon a SAR exercise shall be solely the number of whole Shares calculated in paragraph (a) above.  Fractional Shares shall be rounded down to the nearest whole Share with no cash consideration being paid upon exercise. Anything to the contrary herein notwithstanding, the Company shall not be obligated to issue any Shares hereunder if the issuance of such Shares would violate the provision of any applicable law, in which event the Company shall, as soon as practicable, take whatever action it reasonably can so that such Shares may be issued without resulting in such violations of law.

2

(j)            Termination of Service.  In the event of a termination of the SAR Holder’s employment for Cause, as such term is defined in the Company’s Incentive Compensation Plan on the date hereof, the SAR shall immediately cease to be exercisable and shall be immediately forfeited.

(k)           Obligations as to Capital.  The Company agrees that it will at all times maintain authorized and unissued share capital sufficient to fulfill all of its obligations under the SAR.

(l)            Transfer of Shares.  The SAR, the Shares issued hereunder, or any interest in either, 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 and the terms and conditions hereof.

(m)          Expenses of Issuance of Shares.  The issuance of stock certificates upon the exercise of the SAR in whole or in part, shall be without charge to the SAR Holder.  The Company shall pay any issuance, stamp or documentary taxes (other than transfer taxes) or charges imposed by any governmental body, agency or official (other than income taxes) by reason of the exercise of the SAR in whole or in part or the resulting issuance of Shares hereunder.

(n)           Withholding.  No later than the date of exercise of the SAR granted hereunder, the SAR Holder shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such SAR 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 SAR Holder, federal, state and local taxes of any kind required by law to be withheld upon the exercise of such SAR.

(o)           References.  References herein to rights and obligations of the SAR Holder shall apply, where appropriate, to the SAR Holder’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 SAR.

(p)           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 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.:

3

Wessex House
45 Reid Street
Hamilton HM 12 Bermuda
Attn:  Secretary

If to the SAR Holder:

The last address delivered to the Company by the SAR Holder in the manner set forth herein.

(q)           Governing Law.  This agreement shall be governed by and construed in accordance with the laws of New York, without giving effect to principles of conflict of laws thereof.

(r)            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.

(s)           Counterparts.  This agreement may be executed in two counterparts, each of which shall constitute one and the same instrument.

4

IN WITNESS WHEREOF, the undersigned have executed this agreement as of the Date of Grant.

ARCH CAPITAL GROUP LTD.
By:	/s/ Dawna Ferguson
	Name: Dawna Ferguson
	Title: Secretary
/s/ Constantine Iordanou
Constantine Iordanou

5

EX-10.5

Exhibit 10.5

ARCH CAPITAL GROUP LTD.

Share Appreciation Right Agreement

AGREEMENT, made and entered into this 29th day of February, 2012, by and between Arch Capital Group Ltd. (the “Company”), a Bermuda company, and Constantine Iordanou (the “SAR Holder”).

WHEREAS, the SAR Holder has been granted the following award under the Company’s 2007 Long Term Incentive and Share Award Plan (the “Plan”);

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good and valuable consideration, the Company and the SAR Holder agree as follows:

(a)Grant.  Pursuant to the provisions of the Plan, the terms of which are incorporated herein by reference, the Company hereby grants to the SAR Holder a Share Appreciation Right (the “SAR”) with respect to 161,636 Shares.  The SAR represents a right to be paid, upon exercise of the SAR, an amount measured by (x) the difference between the Fair Market Value per Share on the date of exercise and the exercise price per Share of the SAR, multiplied by (y) the number of Shares with respect to which the SAR is exercised, with such amount to be paid in the form of Shares valued at their Fair Market Value on the date of exercise.  The SAR is granted as of February 29, 2012 (the “Date of Grant”), and such grant is subject to the terms and conditions herein and the terms and conditions of the Plan.  In the event there is any conflict between the terms of the Plan and this Agreement, the terms of the Plan shall control.  Capitalized terms used herein but not defined shall have the meanings given to them in the Plan.

(b)Exercise Price.  The exercise price of the SAR shall be equal to $37.05 per Share.

(c)Status of Shares.  Upon issue, the shares received upon exercise of the SAR shall rank equally in all respects with the other Shares.

(d)Term of SAR.  The SAR may be exercised only during the period (the “SAR Period”) set forth in paragraph (f) below and shall remain exercisable until the tenth anniversary of the Date of Grant.  Thereafter, the SAR Holder shall cease to have any rights in respect thereof.  The right to exercise the SAR shall be subject to sooner termination as provided in paragraph (j) below.

(e)No Rights of Shareholder.  The SAR Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or in equity.

(f)Exercisability.  The SAR shall be fully exercisable on the Date of Grant.  The SAR may be exercised at any time or from time to time during the SAR Period in regard to all of the SAR, as may be adjusted pursuant to paragraph (g) below.

(g)Adjustments for Recapitalization and Dividends.  In the event that, prior to the expiration of the SAR, any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other such change affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the SAR Holder and preserve the value of the SAR, (i) there shall automatically be substituted for each Share subject to the unexercised SAR the number and kind of shares, other securities or other consideration (including cash) into which each outstanding Share shall be changed or for which each such Share shall be exchanged, and (ii) the exercise price shall be increased or decreased proportionately so that the aggregate purchase price for the Shares subject to the unexercised SAR shall remain the same as immediately prior to such event.

(h)Nontransferability.  The SAR, or any interest therein, may not be assigned or otherwise transferred, disposed of or encumbered by the SAR Holder, other than by will or by the laws of descent and distribution.  During the lifetime of the SAR Holder, the SAR shall be exercisable only by the SAR Holder or by his or her guardian or legal representative.  Notwithstanding the foregoing, the SAR may be transferred by the SAR Holder to members of his or her “immediate family” or to a trust or other entity established for the exclusive benefit of solely one or more members of the SAR Holder’s “immediate family.”  Any SAR held by the transferee will continue to be subject to the same terms and conditions that were applicable to the SAR immediately prior to the transfer, except that the SAR will be transferable by the transferee only by will or the laws of descent and distribution.  For purposes hereof, “immediate family” means the SAR Holder’s children, stepchildren, grandchildren, parents, stepparents, grandparents, spouse, siblings (including half brother and sisters), in laws, and relationships arising because of legal adoption.

(i)Exercise of SAR.  In order to exercise the SAR, the SAR Holder shall submit to the Company an instrument specifying the whole number of Shares in respect of which the SAR is being exercised. Shares will be issued accordingly by the Company, and a share certificate dispatched to the SAR Holder within 30 days. The payment upon a SAR exercise shall be solely the number of whole Shares calculated in paragraph (a) above.  Fractional Shares shall be rounded down to the nearest whole Share with no cash consideration being paid upon exercise. Anything to the contrary herein notwithstanding, the Company shall not be obligated to issue any Shares hereunder if the issuance of such Shares would violate the provision of any applicable law, in which event the Company shall, as soon as practicable, take whatever action it reasonably can so that such Shares may be issued without resulting in such violations of law.

2

(j)Termination of Service.  In the event of a termination of the SAR Holder’s employment for Cause, as such term is defined in the Company’s Incentive Compensation Plan on the date hereof, the SAR shall immediately cease to be exercisable and shall be immediately forfeited.

(k)Obligations as to Capital.  The Company agrees that it will at all times maintain authorized and unissued share capital sufficient to fulfill all of its obligations under the SAR.

(l)Transfer of Shares.  The SAR, the Shares issued hereunder, or any interest in either, 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 and the terms and conditions hereof.

(m)Expenses of Issuance of Shares.  The issuance of stock certificates upon the exercise of the SAR in whole or in part, shall be without charge to the SAR Holder.  The Company shall pay any issuance, stamp or documentary taxes (other than transfer taxes) or charges imposed by any governmental body, agency or official (other than income taxes) by reason of the exercise of the SAR in whole or in part or the resulting issuance of Shares hereunder.

(n)Withholding.  No later than the date of exercise of the SAR granted hereunder, the SAR Holder shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such SAR 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 SAR Holder, federal, state and local taxes of any kind required by law to be withheld upon the exercise of such SAR.

(o)References.  References herein to rights and obligations of the SAR Holder shall apply, where appropriate, to the SAR Holder’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 SAR.

(p)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 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.:

3

Wessex House

45 Reid Street

Hamilton HM 12 Bermuda

Attn:  Secretary

If to the SAR Holder:

The last address delivered to the Company by the SAR Holder in the manner set forth herein.

(q)Governing Law.  This agreement shall be governed by and construed in accordance with the laws of New York, without giving effect to principles of conflict of laws thereof.

(r)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.

(s)Counterparts.  This agreement may be executed in two counterparts, each of which shall constitute one and the same instrument.

4

IN WITNESS WHEREOF, the undersigned have executed this agreement as of the Date of Grant.

ARCH CAPITAL GROUP LTD.
By:	/s/ Dawna Ferguson
	Name: Dawna Ferguson
	Title: Secretary
/s/ Constantine Iordanou
Constantine Iordanou

5

EX-15

Exhibit 15

November 9, 2012

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

Commissioners:

We are aware that our report dated November 9, 2012 on our review of interim financial information of Arch Capital Group Ltd. and its subsidiaries (the “Company”) for the three-month periods ended September 30, 2012 and September 30, 2011 and included in the Company’s quarterly report on Form 10-Q for the quarter ended September 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:	November 9, 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, Mark D. Lyons, 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:	November 9, 2012
By:	/s/ Mark D. Lyons
Name:	Mark D. Lyons
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 September 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: November 9, 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 September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Mark D. Lyons, 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: November 9, 2012

/s/ Mark D. Lyons

Mark D. Lyons

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 - Other Than Temporary Impairments Rollforward) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Rollforward:
Balance at start of period	$ 62,526	$ 86,286	$ 66,545	$ 86,040
Credit loss impairments recognized on securities not previously impaired	747	272	2,652	3,135
Credit loss impairments recognized on securities previously impaired	1,632	1,328	2,701	2,492
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	(1,709)	(530)	(8,702)	(4,311)
Balance at end of period	$ 63,196	$ 87,356	$ 63,196	$ 87,356

XML

Income Taxes (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Taxes
Effective tax rate on income before income taxes	2.80%	(1.40%)	1.40%	(1.80%)
Net deferred tax asset	$ 93,600,000	$ 80,700,000	$ 93,600,000	$ 80,700,000
Income taxes paid, net of recoveries			4,100,000	9,600,000
Federal excise taxes incurred			$ 6,200,000	$ 7,300,000

XML

Investment Information (Details - Aging of Available For Sale Securities in an Unrealized Loss Position) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Available for sale securities:
Estimated Fair Value - Less than 12 months	$ 1,037,853	$ 2,159,326
Gross Unrealized Losses - Less than 12 months	(19,084)	(93,901)
Estimated Fair Value - 12 months or more	421,040	174,028
Gross Unrealized Losses - 12 months or more	(34,414)	(24,048)
Estimated Fair Value	1,458,893	2,333,354
Gross Unrealized Losses	(53,498)	(117,949)
Fixed maturities and fixed maturities pledged under securities lending agreements
Available for sale securities:
Estimated Fair Value - Less than 12 months	840,329	1,741,576
Gross Unrealized Losses - Less than 12 months	(11,334)	(63,517)
Estimated Fair Value - 12 months or more	349,939	149,662
Gross Unrealized Losses - 12 months or more	(24,518)	(21,186)
Estimated Fair Value	1,190,268	1,891,238
Gross Unrealized Losses	(35,852)	(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	199,075	781,635
Gross Unrealized Losses - Less than 12 months	(2,673)	(24,977)
Estimated Fair Value - 12 months or more	67,200	47,687
Gross Unrealized Losses - 12 months or more	(4,366)	(4,945)
Estimated Fair Value	266,275	829,322
Gross Unrealized Losses	(7,039)	(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	280,362	255,101
Gross Unrealized Losses - Less than 12 months	(5,268)	(11,988)
Estimated Fair Value - 12 months or more	42,033	44,606
Gross Unrealized Losses - 12 months or more	(2,171)	(11,238)
Estimated Fair Value	322,395	299,707
Gross Unrealized Losses	(7,439)	(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	46,307	39,156
Gross Unrealized Losses - Less than 12 months	(248)	(537)
Estimated Fair Value - 12 months or more	9,802	14,988
Gross Unrealized Losses - 12 months or more	(482)	(349)
Estimated Fair Value	56,109	54,144
Gross Unrealized Losses	(730)	(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	9,901	87,796
Gross Unrealized Losses - Less than 12 months	(451)	(1,676)
Estimated Fair Value - 12 months or more	14,632	14,582
Gross Unrealized Losses - 12 months or more	(1,387)	(1,228)
Estimated Fair Value	24,533	102,378
Gross Unrealized Losses	(1,838)	(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	123,700	7,059
Gross Unrealized Losses - Less than 12 months	(1,520)	(3)
Estimated Fair Value - 12 months or more	0	0
Gross Unrealized Losses - 12 months or more	0	0
Estimated Fair Value	123,700	7,059
Gross Unrealized Losses	(1,520)	(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	153,052	310,182
Gross Unrealized Losses - Less than 12 months	(1,103)	(16,139)
Estimated Fair Value - 12 months or more	126,123	20,482
Gross Unrealized Losses - 12 months or more	(10,090)	(1,545)
Estimated Fair Value	279,175	330,664
Gross Unrealized Losses	(11,193)	(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	27,932	260,647
Gross Unrealized Losses - Less than 12 months	(71)	(8,197)
Estimated Fair Value - 12 months or more	90,149	7,317
Gross Unrealized Losses - 12 months or more	(6,022)	(1,881)
Estimated Fair Value	118,081	267,964
Gross Unrealized Losses	(6,093)	(10,078)
Equity securities
Available for sale securities:
Estimated Fair Value - Less than 12 months	60,326	130,045
Gross Unrealized Losses - Less than 12 months	(5,985)	(22,039)
Estimated Fair Value - 12 months or more	43,562	1,923
Gross Unrealized Losses - 12 months or more	(8,894)	(305)
Estimated Fair Value	103,888	131,968
Gross Unrealized Losses	(14,879)	(22,344)
Other investments
Available for sale securities:
Estimated Fair Value - Less than 12 months	56,778	98,605
Gross Unrealized Losses - Less than 12 months	(1,027)	(3,053)
Estimated Fair Value - 12 months or more	27,539	22,443
Gross Unrealized Losses - 12 months or more	(1,002)	(2,557)
Estimated Fair Value	84,317	121,048
Gross Unrealized Losses	(2,029)	(5,610)
Short-term investments
Available for sale securities:
Estimated Fair Value - Less than 12 months	80,420	189,100
Gross Unrealized Losses - Less than 12 months	(738)	(5,292)
Estimated Fair Value - 12 months or more	0	0
Gross Unrealized Losses - 12 months or more	0	0
Estimated Fair Value	80,420	189,100
Gross Unrealized Losses	$ (738)	$ (5,292)

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Fair Value (Tables)

9 Months Ended

Sep. 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		$	2,707,999	$	-	$	2,613,370	$	94,629
	Mortgage backed securities			1,873,874		-		1,873,874		-
	Municipal bonds			1,579,872		-		1,579,872		-
	Commercial mortgage backed securities			824,162		-		824,162		-
	U.S. government and government agencies			1,131,358		1,131,358		-		-
	Non-U.S. government securities			1,026,432		-		1,026,432		-
	Asset backed securities			835,258		-		835,258		-
		Total		9,978,955		1,131,358		8,752,968		94,629
	Equity securities			312,371		312,288		83		-
	Other investments			477,857		-		473,061		4,796
	Short-term investments			845,158		759,868		85,290		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			234,453		-		234,453		-
	Non-U.S. government bonds			71,971		-		71,971		-
	Equity securities			28,405		28,405		-		-
	Other investments			363,239		-		363,239		-
		Total		698,068		28,405		669,663		-
	TALF investments			270,206		-		270,206		-
		Total assets measured at fair value	$	12,582,615	$	2,231,919	$	10,251,271	$	99,425
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	185,223	$	-	$	185,223	$	-
	Securities sold but not yet purchased (2)			8,017		8,017		-		-
		Total liabilities measured at fair value	$	193,240	$	8,017	$	185,223	$	-

• 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 September 30, 2012
Balance at beginning of period			$	92,036	$	6,386	$	98,422
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		1,402		1,627		3,029
		Included in other comprehensive income		1,229		(1,590)		(361)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(38)		(1,627)		(1,665)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	94,629	$	4,796	$	99,425
Three Months Ended September 30, 2011
Balance at beginning of period			$	164,456	$	7,929	$	172,385
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		(5,742)		-		(5,742)
		Included in other comprehensive income		(17,317)		(1,929)		(19,246)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(376)		-		(376)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

(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
Nine Months Ended September 30, 2012
Balance at beginning of period			$	92,091	$	5,124	$	97,215
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		3,185		1,708		4,893
		Included in other comprehensive income		(530)		(328)		(858)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		0		0
		Settlements		(117)		(1,708)		(1,825)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	94,629	$	4,796	$	99,425
Nine Months Ended September 30, 2011
Balance at beginning of period			$	153,509	$	7,858	$	161,367
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		507		1,709		2,216
		Included in other comprehensive income		(3,763)		(2,901)		(6,664)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(666)		(666)
		Settlements		(9,232)		-		(9,232)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

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

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Fair Value (Details - Fair Value Hierarchy) (Fair value measurements - recurring, USD $) In Thousands, unless otherwise specified	Sep. 30, 2012		Dec. 31, 2011
Assets measured at fair value
Total assets measured at fair value	$ 12,582,615		$ 11,628,517
Liabilities measured at fair value
Total liabilities measured at fair value	193,240		337,664
Fixed maturities and fixed maturities pledged under securities lending agreements
Assets measured at fair value
Total assets measured at fair value	9,978,955	[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	2,707,999	[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	1,873,874	[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	1,579,872	[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	824,162	[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	1,131,358	[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	1,026,432	[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	835,258	[1]	576,757	[1]
Equity securities
Assets measured at fair value
Total assets measured at fair value	312,371		299,584
Other investments
Assets measured at fair value
Total assets measured at fair value	477,857		238,111
Short-term investments
Assets measured at fair value
Total assets measured at fair value	845,158		904,219
Fair value option investments
Assets measured at fair value
Total assets measured at fair value	698,068		366,903
Fair value option investments | Fixed maturities available for sale, at fair value | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	234,453		122,935
Fair value option investments | Fixed maturities available for sale, at fair value | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	71,971		24,844
Fair value option investments | Equity securities, other
Assets measured at fair value
Total assets measured at fair value	28,405		87,403
Fair value option investments | Other investments - fair value option
Assets measured at fair value
Total assets measured at fair value	363,239		131,721
TALF investments
Assets measured at fair value
Total assets measured at fair value	270,206		387,702
TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	185,223		310,486
Securities sold but not yet purchased
Liabilities measured at fair value
Total liabilities measured at fair value	8,017	[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	2,231,919		2,676,295
Liabilities measured at fair value
Total liabilities measured at fair value	8,017		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	1,131,358	[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	1,131,358	[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	312,288		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	759,868		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	28,405		87,403
Quoted Prices in Active Markets for Identical Assets ( Level 1) | Fair value option investments | Fixed maturities available for sale, at fair value | 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 available for sale, at fair value | 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	28,405		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	8,017	[2]	27,178	[2]
Significant Other Observable Inputs ( Level 2)
Assets measured at fair value
Total assets measured at fair value	10,251,271		8,855,007
Liabilities measured at fair value
Total liabilities measured at fair value	185,223		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	8,752,968	[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	2,613,370	[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	1,873,874	[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	1,579,872	[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	824,162	[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	1,026,432	[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	835,258	[1]	576,757	[1]
Significant Other Observable Inputs ( Level 2) | Equity securities
Assets measured at fair value
Total assets measured at fair value	83		56
Significant Other Observable Inputs ( Level 2) | Other investments
Assets measured at fair value
Total assets measured at fair value	473,061		232,987
Significant Other Observable Inputs ( Level 2) | Short-term investments
Assets measured at fair value
Total assets measured at fair value	85,290		66,848
Significant Other Observable Inputs ( Level 2) | Fair value option investments
Assets measured at fair value
Total assets measured at fair value	669,663		279,500
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Fixed maturities available for sale, at fair value | Corporate bonds
Assets measured at fair value
Total assets measured at fair value	234,453		122,935
Significant Other Observable Inputs ( Level 2) | Fair value option investments | Fixed maturities available for sale, at fair value | Non-US government securities
Assets measured at fair value
Total assets measured at fair value	71,971		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	363,239		131,721
Significant Other Observable Inputs ( Level 2) | TALF investments
Assets measured at fair value
Total assets measured at fair value	270,206		387,702
Significant Other Observable Inputs ( Level 2) | TALF borrowings
Liabilities measured at fair value
Total liabilities measured at fair value	185,223		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	99,425		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	94,629	[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	94,629	[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	4,796		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 available for sale, at fair value | 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 available for sale, at fair value | 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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Investment Information (Details - Net Realized Gains and Losses) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Available for sale securities, Gross gains on investment sales	$ 70,510		$ 61,008		$ 186,458		$ 204,303
Available for sale securities, Gross losses on investment sales	(20,672)		(21,503)		(59,365)		(85,170)
Derivative instruments	297	[1]	36,179	[1]	(4,095)	[1]	28,035	[1]
Other investments	(112)		(6,320)		(46)		(4,941)
Net realized gains	60,391		30,199		139,379		96,104
Fixed maturities available for sale, at fair value
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Change in fair value of assets and liabilities accounted for using the fair value option	5,322		(4,366)		8,729		(12,759)
Equity securities
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Change in fair value of assets and liabilities accounted for using the fair value option	1,466		(28,993)		1,264		(32,043)
Other investments
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Change in fair value of assets and liabilities accounted for using the fair value option	3,810		(3,755)		5,819		(3,432)
TALF investments
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Change in fair value of assets and liabilities accounted for using the fair value option	(21)		(2,130)		(71)		2,317
TALF borrowings
Net realized gains (losses) excluding other-than-temporary impairment provisions:
Change in fair value of assets and liabilities accounted for using the fair value option	$ (209)		$ 79		$ 686		$ (206)

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

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Share Transactions

9 Months Ended

Sep. 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 0.7 million common shares for an aggregate purchase price of $20.8 million during the 2011 third quarter and 9.6 million common shares for an aggregate purchase price of $287.6 during the nine months ended September 30, 2011.At September 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.

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Fair Value (Details - Level 3 Rollforward) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	$ 98,422		$ 172,385		$ 97,215		$ 161,367
Total realized and unrealized investment gains (losses) included in earnings	3,029	[1]	(5,742)	[1]	4,893	[1]	2,216	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	(361)		(19,246)		(858)		(6,664)
Purchases, issuances, sales and settlements
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		0		0		(666)
Settlements	(1,665)		(376)		(1,825)		(9,232)
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	99,425		147,021		99,425		147,021
Corporate bonds
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	92,036		164,456		92,091		153,509
Total realized and unrealized investment gains (losses) included in earnings	1,402	[1]	(5,742)	[1]	3,185	[1]	507	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	1,229		(17,317)		(530)		(3,763)
Purchases, issuances, sales and settlements
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		0		0		0
Settlements	(38)		(376)		(117)		(9,232)
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	94,629		141,021		94,629		141,021
Other Investments
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of period	6,386		7,929		5,124		7,858
Total realized and unrealized investment gains (losses) included in earnings	1,627	[1]	0	[1]	1,708	[1]	1,709	[1]
Total realized and unrealized investment gains (losses) included in other comprehensive income	(1,590)		(1,929)		(328)		(2,901)
Purchases, issuances, sales and settlements
Purchases	0		0		0		0
Issuances	0		0		0		0
Sales	0		0		0		(666)
Settlements	(1,627)		0		(1,708)		0
Transfers in and/or out of Level 3	0		0		0		0
Balance at end of period	$ 4,796		$ 6,000		$ 4,796		$ 6,000

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

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Commitment and Contingencies (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Investment commitments:
Estimated investment commitments	$ 528,000,000
LOC Facilities
Letter of credit and revolving credit facilities:
Line of credit facility, amount outstanding	444,800,000
Investments pledged as collateral	518,700,000
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
Expiry 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

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Recent Accounting Pronouncements (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Dec. 31, 2010
Impact of the adoption of new guidance on the consolidated financial statements:
Deferred acquisition costs, net	$ 279,171		$ 279,171		$ 227,884	$ 227,278
Other assets	509,048		509,048		460,052	490,277	[1]
Retained earnings						4,386,336
Other operating expenses	113,429	106,321	337,602	322,045
Income tax benefit	5,441	(2,357)	8,110	(5,178)
Net income	189,656	168,755	574,180	290,831
Net income per common share - basic	$ 1.36	$ 1.23	$ 4.12	$ 2.06
Net income per common share - diluted	$ 1.33	$ 1.18	$ 4.01	$ 1.96
Accounting Standards Update 2010-26 | As previously reported
Impact of the adoption of new guidance on the consolidated financial statements:
Deferred acquisition costs, net						277,861
Other assets						475,911	[1]
Retained earnings						4,422,553
Other operating expenses		105,998		318,981
Income tax benefit		(2,267)		(4,369)
Net income		168,988		293,086
Net income per common share - basic		$ 1.24		$ 2.07
Net income per common share - diluted		$ 1.19		$ 1.98
Accounting Standards Update 2010-26 | Effect of change
Impact of the adoption of new guidance on the consolidated financial statements:
Deferred acquisition costs, net						(50,583)
Other assets						14,366	[1]
Retained earnings						(36,217)
Other operating expenses		323		3,064
Income tax benefit		(90)		(809)
Net income		$ (233)		$ (2,255)
Net income per common share - basic		$ (0.01)		$ (0.01)
Net income per common share - diluted		$ (0.01)		$ (0.02)

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

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Fair Value (Details - Text Items) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 quotes	Sep. 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	$ 12,780,000,000		$ 12,780,000,000		$ 11,970,000,000
Total assets and liabilities measured at fair value priced using non binding broker quotes	2,070,000,000		2,070,000,000		1,190,000,000
Percentage of total assets and liabilities measured at fair value priced using non-binding broker quotes			16.20%		9.90%
Fair value, assets measured on recurring basis, gain (loss) included in net realized gains (losses)	3,000,000	5,700,000	4,900,000	1,900,000
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fair value of senior notes	386,500,000		386,500,000
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				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Numerator:
Net income	$ 189,656		$ 168,755		$ 574,180		$ 290,831
Preferred dividends	(5,484)		(6,461)		(19,594)		(19,383)
Net income available to common shareholders	$ 184,172		$ 162,294		$ 554,586		$ 271,448
Denominator
Weighted average common shares outstanding - basic	135,067,360		131,560,851		134,519,046		132,090,354
Nonvested restricted shares	723,538		750,289		847,959		952,898
Stock options	2,906,036	[1]	4,829,789	[1]	2,868,990	[1]	5,499,306	[1]
Weighted average common shares and common share equivalents outstanding diluted	138,696,934		137,140,929		138,235,995		138,542,558
Earnings per common share:
Basic	$ 1.36		$ 1.23		$ 4.12		$ 2.06
Diluted	$ 1.33		$ 1.18		$ 4.01		$ 1.96
Stock Options
Notes:
Antidilutive securities excluded from computation of earnings per share, amount	621,556		698,912		860,088		385,444

[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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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Segment Reporting Information [Line Items]
Gross premiums written	$ 936,764	[1]	$ 860,289	[1]	$ 3,055,233	[1]	$ 2,736,794	[1]
Net premiums written	755,249		691,381		2,439,093		2,162,202
Net premiums earned	748,691		682,049		2,155,659		1,958,623
Fee income	1,077		848		2,426		2,447
Losses and loss adjustment expenses	(443,871)		(423,984)		(1,238,771)		(1,349,486)
Acquisition expenses, net	(128,065)		(120,205)		(375,316)		(339,598)
Other operating expenses	(104,380)		(100,141)		(309,630)		(297,442)
Underwriting income (loss)	73,452		38,567		234,368		(25,456)
Net investment income	73,221		82,753		221,126		257,731
Net realized gains	60,391		30,199		139,379		96,104
Net impairment losses recognized in earnings	(2,379)		(2,739)		(5,353)		(7,103)
Equity in net income (loss) of investment funds accounted for using the equity method	24,330		(30,549)		56,943		5,097
Other income (loss)	(532)		2,432		(7,905)		2,734
Other expenses	(9,049)		(6,180)		(27,972)		(24,603)
Interest expense	(7,378)		(8,125)		(22,338)		(23,604)
Net foreign exchange gains (losses)	(16,959)		60,040		(5,958)		4,753
Income before income taxes	195,097		166,398		582,290		285,653
Income tax (expense) benefit	(5,441)		2,357		(8,110)		5,178
Net income	189,656		168,755		574,180		290,831
Preferred dividends	(5,484)		(6,461)		(19,594)		(19,383)
Net income available to common shareholders	184,172		162,294		554,586		271,448
Underwriting ratios:
Loss ratio	59.30%		62.20%		57.50%		68.90%
Acquisition expense ratio	17.00%	[2]	17.50%	[2]	17.30%	[2]	17.20%	[2]
Other operating expense ratio	13.90%		14.70%		14.40%		15.20%
Combined ratio	90.20%		94.40%		89.20%		101.30%
Insurance
Segment Reporting Information [Line Items]
Gross premiums written	658,599	[1]	634,280	[1]	2,022,802	[1]	1,903,868	[1]
Net premiums written	483,356		472,986		1,438,620		1,360,540
Net premiums earned	456,341		437,970		1,344,675		1,256,380
Fee income	645		661		1,803		2,141
Losses and loss adjustment expenses	(307,155)		(290,608)		(900,735)		(889,973)
Acquisition expenses, net	(73,663)		(76,763)		(223,591)		(204,721)
Other operating expenses	(75,379)		(77,801)		(225,366)		(230,204)
Underwriting income (loss)	789		(6,541)		(3,214)		(66,377)
Underwriting ratios:
Loss ratio	67.30%		66.40%		67.00%		70.80%
Acquisition expense ratio	16.00%	[2]	17.40%	[2]	16.50%	[2]	16.10%	[2]
Other operating expense ratio	16.50%		17.80%		16.80%		18.30%
Combined ratio	99.80%		101.60%		100.30%		105.20%
Reinsurance
Segment Reporting Information [Line Items]
Gross premiums written	279,751	[1]	227,837	[1]	1,036,708	[1]	836,616	[1]
Net premiums written	271,893		218,395		1,000,473		801,662
Net premiums earned	292,350		244,079		810,984		702,243
Fee income	432		187		623		306
Losses and loss adjustment expenses	(136,716)		(133,376)		(338,036)		(459,513)
Acquisition expenses, net	(54,402)		(43,442)		(151,725)		(134,877)
Other operating expenses	(29,001)		(22,340)		(84,264)		(67,238)
Underwriting income (loss)	$ 72,663		$ 45,108		$ 237,582		$ 40,921
Underwriting ratios:
Loss ratio	46.80%		54.60%		41.70%		65.40%
Acquisition expense ratio	18.60%	[2]	17.80%	[2]	18.70%	[2]	19.20%	[2]
Other operating expense ratio	9.90%		9.20%		10.40%		9.60%
Combined ratio	75.30%		81.60%		70.80%		94.20%

[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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General

9 Months Ended

Sep. 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 - Summary of Available For Sale Securities) (USD $) In Thousands, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2012		Dec. 31, 2011
Available for sale securities:
Estimated fair value	$ 11,614,341		$ 10,873,912
Gross unrealized gains	424,234		328,343
Gross unrealized losses	(53,498)		(117,949)
Cost or amortized cost	11,243,605		10,663,518
OTTI unrealized losses	(16,448)	[1]	(29,051)	[1]
Fixed maturities and fixed maturities pledged under securities lending agreements
Available for sale securities:
Estimated fair value	9,978,955	[2]	9,431,998	[2]
Gross unrealized gains	364,314	[2]	296,743	[2]
Gross unrealized losses	(35,852)	[2]	(84,703)	[2]
Cost or amortized cost	9,650,493	[2]	9,219,958	[2]
OTTI unrealized losses	(16,448)	[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	2,707,999	[2]	2,596,118	[2]
Gross unrealized gains	113,295	[2]	79,407	[2]
Gross unrealized losses	(7,039)	[2]	(29,922)	[2]
Cost or amortized cost	2,601,743	[2]	2,546,633	[2]
OTTI unrealized losses	(113)	[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	1,873,874	[2]	1,592,762	[2]
Gross unrealized gains	42,374	[2]	27,633	[2]
Gross unrealized losses	(7,439)	[2]	(23,226)	[2]
Cost or amortized cost	1,838,939	[2]	1,588,355	[2]
OTTI unrealized losses	(9,342)	[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	1,579,872	[2]	1,430,565	[2]
Gross unrealized gains	74,558	[2]	77,977	[2]
Gross unrealized losses	(730)	[2]	(886)	[2]
Cost or amortized cost	1,506,044	[2]	1,353,474	[2]
OTTI unrealized losses	(17)	[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	824,162	[2]	1,046,326	[2]
Gross unrealized gains	42,745	[2]	28,780	[2]
Gross unrealized losses	(1,838)	[2]	(2,904)	[2]
Cost or amortized cost	783,255	[2]	1,020,450	[2]
OTTI unrealized losses	(3,498)	[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	1,131,358	[2]	1,451,993	[2]
Gross unrealized gains	28,015	[2]	34,811	[2]
Gross unrealized losses	(1,520)	[2]	(3)	[2]
Cost or amortized cost	1,104,863	[2]	1,417,185	[2]
OTTI unrealized losses	(19)	[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	1,026,432	[2]	737,477	[2]
Gross unrealized gains	37,927	[2]	33,486	[2]
Gross unrealized losses	(11,193)	[2]	(17,684)	[2]
Cost or amortized cost	999,698	[2]	721,675	[2]
OTTI unrealized losses	0	[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	835,258	[2]	576,757	[2]
Gross unrealized gains	25,400	[2]	14,649	[2]
Gross unrealized losses	(6,093)	[2]	(10,078)	[2]
Cost or amortized cost	815,951	[2]	572,186	[2]
OTTI unrealized losses	(3,459)	[1],[2]	(3,876)	[1],[2]
Equity securities
Available for sale securities:
Estimated fair value	312,371		299,584
Gross unrealized gains	29,744		22,870
Gross unrealized losses	(14,879)		(22,344)
Cost or amortized cost	297,506		299,058
OTTI unrealized losses	0	[1]	0	[1]
Other investments
Available for sale securities:
Estimated fair value	477,857		238,111
Gross unrealized gains	24,737		8,340
Gross unrealized losses	(2,029)		(5,610)
Cost or amortized cost	455,149		235,381
OTTI unrealized losses	0	[1]	0	[1]
Short-term investments
Available for sale securities:
Estimated fair value	845,158		904,219
Gross unrealized gains	5,439		390
Gross unrealized losses	(738)		(5,292)
Cost or amortized cost	840,457		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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Investment Information (Details - Restricted Assets) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Restricted Assets [Line Items]
Total restricted assets	$ 5,628,541	$ 5,597,953
Assets used for collateral or guarantees - affiliated transactions
Restricted Assets [Line Items]
Total restricted assets	4,285,238	4,321,535
Assets used for collateral or guarantees - third party agreements
Restricted Assets [Line Items]
Total restricted assets	727,485	757,669
Deposits with U.S. regulatory authorities
Restricted Assets [Line Items]
Total restricted assets	289,929	288,458
Deposits with non-U.S. regulatory authorities
Restricted Assets [Line Items]
Total restricted assets	233,868	169,733
Trust funds
Restricted Assets [Line Items]
Total restricted assets	$ 92,021	$ 60,558

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UNAUDITED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $9,616,883 and $9,165,438)	$ 9,944,186	$ 9,375,604
Short-term investments available for sale, at fair value (amortized cost: $840,457 and $909,121)	845,158	904,219
Investment of funds received under securities lending, at fair value (amortized cost: $25,651 and $48,577)	26,279	48,419
Equity securities available for sale, at fair value (cost: $297,506 and $299,058)	312,371	299,584
Other investments available for sale, at fair value (cost: $455,149 and $235,381)	477,857	238,111
Investments accounted for using the fair value option	698,068	366,903
TALF investments, at fair value (amortized cost: $255,615 and $373,040)	270,206	387,702
Investment funds accounted for using the equity method	339,587	380,507
Total investments	12,913,712	12,001,049
Cash	422,440	351,699
Accrued investment income	68,069	70,739
Investment in joint venture (cost: $100,000)	109,363	107,576
Fixed maturities and short-term investments pledged under securities lending, at fair value	34,769	56,393
Premiums receivable	773,172	501,563
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,733,830	1,851,584
Contractholder receivables	849,352	748,231
Prepaid reinsurance premiums	302,513	265,696
Deferred acquisition costs, net	279,171	227,884
Receivable for securities sold	894,318	462,891
Other assets	509,048	460,052
Total Assets	18,889,757	17,105,357
Liabilities
Reserve for losses and loss adjustment expenses	8,562,328	8,456,210
Unearned premiums	1,815,524	1,411,872
Reinsurance balances payable	172,016	133,866
Contractholder payables	849,352	748,231
Senior notes	300,000	300,000
Revolving credit agreement borrowings	100,000	100,000
TALF borrowings, at fair value (par: $186,291 and $310,868)	185,223	310,486
Securities lending payable	35,707	58,546
Payable for securities purchased	1,012,060	480,230
Other liabilities	508,753	513,842
Total Liabilities	13,540,963	12,513,283
Commitments and Contingencies
Shareholders' Equity
Non-cumulative preferred shares	325,000	325,000
Common shares ($0.0033 par, shares issued: 167,004,690 and 164,636,338)	556	549
Additional paid-in capital	200,607	161,419
Retained earnings	5,351,241	4,796,655
Accumulated other comprehensive income, net of deferred income tax	324,132	153,923
Common shares held in treasury, at cost (shares: 30,464,512 and 30,277,993)	(852,742)	(845,472)
Total Shareholders Equity	5,348,794	4,592,074
Total Liabilities and Shareholders Equity	$ 18,889,757	$ 17,105,357

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Derivative Instruments (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended						3 Months Ended		9 Months Ended						3 Months Ended		9 Months Ended						3 Months Ended		9 Months Ended						3 Months Ended		9 Months Ended
	Sep. 30, 2012 Net realized gains (losses)	Sep. 30, 2011 Net realized gains (losses)	Sep. 30, 2012 Net realized gains (losses)	Sep. 30, 2011 Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument	Dec. 31, 2011 Not designated as hedging instrument	Sep. 30, 2012 Not designated as hedging instrument Futures contracts	Dec. 31, 2011 Not designated as hedging instrument Futures contracts	Sep. 30, 2012 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Futures contracts Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Futures contracts Other investments available for sale, at fair value	Dec. 31, 2011 Not designated as hedging instrument Futures contracts Other investments available for sale, at fair value	Sep. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts	Dec. 31, 2011 Not designated as hedging instrument Foreign currency forward contracts	Sep. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Foreign currency forward contracts Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Foreign currency forward contracts Other investments available for sale, at fair value	Dec. 31, 2011 Not designated as hedging instrument Foreign currency forward contracts Other investments available for sale, at fair value	Sep. 30, 2012 Not designated as hedging instrument TBAs	Dec. 31, 2011 Not designated as hedging instrument TBAs	Sep. 30, 2012 Not designated as hedging instrument TBAs Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument TBAs Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument TBAs Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument TBAs Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument TBAs Fixed maturities available for sale, at fair value	Dec. 31, 2011 Not designated as hedging instrument TBAs Fixed maturities available for sale, at fair value	Sep. 30, 2012 Not designated as hedging instrument Other	Dec. 31, 2011 Not designated as hedging instrument Other	Sep. 30, 2012 Not designated as hedging instrument Other Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Other Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Other Net realized gains (losses)	Sep. 30, 2011 Not designated as hedging instrument Other Net realized gains (losses)	Sep. 30, 2012 Not designated as hedging instrument Other Other investments available for sale, at fair value	Dec. 31, 2011 Not designated as hedging instrument Other Other investments available for sale, at fair value
Asset Derivatives
Estimated Fair Value					$ 485,277	$ 40,374							$ 40	$ 771							$ 789	$ 11,937							$ 483,977	$ 23,661							$ 471	$ 4,005
Notional Value							70,000	364,035							86,910	352,992							444,650	23,000							6,336	187,613
Liabilities Derivatives
Estimated Fair Value					(556,704)	(10,929)							(10)	(145)							(1,466)	(6,558)							(554,902)	(2,178)							(326)	(2,048)
Notional Value							53,600	16,275							138,293	253,733							509,550	2,000							27,888	309,931
Derivative Instruments, Gain (Loss) Recognized in Income, Net [Abstract]
Net realized gains or losses recorded on derivative instruments	$ 297	$ 36,179	$ (4,095)	$ 28,035					$ (245)	$ 12,142	$ (4,588)	$ 15,515					$ 737	$ 12,155	$ (206)	$ (4,238)					$ 1,140	$ 2,554	$ 2,882	$ 11,056					$ (1,335)	$ 9,328	$ (2,183)	$ 5,702

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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, beginning of year 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				10,000	3,910,000
Issue costs on Series C preferred shares					0
Exercise of stock options					9,379,000
Amortization of share-based compensation					25,286,000
Other					1,982,000
Dividends declared on preferred shares		(19,383,000)				(19,383,000)
Net income		290,831,000				290,831,000
Change in unrealized appreciation in value of investments, net of deferred income tax							(45,194,000)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax		(3,303,000)					(3,303,000)
Foreign currency translation adjustments, net of deferred income tax		(9,430,000)					(9,430,000)
Shares repurchased for treasury								(294,975,000)
Balance, end of period at Sep. 30, 2011		4,435,899,000	325,000,000	544,000	150,882,000	4,657,784,000	146,576,000	(844,887,000)
Balance, beginning of year 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	4,561,000
Issue costs on Series C preferred shares					9,398,000
Exercise of stock options					7,619,000
Amortization of share-based compensation					34,659,000
Other					1,747,000
Dividends declared on preferred shares		(19,594,000)				(19,594,000)
Net income		574,180,000				574,180,000
Change in unrealized appreciation in value of investments, net of deferred income tax							158,942,000
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax		(776,000)					(776,000)
Foreign currency translation adjustments, net of deferred income tax		12,043,000					12,043,000
Shares repurchased for treasury								(7,270,000)
Balance, end of period at Sep. 30, 2012		$ 5,348,794,000	$ 325,000,000	$ 556,000	$ 200,607,000	$ 5,351,241,000	$ 324,132,000	$ (852,742,000)

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

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Investment Information (Details - Fair Value Option) (USD $) In Thousands, unless otherwise specified	Sep. 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	$ 698,068		$ 366,903
Securities sold not yet purchased	(8,017)	[1]	(27,178)	[1]
TALF investments	270,206		387,702
TALF borrowings	(185,223)		(310,486)
Net assets accounted for using the fair value option	775,034		416,941
Fixed maturities available for sale, at fair value
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	306,424		147,779
Equity securities
Summary of assets and liabilities accounted for using the fair value option:
Investments accounted for using the fair value option	28,405		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	363,239		131,721
Other investments par	$ 354,835		$ 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)

9 Months Ended

Sep. 30, 2012

Earnings Per Common Share

Computation of basic and diluted earnings per common share

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2012		2011		2012		2011
Numerator:
Net income			$	189,656	$	168,755	$	574,180	$	290,831
Preferred dividends				(5,484)		(6,461)		(19,594)		(19,383)
Net income available to common shareholders			$	184,172	$	162,294	$	554,586	$	271,448
Denominator:
	Weighted average common shares outstanding – basic			135,067,360		131,560,851		134,519,046		132,090,354
	Effect of dilutive common share equivalents:
		Nonvested restricted shares		723,538		750,289		847,959		952,898
		Stock options (1)		2,906,036		4,829,789		2,868,990		5,499,306
	Weighted average common shares and common share
		equivalents outstanding – diluted		138,696,934		137,140,929		138,235,995		138,542,558
Earnings per common share:
	Basic		$	1.36	$	1.23	$	4.12	$	2.06
	Diluted		$	1.33	$	1.18	$	4.01	$	1.96

• 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 third quarter and 2011 third quarter, the number of stock options excluded were 621,556 and 698,912, respectively.For the nine months ended September 30, 2012 and 2011, the number of stock options excluded were 860,088 and 385,444, respectively.

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Investment Information (Details - Net Investment Income) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Components of net investment income:
Gross investment income	$ 79,367		$ 89,176		$ 240,357		$ 276,675
Investment expenses	(6,146)		(6,423)		(19,231)		(18,944)
Net investment income	73,221		82,753		221,126		257,731
Fixed maturities available for sale, at fair value
Components of net investment income:
Gross investment income	68,203		82,686		211,942		252,250
Term loan investments
Components of net investment income:
Gross investment income	4,876	[1]	881	[1]	10,732	[1]	1,565	[1]
Equity securities
Components of net investment income:
Gross investment income	2,009		1,796		6,098		5,187
Short-term investments
Components of net investment income:
Gross investment income	485		430		1,617		1,613
Other investment income
Components of net investment income:
Gross investment income	$ 3,794	[2]	$ 3,383	[2]	$ 9,968	[2]	$ 16,060	[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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Investment Information (Tables)

9 Months Ended

Sep. 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 September 30, 2012
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,707,999	$	113,295	$	(7,039)	$	2,601,743	$	(113)
Mortgage backed securities			1,873,874		42,374		(7,439)		1,838,939		(9,342)
Municipal bonds			1,579,872		74,558		(730)		1,506,044		(17)
Commercial mortgage backed securities			824,162		42,745		(1,838)		783,255		(3,498)
U.S. government and government agencies			1,131,358		28,015		(1,520)		1,104,863		(19)
Non-U.S. government securities			1,026,432		37,927		(11,193)		999,698		-
Asset backed securities			835,258		25,400		(6,093)		815,951		(3,459)
	Total		9,978,955		364,314		(35,852)		9,650,493		(16,448)
Equity securities			312,371		29,744		(14,879)		297,506		-
Other investments			477,857		24,737		(2,029)		455,149		-
Short-term investments			845,158		5,439		(738)		840,457		-
	Total	$	11,614,341	$	424,234	$	(53,498)	$	11,243,605	$	(16,448)
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 September 30, 2012, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $1.1 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 September 30, 2012
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	199,075	$	(2,673)	$	67,200	$	(4,366)	$	266,275	$	(7,039)
Mortgage backed securities			280,362		(5,268)		42,033		(2,171)		322,395		(7,439)
Municipal bonds			46,307		(248)		9,802		(482)		56,109		(730)
Commercial mortgage backed
	securities		9,901		(451)		14,632		(1,387)		24,533		(1,838)
U.S. government and
	government agencies		123,700		(1,520)		-		-		123,700		(1,520)
Non-U.S. government securities			153,052		(1,103)		126,123		(10,090)		279,175		(11,193)
Asset backed securities			27,932		(71)		90,149		(6,022)		118,081		(6,093)
	Total		840,329		(11,334)		349,939		(24,518)		1,190,268		(35,852)
Equity securities			60,326		(5,985)		43,562		(8,894)		103,888		(14,879)
Other investments			56,778		(1,027)		27,539		(1,002)		84,317		(2,029)
Short-term investments			80,420		(738)		-		-		80,420		(738)
	Total	$	1,037,853	$	(19,084)	$	421,040	$	(34,414)	$	1,458,893	$	(53,498)
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

		September 30, 2012				December 31, 2011
		Estimated		Amortized		Estimated		Amortized
Maturity		Fair Value		Cost		Fair Value		Cost
Due in one year or less		$	471,678	$	462,425	$	486,986	$	476,734
Due after one year through five years			3,664,256		3,556,156		2,850,578		2,793,982
Due after five years through 10 years			2,083,013		1,978,601		2,532,834		2,441,800
Due after 10 years			226,714		215,166		345,755		326,451
			6,445,661		6,212,348		6,216,153		6,038,967
Mortgage backed securities			1,873,874		1,838,939		1,592,762		1,588,355
Commercial mortgage backed securities			824,162		783,255		1,046,326		1,020,450
Asset backed securities			835,258		815,951		576,757		572,186
	Total	$	9,978,955	$	9,650,493	$	9,431,998	$	9,219,958

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

		September 30,		December 31,
		2012		2011
Fixed maturities		$	306,424	$	147,779
Equity securities			28,405		87,403
Other investments (par: $354,835 and $138,062)			363,239		131,721
	Investments accounted for using the fair value option		698,068		366,903
Securities sold but not yet purchased (1)			(8,017)		(27,178)
TALF investments (2)			270,206		387,702
TALF borrowings (2)			(185,223)		(310,486)
	Net assets accounted for using the fair value option	$	775,034	$	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.
• See Note 12, “Subsequent Events.”

Net investment income

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Fixed maturities		$	68,203	$	82,686	$	211,942	$	252,250
Term loan investments (1)			4,876		881		10,732		1,565
Equity securities			2,009		1,796		6,098		5,187
Short-term investments			485		430		1,617		1,613
Other (2)			3,794		3,383		9,968		16,060
	Gross investment income		79,367		89,176		240,357		276,675
Investment expenses			(6,146)		(6,423)		(19,231)		(18,944)
	Net investment income	$	73,221	$	82,753	$	221,126	$	257,731

• 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				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Available for sale securities:
	Gross gains on investment sales	$	70,510	$	61,008	$	186,458	$	204,303
	Gross losses on investment sales		(20,672)		(21,503)		(59,365)		(85,170)
Change in fair value of assets and liabilities
accounted for using the fair value option:
	Fixed maturities		5,322		(4,366)		8,729		(12,759)
	Equity securities		1,466		(28,993)		1,264		(32,043)
	Other investments		3,810		(3,755)		5,819		(3,432)
	TALF investments		(21)		(2,130)		(71)		2,317
	TALF borrowings		(209)		79		686		(206)
Derivative instruments (1)			297		36,179		(4,095)		28,035
Other			(112)		(6,320)		(46)		(4,941)
	Net realized gains	$	60,391	$	30,199	$	139,379	$	96,104

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

Other than temporary impairments

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Fixed maturities:
	Mortgage backed securities	$	1,511	$	1,192	$	2,403	$	3,620
	Corporate bonds		150		16		1,512		375
	Non-U.S. government securities		-		-		261		-
	Commercial mortgage backed securities		211		-		211		-
	Asset backed securities		-		-		106		10
	U.S. government and government agencies		-		-		10		-
	Total		1,872		1,208		4,503		4,005
Investment of funds received under
securities lending agreements			-		393		87		1,623
Equity securities			507		1,138		763		1,475
	Total OTTI recognized in earnings	$	2,379	$	2,739	$	5,353	$	7,103

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

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2012		2011		2012		2011
Balance at start of period			$	62,526	$	86,286	$	66,545	$	86,040
	Credit loss impairments recognized on securities
		not previously impaired		747		272		2,652		3,135
	Credit loss impairments recognized on securities
		previously impaired		1,632		1,328		2,701		2,492
	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			(1,709)		(530)		(8,702)		(4,311)
Balance at end of period			$	63,196	$	87,356	$	63,196	$	87,356

Restricted assets

		September 30,		December 31,
		2012		2011
Assets used for collateral or guarantees:
	Affiliated transactions	$	4,285,238	$	4,321,535
	Third party agreements		727,485		757,669
Deposits with U.S. regulatory authorities			289,929		288,458
Deposits with non-U.S. regulatory authorities			233,868		169,733
Trust funds			92,021		60,558
	Total restricted assets	$	5,628,541	$	5,597,953

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating Activities
Net income	$ 574,180	$ 290,831
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(142,703)	(100,982)
Net impairment losses recognized in earnings	5,353	7,103
Equity in net income of investment funds accounted for using the equity method and other income	(37,318)	50,324
Share-based compensation	34,659	25,286
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expense recoverable	180,016	334,620
Unearned premiums, net of prepaid reinsurance premiums	283,433	204,042
Premiums receivable	(204,854)	(114,044)
Deferred acquisition costs, net	(51,222)	(26,082)
Reinsurance balances payable	19,171	(3,381)
Other liabilities	21,664	12,678
Other items, net	49,572	76,076
Net Cash Provided By Operating Activities	731,951	756,471
Investing Activities
Purchases of fixed maturity investments	(12,670,073)	(10,116,781)
Purchases of equity securities	(215,921)	(343,062)
Purchases of other investments	(700,308)	(373,814)
Proceeds from the sales of fixed maturity investments	11,522,538	8,855,624
Proceeds from the sales of equity securities	264,417	311,117
Proceeds from the sales of other investments	329,093	396,514
Proceeds from redemptions and maturities of fixed maturity investments	867,080	738,081
Net sales of short-term investments	72,139	112,465
Change in investment of securities lending collateral	22,840	3,325
Purchase of business, net of cash acquired	28,948	0
Purchases of furniture, equipment and other assets	(13,894)	(15,526)
Net Cash Used For Investing Activities	(493,141)	(432,057)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,763	0
Repurchase of Series A and B preferred shares	(325,000)	0
Purchases of common shares under share repurchase program	0	(287,558)
Proceeds from common shares issued, net	1,604	3,087
Repayments of borrowings	(124,577)	(11,839)
Change in securities lending collateral	(22,840)	(3,325)
Other	4,479	3,999
Preferred dividends paid	(22,897)	(19,383)
Net Cash Used For Financing Activities	(173,468)	(315,019)
Effects of exchange rate changes on foreign currency cash	5,399	(2,240)
Increase in cash	70,741	7,155
Cash beginning of year	351,699	362,740
Cash end of period	$ 422,440	$ 369,895

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UNAUDITED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Fixed maturities available for sale, at amortized cost	$ 9,616,883	$ 9,165,438
Short-term investments available for sale, at amortized cost	840,457	909,121
Investment of funds received under securities lending agreements, amortized cost	25,651	48,577
Equity securities (cost)	297,506	299,058
Other investments (cost)	455,149	235,381
TALF investments amortized cost	255,615	373,040
Investment in joint venture cost	100,000	100,000
Liabilities
TALF borrowings,at par	$ 186,291	$ 310,868
Shareholders' Equity
Common shares par	$ 0.0033	$ 0.0033
Common shares (issued)	167,004,690	164,636,338
Common shares held in treasury (shares)	30,464,512	30,277,993

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Income Taxes

9 Months Ended

Sep. 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 2.8%and 1.4% for the 2012 third quarter and nine months ended September 30, 2012,compared to (1.4)%and (1.8)% for the 2011 third quarter and nine months ended September 30, 2011. 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 $93.6 million at September 30, 2012, compared to $80.7 million at December 31, 2011. In addition, the Company paid $4.1 million in income taxes, net of recoveries, for the nine months ended September 30, 2012, compared to $9.6 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 $6.2million of federal excise taxes for the nine months ended September 30, 2012, compared to $7.3 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	9 Months Ended
	Sep. 30, 2012	Nov. 01, 2012
Document And Entity Information [Abstract]
Document type	10-Q
Document period end date	Sep. 30, 2012
Amendment flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
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		136,550,744

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Legal Proceedings

9 Months Ended

Sep. 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 September 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		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues
Net premiums written	$ 755,249	$ 691,381	$ 2,439,093	$ 2,162,202
Change in unearned premiums	(6,558)	(9,332)	(283,434)	(203,579)
Net premiums earned	748,691	682,049	2,155,659	1,958,623
Net investment income	73,221	82,753	221,126	257,731
Net realized gains	60,391	30,199	139,379	96,104
Other-than-temporary impairment losses	(2,644)	(5,180)	(6,129)	(10,407)
Less investment impairments recognized in other comprehensive income, before taxes	265	2,441	776	3,304
Net impairment losses recognized in earnings	(2,379)	(2,739)	(5,353)	(7,103)
Fee income	1,077	848	2,426	2,447
Equity in net income (loss) of investment funds accounted for using the equity method	24,330	(30,549)	56,943	5,097
Other income (loss)	(532)	2,432	(7,905)	2,734
Total revenues	904,799	764,993	2,562,275	2,315,633
Expenses
Losses and loss adjustment expenses	443,871	423,984	1,238,771	1,349,486
Acquisition expenses	128,065	120,205	375,316	339,598
Other operating expenses	113,429	106,321	337,602	322,045
Interest expense	7,378	8,125	22,338	23,604
Net foreign exchange losses (gains)	16,959	(60,040)	5,958	(4,753)
Total expenses	709,702	598,595	1,979,985	2,029,980
Income before income taxes	195,097	166,398	582,290	285,653
Income tax expense (benefit)	5,441	(2,357)	8,110	(5,178)
Net income	189,656	168,755	574,180	290,831
Preferred dividends	5,484	6,461	19,594	19,383
Net income available to common shareholders	$ 184,172	$ 162,294	$ 554,586	$ 271,448
Net income per common share:
Basic	$ 1.36	$ 1.23	$ 4.12	$ 2.06
Diluted	$ 1.33	$ 1.18	$ 4.01	$ 1.96
Weighted average common shares and common share equivalents outstanding
Basic	135,067,360	131,560,851	134,519,046	132,090,354
Diluted	138,696,934	137,140,929	138,235,995	138,542,558

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Earnings Per Common Share

9 Months Ended

Sep. 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				Nine Months Ended
			September 30,				September 30,
			2012		2011		2012		2011
Numerator:
Net income			$	189,656	$	168,755	$	574,180	$	290,831
Preferred dividends				(5,484)		(6,461)		(19,594)		(19,383)
Net income available to common shareholders			$	184,172	$	162,294	$	554,586	$	271,448
Denominator:
	Weighted average common shares outstanding – basic			135,067,360		131,560,851		134,519,046		132,090,354
	Effect of dilutive common share equivalents:
		Nonvested restricted shares		723,538		750,289		847,959		952,898
		Stock options (1)		2,906,036		4,829,789		2,868,990		5,499,306
	Weighted average common shares and common share
		equivalents outstanding – diluted		138,696,934		137,140,929		138,235,995		138,542,558
Earnings per common share:
	Basic		$	1.36	$	1.23	$	4.12	$	2.06
	Diluted		$	1.33	$	1.18	$	4.01	$	1.96

• 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 third quarter and 2011 third quarter, the number of stock options excluded were 621,556 and 698,912, respectively.For the nine months ended September 30, 2012 and 2011, the number of stock options excluded were 860,088 and 385,444, respectively.

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Commitment and Contingencies

9 Months Ended

Sep. 30, 2012

Commitments And Contingencies

Commitments And Contingencies

4.       Commitments and Contingencies

Letter of Credit and Revolving Credit Facilities

As of September 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 September 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 September 30, 2012, the Company had $444.8 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $518.7 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 September 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 $528.0 million at September 30, 2012.

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2012

Segment Information

Segment Information

		Three Months Ended						Three Months Ended
		September 30, 2012						September 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	658,599	$	279,751	$	936,764	$	634,280	$	227,837	$	860,289
Net premiums written			483,356		271,893		755,249		472,986		218,395		691,381
Net premiums earned		$	456,341	$	292,350	$	748,691	$	437,970	$	244,079	$	682,049
Fee income			645		432		1,077		661		187		848
Losses and loss adjustment
	expenses		(307,155)		(136,716)		(443,871)		(290,608)		(133,376)		(423,984)
Acquisition expenses, net			(73,663)		(54,402)		(128,065)		(76,763)		(43,442)		(120,205)
Other operating expenses			(75,379)		(29,001)		(104,380)		(77,801)		(22,340)		(100,141)
Underwriting income (loss)		$	789	$	72,663		73,452	$	(6,541)	$	45,108		38,567
Net investment income							73,221						82,753
Net realized gains							60,391						30,199
Net impairment losses
	recognized in earnings						(2,379)						(2,739)
Equity in net income (loss)
	of investment funds
	accounted for using
	the equity method						24,330						(30,549)
Other income (loss)							(532)						2,432
Other expenses							(9,049)						(6,180)
Interest expense							(7,378)						(8,125)
Net foreign exchange gains
	(losses)						(16,959)						60,040
Income before income taxes							195,097						166,398
Income tax (expense) benefit							(5,441)						2,357
Net income							189,656						168,755
Preferred dividends							(5,484)						(6,461)
Net income available to
	common shareholders					$	184,172					$	162,294
Underwriting Ratios
Loss ratio			67.3%		46.8%		59.3%		66.4%		54.6%		62.2%
Acquisition expense ratio (2)			16.0%		18.6%		17.0%		17.4%		17.8%		17.5%
Other operating expense ratio			16.5%		9.9%		13.9%		17.8%		9.2%		14.7%
Combined ratio			99.8%		75.3%		90.2%		101.6%		81.6%		94.4%

• 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.

		Nine Months Ended						Nine Months Ended
		September 30, 2012						September 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	2,022,802	$	1,036,708	$	3,055,233	$	1,903,868	$	836,616	$	2,736,794
Net premiums written			1,438,620		1,000,473		2,439,093		1,360,540		801,662		2,162,202
Net premiums earned		$	1,344,675	$	810,984	$	2,155,659	$	1,256,380	$	702,243	$	1,958,623
Fee income			1,803		623		2,426		2,141		306		2,447
Losses and loss adjustment
	expenses		(900,735)		(338,036)		(1,238,771)		(889,973)		(459,513)		(1,349,486)
Acquisition expenses, net			(223,591)		(151,725)		(375,316)		(204,721)		(134,877)		(339,598)
Other operating expenses			(225,366)		(84,264)		(309,630)		(230,204)		(67,238)		(297,442)
Underwriting income (loss)		$	(3,214)	$	237,582		234,368	$	(66,377)	$	40,921		(25,456)
Net investment income							221,126						257,731
Net realized gains							139,379						96,104
Net impairment losses
	recognized in earnings						(5,353)						(7,103)
Equity in net income of
	investment funds
	accounted for using
	the equity method						56,943						5,097
Other income (loss)							(7,905)						2,734
Other expenses							(27,972)						(24,603)
Interest expense							(22,338)						(23,604)
Net foreign exchange gains
	(losses)						(5,958)						4,753
Income before income taxes							582,290						285,653
Income tax (expense) benefit							(8,110)						5,178
Net income							574,180						290,831
Preferred dividends							(19,594)						(19,383)
Net income available to
	common shareholders					$	554,586					$	271,448
Underwriting Ratios
Loss ratio			67.0%		41.7%		57.5%		70.8%		65.4%		68.9%
Acquisition expense ratio (2)			16.5%		18.7%		17.3%		16.1%		19.2%		17.2%
Other operating expense ratio			16.8%		10.4%		14.4%		18.3%		9.6%		15.2%
Combined ratio			100.3%		70.8%		89.2%		105.2%		94.2%		101.3%

• 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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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events

Subsequent Events

12.       Subsequent Events

Subsequent to September 30, 2012, the Company sold all investments it held under the FRBNY's TALF program (reflected as “TALF investments, at fair value”) and the related secured financing from the FRBNY was extinguished accordingly (reflected as “TALF borrowings, at fair value”).

On October 29, 2012, Hurricane Sandy made landfall on the eastern coast of the United States. It is too early to reasonably estimate losses for this recent event given the significant unknowns, the early stage of the damage assessment process and the unusual nature of the event.

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Fair Value

9 Months Ended

Sep. 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 September 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 September 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 $12.78 billion of financial assets and liabilities measured at fair value at September 30, 2012, approximately $2.07billion, or 16.2%, 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 September 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		$	2,707,999	$	-	$	2,613,370	$	94,629
	Mortgage backed securities			1,873,874		-		1,873,874		-
	Municipal bonds			1,579,872		-		1,579,872		-
	Commercial mortgage backed securities			824,162		-		824,162		-
	U.S. government and government agencies			1,131,358		1,131,358		-		-
	Non-U.S. government securities			1,026,432		-		1,026,432		-
	Asset backed securities			835,258		-		835,258		-
		Total		9,978,955		1,131,358		8,752,968		94,629
	Equity securities			312,371		312,288		83		-
	Other investments			477,857		-		473,061		4,796
	Short-term investments			845,158		759,868		85,290		-
Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			234,453		-		234,453		-
	Non-U.S. government bonds			71,971		-		71,971		-
	Equity securities			28,405		28,405		-		-
	Other investments			363,239		-		363,239		-
		Total		698,068		28,405		669,663		-
	TALF investments			270,206		-		270,206		-
		Total assets measured at fair value	$	12,582,615	$	2,231,919	$	10,251,271	$	99,425
Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	185,223	$	-	$	185,223	$	-
	Securities sold but not yet purchased (2)			8,017		8,017		-		-
		Total liabilities measured at fair value	$	193,240	$	8,017	$	185,223	$	-

• 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 third quarter and 2011 third quarter:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Three Months Ended September 30, 2012
Balance at beginning of period			$	92,036	$	6,386	$	98,422
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		1,402		1,627		3,029
		Included in other comprehensive income		1,229		(1,590)		(361)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(38)		(1,627)		(1,665)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	94,629	$	4,796	$	99,425
Three Months Ended September 30, 2011
Balance at beginning of period			$	164,456	$	7,929	$	172,385
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		(5,742)		-		(5,742)
		Included in other comprehensive income		(17,317)		(1,929)		(19,246)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(376)		-		(376)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

(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 nine months ended September 30, 2012 and 2011:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total
Nine Months Ended September 30, 2012
Balance at beginning of period			$	92,091	$	5,124	$	97,215
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		3,185		1,708		4,893
		Included in other comprehensive income		(530)		(328)		(858)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		0		0
		Settlements		(117)		(1,708)		(1,825)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	94,629	$	4,796	$	99,425
Nine Months Ended September 30, 2011
Balance at beginning of period			$	153,509	$	7,858	$	161,367
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		507		1,709		2,216
		Included in other comprehensive income		(3,763)		(2,901)		(6,664)
	Purchases, issuances, sales and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(666)		(666)
		Settlements		(9,232)		-		(9,232)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

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

The amount of total gainsfor the 2012 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012 was $3.0million, while the amount of total gainsfor the nine months ended September 30, 2012 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2012 was $4.9million. The amount of total losses for the 2011 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011was $5.7million, while the amount of total gains for the nine months ended September 30, 2011 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011 was $1.9million.

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 September 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 September 30, 2012, the Company's senior notes are carried at their cost of $300.0 million and have a fair value of $386.5 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

9 Months Ended

Sep. 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
		September 30, 2012						September 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	658,599	$	279,751	$	936,764	$	634,280	$	227,837	$	860,289
Net premiums written			483,356		271,893		755,249		472,986		218,395		691,381
Net premiums earned		$	456,341	$	292,350	$	748,691	$	437,970	$	244,079	$	682,049
Fee income			645		432		1,077		661		187		848
Losses and loss adjustment
	expenses		(307,155)		(136,716)		(443,871)		(290,608)		(133,376)		(423,984)
Acquisition expenses, net			(73,663)		(54,402)		(128,065)		(76,763)		(43,442)		(120,205)
Other operating expenses			(75,379)		(29,001)		(104,380)		(77,801)		(22,340)		(100,141)
Underwriting income (loss)		$	789	$	72,663		73,452	$	(6,541)	$	45,108		38,567
Net investment income							73,221						82,753
Net realized gains							60,391						30,199
Net impairment losses
	recognized in earnings						(2,379)						(2,739)
Equity in net income (loss)
	of investment funds
	accounted for using
	the equity method						24,330						(30,549)
Other income (loss)							(532)						2,432
Other expenses							(9,049)						(6,180)
Interest expense							(7,378)						(8,125)
Net foreign exchange gains
	(losses)						(16,959)						60,040
Income before income taxes							195,097						166,398
Income tax (expense) benefit							(5,441)						2,357
Net income							189,656						168,755
Preferred dividends							(5,484)						(6,461)
Net income available to
	common shareholders					$	184,172					$	162,294
Underwriting Ratios
Loss ratio			67.3%		46.8%		59.3%		66.4%		54.6%		62.2%
Acquisition expense ratio (2)			16.0%		18.6%		17.0%		17.4%		17.8%		17.5%
Other operating expense ratio			16.5%		9.9%		13.9%		17.8%		9.2%		14.7%
Combined ratio			99.8%		75.3%		90.2%		101.6%		81.6%		94.4%

• 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 nine months ended September 30, 2012 and 2011:

		Nine Months Ended						Nine Months Ended
		September 30, 2012						September 30, 2011
		Insurance		Reinsurance		Total		Insurance		Reinsurance		Total
Gross premiums written (1)		$	2,022,802	$	1,036,708	$	3,055,233	$	1,903,868	$	836,616	$	2,736,794
Net premiums written			1,438,620		1,000,473		2,439,093		1,360,540		801,662		2,162,202
Net premiums earned		$	1,344,675	$	810,984	$	2,155,659	$	1,256,380	$	702,243	$	1,958,623
Fee income			1,803		623		2,426		2,141		306		2,447
Losses and loss adjustment
	expenses		(900,735)		(338,036)		(1,238,771)		(889,973)		(459,513)		(1,349,486)
Acquisition expenses, net			(223,591)		(151,725)		(375,316)		(204,721)		(134,877)		(339,598)
Other operating expenses			(225,366)		(84,264)		(309,630)		(230,204)		(67,238)		(297,442)
Underwriting income (loss)		$	(3,214)	$	237,582		234,368	$	(66,377)	$	40,921		(25,456)
Net investment income							221,126						257,731
Net realized gains							139,379						96,104
Net impairment losses
	recognized in earnings						(5,353)						(7,103)
Equity in net income of
	investment funds
	accounted for using
	the equity method						56,943						5,097
Other income (loss)							(7,905)						2,734
Other expenses							(27,972)						(24,603)
Interest expense							(22,338)						(23,604)
Net foreign exchange gains
	(losses)						(5,958)						4,753
Income before income taxes							582,290						285,653
Income tax (expense) benefit							(8,110)						5,178
Net income							574,180						290,831
Preferred dividends							(19,594)						(19,383)
Net income available to
	common shareholders					$	554,586					$	271,448
Underwriting Ratios
Loss ratio			67.0%		41.7%		57.5%		70.8%		65.4%		68.9%
Acquisition expense ratio (2)			16.5%		18.7%		17.3%		16.1%		19.2%		17.2%
Other operating expense ratio			16.8%		10.4%		14.4%		18.3%		9.6%		15.2%
Combined ratio			100.3%		70.8%		89.2%		105.2%		94.2%		101.3%

• 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

9 Months Ended

Sep. 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 September 30, 2012
Fixed maturities and fixed maturities pledged
under securities lending agreements (1):
Corporate bonds		$	2,707,999	$	113,295	$	(7,039)	$	2,601,743	$	(113)
Mortgage backed securities			1,873,874		42,374		(7,439)		1,838,939		(9,342)
Municipal bonds			1,579,872		74,558		(730)		1,506,044		(17)
Commercial mortgage backed securities			824,162		42,745		(1,838)		783,255		(3,498)
U.S. government and government agencies			1,131,358		28,015		(1,520)		1,104,863		(19)
Non-U.S. government securities			1,026,432		37,927		(11,193)		999,698		-
Asset backed securities			835,258		25,400		(6,093)		815,951		(3,459)
	Total		9,978,955		364,314		(35,852)		9,650,493		(16,448)
Equity securities			312,371		29,744		(14,879)		297,506		-
Other investments			477,857		24,737		(2,029)		455,149		-
Short-term investments			845,158		5,439		(738)		840,457		-
	Total	$	11,614,341	$	424,234	$	(53,498)	$	11,243,605	$	(16,448)
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 September 30, 2012, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $1.1 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 September 30, 2012
Fixed maturities and fixed maturities
pledged under securities lending
agreements (1):
Corporate bonds		$	199,075	$	(2,673)	$	67,200	$	(4,366)	$	266,275	$	(7,039)
Mortgage backed securities			280,362		(5,268)		42,033		(2,171)		322,395		(7,439)
Municipal bonds			46,307		(248)		9,802		(482)		56,109		(730)
Commercial mortgage backed
	securities		9,901		(451)		14,632		(1,387)		24,533		(1,838)
U.S. government and
	government agencies		123,700		(1,520)		-		-		123,700		(1,520)
Non-U.S. government securities			153,052		(1,103)		126,123		(10,090)		279,175		(11,193)
Asset backed securities			27,932		(71)		90,149		(6,022)		118,081		(6,093)
	Total		840,329		(11,334)		349,939		(24,518)		1,190,268		(35,852)
Equity securities			60,326		(5,985)		43,562		(8,894)		103,888		(14,879)
Other investments			56,778		(1,027)		27,539		(1,002)		84,317		(2,029)
Short-term investments			80,420		(738)		-		-		80,420		(738)
	Total	$	1,037,853	$	(19,084)	$	421,040	$	(34,414)	$	1,458,893	$	(53,498)
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 September 30, 2012, on a lot level basis, approximately 590 security lots out of a total of approximately 4,440 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 $3.1 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.

		September 30, 2012				December 31, 2011
		Estimated		Amortized		Estimated		Amortized
Maturity		Fair Value		Cost		Fair Value		Cost
Due in one year or less		$	471,678	$	462,425	$	486,986	$	476,734
Due after one year through five years			3,664,256		3,556,156		2,850,578		2,793,982
Due after five years through 10 years			2,083,013		1,978,601		2,532,834		2,441,800
Due after 10 years			226,714		215,166		345,755		326,451
			6,445,661		6,212,348		6,216,153		6,038,967
Mortgage backed securities			1,873,874		1,838,939		1,592,762		1,588,355
Commercial mortgage backed securities			824,162		783,255		1,046,326		1,020,450
Asset backed securities			835,258		815,951		576,757		572,186
	Total	$	9,978,955	$	9,650,493	$	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 September 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $34.8 million and $33.6 million, respectively, compared to $56.4million and $54.5million at December 31, 2011, respectively.At September 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:

		September 30,		December 31,
		2012		2011
Fixed maturities		$	306,424	$	147,779
Equity securities			28,405		87,403
Other investments (par: $354,835 and $138,062)			363,239		131,721
	Investments accounted for using the fair value option		698,068		366,903
Securities sold but not yet purchased (1)			(8,017)		(27,178)
TALF investments (2)			270,206		387,702
TALF borrowings (2)			(185,223)		(310,486)
	Net assets accounted for using the fair value option	$	775,034	$	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.
• See Note 12, “Subsequent Events.”

Net Investment Income

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

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Fixed maturities		$	68,203	$	82,686	$	211,942	$	252,250
Term loan investments (1)			4,876		881		10,732		1,565
Equity securities			2,009		1,796		6,098		5,187
Short-term investments			485		430		1,617		1,613
Other (2)			3,794		3,383		9,968		16,060
	Gross investment income		79,367		89,176		240,357		276,675
Investment expenses			(6,146)		(6,423)		(19,231)		(18,944)
	Net investment income	$	73,221	$	82,753	$	221,126	$	257,731

• 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				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Available for sale securities:
	Gross gains on investment sales	$	70,510	$	61,008	$	186,458	$	204,303
	Gross losses on investment sales		(20,672)		(21,503)		(59,365)		(85,170)
Change in fair value of assets and liabilities
accounted for using the fair value option:
	Fixed maturities		5,322		(4,366)		8,729		(12,759)
	Equity securities		1,466		(28,993)		1,264		(32,043)
	Other investments		3,810		(3,755)		5,819		(3,432)
	TALF investments		(21)		(2,130)		(71)		2,317
	TALF borrowings		(209)		79		686		(206)
Derivative instruments (1)			297		36,179		(4,095)		28,035
Other			(112)		(6,320)		(46)		(4,941)
	Net realized gains	$	60,391	$	30,199	$	139,379	$	96,104

• 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				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Fixed maturities:
	Mortgage backed securities	$	1,511	$	1,192	$	2,403	$	3,620
	Corporate bonds		150		16		1,512		375
	Non-U.S. government securities		-		-		261		-
	Commercial mortgage backed securities		211		-		211		-
	Asset backed securities		-		-		106		10
	U.S. government and government agencies		-		-		10		-
	Total		1,872		1,208		4,503		4,005
Investment of funds received under
securities lending agreements			-		393		87		1,623
Equity securities			507		1,138		763		1,475
	Total OTTI recognized in earnings	$	2,379	$	2,739	$	5,353	$	7,103

A description of the methodology and significant inputs used to measure the amount of OTTI in the 2012 third 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 in the 2012 second quarter due to its intent to liquidate such portfolio;
• 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 $16.4 million of OTTI included in accumulated other comprehensive income at September 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 September 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				Nine Months Ended
			September 30,				September 30,
			2012		2011		2012		2011
Balance at start of period			$	62,526	$	86,286	$	66,545	$	86,040
	Credit loss impairments recognized on securities
		not previously impaired		747		272		2,652		3,135
	Credit loss impairments recognized on securities
		previously impaired		1,632		1,328		2,701		2,492
	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			(1,709)		(530)		(8,702)		(4,311)
Balance at end of period			$	63,196	$	87,356	$	63,196	$	87,356

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:

		September 30,		December 31,
		2012		2011
Assets used for collateral or guarantees:
	Affiliated transactions	$	4,285,238	$	4,321,535
	Third party agreements		727,485		757,669
Deposits with U.S. regulatory authorities			289,929		288,458
Deposits with non-U.S. regulatory authorities			233,868		169,733
Trust funds			92,021		60,558
	Total restricted assets	$	5,628,541	$	5,597,953

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Derivative Instruments

9 Months Ended

Sep. 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 September 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 available for sale, at fair value” while the fair value of all other derivatives is included in “other investments available for sale, at fair value” in the consolidated balance sheets.

		Asset Derivatives				Liability Derivatives
		Estimated Fair Value		Notional Value		Estimated Fair Value		Notional Value
At September 30, 2012
Futures contracts		$	40	$	70,000	$	(10)	$	53,600
Foreign currency forward contracts			789		86,910		(1,466)		138,293
TBAs			483,977		444,650		(554,902)		509,550
Other			471		6,336		(326)		27,888
	Total	$	485,277			$	(556,704)
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				Nine Months Ended
Derivatives not designated as		September 30,				September 30,
hedging instruments		2012		2011		2012		2011
Futures contracts		$	(245)	$	12,142	$	(4,588)	$	15,515
Foreign currency forward contracts			737		12,155		(206)		(4,238)
TBAs			1,140		2,554		2,882		11,056
Other			(1,335)		9,328		(2,183)		5,702
	Total	$	297	$	36,179	$	(4,095)	$	28,035

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Investment Information (Details - Maturity Profile of Available For Sale Securities) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012		Dec. 31, 2011
Estimated Fair Value:
Estimated fair value	$ 11,614,341		$ 10,873,912
Amortized Cost:
Amortized cost	11,243,605		10,663,518
Fixed maturities and fixed maturities pledged under securities lending agreements
Estimated Fair Value:
Due in one year or less	471,678		486,986
Due after one year through five years	3,664,256		2,850,578
Due after five years through 10 years	2,083,013		2,532,834
Due after 10 years	226,714		345,755
Subtotal	6,445,661		6,216,153
Estimated fair value	9,978,955	[1]	9,431,998	[1]
Amortized Cost:
Due in one year or less	462,425		476,734
Due after one year through five years	3,556,156		2,793,982
Due after five years through 10 years	1,978,601		2,441,800
Due after 10 years	215,166		326,451
Subtotal	6,212,348		6,038,967
Amortized cost	9,650,493	[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	1,873,874		1,592,762
Estimated fair value	1,873,874	[1]	1,592,762	[1]
Amortized Cost:
Securities without single maturity date	1,838,939		1,588,355
Amortized cost	1,838,939	[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	824,162		1,046,326
Estimated fair value	824,162	[1]	1,046,326	[1]
Amortized Cost:
Securities without single maturity date	783,255		1,020,450
Amortized cost	783,255	[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	835,258		576,757
Estimated fair value	835,258	[1]	576,757	[1]
Amortized Cost:
Securities without single maturity date	815,951		572,186
Amortized cost	$ 815,951	[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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Recent Accounting Pronouncements (Tables)

9 Months Ended

Sep. 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 September 30, 2011
Other operating expenses	$	105,998	$	323	$	106,321
Income tax benefit		(2,267)		(90)		(2,357)
Net income		168,988		(233)		168,755
Net income per common share - basic	$	1.24	$	(0.01)	$	1.23
Net income per common share - diluted	$	1.19	$	(0.01)	$	1.18
Nine Months Ended September 30, 2011
Other operating expenses	$	318,981	$	3,064	$	322,045
Income tax benefit		(4,369)		(809)		(5,178)
Net income		293,086		(2,255)		290,831
Net income per common share - basic	$	2.07	$	(0.01)	$	2.06
Net income per common share - diluted	$	1.98	$	(0.02)	$	1.96
(1) Effect of change equals tax benefit included in "other assets" on the Company's balance sheet.

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Derivative Instruments (Tables)

9 Months Ended

Sep. 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 September 30, 2012
Futures contracts		$	40	$	70,000	$	(10)	$	53,600
Foreign currency forward contracts			789		86,910		(1,466)		138,293
TBAs			483,977		444,650		(554,902)		509,550
Other			471		6,336		(326)		27,888
	Total	$	485,277			$	(556,704)
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				Nine Months Ended
Derivatives not designated as		September 30,				September 30,
hedging instruments		2012		2011		2012		2011
Futures contracts		$	(245)	$	12,142	$	(4,588)	$	15,515
Foreign currency forward contracts			737		12,155		(206)		(4,238)
TBAs			1,140		2,554		2,882		11,056
Other			(1,335)		9,328		(2,183)		5,702
	Total	$	297	$	36,179	$	(4,095)	$	28,035

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Investment Information (Details - Text Items) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2012 lots	Dec. 31, 2011 lots
Continuous unrealized loss qualitative disclosures:
Total number of lots held	4,440	4,520
Number of lots in an unrealized loss position	590	1,150
Largest single unrealized loss from a single lot	$ 3,100,000	$ 3,000,000
Securities lending agreements:
Fair value of fixed maturities and short-term investments pledged	34,800,000	56,400,000
Amortized cost of fixed maturities and short-term investments pledged	33,600,000	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	1,100,000	18,000,000
Portion of OTTI not related to credit losses	$ 16,400,000

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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Net income	$ 574,180	$ 290,831
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	277,656	53,371
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(776)	(3,303)
Reclassification of net realized gains, net of income taxes, included in net income	(118,714)	(98,565)
Foreign currency translation adjustments, net of deferred income tax	12,043	(9,430)
Other comprehensive income	170,209	(57,927)
Comprehensive Income	$ 744,389	$ 232,904

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Recent Accounting Pronouncements

9 Months Ended

Sep. 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 September 30, 2011
Other operating expenses	$	105,998	$	323	$	106,321
Income tax benefit		(2,267)		(90)		(2,357)
Net income		168,988		(233)		168,755
Net income per common share - basic	$	1.24	$	(0.01)	$	1.23
Net income per common share - diluted	$	1.19	$	(0.01)	$	1.18
Nine Months Ended September 30, 2011
Other operating expenses	$	318,981	$	3,064	$	322,045
Income tax benefit		(4,369)		(809)		(5,178)
Net income		293,086		(2,255)		290,831
Net income per common share - basic	$	2.07	$	(0.01)	$	2.06
Net income per common share - diluted	$	1.98	$	(0.02)	$	1.96
(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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Share Transactions (Details) (USD $)	9 Months Ended		3 Months Ended		9 Months Ended		0 Months Ended			9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 Shares repurchased for treasury	Sep. 30, 2011 Shares repurchased for treasury	Sep. 30, 2012 Shares repurchased for treasury	Sep. 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	Sep. 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	700,000	0	9,600,000
Treasury stock, value, acquired, cost method			0	20,800,000	0	287,600,000
Stock repurchase program, remaining authorized repurchase amount										942,000,000
Preferred share offering:
Proceeds from issuance of Series C preferred shares, net	315,763,000	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

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Investment Information (Details - Other Than Temporary Impairments Recognized In Earnings) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	$ 2,379	$ 2,739	$ 5,353	$ 7,103
Fixed maturities available for sale, at fair value
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	1,872	1,208	4,503	4,005
Fixed maturities available for sale, at fair value | Mortgage backed securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	1,511	1,192	2,403	3,620
Fixed maturities available for sale, at fair value | Corporate bonds
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	150	16	1,512	375
Fixed maturities available for sale, at fair value | Non-US government securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	0	0	261	0
Fixed maturities available for sale, at fair value | Commercial mortgage backed securities [Member]
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	211	0	211	0
Fixed maturities available for sale, at fair value | Asset backed securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	0	0	106	10
Fixed maturities available for sale, at fair value | US government and government agencies
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	0	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	0	393	87	1,623
Equity securities
Other Than Temporary Impairment Credit Losses [Line Items]
Net impairment losses recognized in earnings	$ 507	$ 1,138	$ 763	$ 1,475

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 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.