UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2003

Or

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

		For the transition period to

Commission file number: 0-26456

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

Bermuda		Not Applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Wessex House, 45 Reid Street Hamilton HM 12 Bermuda
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common shares.

Class		Outstanding at July 31, 2003
Common Shares, $0.01 par value		28,084,950

ARCH CAPITAL GROUP LTD.

INDEX


*PART I. Financial Information*

Item 1 — Consolidated Financial Statements	Page No.

Report of Independent Accountants	2

Consolidated Balance Sheets June 30, 2003 and December 31, 2002	3

Consolidated Statements of Income For the three and six month periods ended June 30, 2003 and 2002	4

Consolidated Statements of Changes in Shareholders’ Equity For the six month periods ended June 30, 2003 and 2002	5

Consolidated Statements of Comprehensive Income For the six month periods ended June 30, 2003 and 2002	6

Consolidated Statements of Cash Flows For the six month periods ended June 30, 2003 and 2002	7

Notes to Consolidated Financial Statements	8

Item 2 — Management’s Discussion and Analysis of Financial Condition And Results of Operations	24

Item 3 — Quantitative and Qualitative Disclosures About Market Risk	54

Item 4 — Controls and Procedures	55

*PART II. Other Information*

Item 1 — Legal Proceedings	55

Item 5 — Other Information	55

Item 6 — Exhibits and Reports on Form 8-K	56

Report of Independent Accountants

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 as of June 30, 2003, and the related consolidated statements of income for each of the three and six month periods ended June 30, 2003 and 2002, and the consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the six month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. 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 generally accepted auditing standards, 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 information for it to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 19, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
New York, New York
July 30, 2003

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	(Unaudited)
	June 30, 2003			December 31, 2002

Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2003, $2,218,222; 2002, $1,334,637)	$	2,293,223		$	1,382,104
Short-term investments available for sale, at fair value (amortized cost: 2003, $244,950; 2002, $480,541)	244,950			480,541
Privately held securities (cost: 2003, $26,787; 2002, $31,630)	28,606			31,536
Total investments	2,566,779			1,894,181

Cash	62,013			91,717
Accrued investment income	25,570			17,127
Premiums receivable	560,861			343,716
Funds held by reinsureds	116,038			58,351
Unpaid losses and loss adjustment expenses recoverable	306,436			211,100
Paid losses and loss adjustment expenses recoverable	18,496			14,462
Prepaid reinsurance premiums	188,840			120,191
Goodwill and intangible assets	35,882			28,867
Deferred income tax asset	13,937			16,514
Deferred acquisition costs, net	240,300			148,960
Other assets	67,854			46,142
Total Assets	$	4,203,006		$	2,991,328

Liabilities
Reserve for losses and loss adjustment expenses	$	1,185,593		$	592,432
Unearned premiums	1,253,518			761,310
Reinsurance balances payable	81,591			89,191
Investment accounts payable	5,658			45,960
Other liabilities	110,304			91,191
Total Liabilities	2,636,664			1,580,084

Commitments and Contingencies

Shareholders’ Equity
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2003, 38,844,665; 2002, 38,844,665)	388			388
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2003, 28,034,809; 2002, 27,725,334)	280			277
Additional paid-in capital	1,356,014			1,347,165
Deferred compensation under share award plan	(20,321		)	(25,290		)
Retained earnings	161,642			47,372
Accumulated other comprehensive income consisting of unrealized appreciation in value of investments, net of deferred income tax	68,339			41,332
Total Shareholders’ Equity	1,566,342			1,411,244
Total Liabilities and Shareholders’ Equity	$	4,203,006		$	2,991,328

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

	(Unaudited) Three Months Ended June 30,						(Unaudited) Six Months Ended June 30,
	2003			2002			2003			2002
Revenues
Net premiums written	$	560,002		$	223,025		$	1,336,865		$	503,736
Increase in unearned premiums	(51,146		)	(109,566		)	(423,558		)	(322,750		)
Net premiums earned	508,856			113,459			913,307			180,986
Net investment income	19,772			11,611			38,210			20,778
Net realized investment gains	3,889			2,476			10,088			1,011
Fee income	4,934			2,733			10,610			5,488
Other income	587			778			1,726			1,576
Total revenues	538,038			131,057			973,941			209,839

Expenses
Losses and loss adjustment expenses	331,333			80,304			594,461			130,844
Acquisition expenses	95,620			17,755			173,772			25,065
Other operating expenses	40,995			13,456			72,075			25,961
Net foreign exchange gains	(1,761		)	(3,352		)	(2,811		)	(3,244		)
Non-cash compensation	3,498			8,636			7,762			12,764
Total expenses	469,685			116,799			845,259			191,390

Income Before Income Taxes	68,353			14,258			128,682			18,449

Income tax expense (benefit)	6,569			(4,968		)	14,412			(4,743		)

Net Income	$	61,784		$	19,226		$	114,270		$	23,192

Net Income Per Share Data
Basic	$	2.36		$	0.95		$	4.38		$	1.39
Diluted	$	0.91		$	0.33		$	1.70		$	0.42

Average Shares Outstanding
Basic	26,185,445			20,323,114			26,101,843			16,691,051
Diluted	67,728,798			58,877,515			67,381,859			54,981,185

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

	(Unaudited) Six Months Ended June 30,
	2003			2002
Preference Shares
Balance at beginning of year	$	388		$	357
Preference shares issued	—			9
Balance at end of period	388			366

Common Shares
Balance at beginning of year	277			135
Common shares issued	3			103
Balance at end of period	280			238

Additional Paid-in Capital
Balance at beginning of year	1,347,165			1,039,887
Common shares issued	8,337			242,354
Common shares retired	(646		)	—
Stock options issued	1,158			160
Balance at end of period	1,356,014			1,282,401

Deferred Compensation Under Share Award Plan
Balance at beginning of year	(25,290		)	(8,230		)
Restricted common shares issued	(2,686		)	(63,615		)
Deferred compensation expense recognized	7,655			12,604
Balance at end of period	(20,321		)	(59,241		)

Retained Earnings (Deficit)
Balance at beginning of year	47,372			(11,610		)
Net income	114,270			23,192
Balance at end of period	161,642			11,582

Accumulated Other Comprehensive Income Unrealized Appreciation (Decline) in Value of Investments, Net of Deferred Income Tax
Balance at beginning of year	41,332			(170		)
Change in unrealized appreciation (decline)	27,007			10,871
Balance at end of period	68,339			10,701

Total Shareholders’ Equity	$	1,566,342		$	1,246,047

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	(Unaudited) Six Months Ended June 30,
	2003			2002
Comprehensive Income
Net income	$	114,270		$	23,192
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	35,868			10,098
Reclassification of net realized (gains) losses, net of tax, included in net income	(8,861		)	773
Other comprehensive income	27,007			10,871
Comprehensive Income	$	141,277		$	34,063

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	(Unaudited) Six Months Ended June 30,
	2003			2002
Operating Activities
Net income	$	114,270		$	23,192
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(10,088		)	(1,011		)
Provision for non-cash compensation	7,762			12,764
Net unrealized foreign exchange gains	(1,647		)	(3,263		)
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	494,838			106,430
Unearned premiums, net of prepaid reinsurance premiums	423,559			322,458
Premiums receivable	(214,277		)	(240,069		)
Deferred acquisition costs, net	(91,340		)	(56,391		)
Funds held by reinsureds	(57,626		)	(27,247		)
Reinsurance balances payable	(7,600		)	(9,490		)
Accrued investment income	(8,411		)	(5,894		)
Paid losses and loss adjustment expenses recoverable	(4,039		)	(2,436		)
Deferred income tax asset	27			(4,626		)
Other liabilities	20,790			16,801
Loan to Chairman	—			(13,530		)
Other items, net	1,635			(3,983		)
Net Cash Provided By Operating Activities	667,853			113,705

Investing Activities
Purchases of fixed maturity investments	(1,602,839		)	(885,654		)
Release of escrowed assets	—			(18,833		)
Sales of fixed maturity investments	683,660			300,277
Sales of equity securities	7,019			13,802
Net sales of short-term investments	235,943			329,843
Acquisitions, net of cash	(11,774		)	(2,513		)
Purchases of furniture, equipment and other	(12,802		)	(2,073		)
Net Cash Used For Investing Activities	(700,793		)	(265,151		)

Financing Activities
Proceeds from common shares issued	3,882			179,154
Repurchase of common shares	(646		)	—
Debt retirement and other	—			(37		)
Net Cash Provided By Financing Activities	3,236			179,117

(Decrease) increase in cash	(29,704		)	27,671
Cash beginning of year	91,717			9,970
Cash end of period	$	62,013		$	37,641

Income taxes paid, net	$	22,213		$	2,597

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (“GAAP”) and include the accounts of ACGL and its 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 necessary (consisting mainly of normal recurring accruals) 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 pursuant to such rules and regulations; 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, 2002, including the Company’s audited consolidated financial statements and related notes and the section entitled “Business—Risk Factors.”

To facilitate period-to-period comparisons, certain amounts in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation. Such reclassifications had no effect on the Company’s consolidated net income, shareholders’ equity or cash flows.

2. Stock Options

The Company has adopted the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for its employee stock options. Accordingly, under APB No. 25, compensation expense for stock option grants is recognized by the Company to the extent that the fair value of the underlying stock exceeds the exercise price of the option at the measurement date. As provided under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue to account for stock-based compensation in accordance with APB No. 25 and has provided the required additional pro forma disclosures.

If compensation expense for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS No. 123, the Company’s net income and earnings per share would have instead been reported as the pro forma amounts indicated below:

	(Unaudited) Three Months Ended June 30,						(Unaudited) Six Months Ended June 30,
(in thousands, except share data)	2003			2002			2003			2002

Net income, as reported	$	61,784		$	19,226		$	114,270		$	23,192
Total stock-based employee compensation expense under fair value method, net of income tax	(1,547		)	(3,363		)	(3,292		)	(7,799		)
Pro forma net income	$	60,237		$	15,863		$	110,978		$	15,393

Earnings per share – basic:
As reported	$	2.36		$	0.95		$	4.38		$	1.39
Pro forma	$	2.30		$	0.78		$	4.25		$	0.92
Earnings per share – diluted:
As reported	$	0.91		$	0.33		$	1.70		$	0.42
Pro forma	$	0.89		$	0.27		$	1.65		$	0.28

3. Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”), which requires the consolidation of certain entities considered to be variable interest entities (“VIEs”). An entity is considered to be a VIE when it has equity investors which lack the characteristics of a controlling financial interest or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE’s expected losses or residual returns if they occur. FIN 46 provides certain exceptions to these rules, including qualifying special purpose entities subject to the requirements of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003. Certain ceding companies may meet the definition of a VIE due to the protection provided to the ceding company’s equity investors from the absorption of expected losses. The Company is currently evaluating this standard.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is currently evaluating this standard.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for the classification and measurement of financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning in the 2003 third quarter. The Company is currently evaluating this standard.

4. Segment Information

The determination of the Company’s business segments is based on how the Company monitors the performance of its underwriting operations. The Company classifies its businesses into two underwriting segments – reinsurance and insurance – and a corporate and other segment (non-underwriting). The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. Management measures segment performance based on underwriting income or loss. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance treaties. Classes of business focused on include casualty, casualty clash, marine, aviation and space, non-traditional, other specialty, property catastrophe, and property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata).

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on a direct basis. The insurance segment consists of eight profit centers, including casualty, construction and surety, executive assurance, healthcare, professional liability, programs, property, and other (primarily non-standard automobile, collateralized protection business and accident and health and corporate risk programs).

The corporate and other segment (non-underwriting) includes net investment income, other fee income and other expenses incurred by the Company, net realized investment gains or losses, net foreign exchange gains or losses and non-cash compensation. The corporate and other segment also includes the results of the Company’s merchant banking operations.

4. Segment Information (continued)

The following table sets forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income for the three months ended June 30, 2003:

	(Unaudited) Three Months Ended June 30, 2003
(in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	337,038		$	379,607		$	676,005
Net premiums written (1)	323,520			236,482			560,002

Net premiums earned	$	317,504		$	191,352		$	508,856
Policy-related fee income	—			3,562			3,562
Other underwriting-related fee income	1,801			—			1,801
Losses and loss adjustment expenses	(203,797		)	(127,536		)	(331,333		)
Acquisition expenses, net	(73,702		)	(21,918		)	(95,620		)
Other operating expenses	(7,663		)	(30,402		)	(38,065		)
Underwriting income	$	34,143		$	15,058		49,201

Net investment income							19,772
Net realized investment gains							3,889
Other fee income, net of related expenses							(429		)
Other income							587
Other expenses							(2,930		)
Net foreign exchange gains							1,761
Non-cash compensation							(3,498		)
Income before income taxes							68,353

Income tax expense							(6,569		)

Net income							$	61,784

Underwriting Ratios (2)
Loss ratio	64.2		%	66.6		%	65.1		%
Acquisition expense ratio (3)	23.2		%	9.6		%	18.1		%
Other operating expense ratio	2.4		%	15.9		%	7.5		%
Combined ratio	89.8		%	92.1		%	90.7		%

(1) Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written. 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 intercompany transactions in the total. Due to such cessions, the reinsurance segment results include $40.6 million of gross and net premiums written assumed from the insurance segment.

(2) Underwriting ratios are calculated based on net premiums earned.

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

4. Segment Information (continued)

The following table sets forth an analysis of the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income for the three months ended June 30, 2002:

	(Unaudited) Three Months Ended June 30, 2002
(in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	180,339		$	91,546		$	253,655
Net premiums written (1)	176,619			46,406			223,025

Net premiums earned	$	96,330		$	17,129		113,459
Policy-related fee income	—			2,767			2,767
Losses and loss adjustment expenses	(67,100		)	(13,204		)	(80,304		)
Acquisition expenses, net	(16,226		)	(1,529		)	(17,755		)
Other operating expenses	(2,615		)	(8,588		)	(11,203		)
Underwriting income (loss)	$	10,389		$	(3,425	)	6,964

Net investment income							11,611
Net realized investment gains							2,476
Other fee income, net of related expenses							(34		)
Other income							778
Other expenses							(2,253		)
Net foreign exchange gains							3,352
Non-cash compensation							(8,636		)
Income before income taxes							14,258

Income tax benefit							4,968

Net income							$	19,226

Underwriting Ratios (2)
Loss ratio	69.7		%	77.1		%	70.8		%
Acquisition expense ratio (3)	16.8		%	(7.2		%)	13.2		%
Other operating expense ratio	2.7		%	50.1		%	9.9		%
Combined ratio	89.2		%	120.0		%	93.9		%

(1) Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written. 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 intercompany transactions in the total. Due to such cessions, the reinsurance segment results include $18.2 million of gross and net premiums written assumed from the insurance segment.

(2) Underwriting ratios are calculated based on net premiums earned.

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

4. Segment Information (continued)

The following table sets forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income for the six months ended June 30, 2003:

	(Unaudited) Six Months Ended June 30, 2003
(in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	899,699		$	724,913		$	1,536,105
Net premiums written (1)	870,956			465,909			1,336,865

Net premiums earned	$	583,451		$	329,856		$	913,307
Policy-related fee income	—			6,775			6,775
Other underwriting-related fee income	3,728			—			3,728
Losses and loss adjustment expenses	(367,712		)	(226,749		)	(594,461		)
Acquisition expenses, net	(138,368		)	(35,404		)	(173,772		)
Other operating expenses	(13,782		)	(52,491		)	(66,273		)
Underwriting income	$	67,317		$	21,987		89,304

Net investment income							38,210
Net realized investment gains							10,088
Other fee income, net of related expenses							107
Other income							1,726
Other expenses							(5,802		)
Net foreign exchange gains							2,811
Non-cash compensation							(7,762		)
Income before income taxes							128,682

Income tax expense							(14,412		)

Net income							$	114,270

Underwriting Ratios (2)
Loss ratio	63.0		%	68.7		%	65.1		%
Acquisition expense ratio (3)	23.7		%	8.7		%	18.3		%
Other operating expense ratio	2.4		%	15.9		%	7.3		%
Combined ratio	89.1		%	93.3		%	90.7		%

(1) Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written. 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 intercompany transactions in the total. Due to such cessions, the reinsurance segment results include $88.5 million of gross and net premiums written assumed from the insurance segment.

(2) Underwriting ratios are calculated based on net premiums earned.

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

4. Segment Information (continued)

	(Unaudited) Six Months Ended June 30, 2002
(in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	445,200		$	150,268		$	558,450
Net premiums written (1)	441,480			62,256			503,736

Net premiums earned	$	151,863		$	29,123		$	180,986
Policy-related fee income	—			3,935			3,935
Losses and loss adjustment expenses	(108,005		)	(22,839		)	(130,844		)
Acquisition expenses, net	(23,487		)	(1,578		)	(25,065		)
Other operating expenses	(6,133		)	(12,090		)	(18,223		)
Underwriting income (loss)	$	14,238		$	(3,449	)	10,789

Net investment income							20,778
Net realized investment gains							1,011
Other fee income, net of related expenses							(646		)
Other income							1,576
Other expenses							(5,539		)
Net foreign exchange gains							3,244
Non-cash compensation							(12,764		)
Income before income taxes							18,449

Income tax benefit							4,743

Net income							$	23,192

Underwriting Ratios (2)
Loss ratio	71.1		%	78.4		%	72.3		%
Acquisition expense ratio (3)	15.5		%	(8.1		%)	11.7		%
Other operating expense ratio	4.0		%	41.5		%	10.0		%
Combined ratio	90.6		%	111.8		%	94.0		%

(1) Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written. 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 intercompany transactions in the total. Due to such cessions, the reinsurance segment results include $37.0 million of gross and net premiums written assumed from the insurance segment.

(2) Underwriting ratios are calculated based on net premiums earned.

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

4. Segment Information (continued)

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the reinsurance segment for the three months ended June 30, 2003 and 2002:

	(Unaudited) Three Months Ended June 30,
	2003				2002
REINSURANCE SEGMENT (in thousands)	Amount		% of Total		Amount		% of Total

Major line of business:
Net premiums written (1)
Casualty	$	141,864	43.9	%	$	16,128	9.1	%
Property excluding property catastrophe	69,248		21.4	%	41,203		23.3	%
Other specialty	67,926		21.0	%	71,194		40.3	%
Property catastrophe	23,337		7.2	%	28,315		16.0	%
Marine, aviation and space	14,349		4.4	%	9,639		5.5	%
Non-traditional	3,948		1.2	%	8,361		4.8	%
Casualty clash	2,848		0.9	%	1,779		1.0	%
Total	$	323,520	100.0	%	$	176,619	100.0	%

Net premiums earned (1)
Casualty	$	112,101	35.3	%	$	12,628	13.1	%
Property excluding property catastrophe	70,684		22.3	%	16,509		17.1	%
Other specialty	62,916		19.8	%	25,492		26.5	%
Property catastrophe	29,634		9.3	%	19,922		20.7	%
Marine, aviation and space	21,689		6.8	%	5,992		6.2	%
Non-traditional	16,423		5.2	%	12,513		13.0	%
Casualty clash	4,057		1.3	%	3,274		3.4	%
Total	$	317,504	100.0	%	$	96,330	100.0	%

Client location:
Net premiums written (1)
United States	$	195,170	60.3	%	$	97,103	55.0	%
United Kingdom	57,286		17.7	%	28,689		16.2	%
Bermuda	13,973		4.3	%	6,448		3.7	%
Japan	13,870		4.3	%	12,005		6.8	%
Canada	11,194		3.5	%	9,978		5.6	%
Germany	8,097		2.5	%	3,021		1.7	%
France	6,456		2.0	%	4,778		2.7	%
Switzerland	3,179		1.0	%	372		0.2	%
Other	14,295		4.4	%	14,225		8.1	%
Total	$	323,520	100.0	%	$	176,619	100.0	%

(1) Reinsurance segment results include premiums written and earned assumed from the insurance segment of $40.6 million and $39.7 million, respectively, for the 2003 second quarter and $18.2 million and $7.9 million, respectively, for the 2002 second quarter.

4. Segment Information (continued)

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the reinsurance segment for the six months ended June 30, 2003 and 2002:

	(Unaudited) Six Months Ended June 30,
	2003				2002
REINSURANCE SEGMENT (in thousands)	Amount		% of Total		Amount		% of Total

Major line of business:
Net premiums written (1)
Casualty	$	305,824	35.1	%	$	56,868	12.9	%
Other specialty	203,941		23.4	%	101,449		23.0	%
Property excluding property catastrophe	181,848		20.9	%	83,875		19.0	%
Property catastrophe	72,110		8.3	%	79,030		17.9	%
Non-traditional	51,583		5.9	%	78,731		17.8	%
Marine, aviation and space	45,770		5.3	%	28,598		6.5	%
Casualty clash	9,880		1.1	%	12,929		2.9	%
Total	$	870,956	100.0	%	$	441,480	100.0	%

Net premiums earned (1)
Casualty	$	190,608	32.7	%	$	19,144	12.6	%
Other specialty	120,588		20.6	%	32,974		21.7	%
Property excluding property catastrophe	131,751		22.6	%	24,339		16.0	%
Property catastrophe	57,245		9.8	%	31,854		21.0	%
Non-traditional	38,451		6.6	%	27,463		18.1	%
Marine, aviation and space	37,271		6.4	%	10,012		6.6	%
Casualty clash	7,537		1.3	%	6,077		4.0	%
Total	$	583,451	100.0	%	$	151,863	100.0	%

Client location:
Net premiums written (1)
United States	$	524,058	60.2	%	$	208,850	47.3	%
United Kingdom	166,784		19.2	%	107,072		24.3	%
Bermuda	48,297		5.5	%	18,772		4.2	%
Canada	27,370		3.1	%	17,909		4.0	%
France	25,887		3.0	%	20,119		4.6	%
Germany	21,824		2.5	%	26,724		6.1	%
Japan	14,336		1.6	%	12,056		2.7	%
Switzerland	7,460		0.9	%	899		0.2	%
Other	34,940		4.0	%	29,079		6.6	%
Total	$	870,956	100.0	%	$	441,480	100.0	%

(1) Reinsurance segment results include premiums written and earned assumed from the insurance segment of $88.5 million and $61.5 million, respectively, for the six months ended June 30, 2003 and $37.0 million and $10.5 million, respectively, for the six months ended June 30, 2002.

4. Segment Information (continued)

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the insurance segment for the three months ended June 30, 2003 and 2002:

	(Unaudited) Three Months Ended June 30,
	2003					2002
INSURANCE SEGMENT (in thousands)	Amount			%of Total		Amount		%of Total

Major line of business:
Net premiums written (1)
Programs	$	76,949		32.5	%	$	6,429	13.8	%
Casualty	50,992			21.5	%	7,936		17.1	%
Professional liability	28,845			12.2	%	2,138		4.6	%
Construction and surety	22,504			9.5	%	2,643		5.7	%
Property	20,503			8.7	%	5,130		11.1	%
Executive assurance	20,502			8.7	%	10,871		23.4	%
Healthcare	(1,463		)	(0.6	)%	—		—
Other	17,650			7.5	%	11,259		24.3	%
Total	$	236,482		100.0	%	$	46,406	100.0	%

Net premiums earned (1)
Programs	$	61,328		32.1	%	$	3,251	19.0	%
Casualty	36,756			19.2	%	318		1.8	%
Professional liability	14,752			7.7	%	317		1.8	%
Construction and surety	15,901			8.3	%	319		1.9	%
Property	17,124			8.9	%	387		2.3	%
Executive assurance	18,855			9.9	%	1,671		9.8	%
Healthcare	7,084			3.7	%	—		—
Other	19,552			10.2	%	10,866		63.4	%
Total	$	191,352		100.0	%	$	17,129	100.0	%

Client location:
Net premiums written (1)
United States	$	232,743		98.4	%	$	45,300	97.6	%
United Kingdom	936			0.4	%	880		1.9	%
Indonesia	691			0.3	%	—		—
Taiwan	527			0.2	%	—		—
U.S. Virgin Islands	415			0.2	%	—		—
Venezuela	44			0.0	%	—		—
Other	1,126			0.5	%	226		0.5	%
Total	$	236,482		100.0	%	$	46,406	100.0	%

(1) Insurance segment results exclude premiums written and earned ceded to the reinsurance segment of $40.6 million and $39.7 million, respectively, for the 2003 second quarter and $18.2 million and $7.9 million, respectively, for the 2002 second quarter.

4. Segment Information (continued)

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the insurance segment for the six months ended June 30, 2003 and 2002:

	(Unaudited) Six Months Ended June 30,
	2003				2002
INSURANCE SEGMENT (in thousands)	Amount		% of Total		Amount		% of Total

Major line of business:
Net premiums written (1)
Programs	$	147,576	31.7	%	$	8,696	14.0	%
Casualty	100,327		21.5	%	7,936		12.8	%
Professional liability	48,688		10.4	%	2,138		3.4	%
Executive assurance	45,766		9.8	%	12,783		20.5	%
Construction and surety	42,214		9.1	%	2,643		4.2	%
Property	34,741		7.5	%	5,130		8.3	%
Healthcare	14,801		3.2	%	—		—
Other	31,796		6.8	%	22,930		36.8	%
Total	$	465,909	100.0	%	$	62,256	100.0	%

Net premiums earned (1)
Programs	$	101,160	30.7	%	$	4,983	17.1	%
Casualty	62,011		18.8	%	318		1.1	%
Professional liability	23,127		7.0	%	317		1.1	%
Executive assurance	35,129		10.6	%	1,767		6.1	%
Construction and surety	25,730		7.8	%	319		1.1	%
Property	29,619		9.0	%	387		1.3	%
Healthcare	15,897		4.8	%	—		—
Other	37,183		11.3	%	21,032		72.2	%
Total	$	329,856	100.0	%	$	29,123	100.0	%

Client location:
Net premiums written (1)
United States	$	461,071	99.0	%	$	61,150	98.2	%
United Kingdom	971		0.2	%	880		1.4	%
Indonesia	691		0.1	%	—		—
U.S. Virgin Islands	547		0.1	%	—		—
Taiwan	527		0.1	%	—		—
Venezuela	385		0.1	%	—		—
Other	1,717		0.4	%	226		0.4	%
Total	$	465,909	100.0	%	$	62,256	100.0	%

(1) Insurance segment results exclude premiums written and earned ceded to the reinsurance segment of $88.5 million and $61.5 million, respectively, for the six months ended June 30, 2003 and $37.0 million and $10.5 million, respectively, for the six months ended June 30, 2002.

5. Reinsurance

In the normal course of business, the Company’s insurance subsidiaries cede a substantial portion of their premium through pro rata, excess of loss and facultative reinsurance agreements. The Company’s reinsurance subsidiaries are currently retaining substantially all of their assumed reinsurance premiums written. However, the Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company.

Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance and reinsurance subsidiaries would be liable for such defaulted amounts.

The following table sets forth the effects of reinsurance on the Company’s reinsurance and insurance subsidiaries with unaffiliated reinsurers:

	(Unaudited) Three Months Ended June 30,						(Unaudited) Six Months Ended June 30,
(in thousands)	2003			2002			2003			2002

*Premiums Written:*
Direct	$	348,381		$	88,925		$	671,680		$	147,672
Assumed	327,624			164,730			864,425			410,778
Ceded	(116,003		)	(30,630		)	(199,240		)	(54,714		)
Net	$	560,002		$	223,025		$	1,336,865		$	503,736

Premiums Earned:
Direct	$	283,972		$	49,574		$	499,075		$	93,070
Assumed	285,381			92,146			574,251			145,160
Ceded	(60,497		)	(28,261		)	(160,019		)	(57,244		)
Net	$	508,856		$	113,459		$	913,307		$	180,986

Losses and Loss Adjustment Expenses Incurred:
Direct	$	223,352		$	85,542		$	382,893		$	127,249
Assumed	177,552			62,763			355,671			101,726

Report of Independent Accountants

Amount

Premiums Written: