ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

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

	(Unaudited)
	September 30, 2004			December 31, 2003
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2004, $5,049,129; 2003, $3,363,193)	$	5,095,952		$	3,398,424
Short-term investments available for sale, at fair value (amortized cost: 2004, $138,263; 2003, $228,816)	138,260			229,348
Privately held securities (cost: 2004, $17,937; 2003, $27,632)	23,292			32,476
Total investments	5,257,504			3,660,248

Cash	92,763			56,899
Accrued investment income	49,706			30,316
Premiums receivable	601,220			477,032
Funds held by reinsureds	203,818			211,944
Unpaid losses and loss adjustment expenses recoverable	623,317			409,451
Paid losses and loss adjustment expenses recoverable	20,231			18,549
Prepaid reinsurance premiums	260,332			236,061
Goodwill and intangible assets	31,423			35,882
Deferred income tax assets, net	43,443			33,979
Deferred acquisition costs, net	304,454			275,696
Other assets	170,317			139,264
Total Assets	$	7,658,528		$	5,585,321

Liabilities
Reserve for losses and loss adjustment expenses	$	3,229,783		$	1,951,967
Unearned premiums	1,565,097			1,402,998
Reinsurance balances payable	126,387			117,916
Senior notes	300,000			—
Revolving credit agreement borrowings	—			200,000
Deposit accounting liabilities	55,277			25,762
Other liabilities	253,530			175,949
Total Liabilities	5,530,074			3,874,592

Commitments and Contingencies

Shareholders’ Equity
Preference shares ($0.01 par value, 50,000,000 shares authorized, issued: 2004, 37,348,150; 2003, 38,844,665)	373			388
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2004, 34,737,693; 2003, 28,200,372)	347			282
Additional paid-in capital	1,555,284			1,361,267
Deferred compensation under share award plan	(12,262		)	(15,004		)
Retained earnings	537,729			327,963
Accumulated other comprehensive income, net of deferred income tax	46,983			35,833
Total Shareholders’ Equity	2,128,454			1,710,729
Total Liabilities and Shareholders’ Equity	$	7,658,528		$	5,585,321

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)						(Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues
Net premiums written	$	743,229		$	774,167		$	2,304,463		$	2,111,032
Increase in unearned premiums	(7,821		)	(165,211		)	(137,830		)	(588,769		)
Net premiums earned	735,408			608,956			2,166,633			1,522,263
Net investment income	40,752			20,542			98,136			58,752
Net realized gains	13,503			11,366			20,083			21,454
Fee income	5,853			5,489			14,151			16,099
Other income (loss)	95			546			(3,248		)	2,271
Total revenues	795,611			646,899			2,295,755			1,620,839

Expenses
Losses and loss adjustment expenses	561,602			391,974			1,428,111			986,435
Acquisition expenses	137,480			115,851			427,225			289,623
Other operating expenses	70,331			47,202			195,579			119,276
Interest expense	6,334			—			12,350			—
Net foreign exchange losses (gains)	1,787			(3,708		)	1,603			(6,519		)
Non-cash compensation	2,330			3,899			7,724			11,661
Total expenses	779,864			555,218			2,072,592			1,400,476

Income Before Income Taxes and Extraordinary Item	15,747			91,681			223,163			220,363

Income tax (benefit) expense	(2,282		)	9,910			13,397			24,322

Income Before Extraordinary Item	18,029			81,771			209,766			196,041

Extraordinary gain – excess of fair value of net assets acquired over cost (net of $0 income tax)	—			816			—			816

Net Income	$	18,029		$	82,587		$	209,766		$	196,857

Net Income Per Share Data
Basic:
Income before extraordinary item	$	0.55		$	3.12		$	6.82		$	7.50
Extraordinary gain	—			$	0.03		—			$	0.03
Net income	$	0.55		$	3.15		$	6.82		$	7.53

Diluted:
Income before extraordinary item	$	0.25		$	1.21		$	2.91		$	2.90
Extraordinary gain	—			$	0.01		—			$	0.01
Net income	$	0.25		$	1.22		$	2.91		$	2.91

Weighted Average Shares Outstanding
Basic	32,985,085			26,255,775			30,770,428			26,153,718
Diluted	73,547,450			67,774,722			72,090,798			67,539,330

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2004			2003
Preference Shares
Balance at beginning of year	$	388		$	388
Converted to common shares	(15		)	—
Balance at end of period	373			388

Common Shares
Balance at beginning of year	282			277
Common shares issued	50			4
Converted from preference shares	15			—
Balance at end of period	347			281

Additional Paid-in Capital
Balance at beginning of year	1,361,267			1,347,165
Common shares issued	189,542			5,666
Exercise of stock options	5,430			6,068
Common shares retired	(3,019		)	(794		)
Other	2,064			1,227
Balance at end of period	1,555,284			1,359,332

Deferred Compensation Under Share Award Plan
Balance at beginning of year	(15,004		)	(25,290		)
Restricted common shares issued	(7,395		)	(4,762		)
Deferred compensation expense recognized	10,137			11,973
Balance at end of period	(12,262		)	(18,079		)

Retained Earnings
Balance at beginning of year	327,963			47,372
Net income	209,766			196,857
Balance at end of period	537,729			244,229

Accumulated Other Comprehensive Income
Balance at beginning of year	35,833			41,332
Change in unrealized appreciation in value of investments, net of deferred income tax	12,735			8,756
Foreign currency translation adjustments	(1,585		)	—
Balance at end of period	46,983			50,088

Total Shareholders’ Equity	$	2,128,454		$	1,636,239

See Notes to Consolidated Financial Statements

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2004			2003
Operating Activities
Net income	$	209,766		$	196,857
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(19,570		)	(21,454		)
Other loss (income)	3,248			(2,271		)
Non-cash compensation	11,719			12,873
Excess of fair value of net assets acquired over cost	—			(816		)
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	1,063,950			820,862
Unearned premiums, net of prepaid reinsurance premiums	137,828			588,769
Premiums receivable	(124,188		)	(252,421		)
Deferred acquisition costs, net	(28,758		)	(132,810		)
Funds held by reinsureds	8,126			(126,551		)
Reinsurance balances payable	8,471			21,740
Accrued investment income	(19,390		)	(5,986		)
Paid losses and loss adjustment expenses recoverable	(1,682		)	(8,441		)
Deferred income tax asset	(8,285		)	(1,934		)
Deposit accounting liabilities	29,515			17,903
Other liabilities	68,202			47,129
Other items, net	13,537			(7,360		)
Net Cash Provided By Operating Activities	1,352,489			1,146,089

Investing Activities
Purchases of fixed maturity investments	(5,260,351		)	(3,595,697		)
Sales of fixed maturity investments	3,566,717			2,099,515
Sales of equity securities	13,332			7,801
Net sales of short-term investments	99,062			134,119
Acquisitions, net of cash	—			(11,774		)
Purchases of furniture, equipment and other	(13,809		)	(19,930		)
Net Cash Used For Investing Activities	(1,595,049		)	(1,385,966		)

Financing Activities
Proceeds from common shares issued	183,775			4,843
Proceeds from issuance of senior notes	296,442			—
(Repayment of) proceeds from revolving credit agreement borrowings	(200,000		)	200,000
Repurchase of common shares	(1,525		)	(795		)
Net Cash Provided By Financing Activities	278,692			204,048

Effects of exchange rate changes on foreign currency cash	(268		)	—
Increase (decrease) in cash	35,864			(35,829		)
Cash beginning of year	56,899			91,717
Cash end of period	$	92,763		$	55,888

Income taxes paid, net	$	25,304		$	28,399
Interest paid	$	1,967		—

See Notes to Consolidated Financial Statements

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)						(Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
(U.S. dollars in thousands, except share data)	2004			2003			2004			2003

Net income, as reported	$	18,029		$	82,587		$	209,766		$	196,857
Total stock-based employee compensation expense under fair value method, net of income taxes	(2,349		)	(1,896		)	(3,286		)	(5,188		)
Pro forma net income	$	15,680		$	80,691		$	206,480		$	191,669

Earnings per share – basic:
As reported	$	0.55		$	3.15		$	6.82		$	7.53
Pro forma	$	0.48		$	3.07		$	6.71		$	7.33
Earnings per share – diluted:
As reported	$	0.25		$	1.22		$	2.91		$	2.91
Pro forma	$	0.21		$	1.19		$	2.86		$	2.84

3. Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), “Consolidated Financial Statements”, which replaces FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, addresses consolidation by business enterprises of variable interest entities (“VIEs”). FIN 46R clarifies the application of ARB 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In addition, FIN 46R modified FIN 46 to address certain technical corrections and implementation issues relating to FIN 46. Pursuant to FIN 46, if an enterprise has a controlling financial interest in a VIE, the assets, liabilities and results of operations of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. An enterprise with an interest in an entity to which the provisions of FIN 46 had not been applied as of December 24, 2003, applied the provisions of FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The provisions of FIN 46 applied immediately to VIEs created after January 31, 2003; however, for VIEs created prior to January 31, 2003 the provisions of FIN 46R were effective for the first year or interim period beginning after March 15, 2004. The provisions of FIN 46R are required to be applied to financial statements of public entities that have interests in VIEs, commonly referred to as special-purpose entities, for periods ending after December 15, 2003.

The Company concluded that, under FIN 46R, it is required to consolidate the assets, liabilities and results of operations (if any) of a certain managing general agency in which one of the Company’s subsidiaries has an investment. Such agency ceased producing business in 1999 and is currently running-off its operations. Based on current information, there are no assets or liabilities of such agency required to be reflected on the face of the Company’s consolidated financial statements that are not, or have not been previously, otherwise reflected therein. Therefore, the adoption of FIN 46R did not have a material impact on the Company’s consolidated financial statements as of or for the nine months ended September 30, 2004.

In March 2004, the FASB released an exposure draft, “Share-Based Payment-an Amendment of Statements No. 123 and 95” (the “Proposed Statement”), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Proposed Statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method under APB No. 25 and, generally, would require instead that such transactions be accounted for using a fair-value-based method. The proposed effective date is for interim and annual periods beginning after June 15, 2005. The Company will evaluate the impact of the Proposed Statement upon issuance by the FASB.

In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and was effective beginning with the 2004 third quarter. In October 2004, the FASB issued a final FASB Staff Position that delayed the effective date of the application guidance on impairment of securities that is included in paragraphs 10 through 20 of EITF 03-1. The annual disclosure requirements under paragraphs 20 through 21 of EITF 03-1 have not been deferred. The Company is currently evaluating the impact that EITF 03-1 may have on its consolidated financial statements. The delay in the effective date for the application guidance is not a suspension of currently existing accounting requirements for assessing other-than-temporary impairments for securities under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” or other current accounting standards, including current guidance for cost-method and equity-method investments.

4. Segment Information

The Company classifies its businesses into two underwriting segments — reinsurance and insurance — and a corporate and other segment (non-underwriting). The Company’s reinsurance and insurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results.

The reinsurance segment, or division, consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance treaties. Classes of business include: casualty; casualty clash; marine and aviation; 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, or division, consists of the Company’s insurance underwriting subsidiaries which primarily write on a direct basis. The insurance segment consists of eight product lines, including: casualty; construction and surety; executive assurance; healthcare; professional liability; programs; property, marine and aviation; and other (primarily non-standard auto, collateralized protection business and certain programs).

The corporate and other segment (non-underwriting) includes net investment income, other fee income, net of related expenses, other income, other expenses incurred by the Company, net realized gains or losses, net

foreign exchange gains or losses and non-cash compensation. The corporate and other segment also includes the results of Hales & Company Inc. (“Hales”), the Company’s merchant banking operations. Included in other income (loss) for the nine months ended September 30, 2004 is a charge of $4.5 million resulting from a write-down of the carrying value of Hales (see Note 14, “Goodwill and Intangible Assets”). During the 2004 second quarter, the Company entered into negotiations to sell Hales. In October 2004, the sale of Hales was completed.

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:

	(Unaudited)
	Three Months Ended September 30, 2004
(U.S. dollars in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	412,355		$	552,608		$	927,658
Net premiums written (1)	394,495			348,734			743,229

Net premiums earned (1)	$	403,113		$	332,295		$	735,408
Policy-related fee income	—			4,915			4,915
Other underwriting-related fee income	184			635			819
Losses and loss adjustment expenses	(329,451		)	(232,151		)	(561,602		)
Acquisition expenses, net	(101,622		)	(35,858		)	(137,480		)
Other operating expenses	(11,562		)	(54,264		)	(65,826		)
Underwriting (loss) income	$	(39,338	)	$	15,572		(23,766		)

Net investment income							40,752
Net realized gains							13,503
Other fee income, net of related expenses							119
Other income							95
Other expenses							(4,505		)
Interest expense							(6,334		)
Net foreign exchange losses							(1,787		)
Non-cash compensation							(2,330		)
Income before income taxes							15,747
Income tax benefit							2,282

Net income							$	18,029

Underwriting Ratios
Loss ratio	81.7		%	69.9		%	76.4		%
Acquisition expense ratio (2)	25.2		%	9.3		%	18.0		%
Other operating expense ratio	2.9		%	16.3		%	9.0		%
Combined ratio	109.8		%	95.5		%	103.4		%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $36.3 million and $1.0 million, respectively, of gross and net premiums written and $37.5 million and $1.9 million, respectively, of net premiums earned assumed through intersegment transactions.

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

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:

	(Unaudited)
	Three Months Ended September 30, 2003
(U.S. dollars in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	411,443		$	558,863		$	928,243
Net premiums written (1)	397,418			376,749			774,167

Net premiums earned (1)	$	348,883		$	260,073		$	608,956
Policy-related fee income	—			3,583			3,583
Other underwriting-related fee income	1,369			—			1,369
Losses and loss adjustment expenses	(223,419		)	(168,555		)	(391,974		)
Acquisition expenses, net	(79,011		)	(36,840		)	(115,851		)
Other operating expenses	(8,862		)	(33,654		)	(42,516		)
Underwriting income	$	38,960		$	24,607		63,567

Net investment income							20,542
Net realized gains							11,366
Other fee income, net of related expenses							537
Other income							546
Other expenses							(4,686		)
Net foreign exchange gains							3,708
Non-cash compensation							(3,899		)
Income before income taxes and extraordinary item							91,681
Income tax expense							(9,910		)
Income before extraordinary item							81,771
Extraordinary gain, net of $0 income tax							816

Net income							$	82,587

Underwriting Ratios
Loss ratio	64.0		%	64.8		%	64.4		%
Acquisition expense ratio (2)	22.6		%	12.8		%	18.4		%
Other operating expense ratio	2.5		%	12.9		%	7.0		%
Combined ratio	89.1		%	90.5		%	89.8		%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment results include $42.1 million of gross and net premiums written and $36.2 million of net premiums earned assumed through intersegment transactions.

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

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:

	(Unaudited)
	Nine Months Ended September 30, 2004
(U.S. dollars in thousands)	Reinsurance				Insurance				Total

Gross premiums written (1)	$	1,361,081			$	1,499,693			$		2,753,769
Net premiums written (1)	1,309,654				994,809				2,304,463

Net premiums earned (1)	$	1,165,037			$	1,001,596			$	2,166,633
Policy-related fee income	—				12,308				12,308
Other underwriting-related fee income	560				1,059				1,619
Losses and loss adjustment expenses	(767,747			)	(660,364			)	(1,428,111			)
Acquisition expenses, net	(307,015			)	(120,210			)	(427,225			)
Other operating expenses	(31,213			)	(152,047			)	(183,260			)
Underwriting income	$		59,622		$		82,342		141,964

Net investment income									98,136
Net realized gains									20,083
Other fee income, net of related expenses									224
Other income (loss)									(3,248			)
Other expenses									(12,319			)
Interest expense									(12,350			)
Net foreign exchange losses									(1,603			)
Non-cash compensation									(7,724			)
Income before income taxes									223,163
Income tax expense									(13,397			)

Net income									$	209,766

Underwriting Ratios
Loss ratio	65.9			%	65.9			%	65.9			%
Acquisition expense ratio (2)	26.4			%	10.8			%	19.2			%
Other operating expense ratio	2.7			%	15.2			%	8.5			%
Combined ratio	95.0			%	91.9			%	93.6			%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $100.8 million and $6.2 million, respectively, of gross and net premiums written and $106.2 million and $5.4 million, respectively, of net premiums earned assumed through intersegment transactions.

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

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:

	(Unaudited)
	Nine Months Ended September 30, 2003
(U.S. dollars in thousands)	Reinsurance			Insurance			Total

Gross premiums written (1)	$	1,311,142		$	1,283,776		$	2,464,348
Net premiums written (1)	1,268,374			842,658			2,111,032

Net premiums earned (1)	$	932,334		$	589,929		$	1,522,263
Policy-related fee income	—			10,358			10,358
Other underwriting-related fee income	5,097			—			5,097
Losses and loss adjustment expenses	(591,131		)	(395,304		)	(986,435		)
Acquisition expenses, net	(217,379		)	(72,244		)	(289,623		)
Other operating expenses	(22,644		)	(86,145		)	(108,789		)
Underwriting income	$	106,277		$	46,594		152,871
Net investment income							58,752
Net realized gains							21,454
Other fee income, net of related expenses							644
Other income							2,271
Other expenses							(10,487		)
Net foreign exchange gains							6,519
Non-cash compensation							(11,661		)
Income before income taxes and extraordinary item							220,363
Income tax expense							(24,322		)
Income before extraordinary item							196,041
Extraordinary gain, net of $0 income tax							816

Net income							$	196,857

Underwriting Ratios
Loss ratio	63.4		%	67.0		%	64.8		%
Acquisition expense ratio (2)	23.3		%	10.5		%	18.3		%
Other operating expense ratio	2.4		%	14.6		%	7.1		%
Combined ratio	89.1		%	92.1		%	90.2		%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment results include $130.6 million of gross and net premiums written and $97.7 million of net premiums earned assumed through intersegment transactions.

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

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:

	(Unaudited)
	Three Months Ended September 30,
	2004				2003
REINSURANCE SEGMENT (U.S. dollars in thousands)	Amount		% of Total		Amount			% of Total

Net premiums written (1)
Casualty	$	222,448	56.4	%	$	174,945		44.0	%
Property excluding property catastrophe	57,943		14.7	%	76,996			19.4	%
Other specialty	51,792		13.1	%	107,638			27.1	%
Marine and aviation	23,263		5.9	%	14,548			3.7	%
Property catastrophe	23,052		5.8	%	21,872			5.5	%
Non-traditional	13,692		3.5	%	(231		)	(0.1	)%
Casualty clash	2,305		0.6	%	1,650			0.4	%
Total	$	394,495	100.0	%	$	397,418		100.0	%

Net premiums earned (1)
Casualty	$	212,371	52.7	%	$	123,840		35.5	%
Property excluding property catastrophe	68,654		17.0	%	81,645			23.4	%
Other specialty	64,047		15.9	%	83,984			24.1	%
Marine and aviation	26,195		6.5	%	18,333			5.2	%
Property catastrophe	23,357		5.8	%	24,408			7.0	%
Non-traditional	5,320		1.3	%	14,010			4.0	%
Casualty clash	3,169		0.8	%	2,663			0.8	%
Total	$	403,113	100.0	%	$	348,883		100.0	%

Net premiums written by client location (1)
North America	$	219,842	55.7	%	$	233,577		58.8	%
Europe	86,769		22.0	%	124,435			31.3	%
Bermuda	66,515		16.9	%	26,711			6.7	%
Asia and Pacific	5,099		1.3	%	1,273			0.3	%
Other	16,270		4.1	%	11,422			2.9	%
Total	$	394,495	100.0	%	$	397,418		100.0	%

(1) Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $36.3 million and $37.5 million, respectively, for the 2004 third quarter and $42.1 million and $36.2 million, respectively, for the 2003 third quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $1.0 million and $1.9 million, respectively, for the 2004 third quarter.

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:

	(Unaudited)
	Nine Months Ended September 30,
	2004				2003
REINSURANCE SEGMENT (U.S. dollars in thousands)	Amount		% of Total		Amount		% of Total

Net premiums written (1)
Casualty	$	674,624	51.5	%	$	480,769	37.9	%
Property excluding property catastrophe	232,519		17.8	%	258,844		20.4	%
Other specialty	200,323		15.3	%	311,579		24.6	%
Property catastrophe	94,276		7.2	%	93,982		7.4	%
Marine and aviation	65,973		5.0	%	60,318		4.8	%
Non-traditional	31,171		2.4	%	51,352		4.0	%
Casualty clash	10,768		0.8	%	11,530		0.9	%
Total	$	1,309,654	100.0	%	$	1,268,374	100.0	%

Net premiums earned (1)
Casualty	$	554,724	47.6	%	$	314,448	33.7	%
Other specialty	223,962		19.2	%	204,572		21.9	%
Property excluding property catastrophe	210,329		18.1	%	213,396		22.9	%
Property catastrophe	73,968		6.4	%	81,653		8.8	%
Marine and aviation	68,658		5.9	%	55,604		6.0	%
Non-traditional	24,842		2.1	%	52,461		5.6	%
Casualty clash	8,554		0.7	%	10,200		1.1	%
Total	$	1,165,037	100.0	%	$	932,334	100.0	%

Net premiums written by client location (1)
North America	$	800,581	61.1	%	$	785,006	61.9	%
Europe	323,450		24.7	%	355,099		28.0	%
Bermuda	129,922		9.9	%	75,008		5.9	%
Asia and Pacific	22,970		1.8	%	23,796		1.9	%
Other	32,731		2.5	%	29,465		2.3	%
Total	$	1,309,654	100.0	%	$	1,268,374	100.0	%

(1) Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $100.8 million and $106.2 million, respectively, for the nine months ended September 30, 2004 and $130.6 million and $97.7 million, respectively, for the nine months ended September 30, 2003. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $6.2 million and $5.4 million, respectively, for the nine months ended September 30, 2004.

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:

	(Unaudited)
	Three Months Ended September 30,
	2004				2003
INSURANCE SEGMENT (U.S. dollars in thousands)	Amount		% of Total		Amount		% of Total

Net premiums written (1)
Casualty	$	67,250	19.3	%	$	68,788	18.3	%
Programs	62,327		17.9	%	116,172		30.8	%
Property, marine and aviation	48,886		14.0	%	42,770		11.3	%
Construction and surety	45,799		13.1	%	53,374		14.2	%
Professional liability	45,763		13.1	%	28,850		7.7	%
Executive assurance	31,342		9.0	%	34,817		9.2	%
Healthcare	18,036		5.2	%	9,855		2.6	%
Other	29,331		8.4	%	22,123		5.9	%
Total	$	348,734	100.0	%	$	376,749	100.0	%

Net premiums earned (1)
Programs	$	72,239	21.7	%	$	81,712	31.4	%
Casualty	57,687		17.4	%	46,660		17.9	%
Professional liability	45,406		13.7	%	21,428		8.2	%
Construction and surety	45,264		13.6	%	25,672		9.9	%
Property, marine and aviation	39,446		11.9	%	27,730		10.7	%
Executive assurance	29,873		9.0	%	24,380		9.4	%
Healthcare	14,676		4.4	%	10,900		4.2	%
Other	27,704		8.3	%	21,591		8.3	%
Total	$	332,295	100.0	%	$	260,073	100.0	%

Net premiums written by client location (1)
North America	$	338,029	96.9	%	$	368,308	97.8	%
Other	10,705		3.1	%	8,441		2.2	%
Total	$	348,734	100.0	%	$	376,749	100.0	%

(1) Insurance segment results include premiums written and earned assumed through intersegment transactions of $1.0 million and $1.9 million, respectively, for the 2004 third quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $36.3 million and $37.5 million, respectively, for the 2004 third quarter and $42.1 million and $36.2 million, respectively, for the 2003 third quarter.

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:

	(Unaudited)
	Nine Months Ended September 30,
	2004				2003
INSURANCE SEGMENT (U.S. dollars in thousands)	Amount		% of Total		Amount		% of Total

Net premiums written (1)
Programs	$	244,304	24.6	%	$	263,748	31.3	%
Casualty	183,509		18.5	%	169,115		20.1	%
Professional liability	125,814		12.6	%	77,538		9.2	%
Property, marine and aviation	114,409		11.5	%	77,511		9.2	%
Construction and surety	111,787		11.2	%	95,588		11.3	%
Executive assurance	89,357		9.0	%	80,583		9.6	%
Healthcare	41,830		4.2	%	24,656		2.9	%
Other	83,799		8.4	%	53,919		6.4	%
Total	$	994,809	100.0	%	$	842,658	100.0	%

Net premiums earned (1)
Programs	$	262,806	26.2	%	$	182,872	31.0	%
Casualty	170,028		17.0	%	108,671		18.4	%
Construction and surety	136,436		13.6	%	51,402		8.7	%
Professional liability	117,822		11.8	%	44,555		7.6	%
Property, marine and aviation	107,800		10.8	%	57,349		9.7	%
Executive assurance	92,284		9.2	%	59,509		10.1	%
Healthcare	38,342		3.8	%	26,797		4.5	%
Other	76,078		7.6	%	58,774		10.0	%
Total	$	1,001,596	100.0	%

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

	For the quarterly period ended September 30, 2004

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

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

Class		Outstanding at November 5, 2004
Common Shares, $0.01 par value		34,774,241

*PART I. Financial Information*

Item 1 — Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	2

Consolidated Balance Sheets September 30, 2004 and December 31, 2003	3

Consolidated Statements of Income For the three and nine month periods ended September 30, 2004 and 2003	4

Consolidated Statements of Changes in Shareholders’ Equity For the nine month periods ended September 30, 2004 and 2003	5

Consolidated Statements of Comprehensive Income For the nine month periods ended September 30, 2004 and 2003	6

Consolidated Statements of Cash Flows For the nine month periods ended September 30, 2004 and 2003	7

Notes to Consolidated Financial Statements	8

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3 — Quantitative and Qualitative Disclosures About Market Risk	64

Item 4 — Controls and Procedures	64

*PART II. Other Information*	65

Item 1 — Legal Proceedings	65

Item 2 — Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities	65

Item 5 — Other Information	66

Item 6 — Exhibits and Reports on Form 8-K	66

	(Unaudited)
	Nine Months Ended September 30,
	2004				2003
Comprehensive Income
Net income	$	209,766			$		196,857
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	28,948				28,071
Reclassification of net realized investment gains, net of income taxes, included in net income	(16,213			)	(19,315			)
Foreign currency translation adjustments	(1,585			)	—
Other comprehensive income	11,150				8,756
Comprehensive Income	$		220,916		$	205,613

/s/ PricewaterhouseCoopers LLP
New York, New York
November 3, 2004