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 September 30, 2005
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 by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o     No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common shares as of the latest practicable date.

Class	Outstanding at October 31, 2005
Common Shares, $0.01 par value	35,524,092

ARCH CAPITAL GROUP LTD.

INDEX

PART I. Financial Information

Item 1 — Consolidated Financial Statements

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

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Item 4 — Controls and Procedures

PART II. Other Information

Item 1 — Legal Proceedings

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

Item 5 — Other Information

Item 6 — Exhibits

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 sheetof Arch Capital Group Ltd. and its subsidiariesas of September 30, 2005, and the related consolidated statements of income for each of the three month andnine monthperiods ended September 30, 2005 and 2004, and the consolidated statements of changes in shareholders’ equity, comprehensive income and cash flows for the nine month periods ended September 30, 2005 and 2004. 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, 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 have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet as of December 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2004; and in our report dated March 14, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, 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

November 7, 2005

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	September 30, 2005			December 31, 2004
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2005, $5,201,166; 2004, $5,506,193)	$	5,153,953		$	5,545,121
Short-term investments available for sale, at fair value (amortized cost: 2005, $485,571; 2004, $155,498)	485,157			155,771
Short-term investment of funds received under securities lending agreements, at fair value	954,684			—
Privately held securities, at fair value (cost: 2005, $5,371; 2004, $17,022)	12,945			21,571
Total investments	6,606,739			5,722,463
Cash	161,759			113,052
Accrued investment income	56,017			57,163
Fixed maturities pledged under securities lending agreements	918,882			—
Premiums receivable	678,335			520,781
Funds held by reinsureds	198,908			209,946
Unpaid losses and loss adjustment expenses recoverable	1,239,815			695,582
Paid losses and loss adjustment expenses recoverable	30,051			26,874
Prepaid reinsurance premiums	334,229			321,422
Deferred income tax assets, net	57,320			58,745
Deferred acquisition costs, net	313,942			278,184
Receivable for securities sold	68,247			5,285
Other assets	262,509			209,257
Total Assets	$	10,926,753		$	8,218,754
Liabilities
Reserve for losses and loss adjustment expenses	$	5,098,327		$	3,570,734
Unearned premiums	1,678,198			1,541,217
Reinsurance balances payable	196,728			169,502
Senior notes	300,000			300,000
Deposit accounting liabilities	49,782			44,023
Securities lending collateral	954,684			—
Payable for securities purchased	10,096			53,642
Other liabilities	287,407			297,730
Total Liabilities	8,575,222			5,976,848
Commitments and Contingencies
Shareholders’ Equity
Preference shares ($0.01 par value, 50,000,000 shares authorized, issued: 2005, 37,327,502; 2004, 37,348,150)	373			373
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2005, 35,504,734; 2004, 34,902,923)	355			349
Additional paid-in capital	1,575,843			1,560,291
Deferred compensation under share award plan	(5,625		)	(9,879		)
Retained earnings	800,455			644,862
Accumulated other comprehensive income (loss), net of deferred income tax	(19,870		)	45,910
Total Shareholders’ Equity	2,351,531			2,241,906
Total Liabilities and Shareholders’ Equity	$	10,926,753		$	8,218,754

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 September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenues
Net premiums written	$	787,304		$	743,229		$	2,310,833		$	2,304,463
Increase in unearned premiums	(39,529		)	(7,821		)	(126,098		)	(137,830		)
Net premiums earned	747,775			735,408			2,184,735			2,166,633
Net investment income	59,270			40,752			162,846			98,136
Net realized gains (losses)	(10,291		)	13,503			(7,725		)	20,083
Fee income	2,239			5,853			9,376			14,151
Other income (loss)	—			95			—			(3,248		)
Total revenues	798,993			795,611			2,349,232			2,295,755
Expenses
Losses and loss adjustment expenses	672,224			561,602			1,541,678			1,428,111
Acquisition expenses	142,803			137,480			417,474			427,225
Other operating expenses	71,960			70,331			219,593			195,579
Interest expense	5,632			6,334			16,897			12,350
Net foreign exchange (gains) losses	(7,334		)	1,787			(20,769		)	1,603
Non-cash compensation	641			2,330			2,168			7,724
Total expenses	885,926			779,864			2,177,041			2,072,592
Income (Loss) Before Income Taxes	(86,933		)	15,747			172,191			223,163
Income tax expense (benefit)	(642		)	(2,282		)	16,598			13,397
Net Income (Loss)	$	(86,291	)	$	18,029		$	155,593		$	209,766
Net Income (Loss) Per Share Data
Basic	$	(2.48	)	$	0.55		$	4.50		$	6.82
Diluted	$	(2.48	)	$	0.25		$	2.09		$	2.91
Weighted Average Shares Outstanding
Basic	34,750,770			32,985,085			34,561,131			30,770,428
Diluted	34,750,770			73,547,450			74,458,013			72,090,798

See Notes to Consolidated Financial Statements

4

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2005			2004
Preference Shares
Balance at beginning of year	$	373		$	388
Converted to common shares	(0		)	(15		)
Balance at end of period	373			373
Common Shares
Balance at beginning of year	349			282
Common shares issued	6			50
Converted from preference shares	0			15
Balance at end of period	355			347
Additional Paid-in Capital
Balance at beginning of year	1,560,291			1,361,267
Common shares issued	2,893			189,542
Exercise of stock options	13,415			5,430
Common shares retired	(1,398		)	(3,019		)
Other	642			2,064
Balance at end of period	1,575,843			1,555,284
Deferred Compensation Under Share Award Plan
Balance at beginning of year	(9,879		)	(15,004		)
Restricted common shares issued	(1,488		)	(7,395		)
Deferred compensation expense recognized	5,742			10,137
Balance at end of period	(5,625		)	(12,262		)
Retained Earnings
Balance at beginning of year	644,862			327,963
Net income	155,593			209,766
Balance at end of period	800,455			537,729
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year	45,910			35,833
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(64,571		)	12,735
Foreign currency translation adjustments, net of deferred income tax	(1,209		)	(1,585		)
Balance at end of period	(19,870		)	46,983
Total Shareholders’ Equity	$	2,351,531		$	2,128,454

See Notes to Consolidated Financial Statements

5

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2005			2004
Comprehensive Income
Net income	$	155,593		$	209,766
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	(74,758		)	28,948
Reclassification of net realized (gains) losses, net of income taxes, included in net income	10,187			(16,213		)
Foreign currency translation adjustments	(1,209		)	(1,585		)
Other comprehensive income (loss)	(65,780		)	11,150
Comprehensive Income	$	89,813		$	220,916

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,
	2005			2004
Operating Activities
Net income	$	155,593		$	209,766
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	9,601			(19,570		)
Other (income) loss	—			3,248
Non-cash compensation	6,486			11,719
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	983,360			1,063,950
Unearned premiums, net of prepaid reinsurance premiums	124,174			137,828
Premiums receivable	(157,554		)	(124,188		)
Deferred acquisition costs, net	(35,758		)	(28,758		)
Funds held by reinsureds	11,038			8,126
Reinsurance balances payable	27,226			8,471
Accrued investment income	1,146			(19,390		)
Paid losses and loss adjustment expenses recoverable	(3,177		)	(1,682		)
Deferred income tax assets, net	6,649			(8,285		)
Deposit accounting liabilities	5,759			29,515
Other liabilities	(9,026		)	68,202
Other items, net	(20,023		)	13,537
Net Cash Provided By Operating Activities	1,105,494			1,352,489
Investing Activities
Purchases of fixed maturity investments	(6,212,818		)	(5,260,351		)
Proceeds from sales of fixed maturity investments	5,178,452			3,412,623
Proceeds from redemptions and maturities of fixed maturity investments	282,552			154,094
Sales of equity securities	12,701			13,332
Net (purchases) sales of short-term investments	(317,043		)	99,062
Investment of securities lending collateral	(954,684		)	—
Purchases of furniture, equipment and other	(10,548		)	(13,809		)
Net Cash Used For Investing Activities	(2,021,388		)	(1,595,049		)
Financing Activities
Proceeds from common shares issued	11,415			183,775
Proceeds from issuance of senior notes	—			296,442
Repayment of revolving credit agreement borrowings	—			(200,000		)
Securities lending collateral received	954,684			—
Repurchase of common shares	(1,334		)	(1,525		)
Net Cash Provided By Financing Activities	964,765			278,692
Effects of exchange rate changes on foreign currency cash	(164		)	(268		)
Increase in cash	48,707			35,864
Cash beginning of year	113,052			56,899
Cash end of period	$	161,759		$	92,763
Income taxes paid, net	$	37,099		$	25,304
Interest paid	$	11,141		$	1,967

See Notes to Consolidated Financial Statements

7

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 unaudited 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 consolidated 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, 2004, 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 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation. Such reclassifications had no effect on the Company’s consolidated net income (loss).

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.

8

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 (loss) and earnings (loss) 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)	2005			2004			2005			2004
Net income (loss), as reported	$	(86,291	)	$	18,029		$	155,593		$	209,766
Total stock-based employee compensation expense under fair value method, net of income taxes	(1,342		)	(2,349		)	(3,538		)	(3,286		)
Pro forma net income (loss)	$	(87,633	)	$	15,680		$	152,055		$	206,480
Earnings (loss) per share – basic:
As reported	$	(2.48	)	$	0.55		$	4.50		$	6.82
Pro forma	$	(2.52	)	$	0.48		$	4.40		$	6.71
Earnings (loss) per share – diluted:
As reported	$	(2.48	)	$	0.25		$	2.09		$	2.91
Pro forma	$	(2.52	)	$	0.21		$	2.04		$	2.86

3.      Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB No. 25 and requires that the estimated expense resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) eliminates the alternative to disclose, on a pro forma basis, the effects of the fair value based method. Pursuant to a Securities and Exchange Commission ruling released on April 14, 2005, which deferred the effective date of SFAS No. 123(R) for calendar year companies from July 1, 2005 to January 1, 2006, the Company will adopt the fair value recognition provisions of accounting for employee stock option awards as defined in SFAS No. 123(R) on January 1, 2006 under the modified prospective approach. Under the fair value method of accounting, compensation expense is estimated based on the fair value of the award at the grant date and recognized over the requisite service period. Under the modified prospective approach, the fair value based method described in SFAS No. 123(R) is applied to new awards granted after January 1, 2006. Additionally, the unrecognized expense related to the unvested portions of option awards that were outstanding as of the effective date will be recognized as compensation expense as the requisite service is rendered. The Company is currently evaluating the impact of adopting SFAS No. 123(R) on the results of its operations. However, the impact of adopting SFAS No. 123(R) will have no effect on the Company’s cash flows or total shareholders’ equity.

9

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. Intersegment insurance business is allocated to the segment accountable for the underwriting results.

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

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. The insurance segment consists of eight product lines: casualty; construction and surety; executive assurance; healthcare; professional liability; programs; property, marine and aviation; and other (primarily non-standard auto prior to the sale of such operations in December 2004, 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 (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net foreign exchange gains or losses, non-cash compensation and income taxes. The corporate and other segment also includes the results of the Company’s merchant banking operations prior to the sale of such operations in October 2004.

10

The following tables set forth an analysis of the Company’s underwriting income (loss) by segment, together with a reconciliation of underwriting income (loss) to net income (loss):

	(Unaudited)
	Three Months Ended September 30, 2005
(U.S. dollars in thousands)	Reinsurance			Insurance			Total
Gross premiums written (1)	$	445,628		$	617,499		$	1,048,042
Net premiums written (1)	409,768			377,536			787,304
Net premiums earned (1)	$	407,813		$	339,962		$	747,775
Policy-related fee income	—			833			833
Other underwriting-related fee income	74			1,332			1,406
Losses and loss adjustment expenses	(371,453		)	(300,771		)	(672,224		)
Acquisition expenses, net	(107,827		)	(34,976		)	(142,803		)
Other operating expenses	(12,397		)	(53,444		)	(65,841		)
Underwriting loss	$	(83,790	)	$	(47,064	)	(130,854		)
Net investment income							59,270
Net realized losses							(10,291		)
Other expenses							(6,119		)
Interest expense							(5,632		)
Net foreign exchange gains							7,334
Non-cash compensation							(641		)
Income (loss) before income taxes							(86,933		)
Income tax benefit							642
Net income (loss)							$	(86,291	)
Underwriting Ratios
Loss ratio	91.1		%	88.5		%	89.9		%
Acquisition expense ratio (2)	26.4		%	10.0		%	19.0		%
Other operating expense ratio	3.0		%	15.7		%	8.8		%
Combined ratio	120.5		%	114.2		%	117.7		%

(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 $14.3 million and $0.8 million, respectively, of gross and net premiums written and $12.4 million and $1.1 million, respectively, of net premiums earned assumed through intersegment transactions.

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

11

	(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 income (loss)	$	(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 (loss)							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.

12

	(Unaudited)
	Nine Months Ended September 30, 2005
(U.S. dollars in thousands)	Reinsurance			Insurance			Total
Gross premiums written (1)	$	1,311,226		$	1,701,663		$	2,969,487
Net premiums written (1)	1,237,517			1,073,316			2,310,833
Net premiums earned (1)	$	1,169,651		$	1,015,084		$	2,184,735
Policy-related fee income	—			2,482			2,482
Other underwriting-related fee income	4,719			2,175			6,894
Losses and loss adjustment expenses	(804,074		)	(737,604		)	(1,541,678		)
Acquisition expenses, net	(320,722		)	(96,752		)	(417,474		)
Other operating expenses	(35,172		)	(167,631		)	(202,803		)
Underwriting income	$	14,402		$	17,754		32,156
Net investment income							162,846
Net realized losses							(7,725		)
Other expenses							(16,790		)
Interest expense							(16,897		)
Net foreign exchange gains							20,769
Non-cash compensation							(2,168		)
Income before income taxes							172,191
Income tax expense							(16,598		)
Net income							$	155,593
Underwriting Ratios
Loss ratio	68.7		%	72.7		%	70.6		%
Acquisition expense ratio (2)	27.4		%	9.3		%	19.0		%
Other operating expense ratio	3.0		%	16.5		%	9.3		%
Combined ratio	99.1		%	98.5		%	98.9		%

(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 $41.1 million and $2.3 million, respectively, of gross and net premiums written and $43.5 million and $3.5 million, respectively, of net premiums earned assumed through intersegment transactions.

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

13

	(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.

14

The following tables provide summary information regarding net premiums written and earned by major line of business and type of business, together with net premiums written by client location for the reinsurance segment:

	(Unaudited)
	Three Months Ended September 30,
	2005				2004
REINSURANCE SEGMENT	Amount		% of Total		Amount		% of Total
(U.S. dollars in thousands)
Net premiums written (1)
Casualty (2)	$	194,871	47.5	%	$	222,448	56.4	%
Property excluding property catastrophe	92,853		22.7	%	57,943		14.7	%
Other specialty	56,441		13.8	%	51,792		13.1	%
Marine and aviation	24,264		5.9	%	23,263		5.9	%
Property catastrophe	22,008		5.4	%	23,052		5.8	%
Other	19,331		4.7	%	15,997		4.1	%
Total	$	409,768	100.0	%	$	394,495	100.0	%
Net premiums earned (1)
Casualty (2)	$	193,891	47.6	%	$	212,371	52.7	%
Property excluding property catastrophe	72,865		17.9	%	68,654		17.0	%
Other specialty	71,529		17.5	%	64,047		15.9	%
Marine and aviation	31,089		7.6	%	26,195		6.5	%
Property catastrophe	20,387		5.0	%	23,357		5.8	%
Other	18,052		4.4	%	8,489		2.1	%
Total	$	407,813	100.0	%	$	403,113	100.0	%
Net premiums written (1)
Pro rata	$	323,133	78.9	%	$	288,349	73.1	%
Excess of loss	86,635		21.1	%	106,146		26.9	%
Total	$	409,768	100.0	%	$	394,495	100.0	%
Net premiums earned (1)
Pro rata	$	304,425	74.6	%	$	298,309	74.0	%
Excess of loss	103,388		25.4	%	104,804		26.0	%
Total	$	407,813	100.0	%	$	403,113	100.0	%
Net premiums written by client location (1)
United States	$	245,755	60.0	%	$	245,538	62.2	%
Europe	95,241		23.2	%	75,898		19.2	%
Bermuda	38,507		9.4	%	35,706		9.1	%
Canada	17,549		4.3	%	22,423		5.7	%
Asia and Pacific	5,134		1.2	%	5,746		1.5	%
Other	7,582		1.9	%	9,184		2.3	%
Total	$	409,768	100.0	%	$	394,495	100.0	%

(1)Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $14.3 million and $12.4 million, respectively, for the 2005 third quarter and $36.3 million and $37.5 million, respectively, for the 2004 third quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $0.8 million and $1.1 million, respectively, for the 2005 third quarter and $1.0 million and $1.9 million, respectively, for the 2004 third quarter.

(2)Includes professional liability business.

15

	(Unaudited)
	Nine Months Ended September 30,
	2005				2004
REINSURANCE SEGMENT	Amount		% of Total		Amount		% of Total
(U.S. dollars in thousands)
Net premiums written (1)
Casualty (2)	$	566,386	45.8	%	$	674,624	51.5	%
Property excluding property catastrophe	262,389		21.2	%	232,519		17.8	%
Other specialty	222,458		18.0	%	200,323		15.3	%
Property catastrophe	75,932		6.1	%	94,276		7.2	%
Marine and aviation	72,382		5.8	%	65,973		5.0	%
Other	37,970		3.1	%	41,939		3.2	%
Total	$	1,237,517	100.0	%	$	1,309,654	100.0	%
Net premiums earned (1)
Casualty (2)	$	583,551	49.9	%	$	554,724	47.6	%
Property excluding property catastrophe	217,848		18.6	%	210,329		18.1	%
Other specialty	190,828		16.3	%	223,962		19.2	%
Property catastrophe	66,916		5.7	%	73,968		6.3	%
Marine and aviation	73,699		6.3	%	68,658		5.9	%
Other	36,809		3.2	%	33,396		2.9	%
Total	$	1,169,651	100.0	%	$	1,165,037	100.0	%
Net premiums written (1)
Pro rata	$	948,622	76.7	%	$	899,767	68.7	%
Excess of loss	288,895		23.3	%	409,887		31.3	%
Total	$	1,237,517	100.0	%	$	1,309,654	100.0	%
Net premiums earned (1)
Pro rata	$	876,563	74.9	%	$	862,531	74.0	%
Excess of loss	293,088		25.1	%	302,506		26.0	%
Total	$	1,169,651	100.0	%	$	1,165,037	100.0	%
Net premiums written by client location (1)
United States	$	690,284	55.8	%	$	748,341	57.1	%
Europe	360,706		29.1	%	325,558		24.9	%
Bermuda	82,885		6.7	%	109,661		8.4	%
Canada	59,607		4.8	%	74,965		5.7	%
Asia and Pacific	20,533		1.7	%	26,134		2.0	%
Other	23,502		1.9	%	24,995		1.9	%
Total	$	1,237,517	100.0	%	$	1,309,654	100.0	%

(1)Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $41.1 million and $43.5 million, respectively, for the nine months ended September 30, 2005 and $100.8 million and $106.2 million, respectively, for the nine months ended September 30, 2004. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $2.3 million and $3.5 million, respectively, for the nine months ended September 30, 2005 and $6.2 million and $5.4 million, respectively, for the nine months ended September 30, 2004.

(2)Includes professional liability business.

16

The following tables provide summary information regarding net premiums written and earned by major line of business together with net premiums written by client location for the insurance segment:

	(Unaudited)
	Three Months Ended September 30,
	2005				2004
INSURANCE SEGMENT	Amount		% of Total		Amount		% of Total
(U.S. dollars in thousands)
Net premiums written (1)
Casualty	$	70,924	18.8	%	$	67,250	19.3	%
Professional liability	66,257		17.5	%	52,252		15.0	%
Programs	56,335		14.9	%	62,327		17.9	%
Executive assurance	51,654		13.7	%	31,342		9.0	%
Construction and surety	50,401		13.3	%	45,799		13.1	%
Property, marine and aviation	46,407		12.3	%	48,886		14.0	%
Healthcare	19,507		5.2	%	18,036		5.2	%
Other	16,051		4.3	%	22,842		6.5	%
Total	$	377,536	100.0	%	$	348,734	100.0	%
Net premiums earned (1)
Casualty	$	76,200	22.4	%	$	57,687	17.4	%
Professional liability	54,993		16.2	%	51,894		15.6	%
Programs	54,392		16.0	%	72,239		21.7	%
Executive assurance	40,693		12.0	%	29,873		9.0	%
Construction and surety	46,812		13.8	%	45,264		13.6	%
Property, marine and aviation	32,484		9.5	%	39,446		11.9	%
Healthcare	18,099		5.3	%	14,676		4.4	%
Other	16,289		4.8	%	21,216		6.4	%
Total	$	339,962	100.0	%	$	332,295	100.0	%
Net premiums written by client location (1)
United States	$	324,525	86.0	%	$	327,697	94.0	%
Europe	22,680		6.0	%	6,627		1.9	%
Other	30,331		8.0	%	14,410		4.1	%
Total	$	377,536	100.0	%	$	348,734	100.0	%

(1)Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.8 million and $1.1 million, respectively, for the 2005 third quarter and $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 $14.3 million and $12.4 million, respectively, for the 2005 third quarter and $36.3 million and $37.5 million, respectively, for the 2004 third quarter.

17

	(Unaudited)
	Nine Months Ended September 30,
	2005				2004
INSURANCE SEGMENT	Amount		% of Total		Amount		% of Total
(U.S. dollars in thousands)
Net premiums written (1)
Casualty	$	207,225	19.3	%	$	183,509	18.4	%
Professional liability	174,492		16.3	%	145,134		14.6	%
Programs	168,126		15.7	%	244,304		24.6	%
Property, marine and aviation	156,589		14.6	%	114,409		11.5	%
Construction and surety	142,995		13.3	%	111,787		11.2	%
Executive assurance	125,815		11.7	%	89,357		9.0	%
Healthcare	48,569		4.5	%	41,830		4.2	%
Other	49,505		4.6	%	64,479		6.5	%
Total	$	1,073,316	100.0	%	$	994,809	100.0	%
Net premiums earned (1)
Casualty	$	219,153	21.6	%	$	170,028	17.0	%
Professional liability	156,665		15.4	%	137,140		13.7	%
Programs	162,857		16.0	%	262,806		26.2	%
Property, marine and aviation	131,567		13.0