UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2008
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 x     No o

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

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

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

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 April 30, 2008
Common Shares, $0.01 par value	64,086,081

ARCH CAPITAL GROUP LTD.

INDEX

	Page No.
PART I. Financial Information
Item 1 — Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets March 31, 2008 (unaudited) and December 31, 2007	3
Consolidated Statements of Income For the three month periods ended March 31, 2008 and 2007 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity For the three month periods ended March 31, 2008 and 2007 (unaudited)	5
Consolidated Statements of Comprehensive Income For the three month periods ended March 31, 2008 and 2007 (unaudited)	6
Consolidated Statements of Cash Flows For the three month periods ended March 31, 2008 and 2007 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	47
Item 4 — Controls and Procedures	47
PART II. Other Information
Item 1 — Legal Proceedings	48
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 5 — Other Information	49
Item 6 — Exhibits	50

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 sheets of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2008, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the three-month periods ended March 31, 2008 and March 31, 2007. These interim financial statements are the responsibility of the Company’s management.

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

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2008, 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, 2007, 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

May 8, 2008

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	March 31,	December 31,
	2008	2007
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2008, $7,511,224; 2007, $7,037,272)	$7,591,695	$7,137,998
Short-term investments available for sale, at fair value (amortized cost: 2008, $629,249; 2007, $700,262)	631,285	699,036
Short-term investment of funds received under securities lending agreements, at fair value	1,228,868	1,503,723
Other investments (cost: 2008, $308,075; 2007, $323,950)	316,252	353,694
Investment funds accounted for using the equity method	294,379	235,975
Total investments	10,062,479	9,930,426
Cash	258,680	239,915
Accrued investment income	73,686	73,862
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value	1,190,086	1,463,045
Premiums receivable	880,946	729,628
Funds held by reinsureds	72,844	74,752
Unpaid losses and loss adjustment expenses recoverable	1,652,117	1,609,619
Paid losses and loss adjustment expenses recoverable	110,962	132,289
Prepaid reinsurance premiums	419,046	480,462
Deferred income tax assets, net	55,645	57,051
Deferred acquisition costs, net	311,364	290,059
Receivable for securities sold	671,354	17,359
Other assets	595,266	525,800
Total Assets	$16,354,475	$15,624,267
Liabilities
Reserve for losses and loss adjustment expenses	$7,319,141	$7,092,452
Unearned premiums	1,810,324	1,765,881
Reinsurance balances payable	322,280	301,309
Senior notes	300,000	300,000
Securities lending collateral	1,228,868	1,503,723
Payable for securities purchased	710,994	23,155
Other liabilities	658,324	601,936
Total Liabilities	12,349,931	11,588,456
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized)
- Series A (issued: 2008 and 2007, 8,000,000)	80	80
- Series B (issued: 2008 and 2007, 5,000,000)	50	50
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2008, 64,649,618; 2007, 67,318,466)	646	673
Additional paid-in capital	1,269,821	1,451,667
Retained earnings	2,617,539	2,428,117
Accumulated other comprehensive income, net of deferred income tax	116,408	155,224
Total Shareholders’ Equity	4,004,544	4,035,811
Total Liabilities and Shareholders’ Equity	$16,354,475	$15,624,267

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)
	Three Months Ended
	March 31,
	2008		2007
Revenues
Net premiums written	$811,342		$871,745
Increase in unearned premiums	(103,108	)	(126,252	)
Net premiums earned	708,234		745,493
Net investment income	122,193		110,047
Net realized gains (losses)	35,975		(981	)
Fee income	1,068		1,969
Equity in net income (loss) of investment funds accounted for using the equity method	(22,313	)	2,642
Other income	4,036		604
Total revenues	849,193		859,774
Expenses
Losses and loss adjustment expenses	404,417		420,061
Acquisition expenses	114,639		120,128
Other operating expenses	97,187		90,813
Interest expense	5,524		5,523
Net foreign exchange losses	23,587		9,742
Total expenses	645,354		646,267
Income before income taxes	203,839		213,507
Income tax expense	7,956		8,495
Net income	195,883		205,012
Preferred dividends	6,461		6,461
Net income available to common shareholders	$189,422		$198,551
Net income per common share
Basic	$2.90		$2.69
Diluted	$2.78		$2.59
Weighted average common shares and common share equivalents outstanding
Basic	65,295,516		73,931,996
Diluted	68,019,413		76,640,686

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)
	Three Months Ended
	March 31,
	2008		2007
Non-Cumulative Preferred Shares
Balance at beginning and end of period	$130		$130
Common Shares
Balance at beginning of year	673		743
Common shares issued, net	0		1
Purchases of common shares under share repurchase program	(27	)	(7	)
Balance at end of period	646		737
Additional Paid-in Capital
Balance at beginning of year	1,451,667		1,944,304
Common shares issued	0		109
Exercise of stock options	3,749		6,997
Common shares retired	(190,278	)	(46,291	)
Amortization of share-based compensation	4,600		4,306
Other	83		700
Balance at end of period	1,269,821		1,910,125
Retained Earnings
Balance at beginning of year	2,428,117		1,593,907
Adjustment to adopt SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”	—		2,111
Balance at beginning of year, as adjusted	2,428,117		1,596,018
Dividends declared on preferred shares	(6,461	)	(6,461	)
Net income	195,883		205,012
Balance at end of period	2,617,539		1,794,569
Accumulated Other Comprehensive Income
Balance at beginning of year	155,224		51,535
Adjustment to adopt SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”	—		(2,111	)
Balance at beginning of year, as adjusted	155,224		49,424
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax	(37,577	)	20,587
Foreign currency translation adjustments, net of deferred income tax	(1,239	)	7,776
Balance at end of period	116,408		77,787
Total Shareholders’ Equity	$4,004,544		$3,783,348

See Notes to Consolidated Financial Statements

5

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Comprehensive Income
Net income	$195,883		$205,012
Other comprehensive income (loss), net of deferred income tax
Unrealized decline in value of investments:
Unrealized holding gains arising during period	12,707		22,014
Reclassification of net realized gains, net of income taxes, included in net income	(50,284	)	(1,427	)
Foreign currency translation adjustments	(1,239	)	7,776
Other comprehensive (loss) income	(38,816	)	28,363
Comprehensive Income	$157,067		$233,375

See Notes to Consolidated Financial Statements

6

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2008		2007
Operating Activities
Net income	$195,883		$205,012
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(33,791	)	1,097
Equity in net (income) loss of investment funds accounted for using the equity method and other income	18,277		(3,246	)
Share-based compensation	4,600		4,306
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	182,498		147,462
Unearned premiums, net of prepaid reinsurance premiums	105,497		127,107
Premiums receivable	(148,197	)	(203,707	)
Deferred acquisition costs, net	(21,319	)	(23,700	)
Funds held by reinsureds	1,908		21,602
Reinsurance balances payable	19,677		91,498
Other liabilities	40,490		1,296
Other items, net	(30,978	)	34,404
Net Cash Provided By Operating Activities	334,545		403,131
Investing Activities
Purchases of fixed maturity investments	(3,772,652	)	(5,047,868	)
Proceeds from sales of fixed maturity investments	3,523,338		4,326,607
Proceeds from redemptions and maturities of fixed maturity investments	136,932		183,984
Purchases of other investments	(146,815	)	(151,978	)
Proceeds from sales of other investments	65,226		54,754
Net sales of short-term investments	74,201		188,663
Change in securities lending collateral	274,855		(268,722	)
Purchases of furniture, equipment and other	(3,045	)	(4,138	)
Net Cash Provided By (Used For) Investing Activities	152,040		(718,698	)
Financing Activities
Purchases of common shares under share repurchase program	(189,843	)	(44,475	)
Proceeds from common shares issued, net	2,540		3,145
Change in securities lending collateral	(274,855	)	268,722
Excess tax benefits from share-based compensation	660		2,355
Preferred dividends paid	(6,461	)	(6,461	)
Net Cash (Used For) Provided By Financing Activities	(467,959	)	223,286
Effects of exchange rate changes on foreign currency cash	139		513
Increase (decrease) in cash	18,765		(91,768	)
Cash beginning of year	239,915		317,017
Cash end of period	$258,680		$225,249
Income taxes paid, net	$2,510		$596
Interest paid	—		—

See Notes to Consolidated Financial Statements

7

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.      General

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

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, including the Company’s audited consolidated financial statements and related notes and the section entitled “Risk Factors.”

To facilitate period-to-period comparisons, certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on the Company’s consolidated net income.

2.      Share Transactions

Share Repurchase Program

On February 28, 2007, ACGL’s board of directors authorized the investment of up to $1 billion in ACGL’s common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2009. During the 2008 first quarter, ACGL repurchased approximately 2.7 million common shares under the share repurchase program for an aggregate purchase price of $189.8 million. Since the inception of the share repurchase program, ACGL has repurchased approximately 10.5 million common shares for an aggregate purchase price of $726.9 million. As a result of the share repurchase transactions, book value per common share was reduced by $1.70 per share at March 31, 2008 and weighted average shares outstanding for the 2008 first quarter were reduced by 9.4 million shares. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. In connection with the repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under its shareholders agreement with ACGL for all repurchases of common shares by ACGL under the repurchase program in open market transactions and certain privately negotiated transactions.

Non-Cumulative Preferred Shares

During 2006, ACGL completed two public offerings of non-cumulative preferred shares (“Preferred Shares”). On February 1, 2006, $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) were issued with net proceeds of $193.5 million and, on May 24, 2006, $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares”) were issued with net proceeds of $120.9 million. The net proceeds of the offerings were used to

8

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

support the underwriting activities of ACGL’s insurance and reinsurance subsidiaries. ACGL has the right to redeem all or a portion of each series of Preferred Shares at a redemption price of $25.00 per share on or after (1) February 1, 2011 for the Series A Preferred Shares and (2) May 15, 2011 for the Series B Preferred Shares. Dividends on the Preferred Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preferred Shares for any dividend period, holders of Preferred Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. Holders of Preferred Shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of the board of directors. Any such dividends will be payable from the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.0% of the $25.00 liquidation preference per annum for the Series A Preferred Shares and 7.875% of the $25.00 liquidation preference per annum for the Series B Preferred Shares. At March 31, 2008, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

Share-Based Compensation

As required by the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), the Company recorded after-tax share-based compensation expense related to stock options in the 2008 first quarter of $1.1 million, or $0.02 per diluted share, compared to $1.6 million, or $0.02 per diluted share, in the 2007 first quarter.

3.      Debt and Financing Arrangements

Senior Notes

On May 4, 2004, ACGL completed a public offering of $300 million principal amount of 7.35% senior notes (“Senior Notes”) due May 1, 2034 and received net proceeds of $296.4 million. ACGL used $200 million of the net proceeds to repay all amounts outstanding under a revolving credit agreement. The Senior Notes are ACGL’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the Senior Notes are due on May 1st and November 1st of each year. ACGL may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. For the 2008 and 2007 first quarters, interest expense on the Senior Notes was approximately $5.5 million. The fair value of the Senior Notes at March 31, 2008 and December 31, 2007 was $285.2 million and $325.4 million, respectively.

Letter of Credit and Revolving Credit Facilities

As of March 31, 2008, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $1.0 billion secured letter of credit facility (the “Credit Agreement”). The $300 million unsecured revolving loan is also available for the issuance of unsecured letters of credit up to $100 million for Arch Reinsurance Company (“Arch Re U.S.”). Borrowings of revolving loans may be made by ACGL and Arch Re U.S. at a variable rate based on LIBOR or an alternative base rate at the option of the Company. Secured letters of credit are available for issuance on behalf of the Company’s insurance and reinsurance subsidiaries. Issuance of letters of credit and borrowings under the Credit Agreement are subject to the Company’s compliance with certain covenants and conditions, including absence of a material adverse change. These covenants require, among other things, that the Company maintain a debt to shareholders’ equity ratio of not greater than 0.35 to 1 and shareholders’ equity in excess of $1.95 billion plus 25% of future aggregate net income for each quarterly period (not including any future net losses) beginning after June 30, 2006 and 25% of future aggregate proceeds from the issuance of common or preferred equity and that the Company’s principal insurance and reinsurance subsidiaries maintain at least a “B++” rating from A.M. Best. In addition, certain of the Company’s subsidiaries which are party to the Credit Agreement are required to maintain minimum shareholders’ equity levels. The

9

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Company was in compliance with all covenants contained in the Credit Agreement at December 31, 2007. The Credit Agreement expires on August 30, 2011.

Including the secured letter of credit portion of the Credit Agreement and another letter of credit facility (together, the “LOC Facilities”), the Company has access to letter of credit facilities for up to a total of $1.45 billion. The principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company’s reinsurance subsidiaries in United States jurisdictions where such subsidiaries are not licensed or otherwise admitted as an insurer, as required under insurance regulations in the United States, and to comply with requirements of Lloyd’s of London in connection with qualifying quota share and other arrangements. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. When issued, certain letters of credit are secured by a portion of the Company’s investment portfolio. In addition, the LOC Facilities also require the maintenance of certain covenants, which the Company was in compliance with at March 31, 2008. At such date, the Company had approximately $579.9 million in outstanding letters of credit under the LOC Facilities, which were secured by investments totaling $612.2 million. It is anticipated that the LOC Facilities will be renewed (or replaced) on expiry, but such renewal (or replacement) will be subject to the availability of credit from banks which the Company utilizes. In addition to letters of credit, the Company has and may establish insurance trust accounts in the U.S. and Canada to secure its reinsurance amounts payable as required.

4.      Segment Information

The Company classifies its businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). The Company’s insurance and reinsurance 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 business is allocated to the segment accountable for the underwriting results.

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 nine product lines: casualty; construction and national accounts; executive assurance; healthcare; professional liability; programs; property, marine and aviation; surety; and other (consisting of collateral protection, excess workers’ compensation and employers’ liability business and travel and accident business).

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).

10

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Corporate and other (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, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. In addition, corporate and other results include dividends on the Company’s non-cumulative preferred shares. The following tables set forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income available to common shareholders:

	Three Months Ended
	March 31, 2008
(U.S. dollars in thousands)	Insurance		Reinsurance		Total
Gross premiums written (1)	$626,348		$433,827		$1,053,152
Net premiums written (1)	402,764		408,578		811,342
Net premiums earned (1)	$419,100		$289,134		$708,234
Fee income	882		186		1,068
Losses and loss adjustment expenses	(287,303	)	(117,114	)	(404,417	)
Acquisition expenses, net	(51,889	)	(62,750	)	(114,639	)
Other operating expenses	(73,637	)	(18,238	)	(91,875	)
Underwriting income	$7,153		$91,218		98,371
Net investment income					122,193
Net realized gains					35,975
Equity in net income (loss) of investment funds accounted for using the equity method					(22,313	)
Other income					4,036
Other expenses					(5,312	)
Interest expense					(5,524	)
Net foreign exchange losses					(23,587	)
Income before income taxes					203,839
Income tax expense					(7,956	)
Net income					195,883
Preferred dividends					(6,461	)
Net income available to common shareholders					$189,422
Underwriting Ratios
Loss ratio	68.6	%	40.5	%	57.1	%
Acquisition expense ratio (2)	12.2	%	21.7	%	16.1	%
Other operating expense ratio	17.6	%	6.3	%	13.0	%
Combined ratio	98.4	%	68.5	%	86.2	%

(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 insurance segment results include $7.0 million of gross and net premiums written and $8.7 million of net premiums earned assumed through intersegment transactions. The reinsurance segment results include $0.1 million of net premiums earned assumed through intersegment transactions.

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

11

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended
	March 31, 2007
(U.S. dollars in thousands)	Insurance		Reinsurance		Total
Gross premiums written (1)	$661,210		$558,654		$1,210,614
Net premiums written (1)	428,344		443,401		871,745
Net premiums earned (1)	$413,847		$331,646		$745,493
Fee income	1,425		544		1,969
Losses and loss adjustment expenses	(259,322	)	(160,739	)	(420,061	)
Acquisition expenses, net	(46,695	)	(73,433	)	(120,128	)
Other operating expenses	(68,894	)	(13,781	)	(82,675	)
Underwriting income	$40,361		$84,237		124,598
Net investment income					110,047
Net realized losses					(981	)
Equity in net income (loss) of investment funds accounted for using the equity method					2,642
Other income					604
Other expenses					(8,138	)
Interest expense					(5,523	)
Net foreign exchange losses					(9,742	)
Income before income taxes					213,507
Income tax expense					(8,495	)
Net income					205,012
Preferred dividends					(6,461	)
Net income available to common shareholders					$198,551
Underwriting Ratios
Loss ratio	62.7	%	48.5	%	56.3	%
Acquisition expense ratio (2)	11.1	%	22.1	%	16.0	%
Other operating expense ratio	16.6	%	4.2	%	11.1	%
Combined ratio	90.4	%	74.8	%	83.4	%

(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 insurance segment and reinsurance segment results include $0.5 million and $8.7 million, respectively, of gross and net premiums written and $0.5 million and $10.6 million, respectively, of net premiums earned assumed through intersegment transactions.

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

12

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Set forth below is summary information regarding net premiums written and earned by major line of business and net premiums written by client location for the insurance segment:

	Three Months Ended
	March 31,
	2008		2007
INSURANCE SEGMENT (U.S. dollars in thousands)	Amount	% of Total	Amount	% of Total
Net premiums written (1)
Property, marine and aviation	$98,162	24.4	$84,863	19.8
Construction and national accounts	61,211	15.2	60,483	14.1
Programs	54,583	13.5	58,323	13.6
Professional liability	54,081	13.4	58,355	13.6
Executive assurance	42,169	10.5	44,091	10.3
Casualty	27,618	6.9	43,091	10.1
Healthcare	10,997	2.7	21,530	5.0
Surety	10,867	2.7	18,747	4.4
Other (2)	43,076	10.7	38,861	9.1
Total	$402,764	100.0	$428,344	100.0
Net premiums earned (1)
Property, marine and aviation	$84,992	20.3	$81,804	19.8
Construction and national accounts	57,115	13.6	47,975	11.6
Programs	56,987	13.6	56,209	13.6
Professional liability	68,810	16.4	67,884	16.4
Executive assurance	44,408	10.6	45,378	11.0
Casualty	41,772	10.0	51,542	12.4
Healthcare	13,445	3.2	19,844	4.8
Surety	13,499	3.2	19,129	4.6
Other (2)	38,072	9.1	24,082	5.8
Total	$419,100	100.0	$413,847	100.0
Net premiums written by client location (1)
United States	$279,255	69.3	$320,005	74.7
Europe	86,300	21.4	74,935	17.5
Other	37,209	9.3	33,404	7.8
Total	$402,764	100.0	$428,344	100.0
Net premiums written by underwriting location (1)
United States	$287,207	71.3	$331,557	77.4
Europe	102,011	25.3	82,016	19.1
Other	13,546	3.4	14,771	3.5
Total	$402,764	100.0	$428,344	100.0

(1)Insurance segment results include premiums earned assumed through intersegment transactions of $0.1 million for the 2008 first quarter and premiums written and earned assumed of $0.5 million and $0.5 million, respectively, for the 2007 first quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $7.0 million and $8.7 million, respectively, for the 2008 first quarter and $8.7 million and $10.6 million, respectively, for the 2007 first quarter.

(2)Includes excess workers’ compensation and employers’ liability business and travel and accident business.

13

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the reinsurance segment’s net premiums written and earned by major line of business and type of business, together with net premiums written by client location:

	Three Months Ended
	March 31,
	2008		2007
REINSURANCE SEGMENT (U.S. dollars in thousands)	Amount	% of Total	Amount	% of Total
Net premiums written (1)
Property catastrophe	$106,224	26.0	$80,659	18.2
Casualty (2)	105,987	26.0	144,476	32.6
Property excluding property catastrophe (3)	95,922	23.5	94,944	21.4
Other specialty	75,680	18.5	73,996	16.7
Marine and aviation	22,164	5.4	43,715	9.8
Other	2,601	0.6	5,611	1.3
Total	$408,578	100.0	$443,401	100.0
Net premiums earned (1)
Property catastrophe	$50,281	17.4	$34,691	10.5
Casualty (2)	107,648	37.2	140,444	42.4
Property excluding property catastrophe (3)	63,341	21.9	73,039	22.0
Other specialty	38,484	13.3	52,042	15.7
Marine and aviation	27,431	9.5	26,622	8.0
Other	1,949	0.7	4,808	1.4
Total	$289,134	100.0	$331,646	100.0
Net premiums written (1)
Pro rata	$215,419	52.7	$263,815	59.5
Excess of loss	193,159	47.3	179,586	40.5
Total	$408,578	100.0	$443,401	100.0
Net premiums earned (1)
Pro rata	$192,076	66.4	$242,439	73.1
Excess of loss	97,058	33.6	89,207	26.9
Total	$289,134	100.0	$331,646	100.0
Net premiums written by client location (1)
United States	$217,179	53.2	$253,991	57.3
Europe	143,920	35.2	124,338	28.0
Bermuda	34,060	8.3	50,841	11.5
Other	13,419	3.3	14,231	3.2
Total	$408,578	100.0	$443,401	100.0
Net premiums written by underwriting location (1)
Bermuda	$220,669	54.0	$252,028	56.8
United States	154,480	37.8	180,362	40.7
Other	33,429	8.2	11,011	2.5
Total	$408,578	100.0	$443,401	100.0

(1)Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $7.0 million and $8.7 million, respectively, for the 2008 first quarter and $8.7 million and $10.6 million, respectively, for the 2007 first quarter. Reinsurance segment results exclude premiums earned ceded through intersegment transactions of $0.1 million for the 2008 first quarter and premiums written and earned ceded of $0.5 million and $0.5 million, respectively, for the 2007 first quarter.

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

(3)Includes facultative business.

14

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. 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 or reinsurance subsidiaries would be liable for such defaulted amounts.

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

	Three Months Ended
	March 31,
(U.S. dollars in thousands)	2008		2007
Premiums Written
Direct	$619,486		$649,880
Assumed	433,666		560,734
Ceded	(241,810	)	(338,869	)
Net	$811,342		$871,745
Premiums Earned
Direct	$630,814		$637,008
Assumed	365,364		416,132
Ceded	(287,944	)	(307,647	)
Net	$708,234		$745,493
Losses and Loss Adjustment Expenses
Direct	$420,971		$359,476
Assumed	141,249		195,271
Ceded	(157,803	)	(134,686	)
Net	$404,417		$420,061

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At March 31, 2008 and December 31, 2007, approximately 87.9% and 88.5%, respectively, of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.76 billion and $1.74 billion, respectively, were due from carriers which had an A.M. Best rating of “A-” or better. At March 31, 2008 and December 31, 2007, the largest reinsurance recoverables from any one carrier were less than 5.7% and 5.2%, respectively, of the Company’s total shareholders’ equity.

On December 29, 2005, Arch Re Bermuda entered into a quota share reinsurance treaty with Flatiron Re Ltd., a Bermuda reinsurance company, pursuant to which Flatiron Re Ltd. assumed a 45% quota share (the “Treaty”) of certain lines of property and marine business underwritten by Arch Re Bermuda for unaffiliated third parties for the 2006 and 2007 underwriting years (January 1, 2006 to December 31, 2007). Effective June 28, 2006, the parties amended the Treaty to increase the percentage ceded to Flatiron Re Ltd. from 45% to 70% of all covered business bound by Arch Re Bermuda from (and including) June 28, 2006 until (and including) August 15, 2006 provided such business did not incept beyond September 30, 2006. The ceding percentage for all business bound outside of this period continued to be 45%. On December 31, 2007, the Treaty expired by its terms.

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Flatiron Re Ltd. is required to contribute funds into a trust for the benefit of Arch Re Bermuda (the “Trust”). Effective June 28, 2006, the parties amended the Treaty to provide that, through the earning of all written premium, the amount required to be on deposit in the Trust, together with certain other amounts, will be an amount equal to a calculated amount estimated to cover ceded losses arising from in excess of two 1-in-250 year events for the applicable forward twelve-month period (the “Requisite Funded Amount”). If the actual amounts on deposit in the Trust, together with certain other amounts (the “Funded Amount”), do not at least equal the Requisite Funded Amount, Arch Re Bermuda will, among other things, recapture unearned premium reserves and reassume losses that would have been ceded in respect of such unearned premiums. No assurances can be given that actual losses will not exceed the Requisite Funded Amount or that Flatiron Re Ltd. will make, or will have the ability to make, the required contributions into the Trust.

Arch Re Bermuda pays to Flatiron Re Ltd. a reinsurance premium in the amount of the ceded percentage of the original gross written premium on the business reinsured less a ceding commission, which includes a reimbursement of direct acquisition expenses as well as a commission to Arch Re Bermuda for generating the business. The Treaty also provides for a profit commission to Arch Re Bermuda based on the underwriting results for the 2006 and 2007 underwriting years on a cumulative basis. For the 2008 first quarter, $18.4 million of premiums written, $58.9 million of premiums earned and $11.8 million of losses and loss adjustment expenses were ceded to Flatiron Re Ltd. by Arch Re Bermuda, compared to $108.9 million of premiums written, $66.0 million of premiums earned and $25.4 million of losses and loss adjustment expenses for the 2007 first quarter. At March 31, 2008, $104.5 million of premiums ceded to Flatiron Re Ltd. were unearned. Reinsurance recoverables from Flatiron Re Ltd., which is not rated by A.M. Best, were $167.1 million at March 31, 2008, compared to $152.6 million at December 31, 2007. As noted above, Flatiron Re Ltd. is required to contribute funds into a trust for the benefit of Arch Re Bermuda. The recoverable from Flatiron Re Ltd. was fully collateralized through such trust at March 31, 2008 and December 31, 2007.

6.      Investment Information

The following table summarizes the Company’s invested assets:

	March 31,		December 31,
(U.S. dollars in thousands)	2008		2007
Fixed maturities available for sale, at fair value	$7,591,695		$7,137,998
Fixed maturities pledged under securities lending agreements, at fair value (1)	1,189,050		1,462,826
Total fixed maturities	8,780,745		8,600,824
Short-term investments available for sale, at fair value	631,285		699,036
Short-term investments pledged under securities lending agreements, at fair value (1)	1,036		219
Other investments	316,252		353,694
Investment funds accounted for using the equity method	294,379		235,975
Total investments (1)	10,023,697		9,889,748
Securities transactions entered into but not settled at the balance sheet date	(39,640	)	(5,796	)
Total investments, net of securities transactions	$9,984,057		$9,883,952

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received at March 31, 2008 and December 31, 2007 of $1.23 billion and $1.5 billion, respectively, which is reflected as “short-term investment of funds received under securities lending agreements, at fair value” and included the $1.19 billion and $1.46 billion, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at fair value.”

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fixed Maturities and Fixed Maturities Pledged Under Securities Lending Agreements

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements:

(U.S. dollars in thousands)	Estimated Fair Value	Gross Unrealized Gains	Gross Unrealized Losses		Amortized Cost
March 31, 2008:
Corporate bonds	$2,380,756	$63,605	($32,568	)	$2,349,719
Commercial mortgage backed securities	1,334,521	17,326	(6,536	)	1,323,731
Mortgage backed securities	1,333,473	19,605	(41,664	)	1,355,532
Municipal bonds	1,184,123	17,156	(3,156	)	1,170,123
Asset backed securities	1,082,196	15,956	(7,020	)	1,073,260
U.S. government and government agencies	1,028,256	29,468	(735	)	999,523
Non-U.S. government securities	437,420	34,497	(2,259	)	405,182
Total	$8,780,745	$197,613	($93,938	)	$8,677,070
December 31, 2007:
Corporate bonds	$2,452,527	$40,296	($10,994	)	$2,423,225
Commercial mortgage backed securities	1,315,680	17,339	(558	)	1,298,899
Mortgage backed securities	1,234,596	14,211	(4,087	)	1,224,472
Municipal bonds	990,325	13,213	(195	)	977,307
Asset backed securities	1,008,030	9,508	(4,030	)	1,002,552
U.S. government and government agencies	1,165,423	21,598	(447	)	1,144,272
Non-U.S. government securities	434,243	28,032	(3,056	)	409,267
Total	$8,600,824	$144,197	($23,367	)	$8,479,994

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). Upon adopting SFAS No. 155 on January 1, 2007, the Company applied the “fair value option” to certain hybrid securities which are included in the Company’s fixed maturities and records changes in market value of such securities as realized gains or losses. The fair market values of such securities at March 31, 2008 were approximately $62.9 million and the Company recorded a realized loss of $2.4 million on such securities in the 2008 first quarter.

17

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s investment portfolio, which includes fixed maturity securities, short-term investments and other investments, had a “AA+” average credit quality rating at March 31, 2008 and December 31, 2007. The credit quality distribution of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown below:

(U.S. dollars in thousands)	March 31, 2008		December 31, 2007
Rating (1)	Estimated Fair Value	% of Total	Estimated Fair Value	% of Total
AAA	$6,676,227	76.0	$6,600,258	76.7
AA	950,671	10.8	882,262	10.3
A	730,523	8.3	677,047	7.9
BBB	209,874	2.4	243,610	2.8
BB	34,072	0.4	25,390	0.3
B	113,912	1.3	128,459	1.5
Lower than B	9,785	0.1	11,321	0.1
Not rated	55,681	0.7	32,477	0.4
Total	$8,780,745	100.0	$8,600,824	100.0

(1) Ratings as assigned by the major rating agencies.

Securities Lending Agreements

The Company participates in a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. Such securities have been reclassified as “Fixed maturities and short-term investments pledged under securities lending agreements, at fair value.” The Company maintains control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral received, primarily in the form of cash, is required at a rate of 102% of the market value of the loaned securities (or 105% of the market value of the loaned securities when the collateral and loaned securities are denominated in non-U.S. currencies) including accrued investment income and is monitored and maintained by the lending agent. Such collateral is reinvested and is reflected as “Short-term investment of funds received under securities lending agreements, at fair value.” At March 31, 2008, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $1.19 billion and $1.17 billion, respectively, while collateral received totaled $1.23 billion at fair value and amortized cost. At December 31, 2007, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $1.46 billion and $1.44 billion, respectively, while collateral received totaled $1.5 billion at fair value and amortized cost.

Investment-Related Derivatives

The Company’s investment strategy allows for the use of derivative securities. Derivative instruments may be used to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under the Company’s investment guidelines if implemented in other ways. The fair values of those derivatives are based on quoted market prices. At March 31, 2008, the notional value of the net short position for equity futures was $66.2 million, compared to a net long position for equity futures of $91.2 million at December 31, 2007. At March 31, 2008 and December 31, 2007, the notional value of the net long position for Treasury note futures was $444.4 million and $61.7 million, respectively. For the 2008 first quarter, the Company recorded $5.8 million of net realized losses related to changes in the fair value of all futures contracts, compared to $0.9 million of net realized losses for the 2007 first quarter.

18

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Investments

The following table details the Company’s other investments:

	March 31, 2008		December 31, 2007
(U.S. dollars in thousands)	Estimated Fair Value	Cost	Estimated Fair Value	Cost
Mutual funds	$253,947	$255,624	$286,147	$266,515
Privately held securities and other	62,305	52,451	67,547	57,435
Total	$316,252	$308,075	$353,694	$323,950

Other investments include: (i) mutual funds which invest in fixed maturity securities and international equity index funds; and (ii) privately held securities and other which include the Company’s investment in Aeolus LP (see Note 9). The Company’s investment commitments relating to its other investments and investment funds accounted for using the equity method totaled approximately $91.5 million at March 31, 2008.

Investment Funds Accounted for Using the Equity Method

The Company’s investment portfolio includes certain funds that invest in fixed maturity securities which, due to their ownership structure, are accounted for by the Company using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Changes in the carrying value of such investments are recorded in net income as ‘Equity in net income (loss) of investment funds accounted for using the equity method.’ Changes in the carrying value of the Company’s other fixed income investments are recorded as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity. Investment funds accounted for using the equity method totaled $294.4 million at March 31, 2008, compared to $236.0 million at December 31, 2007. The Company recorded $22.3 million of equity in net loss of investment funds accounted for using the equity method in the 2008 first quarter, compared to equity in net income of $2.6 million in the 2007 first quarter.

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The assets on deposit are available to settle insurance and reinsurance liabilities to third parties. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. The following table details the value of restricted assets:

	March 31,	December 31,
(U.S. dollars in thousands)	2008	2007
Assets used for collateral or guarantees	$714,871	$736,938
Deposits with U.S. regulatory authorities	248,399	251,586
Trust funds	139,005	133,238
Deposits with non-U.S. regulatory authorities	57,130	46,789
Total restricted assets	$1,159,405