UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(Do not check if a smaller reporting coming)

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 October 31, 2008
Common Shares, $0.01 par value	60,269,156

ARCH CAPITAL GROUP LTD.

INDEX

	Page No.
PART I. Financial Information
Item 1 — Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets September 30, 2008 (unaudited) and December 31, 2007	3
Consolidated Statements of Income For the three and nine month periods ended September 30, 2008 and 2007 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity For the nine month periods ended September 30, 2008 and 2007 (unaudited)	5
Consolidated Statements of Comprehensive Income For the nine month periods ended September 30, 2008 and 2007 (unaudited)	6
Consolidated Statements of Cash Flows For the nine month periods ended September 30, 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	36
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	65
Item 4 — Controls and Procedures	66
PART II. Other Information
Item 1 — Legal Proceedings	66
Item 1A — Risk Factors	67
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 5 — Other Information	68
Item 6 — Exhibits	68

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of September 30, 2008, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2008 and September 30, 2007 and the consolidated statements of changes in shareholders’ equity, comprehensive income and cash flows for the nine-month periods ended September 30, 2008 and September 30, 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

November 7, 2008

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	September 30,			December 31,
	2008			2007
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2008, $7,822,256; 2007, $7,037,272)	$	7,544,831		$	7,137,998
Short-term investments available for sale, at fair value (amortized cost: 2008, $869,000; 2007, $700,262)	863,783			699,036
Investment of funds received under securities lending agreements, at fair value (amortized cost: 2008, $950,327; 2007, $1,503,723)	933,797			1,503,723
Other investments (cost: 2008, $142,546; 2007, $323,950)	142,146			353,694
Investment funds accounted for using the equity method	384,139			235,975
Investment in joint venture (cost: 2008, $100,000)	98,951			—
Total investments	9,967,647			9,930,426
Cash	239,097			239,915
Accrued investment income	82,218			73,862
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value	905,546			1,463,045
Premiums receivable	738,694			729,628
Unpaid losses and loss adjustment expenses recoverable	1,656,848			1,609,619
Paid losses and loss adjustment expenses recoverable	67,737			132,289
Prepaid reinsurance premiums	335,210			480,462
Deferred income tax assets, net	72,118			57,051
Deferred acquisition costs, net	310,916			290,059
Receivable for securities sold	1,099,000			17,359
Other assets	618,017			600,552
Total Assets	$	16,093,048		$	15,624,267
Liabilities
Reserve for losses and loss adjustment expenses	$	7,569,543		$	7,092,452
Unearned premiums	1,653,855			1,765,881
Reinsurance balances payable	176,796			301,309
Senior notes	300,000			300,000
Revolving credit agreement borrowings	100,000			—
Securities lending payable	950,327			1,503,723
Payable for securities purchased	1,138,117			23,155
Other liabilities	687,700			601,936
Total Liabilities	$	12,576,338		11,588,456
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 13,000,000)	130			130
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2008, 60,173,489; 2007, 67,318,466)	602			673
Additional paid-in capital	977,059			1,451,667
Retained earnings	2,836,211			2,428,117
Accumulated other comprehensive (loss) income, net of deferred income tax	(297,292		)	155,224
Total Shareholders’ Equity	3,516,710			4,035,811
Total Liabilities and Shareholders’ Equity	$	16,093,048		$	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)						(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
Net premiums written	$	692,692		$	694,630		$	2,190,152		$	2,324,270
Decrease (increase) in unearned premiums	40,339			40,899			(43,212		)	(91,836		)
Net premiums earned	733,031			735,529			2,146,940			2,232,434
Net investment income	117,022			118,464			356,335			342,434
Net realized (losses) gains	(105,534		)	14,147			(82,228		)	9,409
Fee income	944			1,610			3,250			5,670
Equity in net income (loss) of investment funds accounted for using the equity method	(1,731		)	(5,283		)	(4,461		)	735
Other income	3,067			2,696			12,071			3,565
Total revenues	746,799			867,163			2,431,907			2,594,247
Expenses
Losses and loss adjustment expenses	548,886			402,695			1,357,928			1,248,419
Acquisition expenses	133,413			131,424			367,278			368,829
Other operating expenses	95,652			95,545			295,417			286,863
Interest expense	6,241			5,524			17,553			16,570
Net foreign exchange (gains) losses	(68,395		)	23,656			(45,106		)	39,848
Total expenses	715,797			658,844			1,993,070			1,960,529
Income before income taxes	31,002			208,319			438,837			633,718
Income tax (benefit) expense	(1,849		)	2,113			11,360			16,645
Net income	32,851			206,206			427,477			617,073
Preferred dividends	6,461			6,461			19,383			19,383
Net income available to common shareholders	$	26,390		$	199,745		$	408,094		$	597,690
Net income per common share
Basic	$	0.44		$	2.87		$	6.50		$	8.30
Diluted	$	0.42		$	2.76		$	6.23		$	8.00
Weighted average common shares and common share equivalents outstanding
Basic	60,109,932			69,561,789			62,790,514			71,980,194
Diluted	62,830,910			72,378,940			65,530,570			74,734,343

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,
	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	3			6
Purchases of common shares under share repurchase program	(74		)	(58		)
Balance at end of period	602			691
Additional Paid-in Capital
Balance at beginning of year	1,451,667			1,944,304
Common shares issued	3,511			405
Exercise of stock options	13,219			15,094
Common shares retired	(515,286		)	(403,027		)
Amortization of share-based compensation	24,303			19,552
Other	(355		)	956
Balance at end of period	977,059			1,577,284
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	(19,383		)	(19,383		)
Net income	427,477			617,073
Balance at end of period	2,836,211			2,193,708
Accumulated Other Comprehensive (Loss) 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	(440,254		)	38,303
Foreign currency translation adjustments, net of deferred income tax	(12,262		)	15,255
Balance at end of period	(297,292		)	102,982
Total Shareholders’ Equity	$	3,516,710		$	3,874,795

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,
	2008			2007
Comprehensive (Loss) Income
Net income	$	427,477		$	617,073
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding (losses) gains arising during period	(513,176		)	54,596
Reclassification of net realized losses (gains), net of income taxes, included in net income	72,922			(16,293		)
Foreign currency translation adjustments	(12,262		)	15,255
Other comprehensive (loss) income	(452,516		)	53,558
Comprehensive (Loss) Income	$	(25,039	)	$	670,631

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,
	2008			2007
Operating Activities
Net income	$	427,477		$	617,073
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses (gains)	86,362			(9,180		)
Other income and equity in net (income) loss of investment funds accounted for using the equity method	(7,345		)	(4,300		)
Share-based compensation	24,303			19,552
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	432,217			454,607
Unearned premiums, net of prepaid reinsurance premiums	33,870			96,585
Premiums receivable	(10,865		)	(149,684		)
Deferred acquisition costs, net	(20,581		)	(10,943		)
Reinsurance balances payable	(122,091		)	31,496
Other liabilities	50,421			30,682
Other items, net	79,229			27,698
Net Cash Provided By Operating Activities	972,997			1,103,586
Investing Activities
Purchases of fixed maturity investments	(11,694,849		)	(14,351,106		)
Proceeds from sales of fixed maturity investments	11,014,920			13,639,106
Proceeds from redemptions and maturities of fixed maturity investments	444,681			494,512
Purchases of other investments	(225,688		)	(229,227		)
Proceeds from sales of other investments	235,712			62,329
Investment in joint venture	(100,000		)	—
Net purchases of short-term investments	(219,985		)	(368,123		)
Change in investment of securities lending collateral	553,396			(28,930		)
Purchases of furniture, equipment and other	(6,756		)	(12,605		)
Net Cash Provided By (Used For) Investing Activities	1,431			(794,044		)
Financing Activities
Purchases of common shares under share repurchase program	(513,130		)	(400,705		)
Proceeds from common shares issued, net	11,384			8,639
Revolving credit agreement borrowings	100,000			—
Change in securities lending collateral	(553,396		)	28,930
Excess tax benefits from share-based compensation	1,778			4,289
Preferred dividends paid	(19,383		)	(19,383		)
Net Cash Used For Financing Activities	(972,747		)	(378,230		)
Effects of exchange rate changes on foreign currency cash	(2,499		)	2,475
Decrease in cash	(818		)	(66,213		)
Cash beginning of year	239,915			317,017
Cash end of period	$	239,097		$	250,804
Income taxes paid, net	$	12,357		$	3,117
Interest paid	$	11,983		$	11,025

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 normal 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. Tabular dollars and share amounts are in thousands, except per share amounts.

2.      Share Transactions

Share Repurchase Program

The board of directors of ACGL has authorized the investment of up to $1.5 billion in ACGL’s common shares through a share repurchase program. Such amount consisted of a $1.0 billion authorization in February 2007 and a $500 million authorization in May 2008. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2010. Since the inception of the share repurchase program, ACGL has repurchased approximately 15.3 million common shares for an aggregate purchase price of $1.05 billion. During the 2008 third quarter and nine months ended September 30, 2008, ACGL repurchased approximately 1.9 million and 7.5 million common shares, respectively, for an aggregate purchase price of $123.4 million and $513.1 million, respectively. As a result of share repurchase transactions, book value per common share was reduced by $3.20 per share at September 30, 2008. Weighted average shares outstanding for the 2008 third quarter and nine months ended September 30, 2008 were reduced by 14.9 million and 12.1 million shares, respectively. Weighted average shares outstanding for the 2007 third quarter and nine months ended September 30, 2007 were reduced by 4.9 million and 2.3 million shares, respectively.

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 share 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 share repurchase program in open market transactions and certain privately negotiated transactions.

8

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 September 30, 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 third quarter of $1.7 million, or $0.03 per diluted share, compared to $1.4 million, or $0.02 per diluted share, in the 2007 third quarter, and $5.7 million, or $0.09 per diluted share, for the nine months ended September 30, 2008, compared to $5.8 million, or $0.08 per diluted share, for the 2007 period.

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 nine months ended September 30, 2008 and 2007, interest expense on the Senior Notes was approximately $16.6 million. The fair value of the Senior Notes at September 30, 2008 and December 31, 2007 was $284.2 million and $325.4 million, respectively.

9

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Letter of Credit and Revolving Credit Facilities

As of September 30, 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 Company was in compliance with all covenants contained in the Credit Agreement at September 30, 2008. The Credit Agreement expires on August 30, 2011.

In May 2008, the Company borrowed $100.0 million under the Credit Agreement at a variable interest rate based on 1 month, 3 month or 6 month LIBOR rates plus 27.5 basis points. The proceeds from such borrowings, which are repayable on August 30, 2011, were contributed to Arch Reinsurance Ltd. (“Arch Re Bermuda”) and used to fund an investment in a joint venture. See Note 6, “Investment Information—Investment in Joint Venture.” For the nine months ended September 30, 2008, the Company incurred interest expense in connection with the borrowing of $1.0 million.

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 September 30, 2008. At such date, the Company had approximately $549.1 million in outstanding letters of credit under the LOC Facilities, which were secured by investments totaling $556.3 million at fair value. 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.

10

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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), including facultative business; and other (consisting of non-traditional and casualty clash business).

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.

11

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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
	September 30, 2008
	Insurance			Reinsurance			Total
Gross premiums written (1)	$	678,338		$	228,593		$	903,533
Net premiums written (1)	466,115			226,577			692,692
Net premiums earned (1)	$	441,049		$	291,982		$	733,031
Fee income	872			72			944
Losses and loss adjustment expenses	(337,456		)	(211,430		)	(548,886		)
Acquisition expenses	(62,752		)	(70,661		)	(133,413		)
Other operating expenses	(71,861		)	(18,331		)	(90,192		)
Underwriting loss	$	(30,148	)	$	(8,368	)	(38,516		)
Net investment income							117,022
Net realized losses							(105,534		)
Equity in net income (loss) of investment funds accounted for using the equity method							(1,731		)
Other income							3,067
Other expenses							(5,460		)
Interest expense							(6,241		)
Net foreign exchange gains							68,395
Income before income taxes							31,002
Income tax benefit							1,849
Net income							32,851
Preferred dividends							(6,461		)
Net income available to common shareholders							$	26,390
Underwriting Ratios
Loss ratio	76.5		%	72.4		%	74.9		%
Acquisition expense ratio (2)	14.0		%	24.2		%	18.1		%
Other operating expense ratio	16.3		%	6.3		%	12.3		%
Combined ratio	106.8		%	102.9		%	105.3		%

(1)Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The insurance segment and reinsurance segment results include nil and $3.4 million, respectively, of gross and net premiums written and nil and $7.2 million, respectively, of net premiums earned assumed through intersegment transactions.

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

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended
	September 30, 2007
	Insurance			Reinsurance			Total
Gross premiums written (1)	$	722,688		$	286,272		$	999,159
Net premiums written (1)	460,019			234,611			694,630
Net premiums earned (1)	$	429,584		$	305,945		$	735,529
Fee income	1,036			574			1,610
Losses and loss adjustment expenses	(273,896		)	(128,799		)	(402,695		)
Acquisition expenses	(52,880		)	(78,544		)	(131,424		)
Other operating expenses	(68,548		)	(22,153		)	(90,701		)
Underwriting income	$	35,296		$	77,023		112,319
Net investment income							118,464
Net realized gains							14,147
Equity in net income (loss) of investment funds accounted for using the equity method							(5,283		)
Other income							2,696
Other expenses							(4,844		)
Interest expense							(5,524		)
Net foreign exchange losses							(23,656		)
Income before income taxes							208,319
Income tax expense							(2,113		)
Net income							206,206
Preferred dividends							(6,461		)
Net income available to common shareholders							$	199,745
Underwriting Ratios
Loss ratio	63.8		%	42.1		%	54.7		%
Acquisition expense ratio (2)	12.1		%	25.7		%	17.8		%
Other operating expense ratio	16.0		%	7.2		%	12.3		%
Combined ratio	91.9		%	75.0		%	84.8		%

(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 insurance segment and reinsurance segment results include $0.1 million and $9.8 million, respectively, of gross and net premiums written and $0.2 million and $10.0 million, respectively, of net premiums earned assumed through intersegment transactions.

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

13

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Nine Months Ended
	September 30, 2008
	Insurance			Reinsurance			Total
Gross premiums written (1)	$	1,926,349		$	935,738		$	2,843,611
Net premiums written (1)	1,290,380			899,772			2,190,152
Net premiums earned (1)	$	1,276,734		$	870,206		$	2,146,940
Fee income	2,634			616			3,250
Losses and loss adjustment expenses	(887,392		)	(470,536		)	(1,357,928		)
Acquisition expenses	(170,041		)	(197,237		)	(367,278		)
Other operating expenses	(217,064		)	(56,660		)	(273,724		)
Underwriting income	$	4,871		$	146,389		151,260
Net investment income							356,335
Net realized losses							(82,228		)
Equity in net income (loss) of investment funds accounted for using the equity method							(4,461		)
Other income							12,071
Other expenses							(21,693		)
Interest expense							(17,553		)
Net foreign exchange gains							45,106
Income before income taxes							438,837
Income tax expense							(11,360		)
Net income							427,477
Preferred dividends							(19,383		)
Net income available to common shareholders							$	408,094
Underwriting Ratios
Loss ratio	69.5		%	54.1		%	63.2		%
Acquisition expense ratio (2)	13.1		%	22.7		%	17.0		%
Other operating expense ratio	17.0		%	6.5		%	12.7		%
Combined ratio	99.6		%	83.3		%	92.9		%

(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 insurance segment and reinsurance segment results include $0.1 million and $18.4 million, respectively, of gross and net premiums written and $0.2 million and $24.4 million, respectively, of net premiums earned assumed through intersegment transactions.

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

14

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Nine Months Ended
	September 30, 2007
	Insurance			Reinsurance			Total
Gross premiums written (1)	$	2,068,623		$	1,272,274		$	3,311,983
Net premiums written (1)	1,340,191			984,079			2,324,270
Net premiums earned (1)	$	1,275,991		$	956,443		$	2,232,434
Fee income	3,737			1,933			5,670
Losses and loss adjustment expenses	(805,876		)	(442,543		)	(1,248,419		)
Acquisition expenses	(147,107		)	(221,722		)	(368,829		)
Other operating expenses	(207,711		)	(55,933		)	(263,644		)
Underwriting income	$	119,034		$	238,178		357,212
Net investment income							342,434
Net realized gains							9,409
Equity in net income (loss) of investment funds accounted for using the equity method							735
Other income							3,565
Other expenses							(23,219		)
Interest expense							(16,570		)
Net foreign exchange losses							(39,848		)
Income before income taxes							633,718
Income tax expense							(16,645		)
Net income							617,073
Preferred dividends							(19,383		)
Net income available to common shareholders							$	597,690
Underwriting Ratios
Loss ratio	63.2		%	46.3		%	55.9		%
Acquisition expense ratio (2)	11.3		%	23.2		%	16.4		%
Other operating expense ratio	16.3		%	5.8		%	11.8		%
Combined ratio	90.8		%	75.3		%	84.1		%

(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 $0.9 million and $28.1 million, respectively, of gross and net premiums written and $1.0 million and $31.4 million, respectively, of net premiums earned assumed through intersegment transactions.

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

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	Three Months Ended
	September 30,
	2008			2007
	Amount		% of Total	Amount		% of Total
INSURANCE SEGMENT
Net premiums written (1)
Property, marine and aviation	$	91,461	19.6	$	85,178	18.5
Programs	78,045		16.7	67,792		14.7
Professional liability	70,778		15.2	80,708		17.5
Construction and national accounts	66,161		14.2	54,543		11.9
Executive assurance	53,665		11.5	46,845		10.2
Casualty	28,456		6.1	46,392		10.1
Surety	16,599		3.6	13,233		2.9
Healthcare	11,411		2.4	15,952		3.5
Other (2)	49,539		10.7	49,376		10.7
Total	$	466,115	100.0	$	460,019	100.0
Net premiums earned (1)
Property, marine and aviation	$	88,903	20.2	$	81,233	18.9
Programs	71,576		16.2	59,518		13.9
Professional liability	62,987		14.3	67,256		15.7
Construction and national accounts	65,710		14.9	55,463		12.9
Executive assurance	47,237		10.7	46,481		10.8
Casualty	37,351		8.5	50,248		11.7
Surety	13,891		3.1	16,597		3.9
Healthcare	12,292		2.8	16,249		3.8
Other (2)	41,102		9.3	36,539		8.4
Total	$	441,049	100.0	$	429,584	100.0
Net premiums written by client location (1)
United States	$	348,306	74.7	$	356,246	77.4
Europe	57,155		12.3	57,686		12.5
Other	60,654		13.0	46,087		10.1
Total	$	466,115	100.0	$	460,019	100.0
Net premiums written by underwriting location (1)
United States	$	354,002	75.9	$	353,703	76.9
Europe	97,548		20.9	92,136		20.0
Other	14,565		3.2	14,180		3.1
Total	$	466,115	100.0	$	460,019	100.0

(1)Insurance segment results include premiums written and earned assumed through intersegment transactions of nil for the 2008 third quarter and $0.1 million and $0.2 million, respectively, for the 2007 third quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $3.4 million and $7.2 million, respectively, for the 2008 third quarter and $9.8 million and $10.0 million, respectively, for the 2007 third quarter.

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

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Nine Months Ended
	September 30,
	2008			2007
	Amount		% of Total	Amount		% of Total
INSURANCE SEGMENT
Net premiums written (1)
Property, marine and aviation	$	278,372	21.6	$	274,177	20.5
Programs	205,830		16.0	185,269		13.8
Construction and national accounts	193,124		15.0	170,540		12.7
Professional liability	188,442		14.6	203,647		15.2
Executive assurance	139,574		10.8	138,840		10.4
Casualty	88,160		6.8	147,292		11.0
Surety	37,672		2.9	44,948		3.4
Healthcare	33,435		2.6	49,865		3.7
Other (2)	125,771		9.7	125,613		9.3
Total	$	1,290,380	100.0	$	1,340,191	100.0
Net premiums earned (1)
Property, marine and aviation	$	257,191	20.1	$	255,303	20.0
Programs	190,648		14.9	172,763		13.5
Construction and national accounts	180,991		14.2	154,403		12.1
Professional liability	197,997		15.5	200,944		15.7
Executive assurance	136,141		10.7	139,267		10.9
Casualty	117,949		9.2	154,481		12.1
Surety	39,447		3.1	52,323		4.1
Healthcare	38,874		3.0	53,200		4.2
Other (2)	117,496		9.3	93,307		7.4
Total	$	1,276,734	100.0	$	1,275,991	100.0
Net premiums written by client location (1)
United States	$	957,715	74.2	$	1,037,984	77.5
Europe	200,112		15.5	193,589		14.4
Other	132,553		10.3	108,618		8.1
Total	$	1,290,380	100.0	$	1,340,191	100.0
Net premiums written by underwriting location (1)
United States	$	959,440	74.4	$	1,026,718	76.6
Europe	279,413		21.7	257,882		19.2
Other	51,527		3.9	55,591		4.2
Total	$	1,290,380	100.0	$	1,340,191	100.0

(1)Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.1 million and $0.2 million, respectively, for the 2008 period and $0.9 million and $1.0 million, respectively, for the 2007 period. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $18.4 million and $24.4 million, respectively, for the 2008 period and $28.1 million and $31.4 million, respectively, for the 2007 period.

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

17

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 and underwriting location:

	Three Months Ended
	September 30,
	2008			2007
	Amount		% of Total	Amount		% of Total
REINSURANCE SEGMENT
Net premiums written (1)
Casualty (2)	$	82,497	36.4	$	103,718	44.2
Property excluding property catastrophe (3)	56,105		24.8	43,341		18.5
Property catastrophe	44,591		19.7	35,268		15.0
Other specialty	24,013		10.6	33,145		14.1
Marine and aviation	18,727		8.3	17,903		7.6
Other	644		0.2	1,236		0.6
Total	$	226,577	100.0	$	234,611	100.0
Net premiums earned (1)
Casualty (2)	$	106,146	36.4	$	115,862	37.9
Property excluding property catastrophe (3)	68,670		23.5	62,699		20.5
Property catastrophe	57,015		19.5	53,703		17.6
Other specialty	36,388		12.5	49,232		16.1
Marine and aviation	22,395		7.7	21,889		7.2
Other	1,368		0.4	2,560		0.7
Total	$	291,982	100.0	$	305,945	100.0
Net premiums written (1)
Pro rata	$	149,023	65.8	$	185,329	79.0
Excess of loss	77,554		34.2	49,282		21.0
Total	$	226,577	100.0	$	234,611	100.0
Net premiums earned (1)
Pro rata	$	187,656	64.3	$	211,169	69.0
Excess of loss	104,326		35.7	94,776		31.0
Total	$	291,982	100.0	$	305,945	100.0
Net premiums written by client location (1)
United States	$	125,650	55.5	$	129,079	55.0
Europe	52,841		23.3	43,481		18.5
Bermuda	34,354		15.2	49,028		20.9
Other	13,732		6.0	13,023		5.6
Total	$	226,577	100.0	$	234,611	100.0
Net premiums written by underwriting location (1)
Bermuda	$	131,777	58.2	$	131,688	56.1
United States	86,671		38.3	100,208		42.7
Other	8,129		3.5	2,715		1.2
Total	$	226,577	100.0	$	234,611	100.0

(1)Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $3.4 million and $7.2 million, respectively, for the 2008 third quarter and $9.8 million and $10.0 million, respectively, for the 2007 third quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of nil for the 2008 third quarter and $0.1 million and $0.2 million, respectively, for the 2007 third quarter.

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

(3)Includes facultative business.

18

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nine Months Ended

September 30,