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 June 30, 2010

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

Commission file number: 001-26456

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

Bermuda

(State or other jurisdiction of incorporation or organization)

Not Applicable

(I.R.S. Employer Identification No.)

Wessex House, 45 Reid Street

Hamilton HM 12, Bermuda

(Address of principal executive offices)

(441) 278-9250

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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

The number of the registrant’s common shares (par value, $0.01 per share) outstanding as of July 30, 2010 was 49,676,650.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	June 30,			December 31,
	2010			2009
Assets
Investments:
Fixed maturities available for sale, at market value (amortized cost: $9,214,640 and $9,227,432)	$	9,428,456		$	9,391,926
Short-term investments available for sale, at market value (amortized cost: $558,283 and $570,469)	554,304			571,489
Investment of funds received under securities lending agreements, at market value (amortized cost: $211,456 and $96,590)	209,635			91,160
TALF investments, at market value (amortized cost: $396,499 and $247,192)	407,469			250,265
Other investments (cost: $337,141 and $162,505)	340,598			172,172
Investment funds accounted for using the equity method	408,402			391,869
Total investments	11,348,864			10,868,881

Cash	341,469			334,571
Accrued investment income	72,102			70,673
Investment in joint venture (cost: $100,000)	103,540			102,855
Fixed maturities and short-term investments pledged under securities lending agreements, at market value	214,564			212,820
Securities purchased under agreements to resell using funds received under securities lending agreements	—			115,839
Premiums receivable	706,503			595,030
Unpaid losses and loss adjustment expenses recoverable	1,673,911			1,659,500
Paid losses and loss adjustment expenses recoverable	47,148			60,770
Prepaid reinsurance premiums	256,952			277,985
Deferred acquisition costs, net	293,982			280,372
Receivable for securities sold	1,084,122			187,171
Other assets	634,242			609,323
Total Assets	$	16,777,399		$	15,375,790

Liabilities
Reserve for losses and loss adjustment expenses	$	7,940,104		$	7,873,412
Unearned premiums	1,492,550			1,433,331
Reinsurance balances payable	128,723			156,500
Senior notes	300,000			300,000
Revolving credit agreement borrowings	125,000			100,000
TALF borrowings, at market value (par: $337,937 and $218,740)	336,213			217,565
Securities lending payable	219,796			219,116
Payable for securities purchased	1,192,181			136,381
Other liabilities	644,829			616,136
Total Liabilities	12,379,396			11,052,441

Commitments and Contingencies

Shareholders’ Equity
Non-cumulative preferred shares - Series A and B	325,000			325,000
Common shares ($0.01 par, shares issued: 52,864,928 and 54,761,678)	529			548
Additional paid-in capital	83,828			253,466
Retained earnings	4,053,332			3,605,809
Accumulated other comprehensive income, net of deferred income tax	173,231			138,526
Common shares held in treasury, at cost (shares: 3,234,358 and 0)	(237,917		)	—
Total Shareholders’ Equity	4,398,003			4,323,349
Total Liabilities and Shareholders’ Equity	$	16,777,399		$	15,375,790

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenues
Net premiums written	$	624,258		$	693,854		$	1,392,012		$	1,516,717
Change in unearned premiums	(1,247		)	5,404			(99,084		)	(116,895		)
Net premiums earned	623,011			699,258			1,292,928			1,399,822
Net investment income	90,537			100,485			183,509			196,367
Net realized gains (losses)	62,114			(11,793		)	109,896			(16,957		)

Other-than-temporary impairment losses	(4,718		)	(20,657		)	(7,054		)	(113,646		)
Less investment impairments recognized in other comprehensive income, before taxes	308			(206		)	1,038			56,649
Net impairment losses recognized in earnings	(4,410		)	(20,863		)	(6,016		)	(56,997		)

Fee income	883			817			1,677			1,742
Equity in net income (loss) of investment funds accounted for using the equity method	(348		)	75,890			28,702			66,309
Other income	4,528			4,950			10,506			8,901
Total revenues	776,315			848,744			1,621,202			1,599,187

Expenses
Losses and loss adjustment expenses	363,145			398,858			791,196			799,400
Acquisition expenses	107,475			123,814			225,099			250,272
Other operating expenses	101,533			99,294			208,339			186,410
Interest expense	7,916			5,712			15,176			11,424
Net foreign exchange (gains) losses	(48,625		)	53,658			(87,226		)	28,453
Total expenses	531,444			681,336			1,152,584			1,275,959

Income before income taxes	244,871			167,408			468,618			323,228

Income tax expense	1,420			8,818			8,173			18,308

Net Income	243,451			158,590			460,445			304,920

Preferred dividends	6,461			6,461			12,922			12,922

Net income available to common shareholders	$	236,990		$	152,129		$	447,523		$	291,998

Net income per common share
Basic	$	4.65		$	2.52		$	8.60		$	4.84
Diluted	$	4.45		$	2.43		$	8.23		$	4.67

Weighted average common shares and common share equivalents outstanding
Basic	50,987,540			60,417,391			52,007,616			60,365,758
Diluted	53,265,303			62,626,317			54,386,690			62,589,856

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2010			2009
Non-Cumulative Preferred Shares
Balance at beginning and end of period	$	325,000		$	325,000

Common Shares
Balance at beginning of year	548			605
Common shares issued, net	11			5
Purchases of common shares under share repurchase program	(30		)	(0		)
Balance at end of period	529			610

Additional Paid-in Capital
Balance at beginning of year	253,466			669,715
Common shares issued	3,289			2,557
Exercise of stock options	24,664			1,233
Common shares retired	(217,562		)	(6,243		)
Amortization of share-based compensation	19,376			14,267
Other	595			(84		)
Balance at end of period	83,828			681,445

Retained Earnings
Balance at beginning of year	3,605,809			2,693,239
Cumulative effect of change in accounting principle (1)	—			61,469
Balance at beginning of year, as adjusted	3,605,809			2,754,708
Dividends declared on preferred shares	(12,922		)	(12,922		)
Net income	460,445			304,920
Balance at end of period	4,053,332			3,046,706

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year	138,526			(255,594		)
Cumulative effect of change in accounting principle (1)	—			(61,469		)
Balance at beginning of year, as adjusted	138,526			(317,063		)
Change in unrealized appreciation in value of investments, net of deferred income tax	43,716			360,865
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(1,038		)	(77,806		)
Foreign currency translation adjustments, net of deferred income tax	(7,973		)	10,211
Balance at end of period	173,231			(23,793		)

Common Shares Held in Treasury, at Cost
Balance at beginning of year	—			—
Shares repurchased for treasury	(237,917		)	—
Balance at end of period	(237,917		)	—

Total Shareholders’ Equity	$	4,398,003		$	4,029,968

(1) Adoption of accounting guidance regarding the recognition and presentation of other-than-temporary impairments.

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2010			2009
Comprehensive Income
Net income	$	460,445		$	304,920
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	113,934			282,405
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(1,038		)	(77,806		)
Reclassification of net realized (gains) losses, net of income taxes, included in net income	(70,218		)	78,460
Foreign currency translation adjustments	(7,973		)	10,211
Other comprehensive income	34,705			293,270
Comprehensive Income	$	495,150		$	598,190

See Notes to Consolidated Financial Statements

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2010			2009
Operating Activities
Net income	$	460,445		$	304,920
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(111,889		)	17,451
Net impairment losses recognized in earnings	6,016			56,997
Equity in net (income) loss of investment funds accounted for using the equity method and other income	(18,380		)	(70,234		)
Share-based compensation	19,376			14,267
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	162,604			88,914
Unearned premiums, net of prepaid reinsurance premiums	96,881			116,092
Premiums receivable	(136,851		)	(95,693		)
Deferred acquisition costs, net	(17,617		)	(10,420		)
Reinsurance balances payable	(17,402		)	17,465
Other liabilities	(15,771		)	7,991
Other items, net	(37,275		)	70,795
Net Cash Provided By Operating Activities	390,137			518,545

Investing Activities
Purchases of:
Fixed maturity investments	(9,483,319		)	(9,373,252		)
Other investments	(357,460		)	(32,351		)
Proceeds from the sales of:
Fixed maturity investments	9,111,774			8,657,765
Other investments	213,814			19,794
Proceeds from redemptions and maturities of fixed maturity investments	456,937			377,034
Net purchases of short-term investments	(6,682		)	(61,105		)
Change in investment of securities lending collateral	(680		)	179,514
Purchases of furniture, equipment and other assets	(7,860		)	(11,519		)
Net Cash Used For Investing Activities	(73,476		)	(244,120		)

Financing Activities
Purchases of common shares under share repurchase program	(450,326		)	(1,552		)
Proceeds from common shares issued, net	14,370			(1,380		)
Proceeds from borrowings	264,526			—
Repayments of borrowings	(120,339		)	—
Change in securities lending collateral	680			(179,514		)
Other	7,357			(549		)
Preferred dividends paid	(12,922		)	(12,922		)
Net Cash Used For Financing Activities	(296,654		)	(195,917		)

Effects of exchange rate changes on foreign currency cash	(13,109		)	6,446

Increase in cash	6,898			84,954
Cash beginning of year	334,571			251,739
Cash end of period	$	341,469		$	336,693

See Notes to Consolidated Financial Statements

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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, 2009, including the Company’s audited consolidated financial statements and related notes.

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

2. Recent Accounting Pronouncements

In March 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This ASU is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The Company does not expect the adoption of this ASU to have a material effect on the Company’s consolidated financial position or results of operations.

In January 2010, the FASB issued an ASU to improve disclosure requirements related to fair value measurements. The ASU requires more robust disclosures about (i) different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs to fair value measurements for both Levels 2 and 3, (iii) the activity within Level 3 fair value measurements (i.e., in the reconciliation for fair value measurements using significant unobservable inputs activity should be presented on a gross basis), and (iv) the transfers between Levels 1, 2 and 3, (i.e., include the reasons for significant transfers in and out of Levels 1 and 2 ).The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements, which will become effective for fiscal years beginning after December 15, 2010. Accordingly, the Company adopted the appropriate disclosure provisions of the ASU on January 1, 2010.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. Share Transactions

Share Repurchases

The board of directors of ACGL has authorized the investment of up to $2.5 billion in ACGL’s common shares through a share repurchase program, consisting of a $1.0 billion authorization in February 2007, a $500 million authorization in May 2008, and a $1.0 billion authorization in November 2009. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 2011. Since the inception of the share repurchase program, ACGL has repurchased 28.1 million common shares for an aggregate purchase price of $1.96 billion. During the 2010 second quarter, ACGL repurchased 3.6 million common shares for an aggregate purchase price of $269.1 million, compared to nil during the 2009 second quarter. During the six months ended June 30, 2010, ACGL repurchased 6.2 million common shares for an aggregate purchase price of $450.3 million, compared to a de minimis number of shares for an aggregate purchase price of $1.6 million during the 2009 period.

At June 30, 2010, approximately $541.1 million of share repurchases were available under the program. 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.

Treasury Shares

In May 2010, ACGL’s shareholders approved amendments to the bye-laws to permit ACGL to hold its own acquired shares as treasury shares in lieu of cancellation, at the discretion of ACGL’s board of directors. From May 5 to June 30, 2010, all repurchases of ACGL’s common shares in connection with the share repurchase plan noted above and other share-based transactions were held in the treasury under the cost method, and the cost of the common shares acquired is included in ‘Common shares held in treasury, at cost.’ Prior to May 5, 2010, such acquisitions were reflected as a reduction in additional paid-in capital. At June 30, 2010, the Company held 3.2 million shares for an aggregate cost of $237.9 million in treasury, at cost.

Non-Cumulative Preferred Shares

ACGL’s outstanding non-cumulative preferred shares consist of $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) and $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares” and together with the Series A Preferred Shares, the “Preferred Shares”). 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. During the six month periods ended June 30, 2010 and 2009, the Company paid $12.9 million to holders of the Preferred Shares. At June 30, 2010, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

Share-Based Compensation

During the 2010 second quarter, the Company made a stock grant of 288,319 stock appreciation rights and stock options and 298,655 restricted shares and units to certain employees. The stock appreciation rights and stock options were valued at the grant date using the Black-Scholes option pricing model. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2010 second quarter were approximately $22.97 and $75.03 per share, respectively. During the 2009 second quarter, the Company made a stock grant of 367,825 stock appreciation rights and stock options and 361,075 restricted shares and units to certain employees. The weighted average grant-date fair value of the stock

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

appreciation rights and options and restricted shares and units granted during the 2009 second quarter were approximately $17.64 and $57.63 per share, respectively. Such values are being amortized over the respective substantive vesting period. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date.

4. 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 six month periods ended June 30, 2010 and 2009, interest expense on the Senior Notes was $11.0 million. The market value of the Senior Notes at June 30, 2010 and December 31, 2009 was $312.4 million and $298.6 million, respectively.

Letter of Credit and Revolving Credit Facilities

As of June 30, 2010, 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”). Under the terms of the agreement, Arch Reinsurance Company (“Arch Re U.S.”) is limited to issuing $100 million of unsecured letters of credit as part of the $300 million unsecured revolving loan. 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. The Credit Agreement and related documents are structured such that each party that requests a letter of credit or borrowing does so only for itself and for only its own obligations. 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 total capital 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 June 30, 2010. The Credit Agreement expires on August 30, 2011.

Including the secured letter of credit portion of the Credit Agreement, the Company has access to letter of credit facilities for up to a total of $1.45 billion. Arch Reinsurance Ltd. (“Arch Re Bermuda”) also has access to other letter of credit facilities, some of which are available on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). 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

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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, summary information regarding net premiums written and earned by major line of business and net premiums written by location:

	Three Months Ended June 30, 2010
	Insurance			Reinsurance			Total

Gross premiums written (1)	$	616,353		$	203,695		$	817,100
Net premiums written (1)	422,837			201,421			624,258

Net premiums earned (1)	$	405,473		$	217,538		$	623,011
Fee income	874			9			883
Losses and loss adjustment expenses	(275,294		)	(87,851		)	(363,145		)
Acquisition expenses, net	(65,359		)	(42,116		)	(107,475		)
Other operating expenses	(71,727		)	(19,303		)	(91,030		)
Underwriting income (loss)	$	(6,033	)	$	68,277		62,244

Net investment income							90,537
Net realized gains							62,114
Net impairment losses recognized in earnings							(4,410		)
Equity in net income of investment funds accounted for using the equity method							(348		)
Other income							4,528
Other expenses							(10,503		)
Interest expense							(7,916		)
Net foreign exchange gains							48,625
Income before income taxes							244,871
Income tax expense							(1,420		)

Net income							243,451
Preferred dividends							(6,461		)
Net income available to common shareholders							$	236,990

Underwriting Ratios
Loss ratio	67.9		%	40.4		%	58.3		%
Acquisition expense ratio (2)	15.9		%	19.4		%	17.1		%
Other operating expense ratio	17.7		%	8.9		%	14.6		%
Combined ratio	101.5		%	68.7		%	90.0		%

(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 $2.9 million, respectively, of gross and net premiums written and $0.3 million and $3.2 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
	June 30, 2009
	Insurance			Reinsurance			Total

Gross premiums written (1)	$	636,645		$	278,389		$	911,920
Net premiums written (1)	419,318			274,536			693,854

Net premiums earned (1)	$	417,454		$	281,804		$	699,258
Fee income	795			22			817
Losses and loss adjustment expenses	(287,350		)	(111,508		)	(398,858		)
Acquisition expenses, net	(58,748		)	(65,066		)	(123,814		)
Other operating expenses	(70,836		)	(16,943		)	(87,779		)
Underwriting income	$	1,315		$	88,309		89,624

Net investment income							100,485
Net realized losses							(11,793		)
Net impairment losses recognized in earnings							(20,863		)
Equity in net loss of investment funds accounted for using the equity method							75,890
Other income							4,950
Other expenses							(11,515		)
Interest expense							(5,712		)
Net foreign exchange losses							(53,658		)
Income before income taxes							167,408
Income tax expense							(8,818		)

Net income							158,590
Preferred dividends							(6,461		)
Net income available to common shareholders							$	152,129

Underwriting Ratios
Loss ratio	68.8		%	39.6		%	57.0		%
Acquisition expense ratio (2)	13.9		%	23.1		%	17.6		%
Other operating expense ratio	17.0		%	6.0		%	12.6		%
Combined ratio	99.7		%	68.7		%	87.2		%

(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 and reinsurance segment results include nil and $3.1 million, respectively, of gross and net premiums written and $0.4 million and $3.6 million, respectively, of net premiums earned assumed through intersegment transactions.

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

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Six Months Ended June 30, 2010
	Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,249,929		$	527,172		$	1,770,787
Net premiums written (1)	875,761			516,251			1,392,012

Net premiums earned (1)	$	834,950		$	457,978		$	1,292,928
Fee income	1,627			50			1,677
Losses and loss adjustment expenses	(587,305		)	(203,891		)	(791,196		)
Acquisition expenses, net	(132,790		)	(92,309		)	(225,099		)
Other operating expenses	(152,447		)	(39,701		)	(192,148		)
Underwriting income (loss)	$	(35,965	)	$	122,127		86,162

Net investment income							183,509
Net realized gains							109,896
Net impairment losses recognized in earnings							(6,016		)
Equity in net income of investment funds accounted for using the equity method							28,702
Other income							10,506
Other expenses							(16,191		)
Interest expense							(15,176		)
Net foreign exchange gains							87,226
Income before income taxes							468,618
Income tax expense							(8,173		)

Net income							460,445
Preferred dividends							(12,922		)
Net income available to common shareholders							$	447,523

Underwriting Ratios
Loss ratio	70.3		%	44.5		%	61.2		%
Acquisition expense ratio (2)	15.7		%	20.2		%	17.3		%
Other operating expense ratio	18.3		%	8.7		%	14.9		%
Combined ratio	104.3		%	73.4		%	93.4		%

(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 nil and $6.3 million, respectively, of gross and net premiums written and $0.5 million and $6.7 million, respectively, of net premiums earned assumed through intersegment transactions.

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

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Six Months Ended
	June 30, 2009
	Insurance			Reinsurance			Total

Gross premiums written (1)	$	1,275,054		$	668,518		$	1,936,891
Net premiums written (1)	860,904			655,813			1,516,717

Net premiums earned (1)	$	818,551		$	581,271		$	1,399,822
Fee income	1,665			77			1,742
Losses and loss adjustment expenses	(557,365		)	(242,035		)	(799,400		)
Acquisition expenses, net	(116,371		)	(133,901		)	(250,272		)
Other operating expenses	(133,744		)	(35,135		)	(168,879		)
Underwriting income	$	12,736		$	170,277		183,013

Net investment income							196,367
Net realized losses							(16,957		)
Net impairment losses recognized in earnings							(56,997		)
Equity in net loss of investment funds accounted for using the equity method							66,309
Other income							8,901
Other expenses							(17,531		)
Interest expense							(11,424		)
Net foreign exchange losses							(28,453		)
Income before income taxes							323,228
Income tax expense							(18,308		)

Net income							304,920
Preferred dividends							(12,922		)
Net income available to common shareholders							$	291,998

Underwriting Ratios
Loss ratio	68.1		%	41.6		%	57.1		%
Acquisition expense ratio (2)	14.0		%	23.0		%	17.8		%
Other operating expense ratio	16.3		%	6.0		%	12.1		%
Combined ratio	98.4		%	70.6		%	87.0		%

(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 $6.6 million, respectively, of gross and net premiums written and $0.9 million and $8.3 million, respectively, of net premiums earned assumed through intersegment transactions.

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

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended
	June 30,
	2010			2009
INSURANCE SEGMENT	Amount		% of Total	Amount		% of Total

Net premiums written (1)
Property, energy, marine and aviation	$	88,194	20.9	$	86,385	20.6
Programs	73,345		17.3	72,279		17.2
Professional liability	64,089		15.2	57,773		13.8
Executive assurance	52,892		12.5	52,919		12.6
Construction	50,435		11.9	56,190		13.4
Casualty	26,617		6.3	27,217		6.5
Travel and accident	15,272		3.6	19,557		4.7
Healthcare	9,989		2.4	9,667		2.3
Surety	7,012		1.7	9,254		2.2
National accounts casualty	3,877		0.9	7,582		1.8
Other (2)	31,115		7.3	20,495		4.9
Total	$	422,837	100.0	$	419,318	100.0

Net premiums earned (1)
Property, energy, marine and aviation	$	80,818	19.9	$	78,570	18.8
Programs	68,381		16.9	71,809		17.2
Professional liability	57,903		14.3	56,549		13.5
Executive assurance	55,143		13.6	52,288		12.5
Construction	33,536		8.3	43,364		10.4
Casualty	28,148		6.9	31,246		7.5
Travel and accident	17,590		4.3	18,198		4.4
Healthcare	10,340		2.6	10,830		2.6
Surety	8,023		2.0	12,141		2.9
National accounts casualty	16,810		4.1	13,079		3.1
Other (2)	28,781		7.1	29,380		7.1
Total	$	405,473	100.0	$	417,454	100.0

Net premiums written by client location (1)
United States	$	321,656	76.1	$	339,375	80.9
Europe	60,974		14.4	48,126		11.5
Other	40,207		9.5	31,817		7.6
Total	$	422,837	100.0	$	419,318	100.0

Net premiums written by underwriting location (1)
United States	$	305,630	72.3	$	315,466	75.2
Europe	90,663		21.4	78,305		18.7
Other	26,544		6.3	25,547		6.1
Total	$	422,837	100.0	$	419,318	100.0

(1) Insurance segment results include premiums written and earned assumed through intersegment transactions of nil and $0.3 million, respectively, for the 2010 second quarter and premiums written and earned of nil and $0.4 million, respectively, for the 2009 second quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $2.9 million and $3.2 million, respectively, for the 2010 second quarter and premiums written and earned of $3.1 million and $3.6 million, respectively, for the 2009 second quarter.

(2) Includes excess workers’ compensation, employers’ liability, collateral protection and alternative markets business.

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended
	June 30,
	2010			2009
REINSURANCE SEGMENT	Amount		% of Total	Amount		% of Total

Net premiums written (1)
Property catastrophe	$	70,403	35.0	$	91,981	33.5
Property excluding property catastrophe (2)	57,880		28.7	90,569		33.0
Casualty (3)	43,642		21.7	72,490		26.4
Other specialty	18,920		9.4	3,304		1.2
Marine and aviation	9,609		4.8	15,391		5.6
Other	967		0.4	801		0.3
Total	$	201,421	100.0	$	274,536	100.0

Net premiums earned (1)
Property catastrophe	$	52,301	24.0	$	58,763	20.9
Property excluding property catastrophe (2)	65,742		30.2	87,304		31.0
Casualty (3)	59,501		27.4	84,078		29.8
Other specialty	22,292		10.2	25,912		9.2
Marine and aviation	16,263		7.5	25,063		8.9
Other	1,439		0.7	684		0.2
Total	$	217,538	100.0	$	281,804	100.0

Net premiums written (1)
Pro rata	$	84,957	42.2	$	140,939	51.3
Excess of loss	116,464		57.8	133,597		48.7
Total	$	201,421	100.0	$	274,536	100.0

Net premiums earned (1)
Pro rata	$	102,374	47.1	$	175,665	62.3
Excess of loss	115,164		52.9	106,139		37.7
Total	$	217,538	100.0	$	281,804	100.0

Net premiums written by client location (1)
United States	$	135,374	67.2	$	193,190	70.4
Europe	33,378		16.6	39,782		14.5
Bermuda	23,022		11.4	32,665		11.9
Other	9,647		4.8	8,899		3.2
Total	$	201,421	100.0	$	274,536	100.0

Net premiums written by underwriting location (1)
Bermuda	$	116,568	57.9	$	184,892	67.3
United States	70,295		34.9	79,152		28.8
Other	14,558		7.2	10,492		3.9
Total	$	201,421	100.0	$	274,536	100.0

(1) Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $2.9 million and $3.2 million, respectively, for the 2010 second quarter and premiums written and earned of $3.1 million and $3.6 million, respectively, for the 2009 second quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of nil and $0.3 million, respectively, for the 2010 second quarter and premiums written and earned of nil and $0.4 million, respectively, for the 2009 second quarter.

(2) Includes facultative business.

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

Table of Contents

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Six Months Ended
	June 30,
	2010			2009
INSURANCE SEGMENT	Amount		% of Total	Amount		% of Total

Net premiums written (1)
Property, energy, marine and aviation	$	188,859	21.6	$	192,414	22.4
Programs	143,843		16.4	147,086		17.1
Professional liability	122,815		14.0	109,781		12.8
Executive assurance	114,247		13.0	102,998		12.0
Construction	86,757		9.9	92,761		10.8
Casualty	52,080		5.9	53,756		6.2
Travel and accident	37,078		4.2	37,091		4.3
National accounts casualty	34,686		4.0	31,809		3.7
Healthcare	18,513		2.1	20,886		2.4
Surety	15,103		1.7	20,612		2.4
Other (2)	61,780		7.2	51,710		5.9
Total	$	875,761	100.0	$	860,904	100.0

Net premiums earned (1)
Property, energy, marine and aviation	$	175,855	21.1	$	152,410	18.6
Programs	134,540		16.1	138,478		16.9
Professional liability	120,148		14.4	114,783		14.0
Executive assurance	111,465		13.3	100,104		12.2
Construction	68,021		8.1	83,784		10.2
Casualty	56,217		6.7	63,944		7.8
Travel and accident	33,668		4.0	31,354		3.8
National accounts casualty	38,583		4.6	27,518		3.4
Healthcare	20,283		2.4	21,758		2.7
Surety	18,281		2.2	25,532		3.1
Other (2)	57,889		7.1	58,886		7.3
Total	$	834,950	100.0	$	818,551	100.0

Net premiums written by client location (1)

	Page No.
*PART I. Financial Information*

Item 1 — Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	2

Consolidated Balance Sheets June 30, 2010 (unaudited) and December 31, 2009	3

Consolidated Statements of Income For the three and six month periods ended June 30, 2010 and 2009 (unaudited)	4

Consolidated Statements of Changes in Shareholders’ Equity For the six month periods ended June 30, 2010 and 2009 (unaudited)	5

Consolidated Statements of Comprehensive Income For the six month periods ended June 30, 2010 and 2009 (unaudited)	6

Consolidated Statements of Cash Flows For the six month periods ended June 30, 2010 and 2009 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3 — Quantitative and Qualitative Disclosures About Market Risk	72

Item 4 — Controls and Procedures	72

*PART II. Other Information*

Item 1 — Legal Proceedings	74

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	74

Item 5 — Other Information	74

Item 6 — Exhibits	75