UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

Or

oTRANSITION 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, 5th Floor, 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, $0.0033 per share) outstanding as of August 1, 2012 was 136,314,789.

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 June 30, 2012 (unaudited) and December 31, 2011	3
Consolidated Statements of Income For the three and six month periods ended June 30, 2012 and 2011 (unaudited)	4
Consolidated Statements of Comprehensive Income For the six months ended ended June 30, 2012 and 2011 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the six months ended ended June 30, 2012 and 2011 (unaudited)	6
Consolidated Statements of Cash Flows For the six months ended ended June 30, 2012 and 2011 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	69
Item 4 — Controls and Procedures	69
PART II. Other Information
Item 1 — Legal Proceedings	70
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 5 — Other Information	70
Item 6 — Exhibits	71

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 June 30, 2012, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2012 and June 30, 2011, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2012 and June 30, 2011. 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, 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 29, 2012, we expressed an unqualified opinion on those consolidated financial statements.  As discussed in Note 3 to the accompanying consolidated financial statements, the Company changed its method of accounting for costs associated with acquiring or renewing insurance contracts. The accompanying December 31, 2011 consolidated balance sheet reflects this change.

/s/ PricewaterhouseCoopers LLP

New York, NY

August 8, 2012

2

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	June 30,			December 31,
	2012			2011
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $9,325,208 and $9,165,438)	$	9,556,326		$	9,375,604
Short-term investments available for sale, at fair value (amortized cost: $1,085,961 and $909,121)	1,087,910			904,219
Investment of funds received under securities lending, at fair value (amortized cost: $66,327 and $48,577)	66,424			48,419
Equity securities available for sale, at fair value (cost: $258,983 and $299,058)	260,864			299,584
Other investments available for sale, at fair value (cost: $368,826 and $235,381)	381,576			238,111
Investments accounted for using the fair value option	496,843			366,903
TALF investments, at fair value (amortized cost: $292,841 and $373,040)	307,453			387,702
Investments accounted for using the equity method	331,601			380,507
Total investments	12,488,997			12,001,049
Cash	355,392			351,699
Accrued investment income	72,095			70,739
Investment in joint venture (cost: $100,000)	109,240			107,576
Fixed maturities and short-term investments pledged under securities lending, at fair value	74,032			56,393
Premiums receivable	834,116			501,563
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	1,849,191			1,851,584
Contractholder receivables	787,389			748,231
Prepaid reinsurance premiums	313,264			265,696
Deferred acquisition costs, net	272,736			227,884
Receivable for securities sold	821,527			462,891
Other assets	518,744			460,052
Total Assets	$	18,496,723		$	17,105,357
Liabilities
Reserve for losses and loss adjustment expenses	$	8,546,350		$	8,456,210
Unearned premiums	1,815,135			1,411,872
Reinsurance balances payable	184,763			133,866
Contractholder payables	787,389			748,231
Senior notes	300,000			300,000
Revolving credit agreement borrowings	100,000			100,000
TALF borrowings, at fair value (par: $237,095 and $310,868)	235,818			310,486
Securities lending payable	76,383			58,546
Payable for securities purchased	927,962			480,230
Other liabilities	502,607			513,842
Total Liabilities	13,476,407			12,513,283
Commitments and Contingencies
Shareholders’ Equity
Non-cumulative preferred shares	325,000			325,000
Common shares ($0.0033 par, shares issued: 166,748,110 and 164,636,338)	556			549
Additional paid-in capital	187,013			161,419
Retained earnings	5,167,069			4,796,655
Accumulated other comprehensive income, net of deferred income tax	193,097			153,923
Common shares held in treasury, at cost (shares: 30,456,458 and 30,277,993)	(852,419		)	(845,472		)
Total Shareholders’ Equity	5,020,316			4,592,074
Total Liabilities and Shareholders’ Equity	$	18,496,723		$	17,105,357

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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues
Net premiums written	$	820,233		$	706,543		$	1,683,844		$	1,470,821
Change in unearned premiums	(93,577		)	(63,664		)	(276,876		)	(194,247		)
Net premiums earned	726,656			642,879			1,406,968			1,276,574
Net investment income	73,608			86,671			147,905			174,978
Net realized gains	34,867			45,210			78,988			65,905
Other-than-temporary impairment losses	(2,454		)	(1,969		)	(3,485		)	(5,227		)
Less investment impairments recognized in other comprehensive income, before taxes	503			285			511			863
Net impairment losses recognized in earnings	(1,951		)	(1,684		)	(2,974		)	(4,364		)
Fee income	806			784			1,349			1,599
Equity in net income of investment funds accounted for using the equity method	7,787			5,973			32,613			35,646
Other income (loss)	695			(4,265		)	(7,373		)	302
Total revenues	842,468			775,568			1,657,476			1,550,640
Expenses
Losses and loss adjustment expenses	399,693			431,622			794,900			925,502
Acquisition expenses	128,289			110,639			247,251			219,393
Other operating expenses	117,701			112,842			224,173			215,724
Interest expense	7,439			7,758			14,960			15,479
Net foreign exchange (gains) losses	(31,689		)	18,375			(11,001		)	55,287
Total expenses	621,433			681,236			1,270,283			1,431,385
Income before income taxes	221,035			94,332			387,193			119,255
Income tax expense (benefit)	767			(2,271		)	2,669			(2,821		)
Net income	220,268			96,603			384,524			122,076
Preferred dividends	7,649			6,461			14,110			12,922
Net income available to common shareholders	$	212,619		$	90,142		$	370,414		$	109,154
Net income per common share
Basic	$	1.58		$	0.69		$	2.76		$	0.82
Diluted	$	1.54		$	0.65		$	2.68		$	0.78
Weighted average common shares and common share equivalents outstanding
Basic	134,529,129			131,232,269			134,241,876			132,359,493
Diluted	138,211,736			137,975,599			138,017,490			139,234,931

See Notes to Consolidated Financial Statements

4

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Comprehensive Income
Net income	$	384,524		$	122,076
Other comprehensive income, net of deferred income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period	112,923			125,232
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(511		)	(863		)
Reclassification of net realized gains, net of income taxes, included in net income	(71,303		)	(67,858		)
Foreign currency translation adjustments, net of deferred income tax	(1,935		)	2,570
Other comprehensive income	39,174			59,081
Comprehensive Income	$	423,698		$	181,157

See Notes to Consolidated Financial Statements

5

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 (U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Non-Cumulative Preferred Shares
Balance at beginning of period	$	325,000		$	325,000
Shares issued - Series C	325,000			—
Shares repurchased - Series A and B	(325,000		)	—
Balance at end of period	325,000			325,000
Common Shares
Balance at beginning of year	549			534
Common shares issued, net	7			7
Balance at end of period	556			541
Additional Paid-in Capital
Balance at beginning of year	161,419			110,325
Common shares issued, net	4,553			3,912
Issue costs on Series C preferred shares	(9,397		)	—
Exercise of stock options	4,822			6,372
Amortization of share-based compensation	23,930			19,505
Other	1,686			1,887
Balance at end of period	187,013			142,001
Retained Earnings
Balance at beginning of year	4,796,655			4,422,553
Cumulative effect of adjustment resulting from adoption of new accounting guidance (1)	—			(36,217		)
Balance at beginning of year, as adjusted	4,796,655			4,386,336
Dividends declared on preferred shares	(14,110		)	(12,922		)
Net income	384,524			122,076
Balance at end of period	5,167,069			4,495,490
Accumulated Other Comprehensive Income
Balance at beginning of year	153,923			204,503
Change in unrealized appreciation in value of investments, net of deferred income tax	41,620			57,374
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax	(511		)	(863		)
Foreign currency translation adjustments, net of deferred income tax	(1,935		)	2,570
Balance at end of period	193,097			263,584
Common Shares Held in Treasury, at Cost
Balance at beginning of year	(845,472		)	(549,912		)
Shares repurchased for treasury	(6,947		)	(273,674		)
Balance at end of period	(852,419		)	(823,586		)
Total Shareholders’ Equity	$	5,020,316		$	4,403,030

(1) Adoption of accounting guidance regarding costs incurred that can be capitalized by insurance entities.

See Notes to Consolidated Financial Statements

6

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	(Unaudited)
	Six Months Ended
	June 30,
	2012			2011
Operating Activities
Net income	$	384,524		$	122,076
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains	(80,753		)	(71,367		)
Net impairment losses recognized in earnings	2,974			4,364
Equity in net income of investment funds accounted for using the equity method and other income	(18,141		)	18,590
Share-based compensation	23,930			19,505
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	107,670			286,223
Unearned premiums, net of prepaid reinsurance premiums	276,877			194,123
Premiums receivable	(273,735		)	(196,244		)
Deferred acquisition costs, net	(45,390		)	(27,520		)
Reinsurance balances payable	37,129			15,987
Other liabilities	(2,526		)	6,753
Other items, net	(15,291		)	74,057
Net Cash Provided By Operating Activities	397,268			446,547
Investing Activities
Purchases of:
Fixed maturity investments	(7,546,498		)	(7,386,907		)
Equity securities	(110,303		)	(248,947		)
Other investments	(386,243		)	(207,365		)
Proceeds from the sales of:
Fixed maturity investments	6,887,186			6,555,997
Equity securities	198,485			199,650
Other investments	216,964			204,747
Proceeds from redemptions and maturities of fixed maturity investments	598,792			537,410
Net (purchases) sales of short-term investments	(174,607		)	235,676
Change in investment of securities lending collateral	(17,837		)	(77,051		)
Purchase of business, net of cash acquired	28,948			—
Purchases of furniture, equipment and other assets	(10,208		)	(12,348		)
Net Cash Used For Investing Activities	(315,321		)	(199,138		)
Financing Activities
Proceeds from issuance of Series C preferred shares, net	315,789			—
Repurchase of Series A and B preferred shares	(325,000		)	—
Purchases of common shares under share repurchase program	—			(266,725		)
Proceeds from common shares issued, net	348			1,478
Repayments of borrowings	(73,773		)	(7,614		)
Change in securities lending collateral	17,837			77,051
Other	3,464			3,181
Preferred dividends paid	(17,412		)	(12,922		)
Net Cash Used For Financing Activities	(78,747		)	(205,551		)
Effects of exchange rate changes on foreign currency cash	493			6,403
Increase in cash	3,693			48,261
Cash beginning of year	351,699			362,740
Cash end of period	$	355,392		$	411,001

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, 2011, 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.       Share Transactions

Share Repurchases

The board of directors of ACGL has authorized the investment 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. During the 2012 periods, ACGL did not repurchase any common shares, compared to 0.9 million common shares for an aggregate purchase price of $29.6 million during the 2011 second quarter and 8.9 million common shares for an aggregate purchase price of $266.7 during the six months ended June 30, 2011. At June 30, 2012, $942.0 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.

Preferred Share Offering

On April 2, 2012, the Company completed the underwritten public offering of $325 million of its 6.75% Series C non-cumulative preferred shares. Except in specified circumstances relating to certain tax or corporate events, the Series C non-cumulative preferred shares are not redeemable prior to April 2, 2017. The net proceeds from the offering of approximately $316 million and other available funds were used to redeem all of the Company’s $200 million of 8.0% Series A preferred shares and $125 million of 7.875% Series B preferred shares on May 2, 2012. The preferred shares were redeemed at a redemption price equal to $25.00 per share, plus all declared and unpaid dividends to (but excluding) the redemption date.

8

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Share-Based Compensation

During the 2012 second quarter, the Company made a stock grant of 782,248 stock appreciation rights and stock options and 728,864 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2012 second quarter were approximately $9.91 and $38.59 per share, respectively. During the 2011 second quarter, the Company made a stock grant of 697,632 stock appreciation rights and stock options and 727,641 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2011 second quarter were approximately $9.75 and $33.91 per share, respectively. The stock appreciation rights and stock options were valued at the grant date using the Black-Scholes option pricing model. 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.

3.      Recent Accounting Pronouncements

Effective January 1, 2012, the Company adopted an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. The impact of the adoption of the new guidance on the consolidated financial statements was as follows:

	As Previously			Effect of			As Currently
	Reported			Change			Reported
December 31, 2010
Deferred acquisition costs, net	$	277,861		$	(50,583	)	$	227,278
Other assets (1)	475,911			14,366			490,277
Retained earnings	4,422,553			(36,217		)	4,386,336
Three Months Ended June 30, 2011
Other operating expenses	$	110,563		$	2,279		$	112,842
Income tax benefit	(1,731		)	(540		)	(2,271		)
Net income	98,342			(1,739		)	96,603
Net income per common share - basic	$	0.70		$	(0.01	)	$	0.69
Net income per common share - diluted	$	0.67		$	(0.02	)	$	0.65
Six Months Ended June 30, 2011
Other operating expenses	$	212,983		$	2,741		$	215,724
Income tax benefit	(2,102		)	(719		)	(2,821		)
Net income	124,098			(2,022		)	122,076
Net income per common share - basic	$	0.84		$	(0.02	)	$	0.82
Net income per common share - diluted	$	0.80		$	(0.02	)	$	0.78

(1) Effect of change equals tax benefit included in “other assets” on the Company’s balance sheet.

9

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Effective January 1, 2012, the Company prospectively adopted an ASU that provides clarification or changes to existing fair value measurement and disclosure requirements, including, for example, additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. See Note 8, “Fair Value,” for the Company’s disclosures on fair value.

Effective January 1, 2012, the Company adopted an ASU that is intended to increase the prominence of other comprehensive income in the financial statements by allowing only two options for reporting comprehensive income: (1) A single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or (2) in a two-statement approach that presents the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The adoption of this ASU did not impact the presentation of the Company’s consolidated financial statements.

In December 2011, the FASB issued an ASU that expands the required disclosures about financial instruments and derivative instruments that are either offset for balance sheet presentation purposes or subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. This ASU is effective for periods beginning on or after January 1, 2013. This new guidance is disclosure-related only and does not amend existing guidance on offsetting on the balance sheet. As such, the Company does not believe that the adoption of this ASU will impact the presentation of its consolidated financial statements.

4.      Commitments and Contingencies

Letter of Credit and Revolving Credit Facilities

As of June 30, 2012, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility (the “Credit Agreement”). The Credit Agreement expires on August 18, 2014. In addition, the Company had access to secured letter of credit facilities of approximately $81 million as of June 30, 2012, 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”). At June 30, 2012, the Company had $445.4 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $514.4 million, and had $100.0 million of borrowings outstanding under the Credit Agreement. The Company was in compliance with all covenants contained in the LOC Facilities at June 30, 2012.

Investment Commitments

The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $537.0 million at June 30, 2012.

10

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.      Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Numerator:
Net income	$	220,268		$	96,603		$	384,524		$	122,076
Preferred dividends	(7,649		)	(6,461		)	(14,110		)	(12,922		)
Net income available to common shareholders	$	212,619		$	90,142		$	370,414		$	109,154
Denominator:
Weighted average common shares outstanding — basic	134,529,129			131,232,269			134,241,876			132,359,493
Effect of dilutive common share equivalents:
Nonvested restricted shares	800,455			931,305			909,524			1,040,514
Stock options (1)	2,882,152			5,812,025			2,866,090			5,834,924
Weighted average common shares and common share equivalents outstanding — diluted	138,211,736			137,975,599			138,017,490			139,234,931
Earnings per common share:
Basic	$	1.58		$	0.69		$	2.76		$	0.82
Diluted	$	1.54		$	0.65		$	2.68		$	0.78

(1)Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2012 second quarter and 2011 second quarter, the number of stock options excluded were 912,056 and 430,758, respectively. For the six months ended June 30, 2012 and 2011, the number of stock options excluded were 688,634 and 223,063, respectively.

11

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.      Segment Information

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:

	Three Months Ended									Three Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	676,090		$	376,981		$	1,051,813		$	635,005		$	277,766		$	911,939
Net premiums written	464,584			355,649			820,233			438,263			268,280			706,543
Net premiums earned	$	446,594		$	280,062		$	726,656		$	410,819		$	232,060		$	642,879
Fee income	628			178			806			702			82			784
Losses and loss adjustment expenses	(290,416		)	(109,277		)	(399,693		)	(301,642		)	(129,980		)	(431,622		)
Acquisition expenses, net	(76,058		)	(52,231		)	(128,289		)	(66,543		)	(44,096		)	(110,639		)
Other operating expenses	(76,617		)	(29,140		)	(105,757		)	(77,774		)	(23,671		)	(101,445		)
Underwriting income (loss)	$	4,131		$	89,592		93,723			$	(34,438	)	$	34,395		(43		)
Net investment income							73,608									86,671
Net realized gains							34,867									45,210
Net impairment losses recognized in earnings							(1,951		)							(1,684		)
Equity in net income of investment funds accounted for using the equity method							7,787									5,973
Other income (loss)							695									(4,265		)
Other expenses							(11,944		)							(11,397		)
Interest expense							(7,439		)							(7,758		)
Net foreign exchange gains (losses)							31,689									(18,375		)
Income before income taxes							221,035									94,332
Income tax (expense) benefit							(767		)							2,271
Net income							220,268									96,603
Preferred dividends							(7,649		)							(6,461		)
Net income available to common shareholders							$	212,619								$	90,142
Underwriting Ratios
Loss ratio	65.0		%	39.0		%	55.0		%	73.4		%	56.0		%	67.1		%
Acquisition expense ratio (2)	16.9		%	18.6		%	17.6		%	16.0		%	19.0		%	17.1		%
Other operating expense ratio	17.2		%	10.4		%	14.6		%	18.9		%	10.2		%	15.8		%
Combined ratio	99.1		%	68.0		%	87.2		%	108.3		%	85.2		%	100.0		%

(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.

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

12

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the six months ended June 30, 2012 and 2011:

	Six Months Ended									Six Months Ended
	June 30, 2012									June 30, 2011
	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written (1)	$	1,364,203		$	756,957		$	2,118,469		$	1,269,588		$	608,779		$	1,876,505
Net premiums written	955,264			728,580			1,683,844			887,554			583,267			1,470,821
Net premiums earned	$	888,334		$	518,634		$	1,406,968		$	818,410		$	458,164		$	1,276,574
Fee income	1,158			191			1,349			1,480			119			1,599
Losses and loss adjustment expenses	(593,580		)	(201,320		)	(794,900		)	(599,365		)	(326,137		)	(925,502		)
Acquisition expenses, net	(149,928		)	(97,323		)	(247,251		)	(127,958		)	(91,435		)	(219,393		)
Other operating expenses	(149,987		)	(55,263		)	(205,250		)	(152,403		)	(44,898		)	(197,301		)
Underwriting income (loss)	$	(4,003	)	$	164,919		160,916			$	(59,836	)	$	(4,187	)	(64,023		)
Net investment income							147,905									174,978
Net realized gains							78,988									65,905
Net impairment losses recognized in earnings							(2,974		)							(4,364		)
Equity in net income of investment funds accounted for using the equity method							32,613									35,646
Other income (loss)							(7,373		)							302
Other expenses							(18,923		)							(18,423		)
Interest expense							(14,960		)							(15,479		)
Net foreign exchange gains (losses)							11,001									(55,287		)
Income before income taxes							387,193									119,255
Income tax (expense) benefit							(2,669		)							2,821
Net income							384,524									122,076
Preferred dividends							(14,110		)							(12,922		)
Net income available to common shareholders							$	370,414								$	109,154
Underwriting Ratios
Loss ratio	66.8		%	38.8		%	56.5		%	73.2		%	71.2		%	72.5		%
Acquisition expense ratio (2)	16.7		%	18.8		%	17.5		%	15.5		%	20.0		%	17.1		%
Other operating expense ratio	16.9		%	10.7		%	14.6		%	18.6		%	9.8		%	15.5		%
Combined ratio	100.4		%	68.3		%	88.6		%	107.3		%	101.0		%	105.1		%

(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.

(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)

7.      Investment Information

Available For Sale Investments

The following table summarizes the fair value and cost or amortized cost of the Company’s investments classified as available for sale:

	Estimated		Gross		Gross			Cost or		OTTI
	Fair		Unrealized		Unrealized			Amortized		Unrealized
	Value		Gains		Losses			Cost		Losses (2)
At June 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,519,832	$	92,282	$	(11,533	)	$	2,439,083	$	(716	)
Mortgage backed securities	1,670,108		23,743		(18,286		)	1,664,651		(14,772		)
Municipal bonds	1,542,262		67,946		(1,541		)	1,475,857		(65		)
Commercial mortgage backed securities	961,326		31,685		(2,412		)	932,053		(3,259		)
U.S. government and government agencies	1,380,074		29,797		(1,872		)	1,352,149		(207		)
Non-U.S. government securities	986,585		32,558		(17,976		)	972,003		(157		)
Asset backed securities	570,171		17,294		(8,579		)	561,456		(3,876		)
Total	9,630,358		295,305		(62,199		)	9,397,252		(23,052		)
Equity securities	260,864		24,129		(22,248		)	258,983		—
Other investments	381,576		15,512		(2,762		)	368,826		—
Short-term investments	1,087,910		3,279		(1,330		)	1,085,961		—
Total	$	11,360,708	$	338,225	$	(88,539	)	$	11,111,022	$	(23,052	)
At December 31, 2011
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	2,596,118	$	79,407	$	(29,922	)	$	2,546,633	$	(1,138	)
Mortgage backed securities	1,592,762		27,633		(23,226		)	1,588,355		(20,466		)
Municipal bonds	1,430,565		77,977		(886		)	1,353,474		(105		)
Commercial mortgage backed securities	1,046,326		28,780		(2,904		)	1,020,450		(3,259		)
U.S. government and government agencies	1,451,993		34,811		(3		)	1,417,185		(207		)
Non-U.S. government securities	737,477		33,486		(17,684		)	721,675		—
Asset backed securities	576,757		14,649		(10,078		)	572,186		(3,876		)
Total	9,431,998		296,743		(84,703		)	9,219,958		(29,051		)
Equity securities	299,584		22,870		(22,344		)	299,058		—
Other investments	238,111		8,340		(5,610		)	235,381		—
Short-term investments	904,219		390		(5,292		)	909,121		—
Total	$	10,873,912	$	328,343	$	(117,949	)	$	10,663,518	$	(29,051	)

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

(2)Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.

14

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:

	Less than 12 Months					12 Months or More					Total
	Estimated		Gross			Estimated		Gross			Estimated		Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
At June 30, 2012
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	289,690	$	(8,308	)	$	36,087	$	(3,225	)	$	325,777	$	(11,533	)
Mortgage backed securities	664,985		(7,631		)	72,287		(10,655		)	737,272		(18,286		)
Municipal bonds	187,671		(943		)	16,583		(598		)	204,254		(1,541		)
Commercial mortgage backed securities	74,376		(728		)	20,739		(1,684		)	95,115		(2,412		)
U.S. government and government agencies	373,405		(1,872		)	—		—			373,405		(1,872		)
Non-U.S. government securities	338,862		(16,492		)	10,046		(1,484		)	348,908		(17,976		)
Asset backed securities	102,740		(5,676		)	24,569		(2,903		)	127,309		(8,579		)
Total	2,031,729		(41,650		)	180,311		(20,549		)	2,212,040		(62,199		)
Equity securities	81,062		(12,458		)	28,874		(9,790		)	109,936		(22,248		)
Other investments	27,754		(1,014		)	23,252		(1,748		)	51,006		(2,762		)
Short-term investments	124,398		(1,330		)	—		—			124,398		(1,330		)
Total	$	2,264,943	$	(56,452	)	$	232,437	$	(32,087	)	$	2,497,380	$	(88,539	)
At December 31, 2011
Fixed maturities and fixed maturities pledged under securities lending agreements (1):
Corporate bonds	$	781,635	$	(24,977	)	$	47,687	$	(4,945	)	$	829,322	$	(29,922	)
Mortgage backed securities	255,101		(11,988		)	44,606		(11,238		)	299,707		(23,226		)
Municipal bonds	39,156		(537		)	14,988		(349		)	54,144		(886		)
Commercial mortgage backed securities	87,796		(1,676		)	14,582		(1,228		)	102,378		(2,904		)
U.S. government and government agencies	7,059		(3		)	—		—			7,059		(3		)
Non-U.S. government securities	310,182		(16,139		)	20,482		(1,545		)	330,664		(17,684		)
Asset backed securities	260,647		(8,197		)	7,317		(1,881		)	267,964		(10,078		)
Total	1,741,576		(63,517		)	149,662		(21,186		)	1,891,238		(84,703		)
Equity securities	130,045		(22,039		)	1,923		(305		)	131,968		(22,344		)
Other investments	98,605		(3,053		)	22,443		(2,557		)	121,048		(5,610		)
Short-term investments	189,100		(5,292		)	—		—			189,100		(5,292		)
Total	$	2,159,326	$	(93,901	)	$	174,028	$	(24,048	)	$	2,333,354	$	(117,949	)

(1)In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

15

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

At June 30, 2012, on a lot level basis, approximately 790 security lots out of a total of approximately 4,470 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $3.5 million. At December 31, 2011, on a lot level basis, approximately 1,150 security lots out of a total of approximately 4,520 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $3.0 million.

The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2012				December 31, 2011
	Estimated		Amortized		Estimated		Amortized
Maturity	Fair Value		Cost		Fair Value		Cost
Due in one year or less	$	491,380	$	483,860	$	486,986	$	476,734
Due after one year through five years	3,434,433		3,356,501		2,850,578		2,793,982
Due after five years through 10 years	2,218,284		2,125,636		2,532,834		2,441,800
Due after 10 years	284,656		273,095		345,755		326,451
	6,428,753		6,239,092		6,216,153		6,038,967
Mortgage backed securities	1,670,108		1,664,651		1,592,762		1,588,355
Commercial mortgage backed securities	961,326		932,053		1,046,326		1,020,450
Asset backed securities	570,171		561,456		576,757		572,186
Total	$	9,630,358	$	9,397,252	$	9,431,998	$	9,219,958

Securities Lending Agreements

The Company operates 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. The Company maintains legal 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. At June 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $74.0 million and $72.0 million, respectively, compared to $56.4 million and $54.5 million at December 31, 2011, respectively. At June 30, 2012, the portfolio of collateral backing the Company’s securities lending program included approximately $6.0 million fair value of sub-prime securities, compared to $7.3 million at December 31, 2011.

16

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Value Option

The Company elected to carry certain fixed maturity securities, equity securities and other investments (primarily term loans) at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in net realized gains or losses while interest income, dividends received and distributions from fund investments which are not a return of capital are reflected in net investment income. The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and to address practicality and cost-benefit considerations.

The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New York’s (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in net realized gains or losses while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.

The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:

June 30,	December 31,
2012	2011