Arch Capital Group Ltd. Reports 2008 Third Quarter Results

HAMILTON, Bermuda--(Business Wire)--
Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2008 third quarter was $26.4
million, or $0.42 per share, compared to $199.7 million, or $2.76 per
share, for the 2007 third quarter, and $408.1 million, or $6.23 per
share, for the nine months ended September 30, 2008, compared to
$597.7 million, or $8.00 per share, for the 2007 period. The Company
also reported after-tax operating income available to common
shareholders of $64.1 million, or $1.02 per share, for the 2008 third
quarter, compared to $214.6 million, or $2.96 per share, for the 2007
third quarter, and $451.5 million, or $6.89 per share, for the nine
months ended September 30, 2008, compared to $624.9 million, or $8.36
per share, for the 2007 period. All earnings per share amounts
discussed in this release are on a diluted basis.

The Company's book value per common share, including the net
effect of share repurchases, was $53.04 at September 30, 2008,
compared to $57.49 at June 30, 2008 and $55.12 at December 31, 2007.
The Company's after-tax operating income available to common
shareholders represented a 7.6% annualized return on average common
equity for the 2008 third quarter, compared to 24.8% for the 2007
third quarter, and 17.4% for the nine months ended September 30, 2008,
compared to 24.5% for the 2007 period. After-tax operating income
available to common shareholders, a non-GAAP measure, is defined as
net income available to common shareholders, excluding net realized
gains or losses, equity in net income or loss of investment funds
accounted for using the equity method and net foreign exchange gains
or losses, net of income taxes. See page 7 for a further discussion of
after-tax operating income available to common shareholders and
Regulation G.

In the 2008 third quarter, the Company recorded estimated
after-tax net losses of $133.0 million, or $2.12 per share, related to
Hurricanes Gustav and Ike, after reinsurance recoveries and net of
reinstatement premiums. Such estimates were based on currently
available information derived from modeling techniques, industry
assessments of exposure, preliminary claims information obtained from
the Company's clients and brokers and a review of the Company's
in-force contracts. The Company's actual losses from these events may
vary materially from the estimates due to the inherent uncertainties
in making such determinations resulting from several factors,
including the preliminary nature of the available information, the
potential inaccuracies and inadequacies in the data provided by
clients and brokers, the modeling techniques and the application of
such techniques, the contingent nature of business interruption
exposures, the effects of any resultant demand surge on claims
activity and attendant coverage issues. In particular, the models used
for offshore energy risks are relatively new and may be subject to
even greater variability. In addition, actual losses may increase if
the Company's reinsurers fail to meet their obligations to the Company
or the reinsurance protections purchased by the Company are exhausted
or are otherwise unavailable.

The following table summarizes the Company's underwriting results:

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Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
(U.S. dollars in
thousands) 2008 2007 2008 2007
--------- --------- ----------- -----------

Gross premiums written $903,533 $999,159 $2,843,611 $3,311,983
Net premiums written 692,692 694,630 2,190,152 2,324,270
Net premiums earned 733,031 735,529 2,146,940 2,232,434
Underwriting (loss) income (38,516) 112,319 151,260 357,212

Combined ratio 105.3% 84.8% 92.9% 84.1%
*T

The following table summarizes, on an after-tax basis, the
Company's consolidated financial data, including a reconciliation of
after-tax operating income available to common shareholders to net
income available to common shareholders and related diluted per share
results:

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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(U.S. dollars in
thousands, except per
share data) 2008 2007 2008 2007
----------- ----------- ----------- -----------

After-tax operating
income available to
common shareholders $64,094 $214,582 $451,452 $624,938
Net realized (losses)
gains, net of tax (104,418) 13,879 (84,150) 11,874
Equity in net income
(loss) of investment
funds accounted for
using the equity
method, net of tax (1,731) (5,283) (4,461) 735
Net foreign exchange
gains (losses), net
of tax 68,445 (23,433) 45,253 (39,857)
----------- ----------- ----------- -----------
Net income available
to common
shareholders $26,390 $199,745 $408,094 $597,690
=========== =========== =========== ===========

Diluted per common
share results:
After-tax operating
income available to
common shareholders $1.02 $2.96 $6.89 $8.36
Net realized (losses)
gains, net of tax (1.66) 0.19 (1.28) 0.16
Equity in net income
(loss) of investment
funds accounted for
using the equity
method, net of tax (0.03) (0.07) (0.07) 0.01
Net foreign exchange
gains (losses), net
of tax 1.09 (0.32) 0.69 (0.53)
----------- ----------- ----------- -----------
Net income available
to common
shareholders $0.42 $2.76 $6.23 $8.00
=========== =========== =========== ===========

Weighted average
common shares and
common share
equivalents
outstanding - diluted 62,830,910 72,378,940 65,530,570 74,734,343
*T

The combined ratio represents a measure of underwriting
profitability, excluding investment income, and is the sum of the loss
ratio and expense ratio. A combined ratio under 100% represents an
underwriting profit and a combined ratio over 100% represents an
underwriting loss. The combined ratio of the Company's insurance and
reinsurance subsidiaries consisted of a loss ratio of 74.9% and an
underwriting expense ratio of 30.4% for the 2008 third quarter,
compared to a loss ratio of 54.7% and an underwriting expense ratio of
30.1% for the 2007 third quarter. The combined ratio of the Company's
insurance and reinsurance subsidiaries consisted of a loss ratio of
63.2% and an underwriting expense ratio of 29.7% for the nine months
ended September 30, 2008, compared to a loss ratio of 55.9% and an
underwriting expense ratio of 28.2% for the 2007 period. The loss
ratio of 74.9% for the 2008 third quarter was comprised of 41.6 points
of paid losses, 9.4 points related to reserves for reported losses and
23.9 points related to incurred but not reported reserves.

In establishing the reserves for losses and loss adjustment
expenses, the Company has made various assumptions relating to the
pricing of its reinsurance contracts and insurance policies and also
has considered available historical industry experience and current
industry conditions. The Company's reserving method to date has been,
to a large extent, the expected loss method, which is commonly applied
when limited loss experience exists. Any estimates and assumptions
made as part of the reserving process could prove to be inaccurate due
to several factors, including the fact that relatively limited
historical information has been reported to the Company through
September 30, 2008. For a discussion of underwriting activities and a
review of the Company's results by operating segment, see "Segment
Information" in the Supplemental Financial Information section of this
release.

Net investment income for the 2008 third quarter was $117.0
million, or $1.86 per share, compared to $118.5 million, or $1.64 per
share, for the 2007 third quarter. For the nine months ended September
30, 2008, net investment income was $356.3 million, or $5.44 per
share, compared to $342.4 million, or $4.58 per share, for the 2007
period. The comparability of net investment income during the 2008 and
2007 periods was influenced by the Company's share repurchase program
described below. The pre-tax investment income yield was 4.74% for the
2008 third quarter, compared to 5.06% for the 2007 third quarter, and
4.80% for the nine months ended September 30, 2008, compared to 4.94%
for the 2007 period.

During the 2008 third quarter, pre-tax net realized losses on the
Company's investment portfolio were $105.5 million, which reflected
$82.5 million of other-than-temporary impairment charges, including
$23 million of write downs on the Company's holdings in fixed income
securities issued by Lehman Brothers Holdings Inc. The Company
recorded approximately $200 million of unrealized losses on its
investment portfolio during the 2008 third quarter, excluding foreign
exchange, which was primarily attributable to wider credit spreads and
not to issue-specific credit events in the period. In addition, the
Company recorded approximately $70 million of unrealized losses on
investments held in foreign currencies due to strengthening of the
U.S. Dollar, which was largely offset by net foreign exchange gains
described below. Through October 22, 2008, the Company estimates that
the total return on its investment portfolio, excluding foreign
exchange, generated approximately $150 million of additional
unrealized losses. This estimate was prepared without the benefit of
the Company's normal quarterly financial procedures and, therefore,
the actual total return at October 22, 2008 could be materially
different than the estimated amount and there can be no assurances
given as to the performance of the Company's investment portfolio for
the complete 2008 fourth quarter or any future period.

The Company's investment portfolio continues to be comprised
primarily of high quality fixed income securities, with no
collateralized debt obligations (CDOs), collateralized loan
obligations (CLOs) or credit default swaps (CDSs). The Company's
portfolio does not include ownership of common stock or preferred
stock of any publicly-traded issuers and essentially includes no
investments in hedge funds or private equity funds. The average credit
quality rating of the portfolio remained at "AA+" at September 30,
2008 and the average effective duration remained relatively constant
at 3.44 years at September 30, 2008, compared to 3.36 years at June
30, 2008 and 3.29 years at December 31, 2007. Further information on
the Company's investments is included on page 10.

In addition, the Company's investment portfolio includes certain
funds that invest in fixed maturity securities which, due to the
ownership structure of the funds, are accounted for by the Company
using the equity method. In applying the equity method, these
investments are initially recorded at cost and are subsequently
adjusted based on the Company's proportionate share of the net income
or loss of the funds (which include changes in the market value of the
underlying securities in the funds). This method of accounting is
different from the way the Company accounts for its other fixed
maturity securities. Investment funds accounted for using the equity
method totaled $384.1 million at September 30, 2008, compared to
$351.9 million at June 30, 2008 and $236.0 million at December 31,
2007.

For the nine months ended September 30, 2008, the effective tax
rates on income before income taxes and pre-tax operating income were
2.6% and 2.0%, respectively, compared to 2.6% and 2.9% for the 2007
period. The Company's effective tax rates may fluctuate from period to
period based on the relative mix of income reported by jurisdiction
primarily due to the varying tax rates in each jurisdiction. The
Company's quarterly tax provision is adjusted to reflect changes in
its expected annual effective tax rates, if any. The Company reduced
its estimated annual effective tax rate on pre-tax operating income
slightly during the 2008 third quarter. The impact of applying the
lower effective tax rate on pre-tax operating income for the six
months ended June 30, 2008 increased the Company's after-tax results
for the 2008 third quarter by $2.1 million, or $0.03 per share. The
Company currently expects that its annual effective tax rate on
pre-tax operating income available to common shareholders for the year
ended December 31, 2008 will be in the range of 1.0% to 3.0%. In
addition, the Company's Bermuda-based reinsurer incurs federal excise
taxes for premiums assumed on U.S. risks. Such expenses are included
in the Company's acquisition expenses.

Net foreign exchange gains for the 2008 third quarter of $68.4
million consisted of net unrealized gains of $66.7 million and net
realized gains of $1.7 million, compared to net foreign exchange
losses for the 2007 third quarter of $23.7 million which consisted of
net unrealized losses of $22.5 million and net realized losses of $1.2
million. Net foreign exchange gains for the nine months ended
September 30, 2008 of $45.1 million consisted of net unrealized gains
of $45.5 million and net realized losses of $0.4 million, compared to
net foreign exchange losses for the 2007 period of $39.8 million which
consisted of net unrealized losses of $45.6 million and net realized
gains of $5.8 million. Net unrealized foreign exchange gains or losses
result from the effects of revaluing the Company's net insurance
liabilities required to be settled in foreign currencies at each
balance sheet date. As discussed above, the Company holds investments
in foreign currencies which are intended to mitigate its exposure to
foreign currency fluctuations in its net insurance liabilities.
However, changes in the value of such investments due to foreign
currency rate movements are reflected as a direct increase or decrease
to shareholders' equity and are not included in the statement of
income.

Diluted weighted average common shares and common share
equivalents outstanding, used in the calculation of after-tax
operating income and net income per common share, were 62.8 million
for the 2008 third quarter, compared to 72.4 million for the 2007
third quarter, and 65.5 million for the nine months ended September
30, 2008, compared to 74.7 million for the 2007 period. The lower
level of weighted average shares outstanding in the 2008 periods was
primarily due to the impact of share repurchases as discussed below.

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. Repurchases under the program may be effected from time to
time in open market or privately negotiated transactions through
February 2010. During the 2008 third quarter, ACGL repurchased
approximately 1.9 million common shares under the share repurchase
program for an aggregate purchase price of $123.4 million. Since the
inception of the share repurchase program through September 30, 2008,
ACGL has repurchased approximately 15.3 million common shares for an
aggregate purchase price of $1.05 billion. At September 30, 2008,
approximately $450 million of repurchases were available under the
share repurchase program. As a result of the share repurchase
transactions to date, book value per common share was reduced by $3.20
per share at September 30, 2008, compared to $1.45 at December 31,
2007, while 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, compared to 4.9 million
shares and 2.3 million shares for the 2007 third quarter and nine
months ended September 30, 2007, respectively.

At September 30, 2008, the Company's capital of $3.92 billion
consisted of $300.0 million of senior notes, representing 7.7% of the
total, $100.0 million of revolving credit agreement borrowings due in
August 2011, representing 2.6% of the total, $325.0 million of
preferred shares, representing 8.3% of the total, and common
shareholders' equity of $3.19 billion, representing the balance. At
December 31, 2007, the Company's capital of $4.34 billion consisted of
$300.0 million of senior notes, representing 6.9% of the total, $325.0
million of preferred shares, representing 7.5% of the total, and
common shareholders' equity of $3.71 billion, representing the
balance. The decrease in capital during 2008 was primarily
attributable to an after-tax decrease in the fair value of our
investment portfolio and share repurchase activity, partially offset
by net income and borrowings during the period.

The Company will hold a conference call for investors and analysts
at 11:00 a.m. Eastern Time on Friday, October 24, 2008. A live webcast
of this call will be available via the Media-Earnings Webcasts section
of the Company's website at http://www.archcapgroup.bm and will be
archived on the website from 1:00 p.m. Eastern Time on October 24
through midnight Eastern Time on November 25, 2008. A telephone replay
of the conference call also will be available beginning on October 24
at 1:00 p.m. Eastern Time until October 31, 2008 at midnight Eastern
Time. To access the replay, domestic callers should dial 888-286-8010
(passcode 33126071), and international callers should dial
617-801-6888 (passcode 33126071).

Please refer to the Company's Financial Supplement dated September
30, 2008, which is posted on the Company's website at
http://www.archcapgroup.bm/docs/3Q2008_Financial Supplement.pdf. The
Financial Supplement provides additional detail regarding the
financial performance of the Company.

Arch Capital Group Ltd., a Bermuda-based company with over $3.9
billion in capital at September 30, 2008, provides insurance and
reinsurance on a worldwide basis through its wholly owned
subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 ("PLSRA")
provides a "safe harbor" for forward-looking statements. This release
or any other written or oral statements made by or on behalf of the
Company may include forward-looking statements, which reflect the
Company's current views with respect to future events and financial
performance. All statements other than statements of historical fact
included in or incorporated by reference in this release are
forward-looking statements. Forward-looking statements, for purposes
of the PLSRA or otherwise, can generally be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" and similar
statements of a future or forward-looking nature or their negative or
variations or similar terminology.

Forward-looking statements involve the Company's current
assessment of risks and uncertainties. Actual events and results may
differ materially from those expressed or implied in these statements.
Important factors that could cause actual events or results to differ
materially from those indicated in such statements are discussed below
and elsewhere in this release and in the Company's periodic reports
filed with the Securities and Exchange Commission (the "SEC"), and
include:

-- the Company's ability to successfully implement its business
strategy during "soft" as well as "hard" markets;

-- acceptance of the Company's business strategy, security and
financial condition by rating agencies and regulators, as well
as by brokers and its insureds and reinsureds;

-- the Company's ability to maintain or improve its ratings,
which may be affected by its ability to raise additional
equity or debt financings, by ratings agencies' existing or
new policies and practices, as well as other factors described
herein;

-- general economic and market conditions (including inflation,
interest rates, foreign currency exchange rates and prevailing
credit terms) and conditions specific to the reinsurance and
insurance markets in which the Company operates;

-- competition, including increased competition, on the basis of
pricing, capacity, coverage terms or other factors;

-- the Company's ability to successfully integrate, establish and
maintain operating procedures (including the implementation of
improved computerized systems and programs to replace and
support manual systems) to effectively support its
underwriting initiatives and to develop accurate actuarial
data;

-- the loss of key personnel;

-- the integration of businesses the Company has acquired or may
acquire into its existing operations;

-- accuracy of those estimates and judgments utilized in the
preparation of the Company's financial statements, including
those related to revenue recognition, insurance and other
reserves, reinsurance recoverables, investment valuations,
intangible assets, bad debts, income taxes, contingencies and
litigation, and any determination to use the deposit method of
accounting, which for a relatively new insurance and
reinsurance company, like the Company, are even more difficult
to make than those made in a mature company since relatively
limited historical information has been reported to the
Company through September 30, 2008;

-- greater than expected loss ratios on business written by the
Company and adverse development on claim and/or claim expense
liabilities related to business written by its insurance and
reinsurance subsidiaries;

-- severity and/or frequency of losses;

-- claims for natural or man-made catastrophic events in the
Company's insurance or reinsurance business could cause large
losses and substantial volatility in its results of
operations;

-- acts of terrorism, political unrest and other hostilities or
other unforecasted and unpredictable events;

-- losses relating to aviation business and business produced by
a certain managing underwriting agency for which the Company
may be liable to the purchaser of its prior reinsurance
business or to others in connection with the May 5, 2000 asset
sale described in the Company's periodic reports filed with
the SEC;

-- availability to the Company of reinsurance to manage its gross
and net exposures and the cost of such reinsurance;

-- the failure of reinsurers, managing general agents, third
party administrators or others to meet their obligations to
the Company;

-- the timing of loss payments being faster or the receipt of
reinsurance recoverables being slower than anticipated by the
Company;

-- the Company's investment performance;

-- material differences between actual and expected assessments
for guaranty funds and mandatory pooling arrangements;

-- changes in accounting principles or policies or in the
Company's application of such accounting principles or
policies;

-- changes in the political environment of certain countries in
which the Company operates or underwrites business;

-- statutory or regulatory developments, including as to tax
policy and matters and insurance and other regulatory matters
such as the adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers
or reinsurers and/or changes in regulations or tax laws
applicable to the Company, its subsidiaries, brokers or
customers; and

-- the other matters set forth under Item 1A "Risk Factors", Item
7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other sections of the Company's
Annual Report on Form 10-K, as well as the other factors set
forth in the Company's other documents on file with the SEC,
and management's response to any of the aforementioned
factors.

In addition, other general factors could affect the Company's
results, including developments in the world's financial and capital
markets and its access to such markets.

All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary
statements that are included herein or elsewhere. The Company
undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise.

Comment on Regulation G

Throughout this release, the Company presents its operations in
the way it believes will be the most meaningful and useful to
investors, analysts, rating agencies and others who use the Company's
financial information in evaluating the performance of the Company.
This presentation includes the use of after-tax operating income
available to common shareholders, which is defined as net income
available to common shareholders, excluding net realized gains or
losses, equity in net income or loss of investment funds accounted for
using the equity method and net foreign exchange gains or losses, net
of income taxes. The presentation of after-tax operating income
available to common shareholders is a "non-GAAP financial measure" as
defined in Regulation G. The reconciliation of such measure to net
income available to common shareholders (the most directly comparable
GAAP financial measure) in accordance with Regulation G is included on
page 2 of this release.

The Company believes that net realized gains or losses, equity in
net income or loss of investment funds accounted for using the equity
method and net foreign exchange gains or losses in any particular
period are not indicative of the performance of, or trends in, the
Company's business performance. Although net realized gains or losses,
equity in net income or loss of investment funds accounted for using
the equity method and net foreign exchange gains or losses are an
integral part of the Company's operations, the decision to realize
investment gains or losses, the recognition of equity in net income or
loss of investment funds accounted for using the equity method and the
recognition of foreign exchange gains or losses are independent of the
insurance underwriting process and result, in large part, from general
economic and financial market conditions. Furthermore, certain users
of the Company's financial information believe that, for many
companies, the timing of the realization of investment gains or losses
is largely opportunistic, and, under applicable GAAP accounting,
losses on the Company's investments can be realized as the result of
other-than-temporary declines in value without actual realization. The
use of the equity method on certain of the Company's investments in
certain funds that invest in fixed maturity securities is driven by
the ownership structure of such funds (either limited partnerships or
limited liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently
adjusted based on the Company's proportionate share of the net income
or loss of the funds (which include changes in the market value of the
underlying securities in the funds). This method of accounting is
different from the way the Company accounts for its other fixed
maturity securities and the timing of the recognition of equity in net
income or loss of investment funds accounted for using the equity
method may differ from gains or losses in the future upon sale or
maturity of such investments. Due to these reasons, the Company
excludes net realized gains or losses, equity in net income or loss of
investment funds accounted for using the equity method and net foreign
exchange gains or losses from the calculation of after-tax operating
income available to common shareholders.

The Company believes that showing net income available to common
shareholders exclusive of the items referred to above reflects the
underlying fundamentals of the Company's business since the Company
evaluates the performance of and manages its business to produce an
underwriting profit. In addition to presenting net income available to
common shareholders, the Company believes that this presentation
enables investors and other users of the Company's financial
information to analyze the Company's performance in a manner similar
to how the Company's management analyzes performance. The Company also
believes that this measure follows industry practice and, therefore,
allows the users of the Company's financial information to compare the
Company's performance with its industry peer group. The Company
believes that the equity analysts and certain rating agencies which
follow the Company and the insurance industry as a whole generally
exclude these items from their analyses for the same reasons.

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION

Book Value Per Common Share and Share
Repurchases
September December
30, 31,
(U.S. dollars in thousands, except share data) 2008 2007
----------- -----------

Calculation of book value per common share:
Total shareholders' equity $3,516,710 $4,035,811
Less preferred shareholders' equity (325,000) (325,000)
----------- -----------
Common shareholders' equity $3,191,710 $3,710,811
Common shares outstanding (1) 60,173,489 67,318,466
----------- -----------
Book value per common share $53.04 $55.12
=========== ===========
*T

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Three Months Ended Nine Months Ended Cumulative
September
September 30, September 30, 30,
--------------------- ---------------------
(U.S. dollars
in thousands,
except share
data) 2008 2007 2008 2007 2008
---------- ---------- ---------- ---------- -----------

Effect of
share
repurchases:
Aggregate
purchase
price of
shares
repurchased $123,377 $145,732 $513,130 $400,705 $1,050,196
Shares
repurchased 1,865,482 2,173,801 7,487,250 5,812,443 15,256,289
---------- ---------- ---------- ---------- -----------
Average
price per
share
repurchased $66.14 $67.04 $68.53 $68.94 $68.84

Estimated
dilutive
impact on
ending book
value per
common
share (2) ($0.40) ($0.48) ($1.71) ($1.36) ($3.20)
========== ========== ========== ========== ===========
Estimated
net
accretive
impact on
diluted
earnings
per share
(3) $0.03 $0.13 $0.67 $0.10
========== ========== ========== ==========
*T

(1) Excludes the effects of 5,500,900 and 5,486,033 stock options
and 433,404 and 116,453 restricted stock units outstanding at
September 30, 2008 and December 31, 2007, respectively.

(2) As the average price per share repurchased during the periods
exceeded the book value per common share at September 30, 2008 and
December 31, 2007, the repurchase of shares during the periods reduced
book value per common share in the periods presented.

(3) The estimated impact on diluted earnings per share was
calculated comparing reported results versus (i) net income per share
plus an estimate of lost net investment income on the share
repurchases divided by (ii) weighted average diluted shares
outstanding excluding the weighted average impact of share
repurchases. The repurchase of shares was accretive to diluted
earnings per share in the periods presented.

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*T

Annualized Operating Return on Average Common Equity

Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(U.S. dollars in
thousands) 2008 2007 2008 2007
---------- ---------- ---------- ----------

After-tax operating income
available to common
shareholders $64,094 $214,582 $451,452 $624,938
Annualized operating
income available to
common shareholders 256,376 858,328 601,936 833,251

Beginning common
shareholders' equity $3,561,233 $3,379,067 $3,710,811 $3,265,619
Ending common
shareholders' equity 3,191,710 3,549,795 3,191,710 3,549,795
---------- ---------- ---------- ----------
Average common
shareholders' equity $3,376,472 $3,464,431 $3,451,261 $3,407,707
---------- ---------- ---------- ----------

Annualized operating
return on average common
equity 7.6% 24.8% 17.4% 24.5%
*T

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*T

Selected Information on Losses and Loss Adjustment Expenses

Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
(U.S. dollars in
thousands) 2008 2007 2008 2007
---------- ---------- ------------ ------------

Components of losses
and loss adjustment
expenses
Paid losses and loss
adjustment expenses $304,625 $300,143 $860,729 $833,016
Increase in unpaid
losses and loss
adjustment expenses 244,261 102,552 497,199 415,403
---------- ---------- ------------ ------------
Total losses and
loss adjustment
expenses $548,886 $402,695 $1,357,928 $1,248,419
========== ========== ============ ============

Estimated net
(favorable) adverse
development in prior
year loss reserves,
net of related
adjustments
Net impact on
underwriting
results:
Insurance (2) ($5,783) ($7,496) ($30,891) ($648)
Reinsurance (49,592) (42,168) (136,217) (124,471)
---------- ---------- ------------ ------------
Total ($55,375) ($49,664) ($167,108) ($125,119)
========== ========== ============ ============

Impact on losses and
loss adjustment
expenses:
Insurance ($13,315) ($8,192) ($42,354) ($5,839)
Reinsurance (54,618) (54,829) (144,738) (140,166)
---------- ---------- ------------ ------------
Total ($67,933) ($63,021) ($187,092) ($146,005)
========== ========== ============ ============

Impact on
acquisition
expenses:
Insurance $7,532 $696 $11,463 $5,191
Reinsurance 5,026 12,661 8,521 15,695
---------- ---------- ------------ ------------
Total $12,558 $13,357 $19,984 $20,886
========== ========== ============ ============

Impact on combined
ratio:
Insurance (1.3%) (1.7%) (2.4%) (0.1%)
Reinsurance (17.0%) (13.8%) (15.6%) (13.0%)
Total (7.6%) (6.8%) (7.8%) (5.6%)

Impact on loss
ratio:
Insurance (3.0%) (1.9%) (3.3%) (0.5%)
Reinsurance (18.7%) (17.9%) (16.6%) (14.6%)
Total (9.3%) (8.6%) (8.7%) (6.5%)

Impact on
acquisition expense
ratio:
Insurance 1.7% 0.2% 0.9% 0.4%
Reinsurance 1.7% 4.1% 1.0% 1.6%
Total 1.7% 1.8% 0.9% 0.9%

Estimated net losses
incurred from current
period catastrophic
events (1)
Insurance $36,490 -- $63,740 --
Reinsurance 105,965 $19,911 128,519 $47,769
---------- ---------- ------------ ------------
Total $142,455 $19,911 $192,259 $47,769
========== ========== ============ ============

Impact on loss
ratio:
Insurance 8.3% -- 5.0% --
Reinsurance 36.3% 6.5% 14.8% 5.0%
Total 19.4% 2.7% 9.0% 2.1%
*T

(1) Equals estimated losses from catastrophic events occurring in
the current accident year, net of reinsurance and reinstatement
premiums. Amounts shown for the insurance segment are for named
catastrophic events only. Amounts shown for the reinsurance segment
include (i) named events with over $5 million of losses incurred by
its Bermuda operations and (ii) all catastrophe losses incurred by its
U.S. operations.

(2) Insurance amounts shown are net of premium, loss and expense
adjustments related to the recording of involuntary pool activity,
which resulted in a net loss to the Company of $1.8 million in the
2008 third quarter.

-0-
*T

Investment Information

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
(U.S. dollars in thousands) 2008 2007 2008 2007
--------- -------- -------- ----------

Net investment income:
Total $117,022 $118,464 $356,335 $342,434
Per share $1.86 $1.64 $5.44 $4.58

Pre-tax investment income yield
(at amortized cost) 4.74% 5.06% 4.80% 4.94%
After-tax investment income
yield (at amortized cost) 4.63% 4.89% 4.68% 4.78%

Cash flow from operations $382,189 $426,583 $972,997 $1,103,586
*T

-0-
*T

September 30, December 31,
(U.S. dollars in thousands) 2008 2007
------------- ------------

Investable assets:
Fixed maturities available for sale, at
fair value $7,544,831 $7,137,998
Fixed maturities pledged under securities
lending agreements, at fair value (1) 901,559 1,462,826
------------- ------------
Total fixed maturities 8,446,390 8,600,824
Short-term investments available for sale,
at fair value 863,783 699,036
Short-term investments pledged under
securities lending agreements, at fair
value (1) 3,987 219
Cash 239,097 239,915
Other investments (2)
Fixed income mutual funds 60,051 194,090
International equity index funds -- 92,056
Privately held securities and other 82,095 67,548
Investment funds accounted for using the
equity method (3) 384,139 235,975
Investment in joint venture 98,951 --
Securities transactions entered into but
not settled at the balance sheet date (39,117) (5,796)
------------- ------------
Total investable assets (1) $10,139,376 $10,123,867
============= ============

Fixed income portfolio (1):
Average effective duration (in years) 3.44 3.29
Average credit quality AA+ AA+
Imbedded book yield (before investment
expenses) 4.74% 5.03%
*T

(1) In securities lending transactions, the Company receives
collateral in excess of the fair value of the fixed maturities and
short-term investments pledged under securities lending agreements.
For purposes of this table, the Company has excluded the collateral
received and reinvested at September 30, 2008 and December 31, 2007 of
$933.8 million and $1.5 billion, respectively, which is reflected as
"investment of funds received under securities lending agreements, at
fair value" and included the $905.5 million and $1.46 billion,
respectively, of "fixed maturities and short-term investments pledged
under securities lending agreements, at fair value."

(2) Other investments include (i) mutual funds which invest in
fixed maturity securities and international equity index funds; and
(ii) privately held securities and other which include the Company's
investment in Aeolus LP and other privately held securities.

(3) The Company's investment portfolio includes certain funds that
invest in fixed maturity securities which, due to the ownership
structure of the funds, are accounted for by the Company using the
equity method. In applying the equity method, these investments are
initially recorded at cost and are subsequently adjusted based on the
Company's proportionate share of the net income or loss of the funds
(which include changes in the market value of the underlying
securities in the funds). Changes in the carrying value of such
investments are recorded as 'Equity in net income (loss) of investment
funds accounted for using the equity method' rather than as an
unrealized gain or loss component of accumulated other comprehensive
income in shareholders' equity as are changes in the carrying value of
the Company's other fixed income investments.

Investment Information (continued)

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

-0-
*T

Gross Gross
(U.S. dollars in Estimated Unrealized Unrealized Amortized
thousands) Fair Value Gains Losses Cost
---------- ---------- ---------- ----------

September 30, 2008:
Corporate bonds $2,047,925 $13,222 ($150,603) $2,185,306
Mortgage backed
securities 1,562,880 8,718 (85,531) 1,639,693
Commercial mortgage
backed securities 1,217,610 6,789 (26,434) 1,237,255
U.S. government and
government agencies 1,116,819 11,504 (9,094) 1,114,409
Municipal bonds 1,107,966 3,724 (18,386) 1,122,628
Asset backed securities 1,026,118 157 (34,476) 1,060,437
Non-U.S. government
securities 367,072 10,778 (12,654) 368,948
---------- ---------- ---------- ----------
Total $8,446,390 $54,892 ($337,178) $8,728,676
========== ========== ========== ==========

December 31, 2007:
Corporate bonds $2,452,527 $40,296 ($10,994) $2,423,225
Mortgage backed
securities 1,234,596 14,211 (4,087) 1,224,472
Commercial mortgage
backed securities 1,315,680 17,339 (558) 1,298,899
U.S. government and
government agencies 1,165,423 21,598 (447) 1,144,272
Municipal bonds 990,325 13,213 (195) 977,307
Asset backed securities 1,008,030 9,508 (4,030) 1,002,552
Non-U.S. government
securities 434,243 28,032 (3,056) 409,267
---------- ---------- ---------- ----------
Total $8,600,824 $144,197 ($23,367) $8,479,994
========== ========== ========== ==========
*T

The following table summarizes the Company's top ten exposures to
fixed income corporate issuers at September 30, 2008:

-0-
*T
Estimated
(U.S. dollars in thousands) Fair Value
-------------

September 30, 2008:
General Electric Capital Corp. $129,902
Citigroup, Inc. 99,173
JPMorgan Chase & Co. 72,395
Bank of America Corp. 69,791
Wells Fargo & Company 57,561
Wachovia Corp. 41,592
American Express Company 31,258
Barclays Bank PLC 29,141
Verizon Communications Inc. 27,983
Morgan Stanley Corp. 24,649
*T

Investment Information (continued)

The following table provides information on the Company's mortgage
backed securities ("MBS") and commercial mortgage backed securities
("CMBS") at September 30, 2008, excluding amounts guaranteed by the
U.S. government:

-0-
*T

Estimated Fair Value
---------------------------
Average % of % of
(U.S. dollars Issuance Par Credit Asset Investable
in thousands) Year Value Quality Total Class Assets
-------- -------- -------- -------- ------ -----------

MBS:
Prime non-
agency MBS 2002 $7,565 AAA $7,107 0.5 0.1
2003 19,290 AAA 18,366 1.2 0.2
2004 68,789 AAA 62,226 4.0 0.6
2005 122,921 AAA 92,610 5.9 0.9
2006 106,908 AAA 81,832 5.2 0.8
2007 126,460 AAA 99,003 6.3 1.0
2008 31,997 AAA 27,614 1.8 0.2
-------- -------- ------ -----------
Total non-
agency MBS $483,930 AAA $388,758 24.9 3.8
======== ======== ====== ===========

CMBS:
Non-agency
CMBS 1998 $3,400 AAA $3,477 0.3 0.0
1999 108,787 AAA 111,076 9.1 1.1
2000 123,642 AAA 125,195 10.3 1.2
2001 104,483 AAA 103,250 8.5 1.0
2002 75,845 AAA 73,248 6.0 0.7
2003 101,196 AAA 94,895 7.8 1.0
2004 77,601 AAA 74,135 6.1 0.7
2005 77,961 AAA 70,722 5.8 0.7
2006 35,289 AAA 31,921 2.6 0.3
2007 28,435 AAA 25,330 2.1 0.3
-------- -------- ------ -----------
Total non-
agency CMBS $736,639 AAA $713,249 58.6 7.0
======== ======== ====== ===========

Additional Statistics: Prime
Non- Non-
Agency Agency
MBS CMBS (1)
-------- --------
Weighted average loan
age (months) 36 74
Weighted average life
(months) (2) 66 36
Weighted average loan-
to-value % (3) 66.0% 58.0%
Total delinquencies (4) 5.2% 0.7%
Current credit support
% (5) 12.4% 28.3%
*T

(1) Loans defeased with government/agency obligations represented
approximately 23% of the collateral underlying the Company's
non-agency CMBS holdings.

(2) The weighted average life for MBS is based on the interest
rates in effect at September 30, 2008. The weighted average life for
non-agency CMBS reflects the average life of the collateral underlying
the Company's non-agency CMBS holdings.

(3) The range of loan-to-values on MBS is 36% to 93% while the
range of loan-to-values on CMBS is 44% to 72%.

(4) Total delinquencies for MBS includes 60 days and over while
CMBS includes 30 days and over.

(5) Current credit support % represents the percentage for a
collateralized mortgage obligation ("CMO") or CMBS class/tranche from
other subordinate classes in the same CMO or CMBS deal.

Investment Information (continued)

The following table provides information on the Company's asset
backed securities ("ABS") at September 30, 2008:

-0-
*T
Estimated Fair Value
-----------------------------
(U.S. Average % of
dollars in Credit Effective % of Investable
thousands)Par Value Quality Duration Total Class Assets
---------- -------- --------- ---------- ------ -----------

Sector:
Autos $308,718 AAA 1.35 $299,646 29.2 3.0
Credit
cards 490,155 AAA 1.85 473,607 46.1 4.7
Rate
reduction
bonds 136,961 AAA 2.17 136,128 13.3 1.3
Other 89,043 AAA 0.79 86,189 8.4 0.8
---------- ---------- ------ -----------
$1,024,877 AAA 1.65 $995,570 97.0 9.8

Home
equity
(1) $27,585 AAA 0.01 $23,130 2.3 0.2
18,800 AA 0.01 6,420 0.6 0.1
464 A 0.01 246 0.0 0.0
4,913 B 0.01 473 0.1 0.0
2,900 CCC 0.01 163 0.0 0.0
702 D 0.07 116 0.0 0.0
---------- ---------- ------ -----------
$55,364 AA+ 0.01 $30,548 3.0 0.3

---------- ---------- ------ -----------
Total ABS$1,080,241 AAA 1.57 $1,026,118 100.0 10.1
========== ========== ====== ===========
*T

(1) The Company's investment portfolio included $67.9 million par
in sub-prime securities at September 30, 2008, with an estimated fair
value of $40.3 million, an average credit quality of AA+ and an
effective duration of 0.01 years. Such amounts were primarily in the
home equity sector with the balance in other ABS, MBS and CMBS
sectors. In addition, the portfolio of collateral backing the
Company's securities lending program contains approximately $70.7
million of AAA rated sub-prime securities with an effective duration
of 0.36 years.

Segment Information

Please refer to the Company's Financial Supplement dated September
30, 2008, which is posted on the Company's website at
http://www.archcapgroup.bm/docs/3Q2008_Financial Supplement.pdf for
additional detail regarding the Company's operating segments.

-0-
*T

Discussion of 2008 Third Quarter Performance

Insurance Segment

Three Months Ended
September 30,
(U.S. dollars in thousands) 2008 2007
--------- ---------

Gross premiums written $678,338 $722,688
Net premiums written 466,115 460,019
Net premiums earned 441,049 429,584
Underwriting (loss) income ($30,148) $35,296

Loss ratio 76.5% 63.8%
Acquisition expense ratio 14.0% 12.1%
Other operating expense ratio 16.3% 16.0%
--------- ---------
Combined ratio 106.8% 91.9%
========= =========
*T

Gross premiums written by the insurance segment in the 2008 third
quarter were 6.1% lower than in the 2007 third quarter, with
reductions in casualty, property and professional liability exposures
as the insurance segment maintained underwriting discipline in
response to the current market environment. Net premiums written in
the 2008 third quarter were 1.3% higher than in the 2007 third
quarter, with the increase due to $10.9 million of premium adjustments
recorded in the 2008 third quarter related to involuntary pools ($10.5
million on an earned basis). Net premiums earned by the insurance
segment in the 2008 third quarter were 2.7% higher than in the 2007
third quarter, and reflect changes in net premiums written over the
previous five quarters, including the mix and type of business
written.

The loss ratio for the insurance segment was 76.5% in the 2008
third quarter, compared to 63.8% in the 2007 third quarter. The 2008
third quarter loss ratio reflected approximately 8.3 points related to
catastrophic activity, primarily related to Hurricanes Gustav and Ike,
while the 2007 third quarter loss ratio did not include any
significant losses from catastrophic events. The 2008 third quarter
loss ratio also reflected a 3.0 point reduction related to estimated
net favorable development in prior year loss reserves, compared to 1.9
points of estimated net favorable development in prior year loss
reserves in the 2007 third quarter. The estimated net favorable
development in the 2008 third quarter was primarily in medium-tail and
longer-tail lines and resulted from better than expected claims
emergence. The insurance segment's loss ratio in the 2008 third
quarter also reflected an increase in expected loss ratios across a
number of lines of business primarily due to rate changes and changes
in the mix of business. In addition, the 2008 third quarter included a
higher level of large, specific risk loss activity than the 2007 third
quarter.

The insurance segment's underwriting expense ratio was 30.3% in
the 2008 third quarter, compared to 28.1% in the 2007 third quarter.
The acquisition expense ratio was 14.0% for the 2008 third quarter,
compared to 12.1% for the 2007 third quarter. The acquisition expense
ratio is influenced by, among other things, (1) the amount of ceding
commissions received from unaffiliated reinsurers, (2) the amount of
business written on a surplus lines (non-admitted) basis and (3) mix
of business. The acquisition expense ratio for the 2008 third quarter
included 1.7 points related to favorable prior year loss development,
compared to 0.2 points in the 2007 third quarter. In addition, the
2008 third quarter acquisition expense ratio reflects changes in the
form of reinsurance ceded and the mix of business. The insurance
segment's other operating expense ratio was 16.3% for the 2008 third
quarter, compared to 16.0% in the 2007 third quarter. Operating
expenses in the 2008 third quarter included $5.7 million of costs
related to workforce reductions and the relocation of certain of the
insurance segment's U.S. operations. Such actions were undertaken as
part of an expense management plan, which includes office relocation,
personnel and other expense saving initiatives, the implementation of
which began in response to market conditions. In addition, operating
expenses related to the involuntary pool adjustment noted above
contributed 0.3 points to the 2008 third quarter operating expense
ratio.

-0-
*T

Reinsurance Segment

Three Months Ended
September 30,
(U.S. dollars in thousands) 2008 2007
--------- ---------

Gross premiums written $228,593 $286,272
Net premiums written 226,577 234,611
Net premiums earned 291,982 305,945
Underwriting (loss) income ($8,368) 77,023

Loss ratio 72.4% 42.1%
Acquisition expense ratio 24.2% 25.7%
Other operating expense ratio 6.3% 7.2%
--------- ---------
Combined ratio 102.9% 75.0%
========= =========
*T

Gross premiums written by the reinsurance segment in the 2008
third quarter were 20.1% lower than in the 2007 third quarter, with
reductions in all treaty lines of business. Commencing in 2006, the
reinsurance segment's Bermuda-based reinsurer, Arch Re Bermuda, ceded
certain lines of property and marine premiums written under a quota
share reinsurance treaty (the "Treaty") to Flatiron Re Ltd. Under the
Treaty, Flatiron Re Ltd. assumed a 45% quota share of certain lines of
property and marine business underwritten by Arch Re Bermuda for the
2006 and 2007 underwriting years (the percentage ceded was increased
from 45% to 70% of covered business bound from June 28, 2006 until
August 15, 2006 provided such business did not incept beyond September
30, 2006). On December 31, 2007, the Treaty expired by its terms. For
its January 1 renewals, Arch Re Bermuda adjusted its book of business
in light of the expiration of the Treaty. Other reductions in the
reinsurance segment's book of business resulted from continued
competition which led to non-renewals or lower shares written.

Ceded premiums written by the reinsurance segment were 0.9% of
gross premiums written for the 2008 third quarter, compared to 18.0%
for the 2007 third quarter. In the 2008 third quarter, Arch Re Bermuda
ceded a minimal amount of premiums written under the Treaty to
Flatiron Re Ltd., compared to $51.4 million, or 18.0%, in the 2007
third quarter, with the lower level due to the expiration of the
Treaty. On an earned basis, Arch Re Bermuda ceded $26.1 million to
Flatiron Re Ltd. in the 2008 third quarter, compared to $68.0 million
in the 2007 third quarter. Commission income from the Treaty (in
excess of the reimbursement of direct acquisition expenses) reduced
the reinsurance segment's acquisition expense ratio by 1.1 points in
the 2008 third quarter, compared to 2.6 points in the 2007 third
quarter. At September 30, 2008, $35.3 million of premiums ceded to
Flatiron Re Ltd. were unearned. The attendant premiums earned, losses
incurred and acquisition expenses will primarily be reflected in the
reinsurance segment's results during the balance of 2008. Net premiums
written by the reinsurance segment in the 2008 third quarter were 3.4%
lower than in the 2007 third quarter and included $4.4 million of
reinstatement premiums related to Hurricanes Gustav and Ike, while net
premiums earned in the 2008 third quarter were 4.6% lower than in the
2007 third quarter. The decrease in net premiums earned in the 2008
third quarter primarily resulted from changes in net premiums written
over the previous five quarters, including the mix and type of
business written.

The reinsurance segment's loss ratio was 72.4% in the 2008 third
quarter, compared to 42.1% for the 2007 third quarter. The 2008 third
quarter loss ratio reflected approximately 36.3 points of catastrophic
activity, primarily related to Hurricanes Gustav and Ike, while the
2007 third quarter loss ratio reflected approximately 6.5 points of
catastrophic activity. The loss ratio for the 2008 third quarter also
reflected an 18.7 point reduction related to estimated net favorable
development in prior year loss reserves, compared to a 17.9 point
reduction in the 2007 third quarter. The estimated net favorable
development in the 2008 third quarter was primarily in short-tail
lines and resulted from better than anticipated claims emergence. The
reinsurance segment's loss ratio in the 2008 third quarter also
reflected an increase in expected loss ratios across a number of lines
of business primarily due to rate changes and changes in the mix of
business.

The underwriting expense ratio for the reinsurance segment was
30.5% in the 2008 third quarter, compared to 32.9% in the 2007 third
quarter. The acquisition expense ratio for the 2008 third quarter was
24.2%, compared to 25.7% for the 2007 third quarter. The acquisition
expense ratio for the 2008 third quarter included 1.7 points related
to favorable prior year loss development, compared to 4.1 points in
the 2007 third quarter. In addition, the acquisition expense ratio is
influenced by, among other things, the mix and type of business
written and earned and the level of ceding commission income. The
reinsurance segment's other operating expense ratio was 6.3% for the
2008 third quarter, compared to 7.2% for the 2007 third quarter. The
decrease in the operating expense ratio primarily related to a higher
level of premium volume in the reinsurance segment's property
facultative operations for the 2008 third quarter, and included a
one-time benefit from a higher level of deferred acquisition costs.

-0-
*T
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
*T

-0-
*T
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 105,491 132,289
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 $16,130,802 $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 214,550 301,309
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 $12,614,092 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 $16,130,802 $15,624,267
============= ============
*T

Arch Capital Group Ltd.
John D. Vollaro, 441-278-9250
Executive Vice President and
Chief Financial Officer
Fax: 441-278-9255

Copyright Business Wire 2008