Arch Capital Group Ltd. Reports 2009 Third Quarter Results

The Company's book value per common share increased to $69.48 at September 30, 2009, a 14.4% increase from $60.76 per share at June 30, 2009 and a 35.3% increase from $51.36 at December 31, 2008, due to growth in retained earnings and an after-tax increase in the market value of the Company's investment portfolio. The Company's after-tax operating income available to common shareholders represented a 16.4% annualized return on average common equity for the 2009 third quarter, compared to 7.6% for the 2008 third quarter, and 18.1% for the nine months ended September 30, 2009, compared to 17.4% for the 2008 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, net impairment losses recognized in earnings, 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.

The following table summarizes the Company's underwriting results:

                             Three Months Ended          Nine Months Ended
                             September 30,               September 30,
(U.S. dollars in thousands)  2009          2008          2009            2008
Gross premiums written       $937,328      $903,533      $2,874,219      $2,843,611
Net premiums written         727,308       692,692       2,244,025       2,190,152
Net premiums earned          734,385       733,031       2,134,207       2,146,940
Underwriting income (loss)   73,835        (38,516  )    256,848         151,260
Combined ratio               90.0     %    105.3    %    88.0       %    92.9       %

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:

                                                                     Three Months Ended              Nine Months Ended
                                                                     September 30,                   September 30,
(U.S. dollars in thousands, except per share data)                   2009            2008            2009            2008
After-tax operating income available to common shareholders          $160,332        $64,094         $492,374        $451,452
Net realized gains (losses), net of tax                              69,190          (21,904    )    48,836          21,704
Net impairment losses recognized in earnings, net of tax             (4,643     )    (82,514    )    (61,563    )    (105,854   )
Equity in net income (loss) of investment funds accounted for using  69,119          (1,731     )    135,428         (4,461     )
the equity method, net of tax
Net foreign exchange gains (losses), net of tax                      (19,591    )    68,445          (48,670    )    45,253
Net income available to common shareholders                          $274,407        $26,390         $566,405        $408,094
Diluted per common share results:
After-tax operating income available to common shareholders          $2.56           $1.02           $7.87           $6.89
Net realized gains (losses), net of tax                              1.11            (0.35      )    0.78            0.33
Net impairment losses recognized in earnings, net of tax             (0.08      )    (1.31      )    (0.98      )    (1.61      )
Equity in net income (loss) of investment funds accounted for using  1.11            (0.03      )    2.16            (0.07      )
the equity method, net of tax
Net foreign exchange gains (losses), net of tax                      (0.31      )    1.09            (0.78      )    0.69
Net income available to common shareholders                          $4.39           $0.42           $9.05           $6.23
Weighted average common shares and common share equivalents          62,533,816      62,830,910      62,590,228      65,530,570
outstanding - diluted

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. For the 2009 third quarter, the combined ratio of the Company's insurance and reinsurance subsidiaries consisted of a loss ratio of 60.6% and an underwriting expense ratio of 29.4%, compared to a loss ratio of 74.9% and an underwriting expense ratio of 30.4% for the 2008 third quarter. For the nine months ended September 30, 2009, the combined ratio of the Company's insurance and reinsurance subsidiaries consisted of a loss ratio of 58.3% and an underwriting expense ratio of 29.7%, compared to a loss ratio of 63.2% and an underwriting expense ratio of 29.7% for the 2008 period. The loss ratio of 60.6% for the 2009 third quarter was comprised of 49.8 points of paid losses (including 3.7 points related to 2005 and 2008 named catastrophic events), 4.3 points related to reserves for reported losses and 6.5 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. 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, 2009. As actual loss information is reported to the Company and it develops its own loss experience, the Company will give more emphasis to other actuarial techniques. 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.

The Company's investment portfolio continues to be comprised primarily of high quality fixed income securities with an average credit quality of "AA+", no direct holdings of 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 portfolio's book yield was 3.93% at September 30, 2009, compared to 4.06% at June 30, 2009 and 4.55% at December 31, 2008. The lower book yields in the 2009 periods were due in part to lower available yields and a reduction in 2009 of the portfolio's effective duration, which was 3.09 years at September 30, 2009, compared to 3.02 years at June 30, 2009 and 3.62 years at December 31, 2008.

The Company's investment portfolio includes exposures to fixed income corporate issuers which are backed by guarantees from the Federal Deposit Insurance Corporation ("FDIC"), a U.S. government agency, under the Temporary Liquidity Guarantee Program, along with foreign exposures which are backed by other governments. As of September 30, 2009, the market value of such securities was approximately $1.36 billion. In addition, the Company began participating in the Federal Reserve's Term Asset-Backed Securities Loan Facility ("TALF") in the 2009 third quarter. TALF provides secured financing for asset-backed securities backed by certain types of consumer and small-business loans and legacy commercial mortgage-backed securities. TALF financing is non-recourse to the Company, is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a 'haircut' that varies based on the type of collateral. The Company can deliver the collateralized securities to the Federal Reserve in full defeasance of the loan. As of September 30, 2009, the Company had $250.5 million of securities purchased under TALF which are reflected as "TALF investments, at market value" and has $219.8 million of secured financing from the Federal Reserve which is reflected as "TALF borrowings, at market value." Changes in the market value of the TALF investments and TALF borrowings are recorded through the Company's income statement each period.

Including the effects of foreign exchange, total return on the Company's investment portfolio was approximately 4.75% for the 2009 third quarter, compared to (2.69%) for the 2008 third quarter, and 10.01% for the nine months ended September 30, 2009, compared to (1.86%) for the 2008 period. Excluding foreign exchange, total return was 4.63% for the 2009 third quarter, compared to (1.88%) for the 2008 third quarter, and 9.30% for the nine months ended September 30, 2009, compared to (1.25%) for the 2008 period. As discussed below, the Company holds investments in foreign currencies which are intended to mitigate its exposure to foreign currency fluctuations in its net insurance liabilities.

Net investment income for the 2009 third quarter was $100.2 million, or $1.60 per share, compared to $100.5 million, or $1.60 per share, for the 2009 second quarter and $117.0 million, or $1.86 per share, for the 2008 third quarter. For the nine months ended September 30, 2009, net investment income was $296.6 million, or $4.74 per share, compared to $356.3 million, or $5.44 per share, for the 2008 period. The pre-tax investment income yield was 3.76% for the 2009 third quarter, compared to 3.91% for the 2009 second quarter and 4.74% for the 2008 third quarter. For the nine months ended September 30, 2009, the pre-tax investment income yield was 3.82%, compared to 4.80% for the 2008 period. The comparability of net investment income between the 2009 and 2008 periods was influenced by the Company's share repurchase program described below.

The Company recorded $4.6 million of net impairment losses through earnings in the 2009 third quarter. The net impairment losses primarily resulted from reductions in the expected recovery values on mortgage backed and asset backed securities during the period. In addition, the Company recorded $69.1 million of net income related to investment funds accounted for using the equity method for the 2009 third quarter, compared to net losses of $1.7 million for the 2008 third quarter, and $135.4 million of net income related to such funds for the nine months ended September 30, 2009, compared to net losses of $4.5 million for the 2008 period. Investment funds accounted for using the equity method totaled $376.4 million at September 30, 2009, compared to $370.2 million at June 30, 2009 and $301.0 million at December 31, 2008.

Please refer to the Company's Financial Supplement dated September 30, 2009, which is posted on the Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx, for further information on the Company's investment portfolio.

For the 2009 third quarter, the Company's effective tax rates on income before income taxes and pre-tax operating income were 0.8% and 0.5%, respectively. For the nine months ended September 30, 2009, the Company's effective tax rates on income before income taxes and pre-tax operating income were 3.4% and 2.9%, respectively, compared to 2.6% and 2.0% for the 2008 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 currently expects that its annual effective tax rate on pre-tax operating income available to common shareholders for the year ended December 31, 2009 will be in the range of 2.0% to 4.0%. In addition, the Company's Bermuda-based reinsurer incurs federal excise taxes for premiums assumed on U.S. risks. The Company incurred $9.7 million of federal excise taxes in each of the nine months ended September 30, 2009 and 2008. Such amounts are reflected as acquisition expenses in the Company's consolidated statements of income.

Net foreign exchange losses for the 2009 third quarter of $19.8 million consisted of net unrealized losses of $18.9 million and net realized losses of $0.9 million, compared to net foreign exchange gains for the 2008 third quarter of $68.4 million which consisted of net unrealized gains of $66.7 million and net realized gains of $1.7 million. Net foreign exchange losses for the nine months ended September 30, 2009 of $48.2 million consisted of net unrealized losses of $45.1 million and net realized losses of $3.1 million, compared to net foreign exchange gains for the 2008 period of $45.1 million which consisted of net unrealized gains of $45.5 million and net realized losses of $0.4 million. The net foreign exchange losses in the 2009 periods resulted from the significant weakening of the U.S. Dollar against the British Pound, Euro and other major currencies during the periods. 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. 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 consolidated statements of income.

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 2009 third quarter, the Company repurchased 1.5 million common shares for an aggregate purchase price of $98.2 million. Since the inception of the share repurchase program through September 30, 2009, ACGL has repurchased 16.8 million common shares for an aggregate purchase price of $1.15 billion. At September 30, 2009, $350.1 million of repurchases were available under the share repurchase program.

At September 30, 2009, the Company's capital of $4.86 billion consisted of $300.0 million of senior notes, representing 6.2% of the total, $100.0 million of revolving credit agreement borrowings due in August 2011, representing 2.1% of the total, $325.0 million of preferred shares, representing 6.7% of the total, and common shareholders' equity of $4.14 billion, representing the balance. At December 31, 2008, the Company's capital of $3.83 billion consisted of $300.0 million of senior notes, representing 7.8% 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 8.5% of the total, and common shareholders' equity of $3.11 billion, representing the balance. The increase in total capital during 2009 was primarily attributable to net income and an after-tax increase in the market value of the Company's investment portfolio during the period.

The Company will hold a conference call for investors and analysts at 11:00 a.m. Eastern Time on Tuesday, October 27, 2009. A live webcast of this call will be available via the Investor Relations -- Events & Presentations section of the Company's website at http://www.archcapgroup.bm. A telephone replay of the conference call also will be available beginning on October 27 at 2:00 p.m. Eastern Time until November 3, 2009 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 35122067), and international callers should dial 617-801-6888 (passcode 35122067).

Please refer to the Company's Financial Supplement dated September 30, 2009, which is posted on the Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx. The Financial Supplement provides additional detail regarding the financial performance of the Company. From time to time, the Company posts additional financial information and presentations to its website, and investors are encouraged to check the Investor Relations -- Events & Presentations section of the Company's website at http://www.archcapgroup.bm/presentations.aspx regularly for additional information regarding the Company.

Arch Capital Group Ltd., a Bermuda-based company with approximately $4.9 billion in capital at September 30, 2009, 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, 2009;

-- 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 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, net impairment losses included in earnings, 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, net impairment losses included in earnings, 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, net impairment losses included in earnings, 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 net impairment 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. In addition, net impairment losses included in earnings on the Company's investments represent other-than-temporary declines in expected recovery values on securities 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.

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
Book Value Per Common Share
                                                September 30, June 30,         December 31,
(U.S. dollars in thousands, except share data)  2009          2009             2008
Calculation of book value per common share:
Total shareholders' equity                      $4,460,822    $4,029,968       $3,432,965
Less preferred shareholders' equity             (325,000   )  (325,000   )     (325,000   )
Common shareholders' equity                     $4,135,822    $3,704,968       $3,107,965
Common shares outstanding (1)                   59,524,309    60,980,806       60,511,974
Book value per common share                     $69.48        $60.76           $51.36

(1)  Excludes the effects of 5,384,188, 5,457,991 and 5,131,135 stock
     options and 263,857, 265,689 and 412,622 restricted stock units
     outstanding at September 30, 2009, June 30, 2009 and December 31,
     2008, respectively.

Share Repurchase Activity
                                                                    Three Months Ended         Nine Months Ended          Cumulative
                                                                    September 30,              September 30,              September30,
(U.S. dollars in thousands, except share data)                      2009       2008            2009       2008            2009
Effect of share repurchases:
Aggregate purchase price of shares repurchased                      $98,194    $123,377        $99,746    $513,130        $1,149,942
Shares repurchased                                                  1,533,247  1,865,482       1,566,552  7,487,250       16,822,841
Average price per share repurchased                                 $64.04     $66.14          $63.67     $68.53          $68.36
Estimated net accretive (dilutive) impact on ending book value per  $0.14      ($0.40    )     $0.15      ($1.71    )     $0.25
common share (1)
Estimated net accretive impact on diluted earnings per share (2)    $0.37      $0.03           $1.15      $0.67

(1)  As the average price per share repurchased during the 2009 periods
     and cumulative through September 30, 2009 was lower than the book
     value per common share, the repurchase of shares increased ending
     book value per common share. For the 2008 periods, the average price
     per share repurchased was higher than the book value per common
     share and, accordingly, decreased ending book value per common share.
(2)  The estimated impact on diluted earnings per share was calculated
     comparing reported results versus (i) net income (loss) per share
     plus an estimate of lost net investment income on the cumulative
     share repurchases divided by (ii) weighted average diluted shares
     outstanding excluding the weighted average impact of cumulative
     share repurchases. The impact of cumulative share repurchases was
     accretive to diluted earnings per share in the periods presented.

Investment Information
                                                       Three Months Ended  Nine Months Ended
                                                       September 30,       September 30,
(U.S. dollars in thousands, except share data)         2009      2008      2009      2008
Net investment income:
Total                                                  $100,213  $117,022  $296,580  $356,335
Per share                                              $1.60     $1.86     $4.74     $5.44
Pre-tax investment income yield (at amortized cost)    3.76%     4.74%     3.82%     4.80%
After-tax investment income yield (at amortized cost)  3.64%     4.63%     3.70%     4.68%
Cash flow from operations                              $316,309  $382,189  $834,854  $972,997

On a consolidated basis, the Company's aggregate investable assets totaled $11.5 billion at September 30, 2009, compared to $10.0 billion at December 31, 2008, as detailed in the table below:

                                                                     September 30,  December 31,
(U.S. dollars in thousands)                                          2009           2008
Investable assets:
Fixed maturities available for sale, at market value                 $9,265,961     $8,122,221
Fixed maturities pledged under securities lending agreements, at     609,334        626,501
market value (1)
Total fixed maturities                                               9,875,295      8,748,722
Short-term investments available for sale, at market value           706,157        479,586
Short-term investments pledged under securities lending agreements,  --             101,564
at market value (1)
Cash                                                                 385,149        251,739
TALF investments, at market value (2)                                250,517        --
Other investments
Fixed income mutual funds                                            55,646         39,858
Equities                                                             31,957         23
Privately held securities and other                                  66,923         69,720
Investment funds accounted for using the equity method (3)           376,381        301,027
Securities transactions entered into but not settled at the balance  (198,980    )  (18,236    )
sheet date
Total investable assets (1)                                          $11,549,045    $9,974,003
Fixed income portfolio (1):
Average effective duration (in years)                                3.09           3.62
Average credit quality                                               AA+            AA+
Imbedded book yield (before investment expenses)                     3.93        %  4.55       %

(1)  In securities lending transactions, the Company receives collateral
     in excess of the market value of the fixed maturities and short-term
     investments pledged under securities lending agreements. This table
     excludes the collateral received and reinvested and includes the
     fixed maturities and short-term investments pledged under securities
     lending agreements, at market value.
(2)  The Company participates in the Federal Reserve's Term Asset-Backed
     Securities Loan Facility ("TALF"), which provides secured financing
     for asset-backed securities backed by certain types of consumer and
     small-business loans and legacy commercial mortgage-backed
     securities. TALF financing is non-recourse to the Company, is
     collateralized by the purchased securities and provides financing
     for the purchase price of the securities, less a 'haircut' that
     varies based on the type of collateral. The Company can deliver the
     collateralized securities to the Federal Reserve in full defeasance
     of the loan. As of September 30, 2009, the Company had $250.5
     million of securities purchased under TALF which are reflected as
     "TALF investments, at market value" and has $219.8 million of
     secured financing from the Federal Reserve that is reflected as
     "TALF borrowings, at market value." The Company is carrying the TALF
     investments and TALF borrowings at market value.
(3)  Changes in the carrying value of investments accounted for using the
     equity method 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.

For further details on the Company's investment portfolio, please refer to the Company's Financial Supplement dated September 30, 2009, which is posted on the Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx.

Selected Information on Losses and Loss Adjustment Expenses
                                                                  Three Months Ended            Nine Months Ended
                                                                  September 30,                 September 30,
(U.S. dollars in thousands)                                       2009           2008           2009             2008
Components of losses and loss adjustment expenses
Paid losses and loss adjustment expenses                          $365,423       $304,625       $1,079,341       $860,729
Increase in unpaid losses and loss adjustment expenses            79,491         244,261        164,973          497,199
Total losses and loss adjustment expenses                         $444,914       $548,886       $1,244,314       $1,357,928
Estimated net (favorable) adverse development in prior year loss
reserves, net of related adjustments
Net impact on underwriting results:
Insurance (2)                                                     ($17,939 )     ($5,783  )     ($45,114   )     ($30,891   )
Reinsurance                                                       (38,508  )     (49,592  )     (120,996   )     (136,217   )
Total                                                             ($56,447 )     ($55,375 )     ($166,110  )     ($167,108  )
Impact on losses and loss adjustment expenses:
Insurance (2)                                                     ($16,770 )     ($13,315 )     ($44,585   )     ($42,354   )
Reinsurance                                                       (38,995  )     (54,618  )     (124,437   )     (144,738   )
Total                                                             ($55,765 )     ($67,933 )     ($169,022  )     ($187,092  )
Impact on acquisition expenses:
Insurance (2)                                                     ($1,169  )     $7,532         ($529      )     $11,463
Reinsurance                                                       487            5,026          3,441            8,521
Total                                                             ($682    )     $12,558        $2,912           $19,984
Impact on combined ratio:
Insurance                                                         (4.1     %)    (1.3     %)    (3.6       %)    (2.4       %)
Reinsurance                                                       (13.2    %)    (17.0    %)    (13.9      %)    (15.6      %)
Total                                                             (7.7     %)    (7.6     %)    (7.8       %)    (7.8       %)
Impact on loss ratio:
Insurance                                                         (3.8     %)    (3.0     %)    (3.5       %)    (3.3       %)
Reinsurance                                                       (13.4    %)    (18.7    %)    (14.3      %)    (16.6      %)
Total                                                             (7.6     %)    (9.3     %)    (7.9       %)    (8.7       %)
Impact on acquisition expense ratio:
Insurance                                                         (0.3     %)    1.7      %     (0.1       %)    0.9        %
Reinsurance                                                       0.2      %     1.7      %     0.4        %     1.0        %
Total                                                             (0.1     %)    1.7      %     0.1        %     0.9        %
Estimated net losses incurred from current accident year
catastrophic events (1)
Insurance                                                         $--            $36,490        $--              $63,740
Reinsurance                                                       5,271          105,965        13,310           128,519
Total                                                             $5,271         $142,455       $13,310          $192,259
Impact on loss ratio:
Insurance                                                         --             8.3      %     --               5.0        %
Reinsurance                                                       1.8      %     36.3     %     1.5        %     14.8       %
Total                                                             0.7      %     19.4     %     0.6        %     9.0        %

(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 and Europe 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.

Segment Information

For additional details regarding the Company's operating segments, please refer to the Company's Financial Supplement dated September 30, 2009 on the Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx.

Discussion of 2009 Third Quarter Performance

Insurance Segment
                               Three Months Ended
                               September 30,
(U.S. dollars in thousands)    2009      2008
Gross premiums written         $673,986  $678,338
Net premiums written           473,676   466,115
Net premiums earned            443,319   441,049
Underwriting income (loss)     7,413     (30,148)
Loss ratio                     68.4%     76.5%
Acquisition expense ratio      13.6%     14.0%
Other operating expense ratio  16.3%     16.3%
Combined ratio                 98.3%     106.8%

Gross premiums written by the insurance segment in the 2009 third quarter were 0.6% lower than in the 2008 third quarter, reflecting reductions in program, construction and surety business. The lower level of program business in the 2009 third quarter primarily resulted from $10.9 million of premium adjustments related to involuntary pools in the 2008 period ($10.5 million on an earned basis) while the decline in construction and surety business was in response to the current market environment. Such amounts were partially offset by growth in property, energy and aviation, national accounts casualty and executive assurance business which was primarily due to new business written in the 2009 third quarter.

Net premiums written increased by 1.6%, reflecting changes in the mix of business, reinstatement premiums and the impact of changes in reinsurance structure. Net premiums earned by the insurance segment in the 2009 third quarter were 0.5% higher than in the 2008 third quarter, and reflect changes in net premiums written over the previous five quarters.

The loss ratio for the insurance segment was 68.4% in the 2009 third quarter, compared to 76.5% in the 2008 third quarter. The loss ratio for the 2009 third quarter did not include significant current year catastrophic event activity, compared to 8.3 points, primarily related to Hurricanes Gustav and Ike, in the 2008 third quarter. The insurance segment's loss ratio in the 2009 third quarter included increases in expected loss ratios across a number of lines of business, primarily due to the anticipated impact of rate changes, and changes in the mix of business. The 2009 third quarter loss ratio reflected a 3.8 point reduction related to estimated net favorable development in prior year loss reserves, compared to a 3.0 point reduction in the 2008 third quarter. The estimated net favorable development in the 2009 third quarter was primarily in short-tail lines and resulted from better than expected claims emergence on large property and energy losses.

The insurance segment's underwriting expense ratio was 29.9% in the 2009 third quarter, compared to 30.3% in the 2008 third quarter. The acquisition expense ratio was 13.6% for the 2009 third quarter, compared to 14.0% for the 2008 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. In addition, the 2009 third quarter acquisition expense ratio reflected a reduction of 0.3 points related to estimated net favorable development in prior year loss reserves, compared to an increase of 1.7 points in the 2008 third quarter. The comparison of the 2009 third quarter and 2008 third quarter acquisition expense ratios 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 2009 and 2008 third quarters.

Reinsurance Segment
                               Three Months Ended
                               September 30,
(U.S. dollars in thousands)    2009          2008
Gross premiums written         $266,193      $228,593
Net premiums written           253,632       226,577
Net premiums earned            291,066       291,982
Underwriting income (loss)     66,422        (8,368   )
Loss ratio                     48.7     %    72.4     %
Acquisition expense ratio      21.2     %    24.2     %
Other operating expense ratio  7.3      %    6.3      %
Combined ratio                 77.2     %    102.9    %

Gross premiums written by the reinsurance segment in the 2009 third quarter were 16.4% higher than in the 2009 third quarter, primarily due to an increase in property business which resulted from new business and an increased contribution from the reinsurance segment's property facultative operations. The growth in property business was partially offset by a decrease in other specialty business which resulted from the non-renewal of a non-standard auto treaty in the 2009 second quarter. Net premiums written by the reinsurance segment in the 2009 third quarter were 11.9% higher than in the 2008 third quarter, primarily due to the items noted above. Net premiums earned in the 2009 third quarter were 0.3% lower than in the 2008 third quarter, and reflect 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 48.7% in the 2009 third quarter, compared to 72.4% for the 2008 third quarter. The loss ratio for the 2009 third quarter included 1.8 points related to current year catastrophic activity in the period, compared to 36.3 points, primarily related to Hurricanes Gustav and Ike, in the 2008 third quarter. The loss ratio for the 2009 third quarter reflected a 13.4 point reduction related to estimated net favorable development in prior year loss reserves, compared to a 18.7 point reduction in the 2008 third quarter. The estimated net favorable development in the 2009 third quarter resulted from a lower level of reported and paid claims activity than previously anticipated in property and other short-tail lines and casualty business which led to decreases in certain loss selections during the period. In addition, the reinsurance segment's loss ratio in the 2009 third quarter included increases in expected loss ratios across a number of lines of business, primarily due to the impact of rate changes, and changes in the mix of business.

The underwriting expense ratio for the reinsurance segment was 28.5% in the 2009 third quarter, compared to 30.5% in the 2008 third quarter. The acquisition expense ratio for the 2009 third quarter was 21.2%, compared to 24.2% for the 2008 third quarter. The 2009 third quarter acquisition expense ratio reflected 0.2 points related to estimated net favorable development in prior year loss reserves, compared to 1.7 points in the 2008 third quarter. The comparison of the 2009 third quarter and 2008 third quarter acquisition expense ratios 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 7.3% for the 2009 third quarter, compared to 6.3% for the 2008 third quarter. The 2008 third quarter operating expense ratio benefited from a higher level of deferred acquisition costs in the reinsurance segment's property facultative operations.

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,
                                                                     2009            2008            2009            2008
Revenues
Net premiums written                                                 $727,308        $692,692        $2,244,025      $2,190,152
Decrease (increase) in unearned premiums                             7,077           40,339          (109,818   )    (43,212    )
Net premiums earned                                                  734,385         733,031         2,134,207       2,146,940
Net investment income                                                100,213         117,022         296,580         356,335
Net realized gains (losses)                                          70,638          (23,001    )    53,681          23,765
Other-than-temporary impairment losses                               (7,860     )    (82,533    )    (142,663   )    (105,993   )
Less investment impairments recognized in other comprehensive        3,217           --              81,023          --
income, before taxes
Net impairment losses recognized in earnings                         (4,643     )    (82,533    )    (61,640    )    (105,993   )
Fee income                                                           826             944             2,568           3,250
Equity in net income (loss) of investment funds accounted for using  69,119          (1,731     )    135,428         (4,461     )
the equity method
Other income                                                         5,687           3,067           14,588          12,071
Total revenues                                                       976,225         746,799         2,575,412       2,431,907
Expenses
Losses and loss adjustment expenses                                  444,914         548,886         1,244,314       1,357,928
Acquisition expenses                                                 122,739         133,413         373,011         367,278
Other operating expenses                                             99,743          95,652          286,153         295,417
Interest expense                                                     6,001           6,241           17,425          17,553
Net foreign exchange (gains) losses                                  19,755          (68,395    )    48,208          (45,106    )
Total expenses                                                       693,152         715,797         1,969,111       1,993,070
Income before income taxes                                           283,073         31,002          606,301         438,837
Income tax expense (benefit)                                         2,205           (1,849     )    20,513          11,360
Net income                                                           280,868         32,851          585,788         427,477
Preferred dividends                                                  6,461           6,461           19,383          19,383
Net income available to common shareholders                          $274,407        $26,390         $566,405        $408,094
Net income per common share
Basic                                                                $4.56           $0.44           $9.39           $6.50
Diluted                                                              $4.39           $0.42           $9.05           $6.23
Weighted average common shares and common share equivalents
outstanding
Basic                                                                60,156,219      60,109,932      60,295,144      62,790,514
Diluted                                                              62,533,816      62,830,910      62,590,228      65,530,570

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
                                                                      (Unaudited)
                                                                      September 30,  December 31,
                                                                      2009           2008
Assets
Investments:
Fixed maturities available for sale, at market value (amortized       $9,265,961     $8,122,221
cost: 2009, $9,020,404; 2008, $8,314,615)
Short-term investments available for sale, at market value            706,157        479,586
(amortized cost: 2009, $696,114; 2008, $478,088)
Investment of funds received under securities lending agreements,     611,496        730,194
at market value (amortized cost: 2009, $621,095; 2008, $750,330)
TALF investments, at market value                                     250,517        --
Other investments (cost: 2009, $147,468; 2008, $125,858)              154,526        109,601
Investment funds accounted for using the equity method                376,381        301,027
Total investments                                                     11,365,038     9,742,629
Cash                                                                  385,149        251,739
Accrued investment income                                             77,762         78,052
Investment in joint venture (cost: $100,000)                          101,473        98,341
Fixed maturities and short-term investments pledged under securities  609,334        728,065
lending agreements, at market value
Premiums receivable                                                   697,806        628,951
Unpaid losses and loss adjustment expenses recoverable                1,709,756      1,729,135
Paid losses and loss adjustment expenses recoverable                  58,588         63,294
Prepaid reinsurance premiums                                          283,290        303,707
Deferred acquisition costs, net                                       303,826        295,192
Receivable for securities sold                                        998,431        105,073
Other assets                                                          592,701        592,367
Total Assets                                                          $17,183,154    $14,616,545
Liabilities
Reserve for losses and loss adjustment expenses                       $7,879,586     $7,666,957
Unearned premiums                                                     1,627,519      1,526,682
Reinsurance balances payable                                          159,898        138,509
Senior notes                                                          300,000        300,000
Revolving credit agreement borrowings                                 100,000        100,000
TALF borrowings, at market value                                      219,843        --
Securities lending payable                                            625,706        753,528
Payable for securities purchased                                      1,197,411      123,309
Other liabilities                                                     612,369        574,595
Total Liabilities                                                     12,722,332     11,183,580
Commitments and Contingencies
Shareholders' Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares   130            130
authorized, issued: 13,000,000)
Common shares ($0.01 par value, 200,000,000 shares authorized,        595            605
issued: 2009, 59,524,309; 2008, 60,511,974)
Additional paid-in capital                                            917,204        994,585
Retained earnings                                                     3,321,113      2,693,239
Accumulated other comprehensive income (loss), net of deferred        221,780        (255,594    )
income tax
Total Shareholders' Equity                                            4,460,822      3,432,965
Total Liabilities and Shareholders' Equity                            $17,183,154    $14,616,545

SOURCE: Arch Capital Group Ltd.

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