HAMILTON, Bermuda--(BUSINESS WIRE)--Aug. 4, 2003--Arch Capital
Group Ltd. (NASDAQ: ACGL) reports that net income for the 2003 second
quarter was $61.8 million, or $0.91 per share, compared to $19.2
million, or $0.33 per share, for the 2002 second quarter. Net income
for the six months ended June 30, 2003 was $114.3 million, or $1.70
per share, compared to $23.2 million, or $0.42 per share, for the six
months ended June 30, 2002. Net premiums written for the 2003 second
quarter increased to $560.0 million from $223.0 million for the 2002
second quarter, and net premiums written for the six months ended June
30, 2003 increased to $1.3 billion from $503.7 million for the six
months ended June 30, 2002. During the 2003 second quarter, diluted
book value per share increased by $1.26, or 5.7%, to $23.42.
The Company also reported after-tax operating income for the 2003
second quarter of $59.2 million, or $0.87 per share, compared to $15.5
million, or $0.27 per share, for the 2002 second quarter. After-tax
operating income for the six months ended June 30, 2003 was $108.4
million, or $1.61 per share, compared to $23.9 million, or $0.43 per
share, for the six months ended June 30, 2002. The Company's after-tax
operating income for the six months ended June 30, 2003 represented a
15.4% return on beginning equity, on an annualized basis. Operating
income, a non-GAAP measure, is defined as net income or loss excluding
net realized investment gains or losses, net foreign exchange gains or
losses, other income and non-cash compensation charges, net of tax.
The following table summarizes, on an after-tax basis, the
Company's consolidated financial data, including a reconciliation of
operating income to net income. The Company's diluted average shares
outstanding were higher in the 2003 periods compared to the 2002
periods due to the issuance during 2002 of preference shares and
common shares in a stock offering and upon the exercise of warrants.



(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
--------- --------- ----------- ---------

Gross premiums written $676,005 $253,655 $1,536,105 $558,450
Net premiums written 560,002 223,025 1,336,865 503,736
Net premiums earned 508,856 113,459 913,307 180,986
Underwriting income - GAAP
basis 49,201 6,964 89,304 10,789

Combined Ratio:
Statutory Basis 91.7% 94.6% 89.4% 91.3%
GAAP Basis 90.7% 93.9% 90.7% 94.0%


(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------

Reconciliation of
Operating Income to
Net Income and Related
Diluted Per Share
Results (after-tax):
Operating income $59,242 $15,514 $108,420 $23,882
Net realized
investment gains
(losses) 3,515 388 8,861 (773)
Net foreign exchange
gains 1,761 3,352 2,811 3,244
Other income 381 644 1,352 1,184
Reversal of deferred
tax asset valuation
allowance -- 7,421 -- 7,421
Non-cash compensation (3,115) (8,093) (7,174) (11,766)
-------- -------- -------- --------
Net income $61,784 $19,226 $114,270 $23,192
======== ======== ======== ========

Operating income $0.87 $0.27 $1.61 $0.43
Net realized
investment gains
(losses) 0.05 0.01 0.13 (0.01)
Net foreign exchange
gains 0.03 0.06 0.04 0.06
Other income 0.01 0.01 0.02 0.02
Reversal of deferred
tax asset valuation
allowance -- 0.12 -- 0.13
Non-cash compensation (0.05) (0.14) (0.10) (0.21)
-------- -------- -------- --------
Net income $0.91 $0.33 $1.70 $0.42
======== ======== ======== ========

Diluted average shares
outstanding 67,728,798 58,877,515 67,381,859 54,981,185

Net realized investment gains or losses, net foreign exchange
gains or losses, other income and non-cash compensation charges, net
of tax, are excluded from operating income because the Company does
not believe that they are relevant indicators of the performance of,
or trends in, the Company's core business operations. Management
believes that operating income provides useful information because it
reflects the underlying fundamentals of the Company's operations,
follows industry practice and enables investors to compare the
Company's performance with its industry peer group. Operating income
should not be viewed as a substitute for net income determined in
accordance with generally accepted accounting principles ("GAAP").
The Company's underwriting income, on a GAAP basis, increased to
$49.2 million for the 2003 second quarter from $7.0 million for the
2002 second quarter. For the six months ended June 30, 2003, the
Company's underwriting income, on a GAAP basis, was $89.3 million,
compared to $10.8 million for the six months ended June 30, 2002. The
increased underwriting income in the 2003 periods was primarily due to
a significantly higher level of net premiums earned. The Company's
combined ratio, on a GAAP basis, was 90.7% for the 2003 second
quarter, compared to 93.9% for the 2002 second quarter, and 90.7% for
the six months ended June 30, 2003, compared to 94.0% for the six
months ended June 30, 2002.
The Company's loss ratio was 65.1% for the 2003 second quarter,
compared to 70.8% for the 2002 second quarter, and 65.1% for the six
months ended June 30, 2003, compared to 72.3% for the six months ended
June 30, 2002. The loss ratio of 65.1% for the six months ended June
30, 2003 was comprised of 11.1 points of paid losses, 7.3 points
related to case reserves and 46.7 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 is primarily 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 very limited historical information has been
reported to the Company through June 30, 2003.
The Company's total expense ratio, on a GAAP basis, which includes
acquisition expenses and other operating expenses, was 25.6% for the
2003 second quarter, compared to 23.1% for the 2002 second quarter.
The Company's total expense ratio for the six months ended June 30,
2003 was 25.6%, compared to 21.7% for the six months ended June 30,
2002. The higher total expense ratio in the 2003 periods compared to
the 2002 periods was due to a higher acquisition expense ratio which
was partially offset by an improvement in the other operating expense
ratio.
The Company's acquisition expense ratio, which is reflected net of
certain policy-related fee income, was 18.1% for the 2003 second
quarter, compared to 13.2% for the 2002 second quarter, and 18.3% for
the six months ended June 30, 2003, compared to 11.7% for the six
months ended June 30, 2002. The increase in the 2003 periods compared
to the 2002 periods was due to changes in the mix of business and a
higher percentage of net premiums earned by the reinsurance segment
relating to pro rata contracts. Pro rata contracts are typically
written at a lower loss ratio and higher expense ratio than excess of
loss business. The other operating expense ratio was 7.5% for the 2003
second quarter, compared to 9.9% for the 2002 second quarter, and 7.3%
for the six months ended June 30, 2003, compared to 10.0% for the six
months ended June 30, 2002. While aggregate other operating expenses
were higher for the 2003 periods compared to the 2002 periods, the
other operating expense ratio decreased primarily due to the
significant growth in net premiums earned during the 2003 periods.
Net investment income for the 2003 second quarter was $19.8
million, compared to $11.6 million for the 2002 second quarter. Net
investment income for the six months ended June 30, 2003 was $38.2
million, compared to $20.8 million for the six months ended June 30,
2002. The growth in net investment income in each of the 2003 periods
was due to a significant increase in the Company's invested assets
primarily resulting from cash flow provided by operating activities
during 2002 and 2003. In addition, the Company received $451,000 of
dividend income in the 2003 second quarter from a privately held
equity investment. The Company's investment portfolio primarily
consists of high quality fixed income securities, which had an average
Standard & Poor's quality rating of "AA-" and an average duration of
2.2 years at June 30, 2003.
Consolidated cash flow provided by operating activities for the
2003 second quarter was $367.4 million, compared to $65.4 million for
the 2002 second quarter. Operating cash flow for the six months ended
June 30, 2003 was $667.9 million, compared to $113.7 million for the
six months ended June 30, 2002. The increase in cash flow in the 2003
periods compared to the 2002 periods was primarily due to the growth
in premium volume and a relatively low level of claim payments due, in
part, to the start-up nature of the Company's insurance and
reinsurance operations.
The Company's effective tax rate 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's tax
provision for the six months ended June 30, 2003 is based upon the
expected annual effective tax rates on net income and operating income
of 11.2% and 11.0%, respectively.
Non-cash compensation results primarily from restricted shares
granted in connection with the Company's capital infusion and
underwriting initiative announced in October 2001. After-tax non-cash
compensation expense for the 2003 second quarter was $3.1 million,
compared to $8.1 million for the 2002 second quarter. After-tax
non-cash compensation expense for the six months ended June 30, 2003
was $7.2 million, compared to $11.8 million for the six months ended
June 30, 2002. Absent significant additional restricted share grants,
after-tax non-cash compensation expense during the remaining two
quarters of 2003 is currently expected to be approximately $3.6
million and $2.7 million, respectively. Non-cash compensation expense
has no effect on the Company's shareholders' equity.
The United States dollar is the functional currency for all of the
Company's business. Net foreign exchange gains for the 2003 second
quarter of $1,761,000 consisted of a net unrealized gain of $1,052,000
and net realized gains of $709,000. Net foreign exchange gains for the
2002 second quarter of $3,352,000 consisted of a net unrealized gain
of $3,263,000 and net realized gains of $89,000. Net foreign exchange
gains for the six months ended June 30, 2003 of $2,811,000 consisted
of a net unrealized gain of $1,647,000 and net realized gains of
$1,164,000. Net foreign exchange gains for the six months ended June
30, 2002 of $3,244,000 consisted of a net unrealized gain of
$3,263,000 and net realized losses of $19,000.
The Company's consolidated shareholders' equity increased by 11.0%
to approximately $1.6 billion, or $23.42 per diluted share, at June
30, 2003 from approximately $1.4 billion, or $21.20 per diluted share,
at December 31, 2002. The increase in shareholders' equity and diluted
per share book value was primarily attributable to the Company's
operating income for the six months ended June 30, 2003 and an
increase in unrealized appreciation of investments. The calculation of
the Company's book value per share amounts is included in the
accompanying supplemental financial information.
The following table summarizes selected underwriting results by
segment, including combined ratios on a GAAP and statutory basis
(amounts in thousands):



(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------

REINSURANCE SEGMENT

Gross premiums written (1) $337,038 $180,339 $899,699 $445,200
Net premiums written 323,520 176,619 870,956 441,480
Net premiums earned 317,504 96,330 583,451 151,863
Underwriting income - GAAP
basis 34,143 10,389 67,317 14,238

Combined Ratio:
Statutory Basis 92.2% 92.5% 87.7% 89.4%
GAAP Basis 89.8% 89.2% 89.1% 90.6%

INSURANCE SEGMENT

Gross premiums written (1) $379,607 $91,546 $724,913 $150,268
Net premiums written 236,482 46,406 465,909 62,256
Net premiums earned 191,352 17,129 329,856 29,123
Underwriting income (loss) -
GAAP basis 15,058 (3,425) 21,987 (3,449)

Combined Ratio:
Statutory Basis 91.4% 104.5% 92.2% 102.5%
GAAP Basis 92.1% 120.0% 93.3% 111.8%

TOTAL

Gross premiums written (1) $676,005 $253,655 $1,536,105 $558,450
Net premiums written 560,002 223,025 1,336,865 503,736
Net premiums earned 508,856 113,459 913,307 180,986
Underwriting income - GAAP
basis 49,201 6,964 89,304 10,789

Combined Ratio:
Statutory Basis 91.7% 94.6% 89.4% 91.3%
GAAP Basis 90.7% 93.9% 90.7% 94.0%

(1) Gross premiums written by the insurance segment have been ceded
to, and are also included in the reinsurance segment's gross
premiums written. Accordingly, the sum of gross premiums written
for each segment does not agree to the total gross premiums
written, as shown in the table above, due to the elimination of
intercompany transactions in the total.

Gross premiums written in the reinsurance segment were $337.0
million for the 2003 second quarter, compared to $180.3 million for
the 2002 second quarter, and $899.7 million for the six months ended
June 30, 2003, compared to $445.2 million for the six months ended
June 30, 2002. Net premiums written were $323.5 million for the 2003
second quarter, compared to $176.6 million for the 2002 second
quarter, and $871.0 million for the six months ended June 30, 2003,
compared to $441.5 million for the six months ended June 30, 2002.
The timing of recording premiums written and earned for the
reinsurance segment differs based on whether the contracts are
recorded on an excess of loss or pro rata basis. For excess of loss
contracts, the minimum premium, as defined in the contract, is
generally recorded as an estimate of premiums written as of the date
of the treaty. Estimates of premiums written under pro rata contracts
are recorded in the period in which the underlying risks are expected
to incept and are based on information provided by brokers and ceding
companies.
Of reinsurance segment net premiums written in the 2003 second
quarter, 75.8% and 24.2% were generated from pro rata contracts and
excess of loss treaties, respectively, compared to 64.6% and 35.4% for
the 2002 second quarter. For the six months ended June 30, 2003, 64.0%
and 36.0% of net premiums written were generated from pro rata
contracts and excess of loss treaties, respectively, compared to 43.7%
and 56.3% for the six months ended June 30, 2002.
Net premiums earned for the reinsurance segment were $317.5
million for the 2003 second quarter, compared to $96.3 million for the
2002 second quarter, and $583.5 million for the six months ended June
30, 2003, compared to $151.9 million for the six months ended June 30,
2002. For the 2003 second quarter, 66.1% and 33.9% of net premiums
earned were generated from pro rata contracts and excess of loss
treaties, respectively, compared to 44.3% and 55.7% for the 2002
second quarter. For the six months ended June 30, 2003, 65.0% and
35.0% of net premiums earned were generated from pro rata contracts
and excess of loss treaties, respectively, compared to 35.7% and 64.3%
for the six months ended June 30, 2002.
The reinsurance segment's underwriting income, on a GAAP basis,
increased to $34.1 million for the 2003 second quarter from $10.4
million for the 2002 second quarter. For the six months ended June 30,
2003, the reinsurance segment's underwriting income increased to $67.3
million from $14.2 million for the six months ended June 30, 2002. The
combined ratio for the reinsurance segment, on a GAAP basis, was 89.8%
for the 2003 second quarter, compared to 89.2% for the 2002 second
quarter, and 89.1% for the six months ended June 30, 2003, compared to
90.6% for the six months ended June 30, 2002.
The reinsurance segment's loss ratio for the 2003 second quarter
was 64.2%, compared to 69.7% for the 2002 second quarter, and 63.0%
for the six months ended June 30, 2003, compared to 71.1% for the six
months ended June 30, 2002. The acquisition expense ratio for the 2003
second quarter was 23.2%, compared to 16.8% for the 2002 second
quarter, and 23.7% for the six months ended June 30, 2003, compared to
15.5% for the six months ended June 30, 2002. The increase in the
acquisition expense ratio in the 2003 periods compared to the 2002
periods was due, in part, to the increased percentage of net premiums
earned from pro rata contracts. The other operating expense ratio for
the 2003 second quarter was 2.4%, compared to 2.7% for the 2002 second
quarter, and 2.4% for the six months ended June 30, 2003, compared to
4.0% for the six months ended June 30, 2002. The other operating
expense ratio decreased primarily due to the significant growth in net
premiums earned in the 2003 periods.
Gross premiums written in the insurance segment were $379.6
million for the 2003 second quarter, compared to $91.5 million for the
2002 second quarter, and $724.9 million for the six months ended June
30, 2003, compared to $150.3 million for the six months ended June 30,
2002. Net premiums written were $236.5 million for the 2003 second
quarter, compared to $46.4 million for the 2002 second quarter, and
$465.9 million for the six months ended June 30, 2003, compared to
$62.3 million for the six months ended June 30, 2002.
During 2002, the insurance segment established new profit centers
in various specialty lines and began writing business in its new areas
of focus in the 2002 second quarter. In addition, the insurance
segment added a number of new programs during 2002. Accordingly,
premiums written by the insurance segment for the 2003 second quarter
and six months ended June 30, 2003 are significantly higher than the
comparable 2002 amounts.
Net premiums earned in the insurance segment were $191.4 million
for the 2003 second quarter, compared to $17.1 million for the 2002
second quarter. For the six months ended June 30, 2003, net premiums
earned were $329.9 million, compared to $29.1 million for the six
months ended June 30, 2002.
The insurance segment's underwriting income, on a GAAP basis, was
$15.1 million for the 2003 second quarter, compared to an underwriting
loss of $3.4 million for the 2002 second quarter. For the six months
ended June 30, 2003, the insurance segment's underwriting income
increased to $22.0 million from an underwriting loss of $3.4 million
for the six months ended June 30, 2002. The combined ratio for the
insurance segment, on a GAAP basis, was 92.1% for the 2003 second
quarter, compared to 120.0% for the 2002 second quarter, and 93.3% for
the six months ended June 30, 2003, compared to 111.8% for the six
months ended June 30, 2002.
The insurance segment's loss ratio for the 2003 second quarter was
66.6%, compared to 77.1% for the 2002 first quarter, and 68.7% for the
six months ended June 30, 2003, compared to 78.4% for the six months
ended June 30, 2002. The insurance segment's acquisition expense ratio
for the 2003 second quarter, which is reflected net of policy-related
fee income, was 9.6%, compared to (7.2%) for the 2002 second quarter,
and 8.7% for the six months ended June 30, 2003, compared to (8.1%)
for the six months ended June 30, 2002. The increase in the
acquisition expense ratio in the 2003 periods compared to the 2002
periods primarily resulted from the increased contribution of business
from its new areas of focus. The other operating expense ratio for the
2003 second quarter was 15.9%, compared to 50.1% for the 2002 second
quarter, and 15.9% for the six months ended June 30, 2003, compared to
41.5% for the six months ended June 30, 2002. While aggregate other
operating expenses were higher for the 2003 periods compared to the
2002 periods, the other operating expense ratio decreased primarily
due to the significant growth in net premiums earned in the 2003
periods.
The Company will hold a conference call for investors and analysts
at 11:00 a.m. Eastern Time on August 5, 2003. A live webcast of this
call will be available at http://www.vcall.com/CEPage.asp?ID=84296 and
will be archived on VCall's website from 1:00 p.m. Eastern Time on
August 5, 2003 through midnight Eastern Time on September 5, 2003. A
telephone replay of the conference call also will be available
beginning on August 5, 2003 at 12:00 p.m. Eastern Time until August 8,
2003 at midnight Eastern Time. To access the replay, domestic callers
should dial 877-660-6853 (account 1628, confirmation number 71996),
and international callers should dial 201-612-7415 (account 1628,
confirmation number 71996).
Arch Capital Group Ltd., a Bermuda-based company with
approximately $1.6 billion in equity capital, 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 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
this release are forward-looking statements. Forward-looking
statements can generally be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate," "believe" or "continue" 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, and include:

-- the Company's ability to successfully implement its business
strategy;

-- acceptance of the Company's products and services and security
by brokers and insureds;

-- acceptance of the Company's business strategy, security and
financial condition by rating agencies and regulators;

-- general economic and market conditions (including inflation,
interest rates and foreign currency exchange rates) 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 new management
and operating personnel and to establish and maintain
operating procedures to effectively support its new
underwriting initiatives and to develop accurate actuarial
data and develop and implement actuarial models and
procedures;

-- the loss of key personnel;

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

-- estimates and judgments, including those related to revenue
recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad
debts, income taxes, contingencies and litigation, for a
relatively new insurance and reinsurance company, like the
Company, are even more difficult to make than those for a
mature company since very limited historical information has
been reported to us through June 30, 2003;

-- greater than expected loss ratios on business written by the
Company and adverse development on reserves for losses and
loss adjustment expenses related to business written by the
Company;

-- 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 the Company's 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;

-- 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 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;

-- changes in accounting principles or the application of such
principles by accounting firms or regulators;

-- 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

-- rating agency policies and practices.

In addition, other general factors could affect the Company's
results, including: (a) developments in the world's financial and
capital markets and the Company's access to such markets; (b) changes
in regulation or tax laws applicable to the Company, its subsidiaries,
brokers or customers; and (c) the effects of business disruption or
economic contraction due to terrorism or other hostilities.
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.



ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)

(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- --------- ---------- ----------
Revenues
Net premiums written $560,002 $223,025 $1,336,865 $503,736
Increase in unearned
premiums (51,146) (109,566) (423,558) (322,750)
---------- --------- ---------- ----------
Net premiums earned 508,856 113,459 913,307 180,986
Net investment income 19,772 11,611 38,210 20,778
Net realized investment
gains 3,889 2,476 10,088 1,011
Fee income 4,934 2,733 10,610 5,488
Other income 587 778 1,726 1,576
---------- --------- ---------- ----------
Total revenues 538,038 131,057 973,941 209,839

Expenses
Losses and loss
adjustment expenses 331,333 80,304 594,461 130,844
Acquisition expenses 95,620 17,755 173,772 25,065
Other operating
expenses 40,995 13,456 72,075 25,961
Net foreign exchange
gains (1,761) (3,352) (2,811) (3,244)
Non-cash compensation 3,498 8,636 7,762 12,764
---------- --------- ---------- ----------
Total expenses 469,685 116,799 845,259 191,390

Income Before Income
Taxes 68,353 14,258 128,682 18,449

Income tax expense
(benefit) 6,569 (4,968) 14,412 (4,743)
---------- --------- ---------- ----------

Net Income $61,784 $19,226 $114,270 $23,192
========== ========= ========== ==========

Net Income Per Share
Data
Basic $2.36 $0.95 $4.38 $1.39
Diluted $0.91 $0.33 $1.70 $0.42

Average Shares
Outstanding
Basic 26,185,445 20,323,114 26,101,843 16,691,051
Diluted 67,728,798 58,877,515 67,381,859 54,981,185


ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

(Unaudited)
June 30, December 31,
2003 2002
---------- -----------
Assets
Investments:
Fixed maturities available for sale, at fair
value (amortized cost: 2003, $2,218,222;
2002, $1,334,637) $2,293,223 $1,382,104
Short-term investments available for sale, at
fair value (amortized cost: 2003, $244,950;
2002, $480,541) 244,950 480,541
Privately held securities (cost: 2003,
$26,787; 2002, $31,630) 28,606 31,536
---------- ----------
Total investments 2,566,779 1,894,181
---------- ----------

Cash 62,013 91,717
Accrued investment income 25,570 17,127
Premiums receivable 560,861 343,716
Funds held by reinsureds 116,038 58,351
Unpaid losses and loss adjustment expenses
recoverable 306,436 211,100
Paid losses and loss adjustment expenses
recoverable 18,496 14,462
Prepaid reinsurance premiums 188,840 120,191
Goodwill 35,882 28,867
Deferred income tax asset 13,937 16,514
Deferred acquisition costs, net 240,300 148,960
Other assets 67,854 46,142
---------- ----------
Total Assets $4,203,006 $2,991,328
========== ==========

Liabilities
Reserve for losses and loss adjustment
expenses $1,185,593 $592,432
Unearned premiums 1,253,518 761,310
Reinsurance balances payable 81,591 89,191
Investment accounts payable 5,658 45,960
Other liabilities 110,304 91,191
---------- ----------
Total Liabilities 2,636,664 1,580,084
---------- ----------

Commitments and Contingencies

Shareholders' Equity
Preferred shares ($0.01 par value, 50,000,000
shares authorized, issued: 2003, 38,844,665;
2002, 38,844,665) 388 388
Common shares ($0.01 par value, 200,000,000
shares authorized, issued: 2003, 28,034,809;
2002, 27,725,334) 280 277
Additional paid-in capital 1,356,014 1,347,165
Deferred compensation under share award plan (20,321) (25,290)
Retained earnings 161,642 47,372
Accumulated other comprehensive income
consisting of unrealized
appreciation in value of investments, net of
deferred income tax 68,339 41,332
---------- ----------
Total Shareholders' Equity 1,566,342 1,411,244
---------- ----------
Total Liabilities and Shareholders' Equity $4,203,006 $2,991,328
========== ==========



ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)

(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
Preference Shares
Balance at beginning of year $388 $357
Preference shares issued -- 9
---------- ----------
Balance at end of period 388 366
---------- ----------

Common Shares
Balance at beginning of year 277 135
Common shares issued 3 103
---------- ----------
Balance at end of period 280 238
---------- ----------

Additional Paid-in Capital
Balance at beginning of year 1,347,165 1,039,887
Common shares issued 8,337 242,354
Common shares retired (646) --
Stock options 1,158 160
---------- ----------
Balance at end of period 1,356,014 1,282,401
---------- ----------

Deferred Compensation Under Share Award Plan
Balance at beginning of year (25,290) (8,230)
Restricted common shares issued (2,686) (63,615)
Deferred compensation expense recognized 7,655 12,604
---------- ----------
Balance at end of period (20,321) (59,241)
---------- ----------

Retained Earnings (Deficit)
Balance at beginning of year 47,372 (11,610)
Net income 114,270 23,192
---------- ----------
Balance at end of period 161,642 11,582
---------- ----------

Accumulated Other Comprehensive Income
Unrealized Appreciation (Decline) in Value of
Investments,
Net of Deferred Income Tax
Balance at beginning of year 41,332 (170)
Change in unrealized appreciation (decline) 27,007 10,871
---------- ----------
Balance at end of period 68,339 10,701
---------- ----------

Total Shareholders' Equity $1,566,342 $1,246,047
========== ==========



ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
Comprehensive Income
Net income $114,270 $23,192
Other comprehensive income, net of deferred
income tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during period 35,868 10,098
Reclassification of net realized (gains) losses
included in net income (8,861) 773
---------- ----------
Other comprehensive income 27,007 10,871
---------- ----------
Comprehensive Income $141,277 $34,063
========== ==========



ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

(Unaudited)
Six Months Ended
June 30,
2003 2002
----------- ---------
Operating Activities
Net income $114,270 $23,192
Adjustments to reconcile net income to net cash
provided by
operating activities:
Net realized investment gains (10,088) (1,011)
Provision for non-cash compensation 7,762 12,764
Net unrealized foreign exchange gains (1,647) (3,263)
Changes in:
Reserve for losses and loss adjustment
expenses, net of unpaid losses and loss
adjustment expenses recoverable 494,838 106,430
Unearned premiums, net of prepaid reinsurance
premiums 423,559 322,458
Premiums receivable (214,277) (240,069)
Deferred acquisition costs (91,340) (56,391)
Funds held by reinsureds (57,626) (27,247)
Reinsurance balances payable (7,600) (9,490)
Accrued investment income (8,411) (5,894)
Paid losses and loss adjustment expenses
recoverable (4,039) (2,436)
Deferred income tax asset 27 (4,626)
Other liabilities 20,790 16,801
Loan to Chairman -- (13,530)
Other items, net 1,635 (3,983)
---------- ---------
Net Cash Provided By Operating Activities 667,853 113,705
---------- ---------

Investing Activities
Purchases of fixed maturity investments (1,602,839) (885,654)
Release of escrowed assets -- (18,833)
Sales of fixed maturity investments 683,660 300,277
Sales of equity securities 7,019 13,802
Net sales of short-term investments 235,943 329,843
Acquisitions, net of cash (11,774) (2,513)
Purchases of furniture, equipment and other (12,802) (2,073)
---------- ---------
Net Cash Used For Investing Activities (700,793) (265,151)
---------- ---------

Financing Activities
Proceeds from common shares issued 3,882 179,154
Repurchase of common shares (646) --
Debt retirement and other -- (37)
---------- ---------
Net Cash Provided By Financing Activities 3,236 179,117
---------- ---------

(Decrease) increase in cash (29,704) 27,671
Cash beginning of year 91,717 9,970
---------- ---------
Cash end of period $62,013 $37,641
========== =========



ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(in thousands except share data)

(Unaudited) (Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
Investment income yield (at amortized
cost) 2003 2002 2003 2002
------ ------ ------ ------
Pre-tax 3.3% 4.1% 3.4% 3.6%
After-tax 2.9% 3.6% 3.0% 3.1%



(Unaudited)
Fixed Maturities and Short-term June 30, December 31,
Investments 2003 2002
---------- -----------

Average duration (in years) 2.2 2.1
Average credit quality (Standard &
Poors) AA- AA-

(Unaudited)
Six Months Ended
June 30,
2003 2002
------ ------

Annualized operating return on beginning equity (1) 15.4% 4.7%

(1) Annualized operating return on beginning equity, a non-GAAP
measure, equals annualized operating income divided by
shareholders' equity as of the beginning of the year.


Segment Information

The determination of the Company's business segments is based on
the manner in which the Company monitors the performance of its
underwriting operations. The Company classifies its businesses into
two underwriting segments - reinsurance and insurance - and a
corporate and other segment (non-underwriting). The Company does not
manage its assets by segment and, accordingly, investment income is
not allocated to each underwriting segment. In addition, other revenue
and expense items are not evaluated by segment. Management measures
segment performance based on underwriting income or loss. The
accounting policies of the segments are the same as those used for the
preparation of our consolidated financial statements. Inter-segment
insurance business is allocated to the segment accountable for the
underwriting results in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
The reinsurance segment consists of the Company's reinsurance
underwriting subsidiaries. The reinsurance segment generally seeks to
write significant lines on specialty property and casualty reinsurance
treaties. Classes of business focused on include casualty, casualty
clash, marine, aviation and space, non-traditional, other specialty,
property catastrophe and property excluding property catastrophe
(losses on a single risk, both excess of loss and pro rata).
The insurance segment consists of the Company's insurance
underwriting subsidiaries which primarily write on a direct basis. The
insurance segment currently consists of eight product lines, including
casualty, construction and surety, executive assurance, healthcare,
professional liability, programs, property, and other (primarily
non-standard auto, collateralized protection business and accident and
health and corporate risk programs).
The corporate and other segment (non-underwriting) includes net
investment income, other fee income and other expenses incurred by the
Company, net realized investment gains or losses, net foreign exchange
gains or losses and non-cash compensation. The corporate and other
segment also includes the results of the Company's merchant banking
operations.
The following tables set forth (i) underwriting income or loss by
segment, together with a reconciliation of underwriting income or loss
to net income, and (ii) net premiums written and earned for each major
line of business and net premiums written by client location by
segment. Certain prior period information has been reclassified to
conform to the current presentation.



(Unaudited)
Three Months Ended
June 30, 2003
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------

Gross premiums written (1) $337,038 $379,607 $676,005
Net premiums written 323,520 236,482 560,002

Net premiums earned $317,504 $191,352 $508,856
Policy-related fee income -- 3,562 3,562
Other underwriting-related fee income 1,801 -- 1,801
Losses and loss adjustment expenses (203,797) (127,536) (331,333)
Acquisition expenses, net (73,702) (21,918) (95,620)
Other operating expenses (7,663) (30,402) (38,065)
---------- --------- ---------
Underwriting income (loss) - GAAP basis $34,143 $15,058 49,201
========== =========

Net investment income 19,772
Other fee income, net of related
expenses (429)
Other expenses (2,930)
---------

Pre-tax operating income 65,614
Income tax expense (6,373)
---------
After-tax operating income 59,241

Net realized investment gains, net of
$374 tax expense 3,515
Net foreign exchange gains, net of $0
tax expense 1,761
Other income, net of $205 tax expense 382
Non-cash compensation, net of $383 tax
benefit (3,115)
---------
Net income $61,784
=========

Diluted Per Share Results
Operating income $0.87
Net realized investment gains 0.05
Net foreign exchange gains 0.03
Other income 0.01
Non-cash compensation (0.05)
---------
Net income per share $0.91
=========

Statutory Basis (2)
Loss ratio 64.2% 66.6% 65.1%
Acquisition expense ratio (3) 24.8% 10.7% 18.8%
Other operating expense ratio 3.2% 14.1% 7.8%
---------- --------- ---------
Combined ratio 92.2% 91.4% 91.7%
---------- --------- ---------

GAAP Basis (2)
Loss ratio 64.2% 66.6% 65.1%
Acquisition expense ratio (3) 23.2% 9.6% 18.1%
Other operating expense ratio 2.4% 15.9% 7.5%
---------- --------- ---------
Combined ratio 89.8% 92.1% 90.7%
---------- --------- ---------

(1) Gross premiums written by the insurance segment have been ceded
to, and are also included in, the reinsurance segment's gross
premiums written. Accordingly, the sum of gross premiums written
for each segment does not agree to the total gross premiums
written as shown in the table above, due to the elimination of
intercompany transactions in the total.
(2) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(3) The acquisition expense ratio is adjusted to include
policy-related fee income.


(Unaudited)
Three Months Ended
June 30, 2002
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------

Gross premiums written (1) $180,339 $91,546 $253,655
Net premiums written 176,619 46,406 223,025

Net premiums earned $96,330 $17,129 113,459
Policy-related fee income -- 2,767 2,767
Losses and loss adjustment expenses (67,100) (13,204) (80,304)
Acquisition expenses, net (16,226) (1,529) (17,755)
Other operating expenses (2,615) (8,588) (11,203)
---------- --------- ---------
Underwriting income (loss) - GAAP basis $10,389 ($3,425) 6,964
========== =========

Net investment income 11,611
Other fee income, net of related
expenses (34)
Other expenses (2,253)
---------

Pre-tax operating income 16,288
Income tax expense (774)
---------
After-tax operating income 15,514

Net realized investment gains, net of
$2,088 tax expense 388
Net foreign exchange gains, net of $0
tax expense 3,352
Other income, net of $134 tax expense 644
Reversal of deferred tax asset
valuation allowance 7,421
Non-cash compensation, net of $543 tax
benefit (8,093)
---------
Net income $19,226
=========

Diluted Per Share Results
Operating income $0.27
Net realized investment gains 0.01
Net foreign exchange gains 0.06
Other income 0.01
Reversal of deferred tax asset
valuation allowance 0.12
Non-cash compensation (0.14)
---------
Net income per share $0.33
=========

Statutory Basis (2)
Loss ratio 69.7% 77.1% 70.8%
Acquisition expense ratio (3) 19.0% 0.6% 15.3%
Other operating expense ratio 3.8% 26.8% 8.5%
---------- --------- ---------
Combined ratio 92.5% 104.5% 94.6%
---------- --------- ---------

GAAP Basis (2)
Loss ratio 69.7% 77.1% 70.8%
Acquisition expense ratio (3) 16.8% (7.2%) 13.2%
Other operating expense ratio 2.7% 50.1% 9.9%
---------- --------- ---------
Combined ratio 89.2% 120.0% 93.9%
---------- --------- ---------

(1) Gross premiums written by the insurance segment have been ceded
to, and are also included in, the reinsurance segment's gross
premiums written. Accordingly, the sum of gross premiums written
for each segment does not agree to the total gross premiums
written as shown in the table above, due to the elimination of
intercompany transactions in the total.
(2) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(3) The acquisition expense ratio is adjusted to include
policy-related fee income.



(Unaudited)
Six Months Ended
June 30, 2003
---------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- -----------

Gross premiums written (1) $899,699 $724,913 $1,536,105
Net premiums written 870,956 465,909 1,336,865

Net premiums earned $583,451 $329,856 $913,307
Policy-related fee income -- 6,775 6,775
Other underwriting-related fee income 3,728 -- 3,728
Losses and loss adjustment expenses (367,712) (226,749) (594,461)
Acquisition expenses, net (138,368) (35,404) (173,772)
Other operating expenses (13,782) (52,491) (66,273)
--------- --------- ----------
Underwriting income (loss) - GAAP
basis $67,317 $21,987 89,304
========= =========

Net investment income 38,210
Other fee income, net of related
expenses 107
Other expenses (5,802)
----------

Pre-tax operating income 121,819
Income tax expense (13,400)
----------
After-tax operating income 108,419

Net realized investment gains, net of
$1,227 tax expense 8,861
Net foreign exchange gains, net of $0
tax expense 2,811
Other income, net of $373 tax expense 1,353
Non-cash compensation, net of $588
tax benefit (7,174)
----------
Net income $114,270
==========

Diluted Per Share Results
Operating income $1.61
Net realized investment gains 0.13
Net foreign exchange gains 0.04
Other income 0.02
Non-cash compensation (0.10)
----------
Net income per share $1.70
==========

Statutory Basis (2)
Loss ratio 63.0% 68.7% 65.1%
Acquisition expense ratio (3) 22.5% 10.6% 18.4%
Other operating expense ratio 2.2% 12.9% 5.9%
--------- --------- ----------
Combined ratio 87.7% 92.2% 89.4%
--------- --------- ----------

GAAP Basis (2)
Loss ratio 63.0% 68.7% 65.1%
Acquisition expense ratio (3) 23.7% 8.7% 18.3%
Other operating expense ratio 2.4% 15.9% 7.3%
--------- --------- ----------
Combined ratio 89.1% 93.3% 90.7%
--------- --------- ----------

(1) Gross premiums written by the insurance segment have been ceded
to, and are also included in, the reinsurance segment's gross
premiums written. Accordingly, the sum of gross premiums written
for each segment does not agree to the total gross premiums
written as shown in the table above, due to the elimination of
intercompany transactions in the total.
(2) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(3) The acquisition expense ratio is adjusted to include
policy-related fee income.



(Unaudited)
Six Months Ended
June 30, 2002
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------

Gross premiums written (1) $445,200 $150,268 $558,450
Net premiums written 441,480 62,256 503,736

Net premiums earned $151,863 $29,123 $180,986
Policy-related fee income -- 3,935 3,935
Losses and loss adjustment expenses (108,005) (22,839) (130,844)
Acquisition expenses, net (23,487) (1,578) (25,065)
Other operating expenses (6,133) (12,090) (18,223)
---------- --------- ---------
Underwriting income (loss) - GAAP basis $14,238 ($3,449) 10,789
========== =========

Net investment income 20,778
Other fee income, net of related
expenses (646)
Other expenses (5,539)
---------

Pre-tax operating income 25,382
Income tax expense (1,500)
---------
After-tax operating income 23,882

Net realized investment losses, net of
$1,784 tax expense (773)
Net foreign exchange gains, net of $0
tax expense 3,244
Other income, net of $392 tax expense 1,184
Reversal of deferred tax asset
valuation allowance 7,421
Non-cash compensation, net of $998 tax
benefit (11,766)
---------
Net income $23,192
=========

Diluted Per Share Results
Operating income $0.43
Net realized investment losses (0.01)
Net foreign exchange gains 0.06
Other income 0.02
Reversal of deferred tax asset
valuation allowance 0.13
Non-cash compensation (0.21)
---------
Net income per share $0.42
=========

Statutory Basis (2)
Loss ratio 71.1% 78.4% 72.3%
Acquisition expense ratio (3) 15.5% (2.9%) 13.2%
Other operating expense ratio 2.8% 27.0% 5.8%
---------- --------- ---------
Combined ratio 89.4% 102.5% 91.3%
---------- --------- ---------

GAAP Basis (2)
Loss ratio 71.1% 78.4% 72.3%
Acquisition expense ratio (3) 15.5% (8.1%) 11.7%
Other operating expense ratio 4.0% 41.5% 10.0%
---------- --------- ---------
Combined ratio 90.6% 111.8% 94.0%
---------- --------- ---------

(1) Gross premiums written by the insurance segment have been ceded
to, and are also included in, the reinsurance segment's gross
premiums written. Accordingly, the sum of gross premiums written
for each segment does not agree to the total gross premiums
written as shown in the table above, due to the elimination of
intercompany transactions in the total.
(2) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(3) The acquisition expense ratio is adjusted to include
policy-related fee income.



(Unaudited)
Three Months Ended
June 30,
2003 2002
---------------- ----------------
REINSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ --------- ------

Major line of business:
Net premiums written
Casualty $141,864 43.9% $16,128 9.1%
Property excluding property
catastrophe 69,248 21.4% 41,203 23.3%
Other specialty 67,926 21.0% 71,194 40.3%
Property catastrophe 23,337 7.2% 28,315 16.0%
Marine, aviation and space 14,349 4.4% 9,639 5.5%
Non-traditional 3,948 1.2% 8,361 4.8%
Casualty clash 2,848 0.9% 1,779 1.0%
-------- ----- -------- -----
Total $323,520 100.0% $176,619 100.0%
======== ===== ======== =====

Net premiums earned
Casualty $112,101 35.3% $12,628 13.1%
Property excluding property
catastrophe 70,684 22.3% 16,509 17.1%
Other specialty 62,916 19.8% 25,492 26.5%
Property catastrophe 29,634 9.3% 19,922 20.7%
Marine, aviation and space 21,689 6.8% 5,992 6.2%
Non-traditional 16,423 5.2% 12,513 13.0%
Casualty clash 4,057 1.3% 3,274 3.4%
-------- ----- -------- -----
Total $317,504 100.0% $96,330 100.0%
======== ===== ======== =====

Client location:
Net premiums written
United States $195,170 60.3% $97,103 55.0%
United Kingdom 57,286 17.7% 28,689 16.2%
Bermuda 13,973 4.3% 6,448 3.7%
Japan 13,870 4.3% 12,005 6.8%
Canada 11,194 3.5% 9,978 5.6%
Germany 8,097 2.5% 3,021 1.7%
France 6,456 2.0% 4,778 2.7%
Switzerland 3,179 1.0% 372 0.2%
Other 14,295 4.4% 14,225 8.1%
-------- ----- -------- -----
Total $323,520 100.0% $176,619 100.0%
======== ===== ======== =====



(Unaudited)
Six Months Ended
June 30,
2003 2002
---------------- ----------------
REINSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ --------- ------

Major line of business:
Net premiums written
Casualty $305,824 35.1% $56,868 12.9%
Other specialty 203,941 23.4% 101,449 23.0%
Property excluding property
catastrophe 181,848 20.9% 83,875 19.0%
Property catastrophe 72,110 8.3% 79,030 17.9%
Non-traditional 51,583 5.9% 78,731 17.8%
Marine, aviation and space 45,770 5.3% 28,598 6.5%
Casualty clash 9,880 1.1% 12,929 2.9%
-------- ----- -------- -----
Total $870,956 100.0% $441,480 100.0%
======== ===== ======== =====

Net premiums earned
Casualty $190,608 32.7% $19,144 12.6%
Other specialty 120,588 20.6% 32,974 21.7%
Property excluding property
catastrophe 131,751 22.6% 24,339 16.0%
Property catastrophe 57,245 9.8% 31,854 21.0%
Non-traditional 38,451 6.6% 27,463 18.1%
Marine, aviation and space 37,271 6.4% 10,012 6.6%
Casualty clash 7,537 1.3% 6,077 4.0%
-------- ----- -------- -----
Total $583,451 100.0% $151,863 100.0%
======== ===== ======== =====

Client location:
Net premiums written
United States $524,058 60.2% $208,850 47.3%
United Kingdom 166,784 19.2% 107,072 24.3%
Bermuda 48,297 5.5% 18,772 4.2%
Canada 27,370 3.1% 17,909 4.0%
France 25,887 3.0% 20,119 4.6%
Germany 21,824 2.5% 26,724 6.1%
Japan 14,336 1.6% 12,056 2.7%
Switzerland 7,460 0.9% 899 0.2%
Other 34,940 4.0% 29,079 6.6%
-------- ----- -------- -----
Total $870,956 100.0% $441,480 100.0%
======== ===== ======== =====


(Unaudited)
Three Months Ended
June 30,
2003 2002
---------------- ---------------
INSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ -------- ------

Major line of business:
Net premiums written
Programs $76,949 32.5% $6,429 13.8%
Casualty 50,992 21.5% 7,936 17.1%
Professional liability 28,845 12.2% 2,138 4.6%
Construction and surety 22,504 9.5% 2,643 5.7%
Property 20,503 8.7% 5,130 11.1%
Executive assurance 20,502 8.7% 10,871 23.4%
Healthcare (1) (1,463) (0.6%) -- --
Other 17,650 7.5% 11,259 24.3%
-------- ----- -------- -----
Total $236,482 100.0% $46,406 100.0%
======== ===== ======== =====

Net premiums earned
Programs $61,328 32.1% $3,251 19.0%
Casualty 36,756 19.2% 318 1.8%
Professional liability 14,752 7.7% 317 1.8%
Construction and surety 15,901 8.3% 319 1.9%
Property 17,124 8.9% 387 2.3%
Executive assurance 18,855 9.9% 1,671 9.8%
Healthcare 7,084 3.7% -- --
Other 19,552 10.2% 10,866 63.4%
-------- ----- -------- -----
Total $191,352 100.0% $17,129 100.0%
======== ===== ======== =====

Client location:
Net premiums written
United States $232,743 98.4% $45,300 97.6%
United Kingdom 936 0.4% 880 1.9%
Indonesia 691 0.3% -- --
Taiwan 527 0.2% -- --
U.S. Virgin Islands 415 0.2% -- --
Venezuela 44 0.0% -- --
Other 1,126 0.5% 226 0.5%
-------- ----- -------- -----
Total $236,482 100.0% $46,406 100.0%
======== ===== ======== =====

(1) Amount reflects approximately $16.0 million of ceded premiums
related to reinsurance arrangements covering the six months ended
June 30, 2003 which were recorded in the 2003 second quarter.



(Unaudited)
Six Months Ended
June 30,
2003 2002
---------------- ---------------
INSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ -------- ------

Major line of business:
Net premiums written
Programs $147,576 31.7% $8,696 14.0%
Casualty 100,327 21.5% 7,936 12.8%
Professional liability 48,688 10.4% 2,138 3.4%
Executive assurance 45,766 9.8% 12,783 20.5%
Construction and surety 42,214 9.1% 2,643 4.2%
Property 34,741 7.5% 5,130 8.3%
Healthcare 14,801 3.2% -- --
Other 31,796 6.8% 22,930 36.8%
-------- ----- -------- -----
Total $465,909 100.0% $62,256 100.0%
======== ===== ======== =====

Net premiums earned
Programs $101,160 30.7% $4,983 17.1%
Casualty 62,011 18.8% 318 1.1%
Professional liability 23,127 7.0% 317 1.1%
Executive assurance 35,129 10.6% 1,767 6.1%
Construction and surety 25,730 7.8% 319 1.1%
Property 29,619 9.0% 387 1.3%
Healthcare 15,897 4.8% -- --
Other 37,183 11.3% 21,032 72.2%
-------- ----- -------- -----
Total $329,856 100.0% $29,123 100.0%
======== ===== ======== =====

Client location:
Net premiums written
United States $461,071 99.0% $61,150 98.2%
United Kingdom 971 0.2% 880 1.4%
Indonesia 691 0.1% -- --
U.S. Virgin Islands 547 0.1% -- --
Taiwan 527 0.1% -- --
Venezuela 385 0.1% -- --
Other 1,717 0.4% 226 0.4%
-------- ----- -------- -----
Total $465,909 100.0% $62,256 100.0%
======== ===== ======== =====

Calculation of Book Value Per Share

The following actual book value per share calculations are based
on shareholders' equity of approximately $1.6 billion and $1.4 billion
at June 30, 2003 and December 31, 2002, respectively. Book value per
share excludes the effects of stock options and Class B warrants.


(Unaudited)
June 30, 2003 December 31, 2002
---------------------- ----------------------

Common Common
Shares and Cumulative Shares and Cumulative
Potential Book Potential Book
Common Value Per Common Value Per
Shares Share Shares Share
----------- ---------- ----------- ----------
Common shares (1) 28,034,809 $26.77 27,725,334 $21.48
Series A convertible
preference shares 38,844,665 $23.42 38,844,665 $21.20
---------- ----------
Common shares and
potential common shares 66,879,474 66,569,999
========== ==========

(1) Book value per common share at June 30, 2003 and December 31, 2002
was determined by dividing (i) the difference between total
shareholders' equity and the aggregate liquidation preference of
the Series A convertible preference shares of $815.7 million, by
(ii) the number of common shares outstanding. Restricted common
shares are included in the number of common shares outstanding as
if such shares were issued on the date of grant.

Pursuant to the subscription agreement entered in connection with
the November 2001 capital infusion (the "Subscription Agreement"), a
post-closing purchase price adjustment will be calculated in November
2003 (or such earlier date as agreed upon by the Company and the
investors thereunder) based on an adjustment basket. The adjustment
basket will be equal to (1) the difference between value realized upon
sale and the GAAP book value at the closing of the capital infusion
(November 2001) (as adjusted based on a pre-determined growth rate) of
agreed upon non-core businesses; plus (2) the difference between GAAP
net book value of the Company's insurance balances attributable to the
Company's core insurance operations with respect to any policy or
contract written or having a specified effective date at the time of
the final adjustment and those balances at the closing; minus (3)
reductions in book value arising from costs and expenses relating to
the transaction provided under the Subscription Agreement, actual
losses arising out of breach of representations under the Subscription
Agreement and certain other costs and expenses. If the adjustment
basket is less than zero, the Company will issue additional preference
shares to the investors based on the decrease in value of the
components of the adjustment basket. If the adjustment basket is
greater than zero, the Company is allowed to use cash in an amount
based on the increase in value of the components of the adjustment
basket to repurchase common shares (other than any common shares
issued upon conversion of the preference shares or exercise of the
Class A warrants). In addition, on the fourth anniversary of the
closing, there will be a calculation of a further adjustment basket
based on (1) liabilities owed to Folksamerica (if any) under the Asset
Purchase Agreement, dated as of January 10, 2000, between the Company
and Folksamerica, and (2) specified tax and ERISA matters under the
Subscription Agreement.