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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001
                                       Or
[_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the transition period ___________________ to _____________________

Commission file number:  0-26456

                             ARCH CAPITAL GROUP LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                Bermuda                              Not Applicable
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

           20 Horseneck Lane
         Greenwich, Connecticut                           06830
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code: (203) 862-4300


   --------------------------------------------------------------------------
   (Former name, former address and former fiscal year, if changed since last
                                     report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes        X          No  ______
      -----------

Indicate the number of shares outstanding of each of the issuer's classes of
common shares.



                 CLASS                        OUTSTANDING AT MARCH 31, 2001
                 -----                        -----------------------------
                                                    
     Common Shares, $.01 par value                     12,828,879



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                             ARCH CAPITAL GROUP LTD.


                                      INDEX



                                                                        PAGE NO.
                                                                       ----------
PART I.  FINANCIAL INFORMATION
                                                                        
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS

        Review Report of Independent Accountants                           1

        Consolidated Balance Sheet                                         2
          March 31, 2001 and December 31, 2000

        Consolidated Statement of Income                                   3
          For the three month periods ended March 31, 2001 and 2000

        Consolidated Statement of Shareholders' Equity and                 4
        Comprehensive Income
          For the three month periods ended March 31, 2001 and 2000

        Consolidated Statement of Cash Flows                               5
          For the three month periods ended March 31, 2001 and 2000

        Notes to Consolidated Financial Statements                         6

ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS                                       16

ITEM 3-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       22

PART II.  OTHER INFORMATION

ITEM 1-- LEGAL PROCEEDINGS                                                23

ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K                                 23









                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Arch Capital Group Ltd.:

We have reviewed the accompanying consolidated balance sheet of Arch Capital
Group Ltd. (formerly known as Risk Capital Holdings, Inc.) and its subsidiaries
as of March 31, 2001, and the related consolidated statements of income, of
changes in shareholders' equity and comprehensive income and of cash flows for
each of the three-month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial information for it to
be in conformity with accounting principles generally accepted in the United
States of America.

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, and the related consolidated statements of income and comprehensive
income, of changes in shareholders' equity, and of cash flows for the year then
ended (not presented herein), and in our report dated February 6, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.



/s/ PricewaterhouseCoopers

Hamilton, Bermuda
May 14, 2001












                                       1



                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)



                                                                            (UNAUDITED)
                                                                             MARCH 31,   DECEMBER 31,
                                                                               2001         2000
                                                                            -----------  -----------
                                                                                     
ASSETS
Investments:
Fixed maturities (amortized cost:  2001, $90,678; 2000, $37,849)              $90,400      $38,475
Publicly traded equity securities (cost:  2001, $16,859; 2000, $24,987)        28,224       51,322
Privately held securities (cost:  2001, $52,132; 2000 $60,623)                 52,080       59,437
Securities held in escrow (amortized cost:  2001, $21,105; 2000, $20,887)      21,373       20,970
Short-term investments                                                         72,421       97,387
                                                                            ---------    ---------
Total investments                                                             264,498      267,591
                                                                            ---------    ---------

Cash                                                                           20,290       11,481
Accrued investment income                                                       2,405        1,432
Premiums receivable                                                            39,459
Unpaid losses and loss expenses recoverable                                    34,520
Prepaid reinsurance premiums                                                   31,735
Reinsurance balances receivable                                                 9,654
Goodwill                                                                       20,381        6,111
Deferred income tax asset                                                       7,980        8,192
Deferred policy acquisition costs                                               2,485
Other assets                                                                    6,829        4,119
                                                                            ---------    ---------
TOTAL ASSETS                                                                 $440,236     $298,926
                                                                            =========    =========

LIABILITIES
Claims and claims expenses                                                    $53,413
Unearned premiums                                                              44,133
Reinsurance balances payable                                                   34,282
Reserve for contingent loss of escrowed assets                                 15,000      $15,000
Investment accounts payable                                                     5,792
Other liabilities                                                              15,135        8,608
                                                                            ---------    ---------
TOTAL LIABILITIES                                                             167,755       23,608
                                                                            ---------    ---------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value:
50,000,000 shares authorized (none issued)
Common shares, $.01 par value:
200,000,000 shares authorized
(issued:  2001, 12,831,860; 2000, 12,708,818)                                     128          127
Additional paid-in capital                                                    289,877      288,016
Deferred compensation under share award plan                                   (1,594)        (341)
Retained earnings (deficit)                                                   (22,775)     (30,916)
Less treasury shares, at cost (2001, 2,981)                                       (48)
Accumulated other comprehensive income consisting of unrealized
appreciation of investments, net of income tax                                  6,893       18,432
                                                                            ---------    ---------
TOTAL SHAREHOLDERS' EQUITY                                                    272,481      275,318
                                                                            ---------    ---------
Total Liabilities and Shareholders' Equity                                   $440,236     $298,926
                                                                            =========    =========



                          See Notes to Consolidated Financial Statements



                                       2





                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                        (IN THOUSANDS, EXCEPT SHARE DATA)



                                                    (UNAUDITED)
                                                THREE MONTHS ENDED
                                                     MARCH 31,
                                               2001            2000
                                           ------------    -------------
                                                     
REVENUES
Net premiums written                             $2,837         $52,889
(Increase) decrease in unearned premiums         (1,204)          5,273
                                           ------------    ------------
Net premiums earned                               1,633          58,162
Net investment income                             3,160           5,290
Net investment gains                              9,004          29,300
Equity in net income of investees                 1,036              46
Fee income                                        1,715
Net commission income                               482
                                           ------------    ------------
TOTAL REVENUES                                   17,030          92,798

EXPENSES
Claims and claims expenses                        1,545          53,875
Commissions and brokerage                                        16,753
Other operating expenses                          4,038           2,568
Foreign exchange loss                                             1,159
                                           ------------    ------------
TOTAL EXPENSES                                    5,583          74,355

INCOME BEFORE INCOME TAXES                       11,447          18,443

Federal income taxes:
Current                                             201             264
Deferred                                          3,105          12,371
                                           ------------    ------------
Income tax expense                                3,306          12,635
                                           ------------    ------------

NET INCOME                                       $8,141          $5,808
                                           ============    ============

AVERAGE SHARES OUTSTANDING
Basic                                        12,786,631      15,517,163
Diluted                                      12,792,448      15,518,341

Basic and diluted net income per share            $0.64           $0.37


              See Notes to Consolidated Financial Statements




                                       3



                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
     CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                                 (IN THOUSANDS)



                                                                                               (UNAUDITED)
                                                                                           THREE MONTHS ENDED,
                                                                                                MARCH 31,
                                                                                            2001          2000
                                                                                        ------------  ------------
                                                                                                
COMMON SHARES
Balance at beginning of year                                                                  $127         $171
Common shares issued                                                                             1
                                                                                        ------------  ------------
Balance at end of period                                                                       128          171
                                                                                        ------------  ------------

ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year                                                               288,016      342,034
Common shares issued                                                                         1,861          (22)
                                                                                        ------------  ------------
Balance at end of period                                                                   289,877      342,012
                                                                                        ------------  ------------

DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year                                                                  (341)        (317)
Restricted common shares (issued) cancelled                                                 (1,612)          22
Compensation expense recognized                                                                359           71
                                                                                        ------------  ------------
Balance at end of period                                                                    (1,594)        (224)
                                                                                        ------------  ------------

RETAINED EARNINGS (DEFICIT)
Balance at beginning of year                                                               (30,916)     (22,175)
Net income (loss)                                                                            8,141        5,808
                                                                                        ------------  ------------
Balance at end of period                                                                   (22,775)     (16,367)
                                                                                        ------------  ------------

TREASURY SHARES, AT COST
Balance at beginning of year                                                                               (387)
Purchase of treasury shares                                                                    (48)     (59,210)
                                                                                        ------------  ------------
Balance at end of period                                                                       (48)     (59,597)
                                                                                        ------------  ------------

ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED APPRECIATION OF INVESTMENTS, NET OF INCOME TAX
Balance at beginning of year                                                                18,432       27,188
Change in unrealized appreciation (depreciation)                                           (11,539)     (43,930)
                                                                                        ------------  ------------
Balance at end of period                                                                     6,893      (16,742)
                                                                                        ------------  ------------

TOTAL SHAREHOLDERS' EQUITY                                                                $272,481     $249,253
                                                                                        ============  ============

COMPREHENSIVE INCOME (LOSS)
  Net income                                                                                $8,141       $5,808
  Other comprehensive income, net of tax
    Unrealized appreciation (depreciation) of investments:
      Unrealized holding gains (losses) arising during period                               (5,387)     (24,885)

      Less:  reclassification adjustment for net realized gains included in net income      (6,152)     (19,045)

                                                                                        ------------  ------------
  Other comprehensive income (loss)                                                        (11,539)     (43,930)
                                                                                        ------------  ------------
Comprehensive Income (Loss)                                                                ($3,398)    ($38,122)
                                                                                        ============  ============


                                See Notes to Consolidated Financial Statements



                                       4



                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)




                                                                                    (UNAUDITED)
                                                                                THREE MONTHS ENDED,
                                                                                     MARCH 31,
                                                                                2001          2000
                                                                            ------------  ------------
                                                                                       
OPERATING ACTIVITIES
Net income                                                                      $8,141       $5,808
 Adjustments to reconcile net income
 to net cash provided by operating activities:
  Liability for claims and claims expenses                                         236       13,743
  Unearned premiums                                                              2,771       (5,274)
  Premiums receivable                                                           (2,478)       3,949
  Accrued investment income                                                       (820)         790
  Reinsurance recoverables                                                      (1,542)      (6,645)
  Reinsurance balances payable                                                   1,103        1,377
  Deferred policy acquisition costs                                               (241)       1,300
  Net investment (gains)/losses                                                 (9,004)     (29,300)
  Deferred income tax asset                                                        213       12,371
  Other liabilities                                                             (1,820)      (3,092)
  Other items, net                                                               3,747        2,279
                                                                            ------------  ------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                               306       (2,694)
                                                                            ------------  ------------

INVESTING ACTIVITIES
Purchases of fixed maturity investments                                        (46,708)     (83,092)
Sales of fixed maturity investments                                             13,117      136,903
Purchases of equity securities                                                              (12,119)
Sales of equity securities                                                      17,986       26,331
Net (purchases)/sales of short-term investments                                 23,954      (66,982)
Sale or disposal (purchases) of furniture and equipment                            (22)           6
Acquisition of American Independent Insurance Holding Company,
     net of cash acquired                                                          224
                                                                            ------------  ------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES                             8,551        1,047
                                                                            ------------  ------------

FINANCING ACTIVITIES
Common shares issued                                                             1,862          (22)
Purchase of treasury shares                                                        (48)       3,637
Deferred compensation on restricted shares                                      (1,612)          22
Other equity compensation                                                         (250)
                                                                            ------------  ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES                               (48)       3,637
                                                                            ------------  ------------

Increase in cash                                                                 8,809        1,990
Cash beginning of year                                                          11,481        9,457
                                                                            ------------  ------------
CASH END OF PERIOD                                                             $20,290      $11,447
                                                                            ============  ============


                         See Notes to Consolidated Financial Statement


                                       5




                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   ORGANIZATION

     Arch Capital Group Ltd. ("ACGL"), a Bermuda company, is a diversified
financial services holding company, with an emphasis on the insurance sector.
ACGL was formed in September 2000 to accomplish the internal reorganization
transaction described below involving Arch Capital Group (U.S.) Inc. (formerly
known as (i) "Risk Capital Holdings, Inc." from March 1995 to May 8, 2000 and
(ii) "Arch Capital Group Ltd." from May 8, 2000 to November 8, 2000), a Delaware
holding company formed in March 1995 ("Arch-U.S."). The common shares of ACGL
are traded on the Nasdaq National Market under the symbol "ACGL."

     On November 8, 2000,  following the approval of Arch-U.S.'s  shareholders,
Arch-U.S.  completed  an internal  reorganization  that  resulted in  Arch-U.S.
becoming a wholly owned  subsidiary of ACGL.  ACGL performs the holding company
functions   previously   conducted  by  Arch-U.S.,   and  the  shareholders  of
Arch-U.S.  have become the shareholders of ACGL.  Prior to the  reorganization,
ACGL had no  significant  assets or  capitalization  and had not engaged in any
business   or   prior   activities   other   than  in   connection   with   the
reorganization.  Arch-U.S.  remains  the holding  company  for  certain  United
States subsidiaries.

     Prior to May 5, 2000, Arch-U.S. provided reinsurance and other forms of
capital for insurance companies through its wholly owned subsidiary, Arch
Reinsurance Company ("Arch Re"), a Nebraska corporation formed in 1995 under the
original name of "Risk Capital Reinsurance Company." On May 5, 2000, Arch-U.S.
sold the reinsurance operations of Arch Re to Folksamerica Reinsurance Company
("Folksamerica").

     As used below, the "Company" means ACGL and its subsidiaries, except when
referring to periods prior to November 8, 2000, when it means Arch-U.S. and its
subsidiaries. Similarly, "Common Shares" means the common shares, par value U.S.
$0.01, of ACGL, except when referring to periods prior to November 8, 2000, when
it means the common stock of Arch-U.S.

     Class A warrants to purchase an aggregate of 2,531,079 Common Shares and
Class B warrants to purchase an aggregate of 1,920,601 Common Shares were issued
in connection with the direct sales of Common Shares. Class A warrants are
immediately exercisable at $20 per share and expire September 19, 2002. Class B
warrants are exercisable at $20 per share during the seven-year period
commencing September 19, 1998, provided that the Common Shares have traded at or
above $30 per share for 20 out of 30 consecutive trading days.


2.   GENERAL

     The interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") in the United
States and include the accounts of ACGL, Arch-U.S., Hales & Company Inc.
("Hales"), American Independent Insurance Holding Company ("AIHC"), Arch Re and
Cross River Insurance Company ("Cross River"). All intercompany transactions and
balances have been eliminated in consolidation. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, the accompanying interim consolidated financial
statements reflect all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of results on an interim basis. These
consolidated financial statements should be read in conjunction with the 2000
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.




                                       6


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RECLASSIFICATIONS

     Certain amounts in the 2000 consolidated financial statements have been
reclassified to conform to the 2001 presentation. Such reclassifications had no
effect on the Company's net income, shareholders' equity or cash flows.

4.   ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standard ("SFAS") No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, such as convertible
securities, and hedging activities, and requires that all derivative financial
instruments be recognized in the balance sheet as either assets or liabilities
and measured at fair value. The recognition of the change in the fair value of a
derivative depends on a number of factors, including the intended use of the
derivative. Currently, the Company's portfolio includes market sensitive
instruments, such as mortgage-backed securities, which are subject to prepayment
risk and changes in market value in connection with changes in interest rates.
In adopting SFAS No. 133, the recognition of the change in the fair value of any
embedded derivative is recorded as a component of net income.

     For the Company, this statement was effective for the year beginning
January 1, 2001, and has been adopted herein. SFAS No. 133 did not have a
material impact on the Company's results of operations, financial condition or
liquidity because the Company generally does not engage in derivative
activities.

5.   GOODWILL

     Goodwill of acquired businesses represents the difference between purchase
cost and the fair value of the net assets of the acquired businesses and is
being amortized on a straight-line basis over the expected life of the related
operations acquired, which generally does not exceed 15 years. The Company
recorded goodwill related to its investment in Hales and AIHC. The Company
evaluates the recoverability of the carrying value of goodwill related to
acquired businesses on an undiscounted basis to ensure it is properly valued. If
it is determined that an impairment exists, the excess of the unamortized
balance will be charged to earnings at that time.

6.   CONTINGENCIES RELATING TO SALE OF REINSURANCE OPERATIONS

      Under the terms of the agreement relating to the sale of the Company's
reinsurance operations to Folksamerica on May 5, 2000, the Company placed $20
million of the purchase price in escrow for a period of five years. Such amounts
represent restricted funds that appear under a separate caption entitled
"Securities held in escrow" on the Company's consolidated balance sheet at March
31, 2001. These funds will be used to reimburse Folksamerica if the loss
reserves (which were $32.3 million at the closing of the asset sale) transferred
to it in the asset sale relating to business produced on behalf of Arch Re by a
certain managing underwriting agency are deficient as measured at the end of
such five-year period or to satisfy certain indemnity claims Folksamerica may
have during such period. In connection with the escrow arrangement, the Company
will record a loss in an amount equal to any probable deficiency in the related
reserve that may become known during or at the end of the five-year period. If
such loss reserves are redundant, all of the escrowed funds will be released
from escrow to the Company and Folksamerica will pay the Company an amount equal
to such redundancy.

     As required under the agreement, Folksamerica reported to the Company that
adverse development had occurred in the loss reserves subject to the
Folksamerica escrow agreement for the period from May 5, 2000 to December 31,
2000. Based on such information and an independent actuarial analysis, the
Company recorded


                                       7


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     6.     CONTINGENCIES RELATING TO SALE OF REINSURANCE OPERATIONS (CONT'D.)

in the 2000 fourth quarter a loss contingency of $15 million, on a pre-tax
basis, to recognize a probable deficiency in such reserves. The actuarial
analysis was based on estimates of claims and claims expenses incurred as of
December 31, 2000 and, therefore, the amount ultimately paid may be more or less
than such estimate.

     Under the terms of the agreement, the Company has also purchased
reinsurance protection covering the Company's aviation business to reduce the
net financial loss to Folksamerica on any large commercial airline catastrophe
to $5.4 million, net of reinstatement premiums. Although the Company believes
that any such net financial loss will not exceed $5.4 million, the Company has
agreed to reimburse Folksamerica for a net financial loss it may incur that is
in excess of $5.4 million for aviation losses under certain circumstances prior
to May 5, 2003.

     The Company also made representations and warranties to Folksamerica about
the Company and the business transferred to Folksamerica for which the Company
retains exposure for certain periods. Although Folksamerica has not asserted
that any amount is currently due under any of the indemnities provided by the
Company under the asset purchase agreement, Folksamerica has indicated a
potential indemnity claim under the agreement in the event of the occurrence of
certain future events. Based on all available information, the Company denies
the validity of any such potential claim.

     At the closing of the asset sale, Arch Re and Folksamerica entered into a
transfer and assumption agreement, under which Folksamerica assumed Arch Re's
rights and obligations under the reinsurance agreements transferred in the asset
sale. The reinsureds under such agreements that were in-force were notified that
Folksamerica had assumed Arch Re's obligations and that, unless the reinsureds
object to the assumption, Arch Re will be released from its obligations to those
reinsureds. None of such reinsureds objected to the assumption and, accordingly,
the gross liabilities for such business have been removed from the accounts of
Arch Re for statutory and GAAP accounting purposes. However, Arch Re will
continue to be liable under those reinsurance agreements if the notice is found
not to be an effective release by the reinsureds. Folksamerica has agreed to
indemnify the Company for any losses arising out of the reinsurance agreements
transferred to Folksamerica Reinsurance Company in the asset sale. However, in
the event that Folksamerica refuses or is unable to perform its obligations to
the Company, Arch Re may incur losses relating to the reinsurance agreements
transferred in the asset sale.

7.   ACQUISITION

     On February 28, 2001, the Company completed a reorganization transaction
pursuant to which the Company acquired all of the common stock of AIHC, one of
its investee companies. See Note 9. AIHC is a specialty property and casualty
insurance holding company that, through its subsidiaries, markets and
underwrites nonstandard personal automobile liability and physical damage lines
of insurance, primarily in Pennsylvania, as well as in Maryland and Delaware.

     The Company purchased a portion of the outstanding shares of AIHC for $1.25
million. The remaining outstanding shares of AIHC were redeemed by AIHC in
exchange for the right to receive a portion of the proceeds resulting from the
final adjudication or settlement of certain lawsuits that AIHC, as plaintiff,
has previously filed against certain defendants. A third party also forgave the
obligations owing to it under certain notes previously issued by AIHC in the
aggregate principal amount of $4 million and returned certain warrants


                                       8



                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.   ACQUISITION (CONT'D.)


to purchase shares of AIHC in exchange for the right to receive a portion of the
proceeds resulting from the final adjudication or settlement of such lawsuits.
Immediately after the Company's purchase of AIHC, the Company contributed to the
capital of AIHC notes in the aggregate principal amount of $8.5 million that
were issued to the Company in connection with loans it had previously made to
AIHC and also returned certain warrants to purchase shares of AIHC. Following
the purchase, the Company also made a capital contribution to AIHC in the amount
of $11 million.

     In connection with the loans the Company had previously made to AIHC, the
Company had obtained rights to provide reinsurance to AIHC's subsidiary,
American Independent Insurance Company ("American Independent"), for specified
periods, which rights had been transferred to Folksamerica in the asset sale on
May 5, 2000. In connection with the Company's acquisition of AIHC, Folksamerica
released American Independent from these reinsurance commitments at a cost to
American Independent of $1.5 million.

8.   EARNINGS PER SHARE DATA


     Earnings per share are computed in accordance  with SFAS No. 128 "Earnings
Per Share."


     Basic earnings per share exclude dilution and is computed by dividing
income available to common shareholders by the weighted average number of Common
Shares outstanding for the periods. Diluted earnings per share reflect the
potential dilution that could occur if Class A and B warrants and employee stock
options were exercised or converted into Common Shares. When a loss occurs,
diluted per share amounts are computed using basic average shares outstanding
because including dilutive securities would decrease the loss per share and
would therefore be anti-dilutive.

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




                                                 (IN THOUSANDS, EXCEPT SHARE DATA)
                                                        THREE MONTHS ENDED
                                                             MARCH 31,
                                                       2001            2000
                                                 ---------------- ---------------
                                                              
NET INCOME
BASIC EARNINGS PER SHARE:
Net income                                                $8,141        $5,808
Divided by:
Weighted average shares outstanding for the period    12,786,631    15,517,163
Basic earnings per share                                   $0.64         $0.37

DILUTED EARNINGS PER SHARE:
Net income                                                $8,141        $5,808
Divided by:
Weighted average shares outstanding for the period    12,786,631    15,517,163
Effect of dilutive securities:
   Warrants
   Employee stock options                                  5,817         1,178
                                                 ---------------- ---------------
Total shares                                          12,792,448    15,518,341
                                                 ================ ===============
Diluted earnings per share                                 $0.64         $0.37







                                       9


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.   INVESTMENT INFORMATION

     Realized investment gains (losses) for the three month period ended March
31, 2001 consisted of the following:




                                                    (IN THOUSANDS)
                                                  THREE MONTHS ENDED
                                                    MARCH 31, 2001
                                          ---------------------------------
                                                                     NET
                                            GROSS       GROSS      REALIZED
                                           REALIZED    REALIZED     GAINS
                                            GAINS       LOSSES     (LOSSES)
                                          ----------  ---------   ---------
                                                           
Fixed maturities                               $53                     $53
Publicly traded equity securities            8,951                   8,951
Privately held securities
                                          ----------  ---------   ---------
Total                                       $9,004                  $9,004
                                          ==========  =========   =========


     The following table reconciles estimated fair value and carrying value to
the amortized cost of fixed maturities and equity securities:



                                               (IN THOUSANDS)
                                               MARCH 31, 2001
                            -------------------------------------------------------
                                   ESTIMATED
                                   FAIR VALUE
                                       AND        GROSS       GROSS
                                    CARRYING    UNREALIZED  UNREALIZED  AMORTIZED
                                      VALUE       GAINS      (LOSSES)     COST
                                   ----------   ----------  ----------  ---------
                                                              
Fixed maturities                     $90,400      $1,666      ($1,944)    $90,678
Publicly traded equity securities     28,224      12,213         (848)     16,859
Privately held securities             52,080                      (52)     52,132
Securities held in escrow             21,373         268                   21,105
                                   ----------   ----------  ----------  ---------
Total                               $192,077     $14,147      ($2,844)    180,774
                                   ==========   ==========  ==========  ==========


     The Company classifies all of its publicly traded fixed maturities and
equity securities as "available for sale" and, accordingly, they are carried at
estimated fair value. The fair value of publicly traded fixed maturities and
publicly traded equity securities is estimated using quoted market prices or
dealer quotes. Short-term investments, which have a maturity of one year or less
at the date of acquisition, are carried at cost, which approximates fair value.




                                       10


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   INVESTMENT INFORMATION (CONT'D.)

     At March 31, 2001, the Company's publicly traded equity securities and
privately held securities were issued by insurance and reinsurance companies or
companies providing services to the insurance industry. At such date, the
publicly traded equity portfolio consisted of the following:



                                                            (IN THOUSANDS)
                                                            MARCH 31, 2001
                                     ------------------------------------------------------------
                                     ESTIMATED
                                        FAIR
                                      VALUE AND         GROSS           GROSS
                                       CARRYING      UNREALIZED       UNREALIZED
                                        VALUE           GAINS          (LOSSES)          COST
                                     -----------     -----------      ----------      -----------
                                                                          
COMMON STOCK:
ACE Limited                             $9,224          $2,908                            $6,316
XL Capital Ltd                           7,987           4,403                             3,584
Farm Family Holdings, Inc.               1,342             430                               912
Meadowbrook Insurance Group                610                            ($848)           1,458
Renaissance Re                           2,450           1,253                             1,197
Metropolitan Life Insurance Company      6,611           3,219                             3,392
                                     -----------     -----------      ----------      -----------
         Total                         $28,224         $12,213            ($848)         $16,859
                                     ===========     ===========      ==========      ===========


     Investments in privately held securities may include both equity securities
and securities convertible into, or exercisable for, equity securities (some of
which may have fixed maturities). Privately held securities are subject to
trading restrictions or are otherwise illiquid and do not have readily
ascertainable market values. The risk of investing in such securities is
generally greater than the risk of investing in securities of widely held,
publicly traded companies. Lack of a secondary market and resale restrictions
may result in the Company's inability to sell a security at a price that would
otherwise be obtainable if such restrictions did not exist and may substantially
delay the sale of a security which the Company seeks to sell. Such investments
are classified as "available for sale" and carried at estimated fair value,
except for investments in which the Company believes it has the ability to
exercise significant influence (generally defined as investments in which the
Company owns 20% or more of the outstanding voting common stock of the issuer),
which are carried under the equity method of accounting. Under this method, the
Company records its proportionate share of income or loss for such investments
in results of operations.

     Goodwill for privately held equity securities carried under the equity
method of accounting was $7.9 million at March 31, 2001, compared to $8.0
million at December 31, 2000.

     The estimated fair value of investments in privately held securities, other
than those carried under the equity method or those with quoted market values,
is initially equal to the cost of such investments until the investments are
revalued based principally on substantive events or other factors which could
indicate a diminution or appreciation in value, such as an arm's-length third
party transaction justifying an increased valuation or adverse development of a
significant nature requiring a write-down. The Company periodically reviews the
valuation of investments in privately held securities with MMC Capital, Inc.
("MMC Capital"), its equity investment advisor with respect to certain of the
Company's privately held securities.





                                       11


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.   INVESTMENT INFORMATION (CONT'D.)


     Privately held securities consisted of the following:



                                                             (IN THOUSANDS)
                                                       MARCH 31,       DECEMBER 31,
                                                         2001             2000
                                                     --------------   -------------
                                                                   
      CARRIED UNDER THE EQUITY METHOD:
      The ARC Group, LLC                                $8,039           $8,468
      Arx Holding Corp.                                  3,458            3,514
      Island Heritage Insurance Company, Ltd.            4,575            4,534
      New Europe Insurance Ventures                        705              642
      Sunshine State Holding Corporation                 2,140            1,766
                                                     --------------   -------------
         Sub-total                                      18,917           18,924
                                                     --------------   -------------

      CARRIED AT FAIR VALUE:
      Altus Holdings, Ltd.                              16,000           16,000
      American Independent Insurance Holding Company                      7,350
      Distribution Investors, LLC                          100              100
      GuideStar Health Systems, Inc.                       250              250
      Stockton Holdings Limited                         10,000           10,000
      Trident II, L.P.                                   6,813            6,813
                                                     --------------   -------------
         Sub-total                                      33,163           40,513
                                                     --------------   -------------
         Total                                         $52,080          $59,437
                                                     ==============   =============


     During the three-month period ended March 31, 2001, the Company received
distributions from The ARC Group, LLC totaling $945,000.

      At March 31, 2001, the Company had investment commitments relating to
its privately held securities totaling approximately $22 million. The
outstanding commitments at March 31, 2001 included $17.6 million committed to
Trident II, L.P., an investment fund established by MMC Capital dedicated to
making private equity and equity related investments in the global insurance,
reinsurance and related industries, and $1.2 million to Distribution
Investors, LLC, the general partner of Distribution Partners Investment
Capital, L.P., a private equity fund investing in insurance distribution
entities which is affiliated with Hales.

     Set forth below is certain information relating to the Company's private
investment activity for the three month period ended March 31, 2001:

     AMERICAN INDEPENDENT INSURANCE HOLDING COMPANY

     On February 28, 2001, the Company completed a reorganization transaction
pursuant to which the Company acquired all of the common stock of one of its
investee companies, AIHC. See Note 7. Immediately after the Company's purchase
of AIHC, the Company contributed to the capital of AIHC notes in the aggregate
principal amount of $8.5 million that were issued to the Company in connection
with loans it had previously made to AIHC. At that date, the Company restored
the estimated market value discount on the loans in the amount of $1.1 million,
which had been previously recorded in the Company's financial statements. The
Company also returned certain warrants to purchase shares of AIHC.




                                       12


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   INVESTMENT INFORMATION (CONT'D.)

     ALTUS HOLDINGS, LTD.

     On March 23, 2001, the Company entered into a reorganization agreement for
the acquisition of all of the remaining ownership interests in one of its
current investee companies, Altus Holdings, Ltd. ("Altus"), which provides
insurance and alternative risk transfer services through rent-a-captive and
other facilities. The Altus group includes First American Insurance Company, an
admitted insurer with licenses in 49 states and an A.M. Best rating of A-.

     Under the agreement, the Company will acquire Altus for a purchase price of
approximately $36 million. The transaction is contingent on obtaining applicable
regulatory approvals, expiration of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing
conditions.

10.   INCOME TAXES

      ACGL is incorporated under the laws of Bermuda and, under current Bermuda
law, is not obligated to pay any taxes in Bermuda based upon income or capital
gains. The Company has received a written undertaking from the Minister of
Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 that,
in the event that any legislation is enacted in Bermuda imposing any tax
computed on profits, income, gain or appreciation on any capital asset, or any
tax in the nature of estate duty or inheritance tax, such tax will not be
applicable to ACGL or any of its operations until March 28, 2016. This
undertaking does not, however, prevent the imposition of taxes on any person
ordinarily resident in Bermuda or any company in respect of its ownership of
real property or leasehold interests in Bermuda.

     ACGL will be subject to U.S.  federal  income tax only to the extent  that
it derives  U.S.  source  income  that is subject  to U.S.  withholding  tax or
income that is  effectively  connected  with the conduct of a trade or business
within the U.S.  and is not exempt  from U.S.  tax under an  applicable  income
tax treaty with the United  States.  ACGL will be subject to a withholding  tax
on  dividends  from U.S.  investments  and interest  from certain U.S.  payors.
ACGL's U.S.  subsidiaries  will continue to be subject to U.S.  income taxes on
their worldwide income.

     Arch-U.S., Hales, Arch Re and Cross River file a U.S. consolidated federal
income tax return, with Arch-U.S. serving as the common parent, and have a tax
sharing agreement (the "Tax Sharing Agreement"), allocating the consolidated
income tax liability on a separate return basis. Pursuant to the Tax Sharing
Agreement, Hales, Arch Re and Cross River make tax sharing payments to Arch-U.S.
based on such allocation. In addition, AIHC, a U.S. subsidiary of ACGL, files a
separate U.S. consolidated return with its subsidiaries, American Independent,
American Independent Services Company and C&L Insurance Agency, Inc.


                                       13


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  INCOME TAXES (CONT'D.)


     An analysis of the Company's effective tax rate for the three months ended
March 31, 2001 and 2000 follows:



                                                            (IN THOUSANDS)
                                                          THREE MONTHS ENDED
                                                               MARCH 31,
                                                          2001          2000
                                                      ------------  ------------
                                                                
      Income tax computed on pre-tax income              $4,007       $ 6,455
      Addition (reduction) in income tax resulting
      from:
         Valuation allowance                               (174)        6,285
         Write-off of deferred tax asset                    251
         Tax-exempt investment income                                    (162)
         Dividend received deduction                        (15)         (127)
         Foreign income, not subject to income tax         (839)
         Other                                               76           184
                                                      ------------  ------------
      Income tax expense on pre-tax income               $3,306       $12,635
                                                      ============  ============


     Deferred income taxes reflect the tax effect of temporary differences
between the value of assets and liabilities for financial reporting purposes and
such values as measured by U.S. tax laws and regulations. The net deferred
income tax asset is net of a valuation allowance for the portion of the deferred
tax asset that management believes may not be realized. Significant components
of the Company's deferred income tax assets and liabilities as of March 31, 2001
and December 31, 2000 were as follows:



                                                          (IN THOUSANDS)
                                                     MARCH 31,     DECEMBER 31,
                                                       2001           2000
                                                   -------------  -------------
                                                              
      Deferred income tax assets:
         Net operating loss                          $12,900        $12,465
         AMT credit carryforward                         651            651
         Net claim reserve discount                      856
         Net unearned premium reserve                    868
         Unrealized loss on private equity               262            262
         Unrealized loss on marketable securities        548            606
         Compensation liabilities                         53            250
         Net unrealized depreciation of
           investments                                   262
         Other, net                                      805             48
                                                   -------------  -------------
      Total deferred tax assets                       17,205         14,282
                                                   -------------  -------------
      Deferred income tax liabilities:
         Equity in net income on investees, net         (549)          (379)
         Deferred policy acquisition cost               (869)
         Net unrealized appreciation of
           investments                                                  (61)
                                                   -------------  -------------
      Total deferred tax liabilities                  (1,418)          (440)
                                                   -------------  -------------
      Valuation allowance                             (7,807)        (5,650)
                                                   -------------  -------------
      Net deferred income tax asset                   $7,980         $8,192
                                                   =============  =============


     As of March 31, 2001, the Company has a deferred income tax valuation
allowance of $7.8 million that adjusts the net deferred income tax asset to its
estimated realizable value of approximately $8.0 million.

     The Company's U.S. subsidiaries have total net operating loss carryforwards
of $36.9 million, substantially all of which expire between 2019 and 2020.


                                       14


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.  SEGMENT INFORMATION

     The Company is a Bermuda-based, diversified financial services holding
company, with an emphasis on the insurance sector. The Company owns and intends
to acquire operating businesses that will enable it to generate both fee-based
revenue (E.G., commissions and advisory and management fees) and risk-based
revenue (I.E., insurance premium).


     SFAS No. 131 requires certain disclosures about operating segments in a
manner that is consistent with how management evaluates the performance of the
segment. As described below, the Company's two operating segments include
insurance and merchant banking:



BUSINESS IDENTITY                             BUSINESS ACTIVITY
-------------------------------------------   ---------------------------------------
                                           
American Independent Insurance Holding        Markets and underwrites nonstandard
Company                                       personal automobile liability and
                                              physical damage lines of insurance,
                                              primarily in Pennsylvania.

Hales & Company Inc.                          A merchant banking firm specializing
                                              in the insurance industry.


      The Company's insurance operating segment includes total assets of
$160.8 million at March 31, 2001, and revenues of $3 million and net income
of $117,000 for the quarter ended March 31, 2001.

      The results of the Company's merchant banking operating segment did not
meet any of the thresholds for segment reporting. Its contribution to the
Company's net income was not material for the 2001 first quarter.


                                       15


         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS.

                                     GENERAL

     THE COMPANY

     Arch Capital Group Ltd. ("ACGL") is a Bermuda-based, diversified financial
services holding company, with an emphasis on the insurance sector. We own and
intend to acquire operating businesses that will enable us to generate both
fee-based revenue (E.G., commissions and advisory and management fees) and
risk-based revenue (I.E., insurance premium). We will participate in the
insurance sector through our ownership interest in various insurance-related
entities such as intermediaries, underwriting agencies, service providers and
insurance companies, each of which will capture a portion of insurance premium
at different points in the insurance chain. As part of our strategy of
diversification and of growing our sources of fee-based revenues, we may also
acquire ownership interests in financial services entities outside the insurance
sector.

     In connection with the development of the risk bearing portion of our
business, we intend to capitalize a Bermuda-based reinsurance company, which
will underwrite business produced by intermediaries, underwriting agencies and
insurance companies owned by or affiliated with us, as well as business produced
by third parties. The Bermuda location provides us with a favorable business
environment for engaging in some of our risk-based activities. We believe that
our ownership interests in a Bermuda-based reinsurance company and other
risk-bearing entities, as well as in insurance intermediaries, underwriting
agencies and other fee-based businesses, will enable us to maximize risk-based
revenues during periods in the underwriting cycle when it is favorable to assume
more underwriting risk, and to increase our focus on fee-based revenues and
assume less underwriting risk when the underwriting cycle presents less
favorable conditions.

       In November 2000, ACGL became the sole shareholder of Arch Capital
Group (U.S.) Inc. ("Arch-U.S.") pursuant to an internal reorganization
transaction.  Arch-U.S. is a Delaware company formed in March 1995 under the
original name of "Risk Capital Holdings."  Arch-U.S. commenced operations in
September 1995 following the completion of its initial public offering.
Prior to May 5, 2000, Arch-U.S. provided reinsurance and other forms of
capital for insurance companies through its wholly owned subsidiary, Arch
Reinsurance Company ("Arch Re"), a Nebraska corporation formed in 1995 under
the original name of "Risk Capital Reinsurance Company."  On May 5, 2000,
Arch-U.S. sold the reinsurance operations of Arch Re to Folksamerica
Reinsurance Company in an asset sale.

     On February 28, 2001, we completed a reorganization transaction pursuant to
which we acquired all of the common stock of American Independent Insurance
Holding Company ("AIHC"), one of our investee companies. AIHC, through its
wholly owned subsidiary, American Independent Insurance Company, markets and
underwrites nonstandard personal automobile liability and physical damage lines
of insurance, primarily in Pennsylvania, as well as in Maryland and Delaware. On
an ongoing basis we will determine the amount of the insurance premium
produced by American Independent that will be retained by us and the amount of
commission income we will capture through the purchase of reinsurance. For
the year 2001, we will reinsure with third parties approximately 70% of
American Independent's business and retain the remaining underwriting risk.
See note 7 under the caption "Acquisition" of the notes accompanying our
consolidated financial statements.

     COMPANY INFORMATION

     At March 31, 2001, our consolidated shareholders' equity was $272.5
million. Our common shares are traded on the Nasdaq National Market under the
symbol "ACGL." Our principal offices are located at Clarendon House, 2 Church
Street, Hamilton HM 11 Bermuda (phone number: (441) 295-1422), and our executive
offices are located at 20 Horseneck Lane, Greenwich, Connecticut 06830 (phone
number: (203) 862-4300).


                                       16


                         LIQUIDITY AND CAPITAL RESOURCES

     We are a holding company whose assets primarily consist of the stock of our
subsidiaries and invested assets totaling $194.3 million at March 31, 2001. We
continuously investigate possible acquisitions of new businesses in support of
our strategy and evaluate the retention or disposition of our existing
subsidiaries and investments. Accordingly, while we do not currently have any
material arrangements or commitments with respect thereto (except as disclosed
in this report), we intend to make further acquisitions, and it is possible that
divestitures and changes in capital structure could occur. We depend on our
available cash resources, liquid investments and dividends or other
distributions from our subsidiaries to make payments, including the payment of
operating expenses we may incur and for any dividends our board of directors may
determine. Our board does not currently intend to declare any dividends or make
any other distributions.

     As of March 31, 2001, we had $45.2 million of cash and short-term
investments, $62.6 million of fixed maturity investments, and $27.6 million of
publicly traded equity securities. As of that date, investments that are
restricted or generally unavailable for liquidity purposes included $37.5
million of privately held securities and $21.4 million of fixed maturity
investments held in escrow in connection with the sale of our reinsurance
operations. In addition, we have an investment commitment relating to our
privately held investment in Trident II totaling approximately $17.6 million.
Amounts discussed above do not include the stock of our subsidiaries or their
invested assets. See note 9 under the caption "Investments" of the notes
accompanying our consolidated financial statements.

     Our future net cash flow will depend on the receipt of dividends and other
distributions from our subsidiaries and proceeds on the disposition of such
subsidiaries, as well as investment income and proceeds on the sale or maturity
of our investments. The ability of our insurance subsidiaries, American
Independent and Arch Re, to pay dividends or make distributions is dependent on
their ability to meet applicable regulatory standards. Based on 2000 results,
American Independent may not pay any dividends or make other distributions
during 2001 without prior regulatory approval. Due to the distributions made by
Arch Re in connection with the XL Capital share repurchase and our
redomestication to Bermuda in 2000, Arch Re may not make any distributions
without prior regulatory approval until December 2001.

      We expect that our operational needs for the foreseeable future will be
met by our balance of cash and short-term investments, as well as by funds
generated from investment income and proceeds on the sale or maturity of our
investments. We will continue to pursue and investigate possible business
combinations and ventures with new operating businesses in furtherance of our
strategy. In that connection, we may need to secure additional financing to
carry out our business plan. We cannot assure you that we will be successful in
obtaining any such financing or in the implementation of our business plan.

     Consolidated cash flows from operating activities for the three months
ended March 31, 2001 and 2000 was approximately $0.3 million and ($2.7) million,
respectively.

     We are subject to certain contingencies relating to the sale of our
reinsurance operations on May 5, 2000, as described in note 6 under the caption
"Contingencies Relating to the Sale of Reinsurance Operations" of the notes
accompanying our consolidated financial statements.

     ACQUISITION

     On March 23, 2001, we entered into a reorganization agreement for the
acquisition of all of the remaining ownership interests in Altus Holdings, Ltd.,
which provides insurance and alternative risk transfer services through
rent-a-captive and other facilities. The Altus group includes First American
Insurance Company, an admitted insurer in 49 states with an A.M. Best rating of
"A-." Under the agreement, we will acquire the remaining ownership interests in
Altus for a purchase price of approximately $36 million. The transaction, which
is currently expected to close during the 2001 second quarter, is contingent on
obtaining applicable regulatory approvals, expiration of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act, and other
customary closing conditions.

     Upon the closing of the acquisition, through Altus and First American, we
will be able to assist a producer, manager or distributor of insurance premium
seeking to participate in the underwriting results of its


                                       17


business or requiring a licensed carrier. We will also be able to provide
services to businesses that are seeking to insure a portion of their corporate
risk exposures with a captive insurance company.

                                   INVESTMENTS

     We seek to acquire operating companies in support of our business plan of
building a diversified financial services holding company. Our success depends
to a large extent on the operations, financial condition and management of the
companies with which we may merge or which we may acquire in whole or in part.

     At March 31, 2001, consolidated cash and invested assets totaled
approximately $284.8 million, consisting of $92.7 million of cash and short-term
investments, $90.4 million of publicly traded fixed maturity investments, $21.4
million of fixed maturities held in escrow, $28.2 million of publicly traded
equity securities, and $52.1 million of privately held securities.

     Our publicly traded equity portfolio consists of securities issued by
insurance and reinsurance companies and companies providing services to the
insurance industry. Such portfolio lacks industry diversification and will be
particularly subject to the performance of the insurance industry. Unlike fixed
income securities, equity securities such as common stocks, including the equity
securities in which we have invested, generally are not and will not be rated by
any nationally recognized rating service. The values of equity securities
generally are more dependent on the financial condition of the issuer and less
dependent on fluctuations in interest rates than are the values of fixed income
securities. The market value of equity securities generally is regarded as more
volatile than the market value of fixed income securities. Since the realization
of gains and losses on equity investments is not generally predictable, such
gains and losses have differed and will differ significantly from period to
period. Variability and declines in our results of operations could be further
exacerbated by certain private equity investments which are accounted for under
the equity method. The effects of such volatility on our equity portfolio could
be worsened to the extent that such portfolio is concentrated in the insurance
industry and in relatively few issuers.

     Investments included in our private portfolio include securities issued by
privately held companies that are generally restricted as to resale or are
otherwise illiquid and do not have readily ascertainable market values. The risk
of investing in such securities is generally greater than the risk of investing
in securities of widely held, publicly traded companies. Lack of a secondary
market and resale restrictions may result in an inability by us to sell a
security at a price that would otherwise be obtainable if such restrictions did
not exist and may substantially delay the sale of a security we seek to sell.

     At March 31, 2001, our private equity portfolio consisted of ten
investments, with additional investment portfolio commitments in an aggregate
amount of approximately $22.0 million.

     See note 9 under the caption "Investment Information" of the notes
accompanying our consolidated financial statements for certain information
regarding our publicly traded and privately held securities and their carrying
values, and commitments made by us relating to our privately held securities.

     On February 28, 2001, we completed a reorganization transaction pursuant to
which we acquired all of the common stock of AIHC, one of our investee
companies. On March 23, 2001, we entered into a reorganization agreement for the
acquisition of the remaining ownership interests in Altus Holdings, Ltd.,
another of our investee companies. See "--Acquisition" above and note 7 and note
9 of the notes accompanying our consolidated financial statements.

     At March 31, 2001, approximately 86.9% of our fixed maturity and short-term
investments were rated investment grade by Moody's or Standard & Poor's and had
an average quality rating of A+ and an average duration of approximately 1.5
years. In November 2000, we liquidated our high yield portfolio in connection
with our reorganization transaction. In January 2001, we began to reinvest
approximately $35 million of cash in high yield fixed maturity investments. At
March 31, 2001, we had approximately $33.6 million of such funds invested in
high yield investments, with an average quality rating of BB- and an average
duration of 4.6 years.

    During the 2001 first quarter, we liquidated a substantial portion of the
public equity portfolio. The proceeds from the sales, which amounted to $18
million, were reinvested in short-term money market securities.


                                       18


    We have not invested in derivative financial instruments such as futures,
forward contracts, swaps, or options or other financial instruments with similar
characteristics such as interest rate caps or floors and fixed-rate loan
commitments. Our portfolio includes market sensitive instruments, such as
mortgage-backed securities, which are subject to prepayment risk and changes in
market value in connection with changes in interest rates.

     MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

     In accordance with the SEC's Financial Reporting Release No. 48, we
performed a sensitivity analysis to determine the effects that market risk
exposures could have on the future earnings, fair values or cash flows of our
financial instruments as of December 31, 2000. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our 2000
Annual Report on Form 10-K.) Market risk represents the risk of changes in the
fair value of a financial instrument and is comprised of several components,
including liquidity, basis and price risks. At March 31, 2001, there have been
no material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented as of December 31, 2000.

RESULTS OF OPERATIONS

     NET INCOME

     For the 2001 first quarter, we reported net income of $8.1 million, or
$0.64 per share, compared with net income of $5.8 million, or $0.37 per share,
for the 2000 first quarter. The 2001 first quarter net income included after-tax
net realized investment gains of $6.2 million, or $0.48 per share, and after-tax
equity in net income of investees of $688,000, or $0.05 per share. These amounts
compare with after-tax net realized investment gains of $19 million, or $1.23
per share, and after-tax equity in net income of investees of $30,000, for the
2000 first quarter.

     SEGMENT DATA

     Statement of Financial Accounting Standard No. 131 requires certain
disclosures about operating segments in a manner that is consistent with how
management evaluates the performance of the segment. Our two operating segments
include insurance and merchant banking. See note 11 under the caption "Segment
Information" of the notes accompanying our consolidated financial statements.

     On February 28, 2001, we completed our acquisition of AIHC, a specialty
property and casualty insurance holding company that, through its subsidiaries,
markets and underwrites nonstandard personal automobile liability and physical
damage lines of insurance, primarily in Pennsylvania, as well as in Maryland and
Delaware. AIHC's net income for the one-month period was not material to our
first quarter results. See note 7 and note 9 of the notes accompanying our
consolidated financial statements.

     Revenues from our merchant bank, Hales, could vary significantly from
quarter to quarter. Such revenues are dependent upon (i) deal flow, which is
influenced by various factors, including the insurance marketplace and economic
conditions, and (ii) risks associated with closing transactions, which include
regulatory and other approvals and other factors outside the control of Hales.
Hale's results of operations for the three months ended March 31, 2001 were not
material to our first quarter results.

     BOOK VALUE PER SHARE

     At March 31, 2001, consolidated shareholders' equity totaled $272.5
million, or $21.24 per share, compared with $275.3 million, or $21.66 per share,
at December 31, 2000. The decrease in book value resulted from a decline in
unrealized appreciation of our investment portfolio totaling $11.5 million, or
$0.90 per share, partially offset by net income. On a diluted basis, which
included dilutive options outstanding, book value per share was $21.05 at March
31, 2001, compared with $21.66 at December 31, 2000.


                                       19


     NET INVESTMENT INCOME

     After-tax net investment income for the 2001 first quarter was $2.9
million, compared with $3.7 million for the 2000 first quarter. The decrease in
net investment income in 2001 compared with 2000 primarily reflected the decline
in our average invested asset base resulting from the sale of Arch Re's
reinsurance operations in May 2000, partially offset by a decrease in investment
expenses and higher overall investment yields. Our yields have moderately
increased as proceeds from the sales of public equity securities have been
allocated into short-term investments over the last several quarterly periods.

     For the three month periods ended March 31, 2001 and 2000, our sources of
net realized investment gain (losses) were as follows (in thousands):



                                                     THREE MONTHS ENDED
                                                         MARCH 31,
                                              -------------------------------
                                                   2001            2000
                                              -------------------------------
                                                           
     Fixed maturities                             $   53         ($ 2,399)
     Publicly traded equity securities             8,951           35,359

     Privately held securities                                     (3,660)
                                              --------------  ---------------
     Total                                        $9,004          $29,300
                                              ==============  ===============


     During the three months ended March 31, 2001, we disposed of, or reduced
our position in, several publicly traded equity security investments, producing
a net realized gain of $9.0 million.

     For the first three months of 2001, the change in after-tax net unrealized
appreciation of investments of $11.5 million reflects the following (in
millions):



                                          MARCH 31,      DECEMBER 31,
                                            2001             2000          CHANGE
                                        --------------  ----------------  ---------
                                                                  
Pre-tax unrealized appreciation
(depreciation)                              $11.4            $25.8         ($14.4)
Deferred income tax (benefit) expense        (4.5)            (7.4)           2.9
                                        --------------  ----------------  ---------
After-tax unrealized appreciation
(depreciation)                              $ 6.9            $18.4         ($11.5)
                                        ==============  ================  =========


     The decline in unrealized appreciation in the 2001 first quarter resulted
from the sales described above, coupled with a decline in market prices in the
insurance sector of the public equity markets and our high yield fixed maturity
investments.

     INCOME TAXES

     Under current Bermuda law, ACGL is not obligated to pay any taxes in
Bermuda based upon income or capital gains. We have received a written
undertaking from the Minister of Finance in Bermuda under the Exempted
Undertakings Tax Protection Act 1966 that, in the event that any legislation is
enacted in Bermuda imposing any tax computed on profits, income, gain or
appreciation on any capital asset, or any tax in the nature of estate duty or
inheritance tax, such tax will not be applicable to us or our operations until
March 28, 2016. This undertaking does not, however, prevent the imposition of
taxes on any person ordinarily resident in Bermuda or any company in respect of
its ownership of real property or leasehold interests in Bermuda.

     ACGL will be subject to U.S. federal income tax only to the extent that
it derives U.S. source income that is subject to U.S. withholding tax or
income that is effectively connected with the conduct of a trade or business
within the United States and is not exempt from U.S. tax under an applicable
income tax treaty with the United States.  ACGL will be subject to a
withholding tax on dividends from U.S. investments and interest from certain
U.S. payors.  ACGL does not consider itself to be engaged in a trade or
business within the United States and, consequently, does not expect to be
subject to direct U.S. income taxation.  ACGL's U.S. subsidiaries will
continue to be subject to U.S. income taxes on their worldwide income.


                                       20


     Upon our redomestication to Bermuda, Arch-U.S. distributed substantially
all of its public equity portfolio to its Bermuda parent, ACGL, at the current
market values and realized gains for tax purposes of $21,044,000. The associated
income tax expense of $7,365,000 reduced Arch-U.S.'s net operating loss
carryforwards by such amount. However, for financial reporting purposes, since
the securities have not been sold to an unrelated third party, the realized gain
has been deferred and was reported as unrealized appreciation in our
consolidated financial statements. Accordingly, the income tax expense was also
deferred and reduces unrealized appreciation in our consolidated financial
statements.

     Income tax expense for the three months ended March 31, 2001 was $3.3
million, which included recognizing a portion of the deferred taxes described
above relating to the investment gains realized during the period. This compares
to income tax expense for the three months ended March 31, 2000 of $12.6
million, of which $6.3 million related to the establishment of a valuation
allowance totaling $12.1 million against the deferred tax asset during that
period. The remaining $5.8 million of the valuation allowance was included in
the change in unrealized depreciation of investments.

     As of March 31, 2001, we have a deferred income tax asset valuation
allowance of $7.8 million that adjusts our deferred income tax asset to its
estimated realizable value of approximately $8.0 million. See note 10 under the
caption "Income Taxes" of the notes accompanying our consolidated financial
statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. All statements other than statements of historical fact
included in this report 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 our 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 report and include:

     o    the availability of acquisition candidates and other investments on
          attractive terms;

     o    competition for acquisition opportunities and in the businesses of the
          operating companies we have acquired or may acquire of form;

     o    changes in the performance of the insurance sector of the public
          equity markets or market professionals' views as to such sector;

     o    general economic conditions;

     o    regulatory changes and conditions;

     o    losses relating to aviation business and business produced by a
          certain managing underwriting agency for which we may be liable to the
          purchaser of our reinsurance business or to others;

     o    our future business operations and strategy;

     o    the integration of businesses we have acquired or may acquire into our
          existing operations;

     o    rating agency policies and practices;


                                       21


     o    greater than expected loss ratios on insurance written by our
          insurance subsidiaries and adverse development of claim and/or claim
          expense liabilities related to business written by our insurance
          subsidiaries in prior years; and

     o    loss of key personnel.

     In addition to risks and uncertainties related to our business, our
proposed acquisition of Altus Holdings, Ltd. is subject to various risks and
uncertainties including, but not limited to, the risks that the conditions to
closing will not be satisfied as well as risks relating to the successful
integration of Altus' business.

     All subsequent written and oral forward-looking statements attributable to
us or persons acting on our 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. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Reference is made to the information appearing above under the subheading
"Market Sensitive Instruments and Risk Management" under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which information is hereby incorporated by reference.


                                       22


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   The Company's insurance subsidiaries are involved in ordinary routine
litigation and arbitration proceedings incidental to their insurance business.
The Company does not believe that there are any material pending legal
proceedings to which the Company or any of its subsidiaries is a party or of
which any of their property is subject.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)     EXHIBITS.

        Exhibit No.                  Description
        -----------                  -----------

        10        Administrative Services Agreement, between Arch Capital
                  Group Ltd. and Arch Capital Group (U.S.) Inc.

        15        Accountants' Awareness Letter (regarding unaudited interim
                  financial information)

(b)     REPORTS ON FORM 8-K.

        The Company filed a report on Form 8-K during the three month period
        ended March 31, 2001 on March 15, 2001 to report the closing of the
        Company's acquisition of American Independent Insurance Holding Company.
        The Company also filed a report on Form 8-K/A on May 14, 2001 to file
        required financial information relating to such acquisition.

   Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.


                                       23


                                   SIGNATURES

================================================================================

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                            ARCH CAPITAL GROUP LTD.
                                            ------------------------------------
                                            (REGISTRANT)


                                            /s/ Peter A. Appel
                                            ------------------------------------
Date: May 15, 2001                          Peter A. Appel
                                            President & Chief Executive Officer


                                            /s/ Debra M. O'Connor
                                            ------------------------------------
Date: May 15, 2001                          Debra M. O'Connor
                                            Senior Vice President, Controller &
                                            Treasurer


                                       24


                                  EXHIBIT INDEX

        Exhibit No.                  Description
        -----------                  -----------

        10        Administrative Services Agreement, between Arch Capital
                  Group Ltd. and Arch Capital Group (U.S.) Inc.

        15        Accountants' Awareness Letter (regarding unaudited interim
                  financial information)