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

                           --------------------------

                                   FORM 10-K

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

                      FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                          OR

       / /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                    FOR THE TRANSITION PERIOD FROM       TO

                              COMMISSION FILE NO. 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
          incorporation or organization)                             Identification)

                   WESSEX HOUSE
                  45 REID STREET
              HAMILTON HM 12 BERMUDA
     (Address of principal executive offices)                           (Zip Code)


       Registrant's telephone number, including area code:    (441) 296-8240

          Securities registered pursuant to Section 12(b) of the Act:



                                                                  NAME OF EACH EXCHANGE
               TITLE OF EACH CLASS                                 ON WHICH REGISTERED
               -------------------                                ---------------------
                                                 
                       None                                                None


          Securities registered pursuant to Section 12(g) of the Act:

                    COMMON SHARES, PAR VALUE $0.01 PER SHARE

    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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  /X/

    The aggregate market value of the common shares held by non-affiliates of
the Registrant as of March 8, 2002 was approximately $341,147,288 based on the
closing price on the Nasdaq National Market on that date.

    As of March 8, 2002, there were 15,765,332 of the Registrant's common shares
outstanding.

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                            ARCH CAPITAL GROUP LTD.
                               TABLE OF CONTENTS



ITEM                                                                                    PAGE
----                                                                                  --------
                                                                                
                                            PART I
ITEM 1.                 BUSINESS....................................................      1
ITEM 2.                 PROPERTIES..................................................     46
ITEM 3.                 LEGAL PROCEEDINGS...........................................     46
ITEM 4.                 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........     46

                                           PART II

ITEM 5.                 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                          SHAREHOLDER MATTERS.......................................     47
ITEM 6.                 SELECTED FINANCIAL DATA.....................................     48
ITEM 7.                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                          AND RESULTS OF OPERATIONS.................................     51
ITEM 7A.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                          RISK......................................................     63
ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................     63
ITEM 9.                 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                          AND FINANCIAL DISCLOSURE..................................     63

                                           PART III

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........     64
ITEM 11.                EXECUTIVE COMPENSATION......................................     66
ITEM 12.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                          MANAGEMENT................................................     76
ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............     84

                                           PART IV

ITEM 14.                EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                          8-K.......................................................     85


                                       i

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report includes 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 or incorporated by reference 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, including, without
limitation, the section entitled "Risk Factors," and include:

    - our management's ability to successfully implement its business strategy,
      as described herein;

    - acceptance of our products and services and security by brokers and
      insureds;

    - acceptance of our business strategy, security and financial condition by
      rating agencies and regulators;

    - general economic and market conditions (including as to inflation and
      foreign currency exchange rates) and conditions specific to the
      reinsurance and insurance markets in which we operate;

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

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

    - greater than expected loss ratios on business written by us and adverse
      development on claim and/or claim expense liabilities related to business
      written by us;

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

    - 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 prior reinsurance business or to others in connection with the
      May 5, 2000 asset sale;

    - availability to us of reinsurance to manage our gross and net exposures;

    - the failure of reinsurers or others to meet their obligations to us;

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

    - changes in the financial environment, including interest rates;

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

    - statutory or regulatory, including as to tax policy and matters and
      insurance regulatory matters and government provision or back-stopping of
      insurance (including for acts of terrorism); and

    - rating agency policies and practices.

                                       ii

    In addition to the risks discussed in "Risk Factors," other general factors
could affect our results, including: (a) developments in the world's financial
and capital markets and our access to such markets; (b) changes in regulations
or tax laws applicable to us, our 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
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.

                                      iii

                                     PART I

ITEM 1. BUSINESS

    In this report, unless the context requires otherwise: (a) "ACGL" refers to
Arch Capital Group Ltd., (b) "we," "us" and "our" refer to ACGL and its
subsidiaries, (c) "Arch Re (Bermuda)" refers only to our wholly owned Bermuda
reinsurance subsidiary, Arch Reinsurance Ltd., and (d) "Arch Re (US)" refers
only to our wholly owned U.S. reinsurance subsidiary, Arch Reinsurance Company.
The term "Arch US operations" refers to the insurance and reinsurance operations
conducted in the United States principally by our subsidiaries First American
Insurance Company, Arch Reinsurance Company, Cross River Insurance Company and
Rock River Insurance Company. The term "Arch worldwide operations" refers to
those operations conducted outside the United States principally by our
subsidiaries Arch Re (Bermuda) and Arch Risk Transfer Services Ltd. We sometimes
refer to these businesses collectively as our "core businesses." The term "other
businesses" refers principally to the insurance advisory and other businesses
conducted principally by our subsidiaries Hales & Company, Inc. and American
Independent Insurance Holding Company. The terms the "Warburg Pincus funds" and
the "Hellman & Friedman funds" refer to the Warburg Pincus LLC private equity
funds and the Hellman & Friedman LLC private equity funds.

                                  OUR COMPANY

    We are a Bermuda public limited liability company with $1.0 billion in
equity capital and, through operations in Bermuda and the United States, are
positioned to write insurance and reinsurance on a worldwide basis. While we are
positioned to provide a full range of property and casualty insurance and
reinsurance lines, we are focusing on writing specialty lines of insurance and
reinsurance profitably and earning a superior return on equity as we establish
an enduring underwriting franchise.

    Recent events have provided a significant market opportunity for well
capitalized insurance companies that are not burdened by the uncertainties
resulting from prior years' underwriting losses and material reinsurance
recoverable balances. As a result, we recently launched an underwriting
initiative that included the recruitment of new insurance and reinsurance
management teams and an equity capital infusion of $763.2 million. It is our
belief that our existing Bermuda and U.S.-based underwriting platform, our
strong management team and our $1.0 billion in capital that is unencumbered by
significant exposure to pre-2002 risks have enabled us both to establish an
immediate presence in an increasingly attractive insurance marketplace and to
actively participate in the January 1, 2002 reinsurance renewal season. Since
January 1, 2002, we have entered into approximately 800 reinsurance treaties and
other reinsurance arrangements which are expected to provide approximately
$500 million of gross written reinsurance premiums during 2002.

                                  OUR HISTORY

    We commenced operations in September 1995 following the completion of the
initial public offering of our predecessor, Risk Capital Holdings Inc. From that
time until May 2000, we provided reinsurance and other forms of capital to
insurance companies. On May 5, 2000, we sold our prior reinsurance book of
business to Folksamerica Reinsurance Company in an asset sale, but retained our
surplus and our U.S.-licensed reinsurance platform. On November 8, 2000,
following shareholder approval, we changed our legal domicile to Bermuda in
order to benefit from Bermuda's favorable business, regulatory, tax and
financing environment.

    During the period from May 2000 through the announcement of our underwriting
initiative in October 2001, we built and acquired insurance businesses that
enable us to generate both fee-based revenue (e.g., commissions and advisory and
management fees) and risk-based revenue (i.e., insurance premium). As part of
this strategy, we built an underwriting platform that is intended to enable us
to

                                       1

maximize risk-based revenue during periods in the underwriting cycle when we
believe it is more favorable to assume underwriting risk. Recent events have led
us to conclude that underwriting conditions favor dedicating our attention
exclusively to building our insurance and reinsurance business.

                          PRINCIPAL EXECUTIVE OFFICES

    Our registered office is located at Clarendon House, 2 Church Street,
Hamilton HM 11 Bermuda (telephone number: (441) 295-1422), and our principal
executive offices are located at Wessex House, 45 Reid Street, Hamilton HM 12
Bermuda (telephone number: (441) 296-8240).

                              RECENT DEVELOPMENTS

THE CAPITAL INFUSION

    On November 20, 2001, investors led by the Warburg Pincus funds and the
Hellman & Friedman funds purchased from us, for $750.0 million in cash,
35,072,795 series A convertible preference shares and 3,710,959 class A
warrants. At the same time, we also entered into a management subscription
agreement whereby certain members of our management (or entities affiliated with
them) agreed to purchase, for an aggregate of $13.2 million, 614,940 preference
shares and 65,066 class A warrants. The purpose of this capital infusion was to
provide a significant infusion of capital to launch our new underwriting
initiative to meet current and future demand in the global insurance and
reinsurance markets. On March 7, 2002, certain matters relating to the capital
infusion required to be approved by our shareholders were approved. Regulatory
approvals required in connection with the capital infusion have been obtained in
Nebraska, Missouri and Wisconsin, and required regulatory approvals are pending
in Pennsylvania and Florida.

    Prior to the closing on November 20, 2001, the Warburg Pincus funds and the
Hellman & Friedman funds assigned portions of their commitments to third
parties. At closing, we issued the following numbers of preference shares and
class A warrants for the aggregate dollar amounts specified:



                                                                                           AGGREGATE
                                                  PREFERENCE SHARES   CLASS A WARRANTS   DOLLAR AMOUNT
                                                  -----------------   ----------------   -------------
                                                                                
Warburg Pincus funds............................      18,939,311         2,003,918       $405,000,000
Hellman & Friedman funds........................      10,521,839         1,113,289        225,000,000
Trident II, L.P. and co-investment funds(1).....       1,636,729           173,178         35,000,000
Farallon Capital investors......................       1,169,093           123,698         25,000,000
Insurance Private Equity Investors, L.L.C.
  (affiliated with GE Asset Management).........       2,338,186           247,397         50,000,000
Orbital Holdings, Ltd. (affiliated with GE
  Capital)......................................         467,637            49,479         10,000,000
Management investors............................         614,940            65,066         13,150,000
                                                      ----------         ---------       ------------
    Total.......................................      35,687,735         3,776,025       $763,150,000
                                                      ==========         =========       ============


------------------------

(1)  In a related transaction, upon closing of the capital infusion, 905,397
     previously existing class A warrants held by Marsh & McLennan Risk Capital
    Holdings, Ltd. were canceled in exchange for 140,380 newly issued common
    shares, and 1,770,601 class B warrants held by Marsh & McLennan Risk Capital
    Holdings were canceled in exchange for a cash payment by us of $7.50 per
    class B warrant (approximately $13.3 million in the aggregate). See
    note (2) under "Security Ownership of Certain Beneficial Owners and
    Management" for a description of the terms of the class B warrants. Marsh &
    McLennan Risk Capital Holdings' pre-existing right to have an observer
    attend meetings of our board of directors was terminated, and The Trident
    Partnership, L.P.'s pre-existing right to designate a director for election
    to our board of directors was terminated. We were

                                       2

    released from our remaining $11.0 million capital commitment to Trident II,
    L.P. for new investments.

SUBSCRIPTION AGREEMENT

    Set forth below is a summary of the material terms of the subscription
agreement entered into with the investors (other than the management investors)
in connection with the capital infusion. You should read this summary in
conjunction with the agreement, which is incorporated herein by reference. A
conformed copy of the subscription agreement is filed herewith as an exhibit.

    PURCHASE PRICE.  The purchase price for the preference shares and class A
warrants paid at closing was based on the book value of our common shares as of
June 30, 2001. The number of preference shares issued to each investor was equal
to the total dollar amount of that investor's investment divided by the
estimated per share price as determined under the subscription agreement
(approximately $21.384), which was based on an estimate of the book value of our
assets at June 30, 2001. The number of warrants issued to each investor was
equal to the Adjusted Warrant Amount times the number of common shares issuable
upon exercise of all outstanding class A warrants (2,531,079) divided by the
number of common shares outstanding as of June 30, 2001 (12,863,079). The
"Adjusted Warrant Amount" was equal to one-half of the quotient of the total
dollar amount of that investor's investment divided by the difference of the
estimated per share price minus $1.50. There would have been an adjustment to
the purchase price if any of the transactions contemplated by the subscription
agreement or the options granted to management concurrently therewith had
triggered an anti-dilution adjustment under our existing class A warrants or
class B warrants, but all holders of those warrants waived any rights to any
anti-dilution adjustment with respect to the issuance under the subscription
agreements or the grants to management contemplated thereby. For the ten trading
days ended October 23, 2001, the last trading day prior to the announcement of
the signing of the subscription agreements for the capital infusion and our new
underwriting initiative, the average closing price of our common shares on the
Nasdaq National Market was $16.86 per share.

    PURCHASE PRICE ADJUSTMENTS.  The subscription agreement provides that the
estimated per share price may be adjusted as described below. All determinations
to be made by the investors in connection with the purchase price adjustments
will be made by the Warburg Pincus funds and the Hellman & Friedman funds. These
adjustments are the sole remedy for any breach of representations and warranties
of the company under the subscription agreement.

    AUDIT ADJUSTMENT.  We agreed to engage PricewaterhouseCoopers as independent
accountants to audit our consolidated balance sheet as of June 30, 2001, an
independent actuary (to be selected by us and the Warburg Pincus funds and the
Hellman & Friedman funds) to review the reserves for claims and claims expenses
on our balance sheet, and an independent pricing service selected by us and the
Warburg Pincus funds and the Hellman & Friedman funds to determine the estimated
fair value of our investments in marketable securities as of the third business
day prior to closing. The independent pricing service, the public accountants
and the independent actuary are referred to below as the independent advisors.

    If the audited per share price is greater than the estimated per share price
at closing, each investor will either pay the difference to us in cash or return
the equivalent amount in preference shares. If the estimated per share price at
closing is greater than the audited per share price, we will issue an amount of
preference shares to the investors representing the difference. We currently
estimate that we will issue an additional 875,765 preference shares during the
first quarter of 2002 in connection with the audit of the book value of our
assets at June 30, 2001 discussed above.

    ADJUSTMENT FOR TRADING PRICE OR CHANGE OF CONTROL.  In the event that on or
prior to September 19, 2005, (1) the closing price of our common shares is at
least $30.00 per share for at least 20 out of 30 consecutive trading days or
(2) a change of control occurs (either case, a "Triggering Event"), we

                                       3

agreed to issue and deliver to each investor additional preference shares such
that the audited per share price is adjusted downward by $1.50 per preference
share. For this purpose "change of control" means the acquisition by any person
or group (within the meaning of section 13(d)(3) of the Exchange Act) of
beneficial ownership of 40% or more by either the voting power of our then
outstanding common shares or the combined voting power of our then outstanding
voting securities entitled to vote generally in the election of directors;
provided that if such acquisition results in whole or in part from a transfer of
common shares or other voting securities by Marsh & McLennan Companies, Inc. or
any of its subsidiaries, such acquisition will not constitute a change of
control unless such transfer is effected pursuant to an offer by such acquiror
to purchase all of our outstanding common shares.

    FINAL ADJUSTMENTS.  We agreed to make another adjustment at the second
anniversary of closing (or such earlier date as the Warburg Pincus funds and the
Hellman & Friedman funds request and the Transaction Committee (described below
under "--Transaction Committee") agrees) based on an adjustment basket described
below.

    The adjustment basket will be equal to:

    - the difference between value realized upon sale and the book value at
      closing (as adjusted based on a pre-determined growth rate) of the agreed
      upon non-core businesses; plus

    - the difference between the GAAP net book value of all of our insurance
      balances with respect to any policy or contract written or having an
      effective date prior to November 20, 2001 (I.E., premiums receivable,
      unpaid claims and claims expenses recoverable, prepaid reinsurance
      premiums, reinsurance balances receivable, deferred policy acquisition
      costs, claims and claims expenses, unearned premiums, reinsurance balances
      payable, and any other insurance balance attributable to our "core
      insurance operations," as defined below) at the time of determination of
      the final adjustment and those balances at the closing; minus

    - reductions in book value arising from (without duplication of any expenses
      included in the calculation of value realized upon sale of the non-core
      businesses or any expense otherwise reflected in the determination of the
      per share price) costs and expenses relating to the investments and
      transactions provided for under the subscription agreement, actual losses
      arising out of breach of representations under the subscription agreement
      and certain other costs and expenses.

    Our "core insurance operations" include:

    - Arch Re (Bermuda);

    - Arch Capital Group (U.S.) Inc.;

    - Arch Re (US);

    - Cross River (including funding for Rock River);

    - ART Services (including First American Financial Corporation);

    - capital held at ACGL, gross of capital to be invested in unfunded private
      equity commitments; and

    - $2.5 million in segregated assets and liabilities in "cell" accounts
      formed by Alternative Insurance Company Limited and Alternative Re, Ltd.

    Non-core businesses are currently defined as American Independent Insurance
Holding Company, Hales & Company Inc., escrow assets under the Folksamerica
disposition agreement, all nonpublic securities held by ACGL, Arch Capital Group
(U.S.) Inc. and Arch Re (US) and all commitments to Trident II, L.P.,
Distribution Partners and Innovative Coverage Concepts LLC, as and when funded.

                                       4

    The adjustment basket will be calculated by our independent auditors as soon
as practicable after the second anniversary of the closing or such earlier date
as the Warburg Pincus funds and the Hellman & Friedman funds request and ACGL
agrees. ACGL and the Warburg Pincus funds and the Hellman & Friedman funds have
the right to make a full review of the adjustment basket determination. We
agreed to cause our subsidiaries to maintain the components necessary to
calculate the adjustment basket under separate ledgers.

    If the adjustment basket is less than zero, we agreed to issue additional
preference shares to the investors based on the decrease in the value of the
components of the adjustment basket. If the adjustment basket is greater than
zero, the subscription agreement allows us 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, if the adjustment basket is less than zero and in the event
that a Triggering Event occurs, we agreed to issue additional preference shares
to the investors as a further adjustment.

    Finally, on the fourth anniversary of the closing, there will be a
calculation of a further adjustment basket based on (1) liabilities in excess of
the Folksamerica escrow assets owed to Folksamerica under the Asset Purchase
Agreement, dated as of January 10, 2000, between ACGL, Arch Re (US),
Folksamerica Holding Company, Inc. and Folksamerica Reinsurance Company and
(2) specified tax and ERISA matters under the subscription agreement. As
described under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operation--General--May 2000 Sale of Our Prior
Reinsurance Operations," in February 2002, we reached a definitive settlement
agreement with Folksamerica pursuant to which we will satisfy all of our
obligations under the escrow agreement for an amount equal to approximately
$17.0 million of the escrowed assets, plus accrued interest on such amount.

    RESTRICTIONS ON TRANSFER OF SECURITIES.  The investors agreed not to
transfer, in one transaction, or a series of transactions, to a single person or
group, common shares or securities convertible into common shares representing
in excess of either 51% of the votes then entitled to be cast in the election of
directors, or 51% of the then outstanding common shares (taking into account
common shares issuable upon conversion of the preference shares) without giving
all shareholders the right to participate in such transaction on the same or
substantially the same terms as the investors.

    The shareholders agreement between us and the holders of preference shares
also contains restrictions on the transfer of preference shares, which
terminates upon consumation of any registered public offering of our common
shares generating net proceeds to us in excess of $25.0 million.

    DISPOSITIONS; PENDING ACQUISITION.  We agreed to sell, prior to the time of
the audit adjustment described above, the portion of our investment portfolio
specified in a schedule to the agreement, consisting of specified publicly
traded noninvestment grade debt securities and certain equity securities.

    INFORMATION.  The investors agreed to give us information regarding their
ownership of our company, ownership information concerning each of them and
other related information in connection with preparing disclosure in filings
under the United States Securities Act of 1933 (the "Securities Act") or the
Exchange Act on issues arising under the Internal Revenue Code, including the
rules applicable to "controlled foreign corporations."

    INDEMNIFICATION; INSURANCE.  We and the investors agreed to maintain all
rights to indemnification in favor of our directors, officers, employees and
agents or any of our subsidiaries with respect to their activities prior to the
closing (except that with respect to the Transaction Committee this covenant
will cover activities after the closing) (as provided for in our organizational
documents in effect on October 24, 2001) in full force and effect for a period
of not less than six years from the closing. The investors agreed not to cause
us to take any action inconsistent with this agreement.

                                       5

    We and the investors also agreed that we will indemnify each of our present
and former directors or officers against liabilities arising before the closing
(including the transactions contemplated by the subscription agreement) and,
with respect to the Transaction Committee, also after the closing. We and the
investors agreed that we will maintain our current level of directors' and
officers' liability insurance coverage for a period of at least six years after
the closing.

    CERTAIN TAX MATTERS.  With respect to each taxable year during which any of
the Warburg Pincus funds or the Hellman & Friedman funds owns our shares, we
agreed to use reasonable best efforts to cause us and each of our subsidiaries:

    - not to constitute a "passive foreign investment company" within the
      meaning of Section 1297 of the Code;

    - not to satisfy the gross income requirement set forth in Section 542(a) of
      the Code;

    - not to satisfy the gross income requirement set forth in Section 552(a) of
      the Code; and

    - not to have any related person insurance income within the meaning of
      Section 953(c)(2) of the Code.

In the event that we or any of our subsidiaries constitute a personal holding
company, a foreign personal holding company, a controlled foreign corporation, a
foreign investment company or a passive foreign investment company for U.S.
federal income tax purposes with respect to any taxable year, we agreed to
provide each of the Warburg Pincus funds or the Hellman & Friedman funds with
any information it requests to satisfy its legitimate tax, accounting or other
reporting requirements.

    RIGHT TO EXCHANGE INTO SUBSIDIARY SHARES.  We agreed to form a new, wholly
owned subsidiary to hold Arch Re (Bermuda) as well as all of the "core insurance
operations" other than Arch Re (US).

    In the event that:

    - we fail to obtain the regulatory approvals required in connection with the
      investment before May 20, 2002 or

    - the adjustments described above under "--Purchase Price Adjustments--Final
      Adjustment" are less than zero and their absolute value exceeds
      $250.0 million,

the Warburg Pincus funds, the Hellman & Friedman funds and the other holders of
our preference shares will have the option to exchange their preference shares
and class A warrants, in whole or in part (but not for less than $150.0 million
liquidation preference of preference shares), for preference shares and warrants
of our newly formed subsidiary bearing identical rights and privileges,
including the right to convert into, or be exercised for, common shares of our
newly formed subsidiary, but not including voting limitations to the extent such
limitations are not required pending the remaining regulatory approvals required
in connection with the capital infusion.

    INVESTORS' COSTS AND EXPENSES.  We agreed to reimburse the Warburg Pincus
funds and the Hellman & Friedman funds for their costs and expenses, and the GE
investors for up to $50,000 of their costs and expenses, in connection with the
investment and the related transactions.

    TRANSACTION COMMITTEE.  Until the date of the final determination of the
adjustment basket at the fourth anniversary of closing, approval of the
following actions by the Transaction Committee (as defined below) is deemed to
be approval by the entire board of directors:

    - an amendment, modification or waiver of rights by ACGL under the
      subscription agreement, the certificate of designation for the preference
      shares, the class A warrants or the shareholders agreement;

    - the enforcement of obligations of the investors under the above
      agreements; or

                                       6

    - approval of actions relating to the disposition of non-core assets.

    "Transaction Committee" means a committee of the board of directors
consisting of persons who either (a) were members of our board of directors on
October 22, 2001 and/or (b) were designated as members of the Transaction
Committee by a person who was a member of our board of directors on October 22,
2001. The Transaction Committee currently consists of Robert Clements, Peter A.
Appel, James J. Meenaghan and Robert F. Works.

SHAREHOLDERS AGREEMENT

    On November 20, 2001 upon consummation of the capital infusion, we entered
into a shareholders agreement with the investors. Set forth below is a summary
of the material terms of the shareholders agreement. You should read this
summary in conjunction with the agreement. A conformed copy of the shareholders
agreement is filed herewith as an exhibit.

    BOARD REPRESENTATION.  Following the closing, the Warburg Pincus funds
exercised their right to designate one director to our board and the Hellman &
Friedman funds exercised their right to designate one director to our board.
Kewsong Lee is serving as the designee for the Warburg Pincus funds and John L.
Bunce, Jr. is serving as the designee for the Hellman & Friedman funds. Once the
remaining regulatory approvals required in connection with the capital infusion
have been obtained, we will increase the size of our board to up to 17 members
and the Warburg Pincus funds will have the right to designate or nominate five
additional directors and the Hellman & Friedman funds will have the right to
designate or nominate two additional directors. Continued representation on our
board of directors by these shareholders is based on the respective retained
percentages of their equity securities in according to the following schedules:



              WARBURG PINCUS FUNDS                              HELLMAN & FRIEDMAN FUNDS
-------------------------------------------------   -------------------------------------------------
         PERCENTAGE             MINIMUM NUMBER OF            PERCENTAGE             MINIMUM NUMBER OF
         OF ORIGINAL             DIRECTORS TO BE             OF ORIGINAL             DIRECTORS TO BE
       INVESTMENT HELD              NOMINATED              INVESTMENT HELD              NOMINATED
-----------------------------   -----------------   -----------------------------   -----------------
                                                                           
greater than or equal to 75%            6           greater than or equal to 60%            3
60% greater than or equal to X < 75%          5     35% less than or equal to X < 60%          2
45% less than or equal to X < 60%          4        20% less than or equal to X < 35%          1
30% less than or equal to X < 45%          3
20% less than or equal to X < 30%          2
10% less than or equal to X < 20%          1


    COMMITTEES OF THE BOARD.  As long as at least one representative of the
Warburg Pincus funds is on the board, each board committee will include at least
one representative of the Warburg Pincus funds, and as long as at least one
representative of the Hellman & Friedman funds is on the board, each board
committee will include at least one representative of the Hellman & Friedman
funds. The foregoing is subject to any Nasdaq Stock Market or SEC restrictions
applicable to the audit committee.

    INVESTOR PROTECTION MATTERS.  Prior to the receipt of the remaining
regulatory approvals in connection with the capital infusion certain matters
require approval by at least one director representing the Warburg Pincus funds
(if the Warburg Pincus funds hold at least 25% of their original investment in
ACGL) and one director representing the Hellman & Friedman funds (if the
Hellman & Friedman funds hold at least 50% of their original investment in us).
Such matters include, among other things, subject to exceptions set forth in the
subscription agreements:

    - any amendment to our organizational documents or the subscription
      agreement;

    - any change to our capital structure or the terms of our outstanding
      securities;

    - the declaration of any dividend or other distribution on, or repurchase
      of, our securities;

                                       7

    - the issuance of any securities or the grant of any preemptive or
      anti-dilutive rights to any holder of our securities, or the grant of
      registration rights with respect to any of our securities;

    - any amendment to any grants made under our Long Term Incentive Plan for
      New Employees;

    - the incurrence of any material indebtedness;

    - our entering into any interested party transactions;

    - the acquisition of any material assets;

    - the acquisition of equity interests in any other person;

    - any change in our independent auditors or any material change in any
      method of financial accounting or accounting practice (other than changes
      required under U.S. generally accepted accounting principles);

    - any sale of material assets;

    - significant changes in compensation arrangements with any officer or key
      employee;

    - our liquidation or dissolution, or certain mergers or consolidations, sale
      of all or substantially all of our assets, or similar business
      combination;

    - entering into any transaction involving in excess of $1,000,000 or, if
      such transaction is in the ordinary course of business consistent with
      past practice, $5,000,000;

    - the approval of our annual plan, annual capital expenditure budget or the
      five-year plan of our company; or

    - the removal or appointment of a new chief executive officer or chairman.

    Notwithstanding the required approvals described above, the shareholders
agreement does not grant these shareholders any right or consent to the extent
that such right would result in such party being deemed to "control" any of our
insurance subsidiaries that are domiciled in any state in the United States,
where the exercise of such control would otherwise require the prior approval of
such state.

    The rights of these shareholders described above terminate upon the
mandatory conversion of the preference shares or the earlier conversion of all
preference shares in accordance with their terms.

    SPECIAL BOARD MEETINGS.  We agreed to use best efforts (1) to cause a
special meeting of the board to be called upon the request of at least three
directors and (2) to cause to be submitted, at the 2002 annual general meeting
of our shareholders, a proposal to amend our bye-laws so that a special meeting
of the board may be called by three directors or a majority of the total number
of directors (whichever is fewer), in addition to the chairman of the board and
the president of ACGL.

    VOTING.  The signatories to the shareholders agreement agreed to vote all of
their voting shares in favor of the proposal to approve a grant of restricted
shares to Mr. Clements and an option grant to Mr. Pasquesi to be submitted for
approval at our next annual general meeting.

    CHAIRMAN.  The Warburg Pincus funds and the Hellman & Friedman funds agreed
to take all actions necessary to cause Robert Clements to be duly elected as
chairman of our board of directors for so long as he is willing and able to
serve.

    CERTAIN TRANSACTIONS.  The Warburg Pincus funds and the Hellman & Friedman
funds agreed that, for a period of two years after the closing, they will not,
directly or indirectly, without the prior

                                       8

approval of a majority of directors who are not affiliated with either the
Warburg Pincus funds or the Hellman & Friedman funds:

    - acquire securities or assets from us or any of our subsidiaries, except as
      specifically contemplated by the subscription agreements, the preference
      shares and the class A warrants;

    - engage in any "Rule 13e-3 transaction" (as such term is defined in
      Rule 13e-3(a)(3) under the Exchange Act) involving us; or

    - engage in any other transaction that would result in the compulsory
      acquisition of our common shares.

    We and the Warburg Pincus funds and the Hellman & Friedman funds have agreed
to endeavor to include at all times two directors on our board who are not
affiliated with either the Warburg Pincus funds or the Hellman & Friedman funds.
The prior approval of a majority of such independent directors is required prior
to any change to or elimination of these provisions.

    REGISTRATION RIGHTS.  The shareholders agreement also grants the investors
registration rights described below.

    DEMAND REGISTRATION RIGHTS.  The Warburg Pincus funds and the Hellman &
Friedman funds have the right to request registration of their shares under the
Securities Act, at any time and on not more than five separate occasions, so
long as the request covers common shares with a market value on the date of the
request of at least $25.0 million.

    PIGGY-BACK REGISTRATION RIGHTS.  If at any time we propose to register any
common shares under the Securities Act on our own behalf or on behalf of any of
our shareholders (including pursuant to a demand registration as discussed
above), we are required to give reasonably prompt written notice to each
investor of our intention to do so and, upon request of any investor, but
subject to limitations in some cases, include the investor's shares for
registration.

    REGISTRATION EXPENSES.  We agreed to bear all registration, filing and
related fees (excluding underwriters' discounts or commissions) in connection
with any registration and listing of any common shares pursuant the registration
provisions described above.

    INDEMNIFICATION; CONTRIBUTION.  We agreed to indemnify each investor and its
officers, directors, employees and controlling persons, and each underwriter,
its partners, officers, directors, employees and controlling persons, in any
offering or sale of common shares, against certain liabilities in connection
with these registered offerings. Each investor agreed to indemnify us and our
officers, directors, employees and controlling persons, against certain
liabilities in connection with these registered offerings. In the event that the
indemnification provisions are unavailable, we and the investors agreed to
contribute such amounts as are appropriate to reflect the relative fault of the
parties.

    TAG-ALONG/DRAG-ALONG RIGHTS.  In the event that a Warburg Pincus fund, a
Hellman & Friedman fund or a GE investor proposes to transfer preference shares,
class A warrants or common shares issued upon conversion or exercise of such
securities to a third party, and the net proceeds of such sale are reasonably
expected to exceed $50.0 million, other investors may have rights under the
shareholders agreement to "tag along" in such sale. The following tag-along
rights are provided for in the shareholders agreement:

    - The GE investors have tag-along rights only if (1) a Warburg Pincus fund
      is the seller or (2) a Hellman & Friedman fund is the seller and the
      Warburg Pincus funds also exercise their rights to tag along in the sale.

                                       9

    - Farallon has tag-along rights only if (1) a Hellman & Friedman fund is the
      seller or (2) a Warburg Pincus fund is the seller and the Hellman &
      Friedman funds also exercise their rights to tag along in the sale.

    - Trident II has tag-along rights in the event that a Warburg Pincus fund or
      a Hellman & Friedman fund is the seller.

    Any sale effected in the public markets (including by means of a "block
trade" effected through any registered broker-dealer) or any distribution to
partners of any partnership in which a Warburg Pincus fund or a Hellman &
Friedman fund, or any of their respective affiliates, is the general partner
will not give rise to any tag-along rights.

    In the event that a Warburg Pincus fund and/or a Hellman & Friedman fund
proposes to transfer preference shares, class A warrants or common shares issued
upon conversion or exercise of such securities representing either 51% of the
votes then entitled to be cast in the election of directors, or 51% of our then
outstanding common shares (taking into account common shares issuable upon
conversion of preference shares) in a transaction, or in a series of related
transactions, to a single person or group, the Warburg Pincus funds and the
Hellman & Friedman funds have the right to require that Trident II participate
in such transaction on a ratable basis.

    RESTRICTIONS ON TRANSFER.  Each investor has agreed not to sell more than
one-third of the shares purchased in its original investment until the earliest
to occur of

    - November 20, 2002;

    - any event that would cause our outstanding class B warrants to become
      exercisable; or

    - our completion of a registered public offering of common shares the net
      proceeds of which to us exceed $25.0 million.

    RESTRICTIONS ON CONVERSION/EXERCISE.  Prior to receipt of the regulatory
approvals required in connection with the investment, the investors agreed not
to convert any preference shares or exercise class A warrants issued under the
subscription agreements unless all necessary approvals for the ownership of
common shares issued upon such conversion or exercise have been obtained.

    RESTRICTIONS ON DIVIDENDS AND SHARE REPURCHASES.  We agreed not to declare
any dividend or make any other distribution on our common shares, and not to
repurchase any common shares, until we have repurchased from the Warburg Pincus
funds, the Hellman & Friedman funds, and the other holders of our preference
shares, pro rata, on the basis of the amount of each of these shareholders'
retained investment in the company at the time of such repurchase, preference
shares having an aggregate value of $250.0 million, at a per share price
acceptable to these shareholders (subject to the exception described under
"--Subscription Agreement--Purchase Price Adjustments--Final Adjustments").

    TERMINATION.  The shareholders agreement terminates upon the earlier to
occur of:

    - November 20, 2011; or

    - mutual written agreement of us and the Warburg Pincus funds and the
      Hellman & Friedman funds.

MANAGEMENT SUBSCRIPTION

    In connection with the capital infusion, we entered into a management
subscription agreement, pursuant to which certain members of management (or
entities affiliated with them) agreed to purchase preference shares and class A
warrants on the same economic terms as the Warburg Pincus funds and the
Hellman & Friedman funds. The management subscription agreement is filed as an
exhibit to this report.

                                       10

    On November 20, 2001, each of the persons or entities listed purchased
preference shares and class A warrants for the amount opposite his or its names
set forth in the table below:



NAME                                                       AMOUNT
----                                                       ------
                                                      
SoundView Partners LP (an entity affiliated with Robert
  Clements)............................................  $ 2,000,000
Otter Capital LLC (an entity affiliated with John M.
  Pasquesi)............................................    7,500,000
Peter A. Appel.........................................    1,000,000
Paul B. Ingrey.........................................    2,000,000
Dwight R. Evans........................................      400,000
Marc Grandisson........................................      250,000
                                                         -----------
  Total................................................  $13,150,000
                                                         ===========


CERTIFICATE OF DESIGNATIONS

    Set forth below is a summary of the material terms of the certificate of
designations for our series A convertible preference shares. You should read
this summary in conjunction with the certificate, which is filed herewith as an
exhibit.

    DIVIDENDS.  The holders of preference shares are entitled to receive
dividends along with holders of our common shares, on an as-converted basis.
Dividends are payable on each outstanding preference share on an as-converted
basis. No dividends may be paid or declared on or with respect to our common
shares prior to the declaration and payment of a dividend on or with respect to
the preference shares. Dividends on the preference shares are noncumulative.

    RANKING.  The preference shares rank, with respect to dividends and upon
liquidation, winding up or dissolution:

    - on a parity with those shares which, by the terms of our bye-laws or by
      such rights, preferences or limitations as fixed by the board of
      directors, are specifically entitled to share ratably with the preference
      shares, and

    - senior to each other class or series of our shares.

The shareholders agreement between us and the holders of our preference shares
includes a limitation on dividends on, and repurchases of, our common shares.

CONVERSION

    GENERAL.  Each preference share is convertible at any time and from time to
time at the option of the holder, initially, into one fully paid and
nonassessable common share, subject to adjustment for certain events as
described below under "--Adjustments." In connection with the conversion of any
preference shares, no fractional shares will be issued. Instead, we will pay a
cash amount for such fractional interest based on the current market price of
the common shares. As discussed above, the shareholders agreement between us and
the holders of our preference shares contains a limitation on conversion of the
preference shares until the receipt of certain shareholder and regulatory
approvals.

    MANDATORY CONVERSION.  The preference shares will automatically convert into
common shares following the later of: (a) the receipt of the regulatory
approvals required in connection with the November 20 capital infusion and
(b) 90 days following the consummation of the purchase price

                                       11

adjustment to be performed at the fourth anniversary of closing (described above
under "The Capital Infusion--Purchase Price Adjustments").

    ADJUSTMENTS.  The number of common shares into which each preference share
is convertible is subject to adjustment from time to time in the event of:

    - share splits or combinations of our common shares;

    - the declaration and payment of dividends on the common shares in
      additional common shares;

    - the distribution of indebtedness, securities or assets to holders of our
      common shares;

    - transactions in which our common shares are exchanged (either for
      different securities of our company or securities of a different company);
      or

    - offerings of our common shares, or securities convertible into or
      exercisable for common shares, at a price below the market value for our
      common shares at the time of issuance, subject to exceptions.

    LIQUIDATION PREFERENCE.  In the event of our voluntary or involuntary
liquidation, dissolution or winding-up, or a reduction or decrease in our share
capital resulting in a distribution of assets to the holders of any class or
series of our shares, each holder of preference shares is entitled to payment
out of our assets available for distribution of an amount equal to the
liquidation preference of $21.00 per preference share held by such holder, plus
all accumulated and unpaid dividends, before any distribution is made on any
common shares. If, in the event of our voluntary or involuntary liquidation,
dissolution or winding up or a reduction or decrease in our share capital, the
amounts payable with respect to preference shares and parity shares are not paid
in full, the holders of preference shares and the parity shares share equally
and ratably in any distribution of share assets in proportion to the full
liquidation preference and all accumulated and unpaid dividends to which each
such holder is entitled.

    VOTING RIGHTS.  Each holder of preference shares is entitled to the number
of votes equal to the number of whole common shares into which all of such
holder's preference shares are convertible, with respect to all matters
submitted for shareholder approval. Except as required by applicable Bermuda law
or by the express terms of the preference shares, holders will vote together
with holders of the common shares as a single class.

    The affirmative vote of the holders of at least a majority of the
outstanding preference shares, voting with holders of shares of all other series
of preference shares affected in the same way as a single class, is required to
amend, repeal or change any provisions of the certificate of designations in any
manner which would adversely affect, alter or change the powers, preferences or
special rights of the preference shares and any such securities affected in the
same way. However, the creation, authorization or issuance of any other class or
series of shares or the increase or decrease in the amount of authorized shares
of any such class or series or of the preference shares, or any increase,
decrease or change in the par value of any class or series of shares (including
the preference shares) do not require the consent of the holders of the
preference shares and are not deemed to affect adversely, alter or change the
powers, preferences and special rights of the preference shares. With respect to
any matter on which the holders are entitled to vote as a separate class, each
preference share is entitled to one vote.

    Notwithstanding the foregoing, prior to the receipt of the regulatory
approvals required in connection with the capital infusion by the Warburg Pincus
funds and the Hellman & Friedman funds, if the votes conferred by common shares
and preference shares beneficially owned by a given person would otherwise
represent more than 9.9% of the voting power of all shares of the company
entitled to vote generally at an election of directors, the vote of each
preference share held by that person will be

                                       12

reduced by whatever amount is necessary so that after any reduction, the votes
conferred by the common shares and preference shares beneficially owned by that
person constitute 9.9% of the total voting power of all shares of the company
entitled to vote generally at any election of directors.

CLASS A WARRANTS

    Set forth below is a summary of the material terms of the class A warrants.
You should read this summary in conjunction with the certificate for the
class A warrants, the form of which is filed as an exhibit herewith.

    GENERAL.  Each class A warrant entitles the holder to purchase one common
share for $20.00. The exercise price is subject to adjustments as discussed in
greater detail below under "--Anti-Dilution and Other Adjustments." The class A
warrants will expire on September 19, 2002.

    EXERCISE OF THE CLASS A WARRANTS.  Holders of the class A warrants may
exercise their purchase rights under the class A warrants by making payment of
the purchase price in cash or through a cashless exercise. Holders may effect a
cashless exercise by (a) delivering common shares equivalent in value to the
exercise price or (b) accepting a reduction in the number of common shares
deliverable upon exercise of the class A warrant by an amount which would be
equivalent in value to the exercise price. See "--Shareholders
Agreement--Restrictions on Conversion/Exercise" for a description of the
limitation on exercise of the class A warrants under the shareholders agreement.

    ANTI-DILUTION AND OTHER ADJUSTMENTS.  The exercise price will be adjusted
from time to time in order to prevent dilution. In addition, certain other
adjustments will be made to the terms of the class A warrants upon extraordinary
corporate events. Such anti-dilution and other adjustments include:

    - offerings of our common shares at a price below the market value of our
      common shares at the time of issuance will result in an adjustment to the
      exercise price under the class A warrants;

    - share splits or combinations of our common shares will result in an
      adjustment to the exercise price under the class A warrants;

    - a reorganization, reclassification, consolidation, merger or sale of
      assets may result in the substitution of other securities, cash or
      property upon exercise of the class A warrants; and

    - issuance of assets or debt securities or rights or warrants to purchase
      assets or securities by the company to its shareholders may result in an
      adjustment to the exercise price under the class A warrants.

    In addition, our board of directors may make such additional adjustments to
the exercise price or other terms of the class A warrants in order to protect
the rights of the holders of the class A warrants.

OPERATIONS

OUR REINSURANCE OPERATIONS

    Our Reinsurance Group is worldwide, with U.S. and Bermuda-based operations.
It has two principal offices, one located in Hamilton, Bermuda and the other in
Morristown, New Jersey. As of March 14, 2002, the group has 36 employees
consisting of 20 underwriters, seven other professionals and nine
non-professionals. We expect that our Reinsurance Group will have approximately
55 total employees once fully staffed.

                                       13

    STRATEGY.  Our Reinsurance Group's strategy is to capitalize on our
financial capacity, experienced management and operational flexibility to offer
multiple products through our Bermuda- and U.S.-based operations. The group's
operating principles are:

    - ACTIVELY SELECT AND MANAGE RISKS. We will not underwrite business that
      does not meet our profitability criteria, and we will emphasize
      disciplined underwriting over premium growth. To this end, we will
      maintain centralized control over reinsurance underwriting guidelines and
      authorities.

    - MAINTAIN FLEXIBILITY AND RESPOND TO CHANGING MARKET CONDITIONS. Our
      organizational structure and philosophy allow us to take advantage of
      increases or changes in demand or favorable pricing trends. We believe
      that our existing Bermuda and U.S.-based platform, broad underwriting
      expertise, and substantial capital will facilitate adjustments to our mix
      of business geographically and by line and type of coverage. We believe
      that this flexibility will allow us to participate in those market
      opportunities that provide the greatest potential for underwriting
      profitability.

    - MAINTAIN A LOW COST STRUCTURE. We believe that maintaining tight control
      over our staffing and operating as a broker market reinsurer will permit
      us to maintain low operating costs relative to our capital and premiums.

    LINES OF BUSINESS.  We are seeking to write "large lines" (I.E., significant
portions) on a select number of specialty property and casualty reinsurance
treaties.

    Our Reinsurance Group focuses on the following lines of business:

    - PROPERTY CATASTROPHE REINSURANCE. Property catastrophe reinsurance
      provides coverage on an excess of loss basis when aggregate losses and
      loss adjustment expense from a single occurrence of covered peril exceed
      the attachment point specified in the policy. Some of our property
      catastrophe contracts limit coverage to one occurrence in a policy year,
      but most contracts generally provide for at least one reinstatement of the
      limit covered, which could result in two or more exposures to a given
      risk.

    - PROPERTY RISK EXCESS OF LOSS. We also write risk excess of loss property
      reinsurance. Risk excess of loss reinsurance responds to a loss of the
      reinsured on a single "risk" of the type reinsured rather than to
      aggregate losses for all covered risks as does catastrophe reinsurance.
      The risk excess of loss property protects the reinsured from losses in
      excess of its retention level on a single risk. A "risk" in this context
      might mean the insurance coverage on one building or a group of buildings
      or the insurance coverage under a single policy, which the reinsured
      treats as a single risk. Risk excess contracts are generally "all risk" in
      nature, similar to property catastrophe reinsurance.

    - PROPERTY PRO RATA. In pro rata reinsurance, we assume a specified portion
      of the risk on the specified coverage and receive an equal proportion of
      the premium. The ceding insurer receives a commission based upon the
      premiums ceded to the reinsurer and may also be entitled to receive a
      profit commission based on the ratio of losses, loss adjustment expense
      and the reinsurer's expenses to premiums ceded. A pro rata reinsurer is
      dependent upon the ceding insurer's underwriting, pricing and claims
      administration to yield an underwriting profit. In some instances we may
      be entitled to the benefit of other reinsurance, known as common account
      reinsurance, purchased by the ceding company on an account reinsured by us
      on a pro rata basis.

    - CASUALTY. We also write the following lines of business on both a pro rata
      and excess of loss basis: general liability (including excess general
      liability), workers' compensation, commercial transportation, non-standard
      auto liability, surety, aviation & aerospace, marine, medical

                                       14

      malpractice, directors and officers, errors and omissions and energy. We
      may write other lines, including trade credit and political risk.

    Although we will seek to exclude terrorism from the property reinsurance
which we write, we may specifically reinsure risks resulting from terrorism on
an excess of loss basis, or, based on market factors, we may determine to
include terrorism risk. Our reinsurance business may also include clash covers
which are excess of loss agreements where the underlying amount to be retained
by the ceding insurer is at an amount which is higher than the limit on any one
reinsured policy. Such agreements provide payment of loss when the unusual
circumstances occur where two or more casualty policies (or, with respect to
workers compensation coverages, multiple employees) experience the same
occurrence of loss and the total amount of the payment of losses for the
multiple policies exceeds the clash cover retention amount.

    We also write non-traditional business that is intended to provide insurers
with creative risk management solutions that complement traditional reinsurance.
Under these covers, we would assume a measured amount of insurance risk in
exchange for a specified margin. Coverages may include a combination of
sublimits and caps. Examples of such non-traditional business include aggregate
stop-loss coverages and financial quota share coverages.

    UNDERWRITING PHILOSOPHY.  We employ a disciplined, analytical approach to
underwriting reinsurance risks that is designed to specify an adequate premium
for a given exposure commensurate with the amount of capital we anticipate
placing at risk. Many of our underwriters are also actuaries. We believe that
employing actuaries on the front-end of the underwriting process gives us an
advantage in evaluating risks and constructing a high quality book of business.

    As part of our underwriting process, we typically assess a variety of
factors, including:

    - the reputation of the proposed cedent and the likelihood of establishing a
      long-term relationship with the cedent, the geographic area in which the
      cedent does business, together with its catastrophe exposures, and our
      market share in that area;

    - historical loss data for the cedent and, where available, for the industry
      as a whole in the relevant regions, in order to compare the cedent's
      historical loss experience to industry averages;

    - projections of future loss frequency and severity; and

    - the perceived financial strength of the cedent.

    For our catastrophe exposed reinsurance business, we have developed
underwriting guidelines under which we generally limit the amount of exposure we
will assume from any one reinsured and the amount of the aggregate exposure to
catastrophe losses in any geographic zone.

    MARKETING.  We market our reinsurance products through brokers. Brokers do
not have the authority to bind us with respect to reinsurance agreements, nor do
we commit in advance to accept any portion of the business that brokers submit
to us. Reinsurance business from any ceding company, whether new or renewal, is
subject to acceptance by us.

    CLAIMS MANAGEMENT.  Claims management includes the receipt of initial loss
reports, creation of claim files, determination of whether further investigation
is required, establishment and adjustment of case reserves and payment of
claims. Additionally, audits will be conducted for both specific claims and
overall claims procedures at the offices of selected ceding companies. We may
make use of outside consultants for claims work.

                                       15

OUR INSURANCE OPERATIONS

    Our Insurance Group will have operations in the U.S. and Bermuda. As of
March 14, 2002, our Insurance Group has 37 employees consisting of 17
underwriters, 16 other professionals and 4 non-professionals. We expect that the
number of employees in our Insurance Group will increase significantly as we
expand our insurance operations.

    STRATEGY.  Our Insurance Group strategy is to write business profitably (on
both a gross and net basis) across all of our product lines. Our Group's
operating principles are:

    - CAPITALIZE ON PROFITABLE UNDERWRITING OPPORTUNITIES. We believe that our
      experienced management and underwriting team will be able to locate and
      identify lines of business with attractive risk/ reward characteristics.
      As profitable underwriting opportunities are identified, we will make
      additions to our product portfolio in order to take advantage of market
      trends. This could include adding underwriting and other professionals
      with specific expertise in specialty lines of business.

    - CENTRALIZE RESPONSIBILITY WITHIN EACH LINE OF BUSINESS. Our Insurance
      Group will consist of "profit centers" consisting of individual lines of
      business. Within each profit center, profit center managers will oversee
      the underwriting and other functions within each business region, and
      regional executives will be responsible for overall profitability within
      each business line. We believe that this organizational structure will
      allow close control of our profitability, and create clear accountability,
      within each line of business and each region.

    - MAINTAIN A DISCIPLINED UNDERWRITING PHILOSOPHY. Our underwriting
      philosophy is to generate an underwriting profit through prudent risk
      selection and proper pricing. We believe that the key to this approach is
      strict adherence to uniform underwriting standards across all lines of
      business. Our insurance senior management intends to provide close control
      of the underwriting process.

    - FOCUS ON PROVIDING SUPERIOR CLAIMS MANAGEMENT. We believe that claims
      handling is an integral component of credibility in the market for
      insurance products. Therefore, we believe that our ability to handle
      claims expeditiously and satisfactorily will be a key to our success. We
      intend to use experienced internal claims professionals, as well as
      nationally recognized external claims managers.

    - UTILIZE AN OPEN BROKERAGE DISTRIBUTION SYSTEM. We believe that by avoiding
      reliance on contractual relationships with brokers or other agents, we can
      efficiently access a broad customer base while maintaining underwriting
      control. We will compensate our distribution sources on a risk-by-risk
      basis and we do not intend to offer additional incentives based on volume
      or profitability.

    LINES OF BUSINESS.  Our Insurance Group will initially comprise six lines of
business or "profit centers": property, casualty (including excess and
umbrella), executive assurance (including, but not limited to, financial and
commercial institution directors and officers liability and errors and omissions
coverage), medical malpractice, professional liability insurance (including, but
not limited to, architects and engineers, small to medium accounting firms and
lawyers professional liability) and program business (including alternative
risk). Once these units are operational, we will explore other opportunities in
new areas which may include: marine, environmental liability, construction risk
and surety.

                                       16

UNDERWRITING PHILOSOPHY.

    Our Insurance Group's underwriting philosophy is to generate an underwriting
profit (on both a gross and net basis) through prudent risk selection and proper
pricing across all lines of business. One key to this philosophy will be the
strict adherence to uniform underwriting standards across each profit center
that will focus on the following:

    - risk selection;

    - desired attachment point;

    - limits and retention management;

    - due diligence, including as to financial condition, claims history,
      management, and product, class and territorial exposure;

    - underwriting authority and appropriate approvals; and

    - collaborative decision-making.

    MARKETING.  Our Insurance Group's products will be marketed principally
through licensed independent brokers and wholesalers. We anticipate that a
majority of our volume may emanate from the top three insurance brokers.

    CLAIMS MANAGEMENT.  Our claims department will provide underwriting and loss
service support to all of our branches. In addition, claims personnel will fully
participate in the creation of insurance products. Members of our claims
department will work with our underwriting professionals as functional teams in
order to develop products and services that our customers desire and may use
independent national claims firms for investigations and field adjustments.

RESERVES

    We believe we have applied, and will continue to so apply, a conservative
reserving philosophy for both our insurance and reinsurance operations. We
utilize regular actuarial reviews. Reserve estimates are derived after extensive
consultation with individual underwriters, actuarial analysis of the loss
reserve development and comparison with market benchmarks. We are building our
actuarial staff and will utilize both internal and external actuaries.
Generally, reserves are established without regard to whether we may
subsequently contest the claim. We do not currently expect to discount our loss
reserves.

    Loss reserves represent estimates of what the insurer or reinsurer
ultimately expects to pay on claims at a given time, based on facts and
circumstances then known, and it is possible that the ultimate liability may
exceed or be less than such estimates. Even actuarially sound methods can lead
to subsequent adjustments to reserves that are both significant and irregular
due to the nature of the risks written. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Critical Accounting
Policies, Estimates and Recent Accounting Pronouncements--Losses and Loss
Adjustment Expenses."

    The following table represents the development of generally accepted
accounting principles ("GAAP") balance sheet reserves for 1997 through
December 31, 2001. This table does not present accident or policy year
development data. Results for the period 1996 to December 31, 2000 relate to our
prior reinsurance operations, which was sold on May 5, 2000 to Folksamerica
Reinsurance Company. The top line of the table shows the reserves, net of
reinsurance recoverables, at the balance sheet date for each of the indicated
years. This represents the estimated amounts of net claims and

                                       17

claims expenses arising in all prior years that are unpaid at the balance sheet
date, including incurred but not reported ("IBNR") reserves. The table also
shows the reestimated amount of the previously recorded reserve based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes known about the frequency and severity of claims for
individual years. The "cumulative redundancy (deficiency)" represents the
aggregate change in the estimates over all prior years. The table also shows the
cumulative amounts paid as of successive years with respect to that reserve
liability. In addition, the table reflects the claim development of the gross
balance sheet reserves for 1996 through December 31, 2001.

    With respect to the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts for prior periods.
For additional information on our reserves, including a reconciliation of claims
and claims expense reserves for the years ended December 31, 2001, 2000 and
1999, please refer to Note 5 of the notes accompanying our consolidated
financial statements.

                          DEVELOPMENT OF GAAP RESERVES
                       CUMULATIVE REDUNDANCY (DEFICIENCY)



                                                                         YEARS ENDED DECEMBER 31,
                                                   ---------------------------------------------------------------------
                                                     1996       1997       1998          1999          2000       2001
                                                   --------   --------   --------      --------      --------   --------
                                                                               (IN MILLIONS)
                                                                                              
Reserves for unpaid claims and claims adjustment
  expenses, net of reinsurance recoverables......   $  20       $ 71      $  186        $ 309          $ --       $ 23
Paid (cumulative) as of:
  One year later.................................       9         19          88          311            --         --
  Two years later................................      10         33         216          311            --         --
  Three years later..............................      12         64         216           --            --         --
  Four years later...............................      18         64          --           --            --         --
  Five years later...............................      18         --          --           --            --         --
Reserve reestimated as of:
  One year later.................................      20         68         216           --            --         --
  Two years later................................      19         65         216           --            --         --
  Three years later..............................      18         64         216           --            --         --
  Four years later...............................      18         64          --           --            --         --
  Five years later...............................      18         --          --           --            --         --

Cumulative redundancy (deficiency)...............   $   2       $  7      $  (30)       $  (2)           --         --
                                                    =====       ====      ======        =====          ====       ====
Cumulative redundancy (deficiency) as a
  percentage of net reserves.....................    10.0%       8.5%      (16.1)%       (1.0)%          --         --

Gross reserve for claims and claims expenses.....   $  20       $ 71      $  216        $ 365            --       $113
Reinsurance recoverable..........................      --         --         (30)         (56)           --        (90)
                                                    -----       ----      ------        -----          ----       ----
Net reserve for claims and claims expenses.......   $  20       $ 71      $  186        $ 309          $ --       $ 23
                                                    -----       ----      ------        -----          ----       ----
Gross reestimated reserve........................   $  18       $ 64      $  246        $ 367          $ --       $113
Reestimated reinsurance recoverable..............      --         --         (30)         (56)           --        (90)
                                                    -----       ----      ------        -----          ----       ----
Net reestimated reserve..........................   $  18       $ 64      $  216        $ 311          $ --       $ 23
Gross reestimated redundancy (deficiency)........   $   2       $  7      $  (30)       $  (2)           --         --
                                                    =====       ====      ======        =====          ====       ====


INVESTMENTS

    At December 31, 2001, consolidated cash and invested assets totaled
approximately $1.0 billion, consisting of $486.8 million of cash and short-term
investments, $468.3 million of publicly traded fixed

                                       18

maturity investments, $22.2 million of fixed maturities held in escrow,
$41.6 million of privately held securities and $0.2 million of publicly traded
equity securities. Our strategy is to maximize our underwriting profitability
and fully deploy our capital through our underwriting activities. Consequently,
we have established an investment policy, which we consider to be conservative.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Investments."

    Our current investment guidelines stress preservation of capital, market
liquidity, and diversification of risk. To achieve this objective, our current
fixed income investment guidelines call for an average credit quality of "Aa3"
and "AA-" as measured by Moody's and Standard & Poor's, respectively.
Notwithstanding the foregoing, our investments are subject to market-wide risks
and fluctuations, as well as to risks inherent in particular securities.

    At December 31, 2001, almost all of our fixed maturity and short-term
investments were rated investment grade by Moody's or Standard & Poor's and had
an average Standard & Poor's quality rating of "AA-" and an average duration of
approximately 1.9 years.

    The following table summarizes the fair value of our investments and cash
and short-term investments at the dates indicated.



                                                                    DECEMBER 31,
                                     ---------------------------------------------------------------------------
                                             2001                       2000                       1999
                                     ---------------------      ---------------------      ---------------------
                                     ESTIMATED      % OF        ESTIMATED      % OF        ESTIMATED      % OF
                                     FAIR VALUE    TOTAL        FAIR VALUE    TOTAL        FAIR VALUE    TOTAL
                                     ----------   --------      ----------   --------      ----------   --------
                                                               (DOLLARS IN THOUSANDS)
                                                                                      
Cash and short-term investments....  $  486,790      48%         $108,868       39%         $ 82,242       14%
Short-term investments held in
  escrow...........................      22,156        2               --        --               --        --
                                     ----------     ----         --------      ----         --------      ----
    Sub-total......................     508,946       50          108,868        39           82,242        14
                                     ----------     ----         --------      ----         --------      ----
Fixed maturities:
  U.S. government and government
    agencies.......................     137,861       14           27,122        10           41,095         7
  Municipal bonds..................          --       --               --        --           52,245         9
  Corporate bonds..................     239,261       23            5,835         2          136,838        24
  Mortgage and asset-backed
    securities.....................      91,147        9            5,518         2           27,298         5
  Foreign governments..............          --       --               --        --            3,591         1
                                     ----------     ----         --------      ----         --------      ----
      Sub-total....................     468,269       46           38,475        14          261,067        46
                                     ----------     ----         --------      ----         --------      ----
Fixed maturities held in escrow....          --       --           20,970         8               --        --
                                     ----------     ----         --------      ----         --------      ----
Equity securities:
  Publicly traded..................         235       --           51,322        19          158,631        27
  Privately held...................      41,608        4           56,418        20           77,934        13
                                     ----------     ----         --------      ----         --------      ----
      Sub-total....................      41,843        4          107,740        39          236,565        40
                                     ----------     ----         --------      ----         --------      ----
        Total......................  $1,019,058     100%         $276,053      100%         $579,874      100%
                                     ==========     ====         ========      ====         ========      ====


                                       19

    Primarily because of the potential for large claims payments, our investment
portfolio is structured to provide a high level of liquidity. The table below
shows the contractual maturities of our fixed maturities at December 31, 2001:



                                                           DECEMBER 31, 2001
                                                       --------------------------
                                                       ESTIMATED        AMORTIZED
                                                       FAIR VALUE         COST
                                                       ----------       ---------
                                                             (IN THOUSANDS)
                                                                  
Available for sale:
  Due in one year or less............................   $  9,351        $ 10,438
  Due after one year through five years..............    322,923         321,315
  Due after five years through ten years.............     34,751          31,445
  Due after 10 years.................................     10,097          12,804
                                                        --------        --------
    Sub-total........................................    377,122         376,002
                                                        --------        --------
  Mortgage and asset-backed securities...............     91,147          91,152
                                                        --------        --------
      Total..........................................   $468,269        $467,154
                                                        ========        ========


    The table below presents the credit quality (according to Standard & Poor's)
distribution of our fixed maturities at December 31, 2001:



                                                        DECEMBER 31, 2001
                                                    -------------------------
                                                    ESTIMATED          % OF
                                                    FAIR VALUE        TOTAL
                                                    ----------       --------
                                                         (IN THOUSANDS)
                                                               
AAA...............................................   $199,416          42.6%
AA................................................     31,847           6.8%
A.................................................    147,679          31.5%
BBB...............................................     87,378          18.7%
B.................................................      1,949           0.4%
                                                     --------         ------
      Total.......................................   $468,269         100.0%
                                                     ========         ======


RATINGS

    Our reinsurance subsidiaries, Arch Re (US), Arch Re (Bermuda) and First
American Insurance Company, each currently have financial strength ratings of
"A-" (Excellent) from A.M. Best and American Independent Insurance Company has a
financial strength rating of "C++" (Marginal) from A.M. Best. We do not believe
that American Independent's non-standard automobile business is particularly
ratings sensitive because its insureds purchase insurance primarily to satisfy
state and local insurance and financial reporting requirements. Rock River has a
financial strength rating of "A+u" (Superior--under review) from A.M. Best and
Cross River has a financial strength rating of "NR-2" (Insufficient Size and/or
Operating Experience) from A.M. Best. We are currently seeking to improve the
financial strength for Rock River and Cross River, and we are also seeking
ratings for our other principal U.S. insurance subsidiaries.

    Recently, rating agencies have been coming under increasing pressure as a
result of high-profile corporate bankruptcies and may, as a result, increase
their scrutiny of rated companies, revise their rating policies or take other
action. We can offer no assurances that our ratings will remain at their current
levels.

COMPETITION

    The world-wide reinsurance and insurance businesses are highly competitive.
We compete, and will continue to compete, with major U.S. and non-U.S. insurers
and reinsurers and others, some of which

                                       20

have greater financial, marketing and management resources than us and have had
longer-term relationships with insureds and brokers than us. We compete with
other insurers and reinsurers primarily on the basis of overall financial
strength, ratings assigned by independent rating agencies, geographic scope of
business, strength of client relationships, premiums charged, contract terms and
conditions, products and services offered, speed of claims payment, reputation,
employee experience, and qualifications and local presence.

OTHER OPERATIONS

    During the period following the sale of our prior reinsurance operations in
May 2000 through the announcement of our underwriting initiative in
October 2001, we built and acquired insurance businesses that enable us to
generate both fee-based revenue (E.G., commissions and advisory and management
fees) and risk-based revenue (I.E., insurance premium). As part of this
strategy, we acquired certain businesses, including Hales & Company Inc. (an
insurance advisory firm) and American Independent Insurance Holding Company
(which principally writes non-standard automobile coverages), which are
considered "non-core businesses" for purposes of the capital infusion. See "The
Capital Infusion."

REGULATION

U.S. INSURANCE REGULATION

    GENERAL.  In common with other insurers, our U.S.-based insurance
subsidiaries are subject to extensive governmental regulation and supervision in
the various states and jurisdictions in which they are domiciled and licensed to
conduct business. The laws and regulations of the state of domicile have the
most significant impact on operations. This regulation and supervision is
designed to protect policyholders rather than investors. Generally, regulatory
authorities have broad supervisory powers over such matters as licenses,
standards of solvency, premium rates, policy forms, marketing practices,
investments, security deposits, methods of accounting, form and content of
financial statements, reserves and provisions for unearned premiums, unpaid
losses and loss adjustment expenses, reinsurance, minimum capital and surplus
requirements, dividends and other distributions to shareholders, periodic
examinations and annual and other report filings. Certain insurance regulatory
requirements are highlighted below. In addition, regulatory authorities conduct
periodic financial and market conduct examinations.

    CREDIT FOR REINSURANCE.  Arch Re (US) is subject to insurance regulation and
supervision that is similar to the regulation of licensed primary insurers.
However, the terms and conditions of reinsurance agreements generally are not
subject to regulation by any governmental authority with respect to rates or
policy terms. This contrasts with primary insurance policies and agreements, the
rates and terms of which generally are regulated by state insurance regulators.
As a practical matter, however, the rates charged by primary insurers do have an
effect on the rates that can be charged by reinsurers.

    A primary insurer ordinarily will enter into a reinsurance agreement only if
it can obtain credit for the reinsurance ceded on its statutory financial
statements. In general, credit for reinsurance is allowed in the following
circumstances:

    - if the reinsurer is licensed in the state in which the primary insurer is
      domiciled or, in some instances, in certain states in which the primary
      insurer is licensed;

    - if the reinsurer is an "accredited" or otherwise approved reinsurer in the
      state in which the primary insurer is domiciled or, in some instances, in
      certain states in which the primary insurer is licensed;

                                       21

    - in some instances, if the reinsurer (a) is domiciled in a state that is
      deemed to have substantially similar credit for reinsurance standards as
      the state in which the primary insurer is domiciled and (b) meets certain
      financial requirements; or

    - if none of the above apply, to the extent that the reinsurance obligations
      of the reinsurer are collateralized appropriately, typically through the
      posting of a letter of credit for the benefit of the primary insurer or
      the deposit of assets into a trust fund established for the benefit of the
      primary insurer.

    As a result of the requirements relating to the provision of credit for
reinsurance, Arch Re (US) and Arch Re (Bermuda) are indirectly subject to
certain regulatory requirements imposed by jurisdictions in which ceding
companies are licensed.

    As of March 8, 2002, Arch Re (US) is licensed or is an accredited or
otherwise approved reinsurer in 43 states and the District of Columbia, First
American is licensed or otherwise approved as an insurer in 49 states and the
District of Columbia, Cross River is licensed or otherwise approved as an excess
and surplus lines insurer in 23 states and the District of Columbia, Rock River
is licensed or otherwise approved as an excess and surplus lines insurer in 47
states and the District of Columbia and American Independent Insurance Company
is licensed as an insurer in three states. Arch Re (Bermuda) is not, and does
not expect to become, so licensed or approved.

    HOLDING COMPANY ACTS.  State insurance holding company system statutes and
related regulations provide a regulatory apparatus which is designed to protect
the financial condition of domestic insurers operating within a holding company
system. All insurance holding company statutes require disclosure and, in some
instances, prior approval of material transactions between the domestic insurer
and an affiliate. Such transactions typically include sales, purchases,
exchanges, loans and extensions of credit, reinsurance agreements, service
agreements, guarantees and investments between an insurance company and its
affiliates, involving in the aggregate certain percentages of an insurance
company's admitted assets or policyholders surplus, or dividends that exceed
certain percentages of an insurance company's surplus or income.

    Typically, the holding company statutes also require each of the insurance
subsidiaries periodically to file information with state insurance regulatory
authorities, including information concerning capital structure, ownership,
financial condition and general business operations. Under the terms of
applicable state statutes, any person or entity desiring to acquire control of a
domestic insurer is required first to obtain approval of the applicable state
insurance regulator.

    REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES.  The
ability of an insurer to pay dividends or make other distributions is subject to
insurance regulatory limitations of the insurance company's state of domicile.
Generally, such laws limit the payment of dividends or other distributions above
a specified level. Dividends or other distributions in excess of such thresholds
are "extraordinary" and are subject to regulatory approval. Generally, during
2002, all dividends or other distributions from Arch Re (US), First American and
our other insurance subsidiaries will be subject to regulatory approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 12, "Share Capital," of
the notes accompanying our financial statements.

    INSURANCE REGULATORY INFORMATION SYSTEM RATIOS.  The National Association of
Insurance Commissioners ("NAIC") Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
intended primarily to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance companies
operating in their respective states. IRIS identifies 11 industry ratios and
specifies "usual values" for each ratio. Departure from the usual values of the
ratios can lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. Insurers that report four or

                                       22

more unusual values are generally targeted for regulatory review. For the year
ended December 31, 2001, our U.S.-based insurance operations were within the
normal range of results except for American Independent, which has not received
any notice of regulatory review.

    ACCREDITATION.  The NAIC has instituted its Financial Regulatory
Accreditation Standards Program ("FRASP") in response to federal initiatives to
regulate the business of insurance. FRASP provides a set of standards designed
to establish effective state regulation of the financial condition of insurance
companies. Under FRASP, a state must adopt certain laws and regulations,
institute required regulatory practices and procedures, and have adequate
personnel to enforce such items in order to become an "accredited" state. If a
state is not accredited, accredited states are not able to accept certain
financial examination reports of insurers prepared solely by the regulatory
agency in such unaccredited state.

    RISK-BASED CAPITAL REQUIREMENTS.  In order to enhance the regulation of
insurer solvency, the NAIC adopted in December 1993 a formula and model law to
implement risk-based capital requirements for property and casualty insurance
companies. These risk-based capital requirements are designed to assess capital
adequacy and to raise the level of protection that statutory surplus provides
for policyholder obligations. The risk-based capital model for property and
casualty insurance companies measures three major areas of risk facing property
and casualty insurers:

    - underwriting, which encompasses the risk of adverse loss developments and
      inadequate pricing;

    - declines in asset values arising from credit risk; and

    - declines in asset values arising from investment risks.

    Insurers having less statutory surplus than required by the risk-based
capital calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy. Equity investments in common stock
typically are valued at 85% of their market value under the risk-based capital
guidelines. For equity investments in an insurance company affiliate, the
risk-based capital requirement for the equity securities of such affiliate would
generally be our U.S. insurance subsidiaries' proportionate share of the
affiliate's risk-based capital requirement.

    Under the approved formula, an insurer's statutory surplus is compared to
its risk-based capital requirement. If this ratio is above a minimum threshold,
no company or regulatory action is necessary. Below this threshold are four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over an insurer as the ratio of surplus to risk-based
capital requirement decreases. The four action levels include:

    - insurer is required to submit a plan for corrective action,

    - insurer is subject to examination, analysis and specific corrective
      action,

    - regulators may place insurer under regulatory control, and

    - regulators are required to place insurer under regulatory control.

    Each of our U.S. insurance subsidiaries' surplus (as calculated for
statutory annual statement purposes) is above the risk-based capital thresholds
that would require either company or regulatory action.

    GUARANTY FUNDS AND ASSIGNED RISK PLANS.  Most states require all admitted
insurance companies to participate in their respective guaranty funds which
cover certain claims against insolvent insurers. Solvent insurers licensed in
these states are required to cover the losses paid on behalf of insolvent
insurers by the guaranty funds and are generally subject to annual assessments
in the state by its guaranty fund to cover these losses. Some states also
require licensed insurance companies to participate in assigned risk plans which
provide coverage for automobile insurance and other lines for insureds which,
for various reasons, cannot otherwise obtain insurance in the open market. This

                                       23

participation may take the form of reinsuring a portion of a pool of policies or
the direct issuance of policies to insureds. The calculation of an insurer's
participation in these plans is usually based on the amount of premium for that
type of coverage that was written by the insurer on a voluntary basis in a prior
year. Assigned risk pools tend to produce losses which result in assessments to
insurers writing the same lines on a voluntary basis.

    FEDERAL REGULATION.  Although state regulation is the dominant form of
regulation for insurance and reinsurance business, the federal government has
shown increasing concern over the adequacy of state regulation. It is not
possible to predict the future impact of any potential federal regulations or
other possible laws or regulations on Arch Re (US)'s capital and operations, and
such laws or regulations could materially adversely affect its business.

    THE GRAMM-LEACH-BLILEY ACT.  The Gramm-Leach-Bliley Act of 1999 ("GLBA")
which implements fundamental changes in the regulation of the financial services
industry in the United States was enacted on November 12, 1999. The GLBA permits
the transformation of the already converging banking, insurance and securities
industries by permitting mergers that combine commercial banks, insurers and
securities firms under one holding company, a "financial holding company." Bank
holding companies and other entities that qualify and elect to be treated as
financial holding companies may engage in activities, and acquire companies
engaged in activities, that are "financial" in nature or "incidental" or
"complementary" to such financial activities. Such financial activities include
acting as principal, agent or broker in the underwriting and sale of life,
property, casualty and other forms of insurance and annuities.

    Until the passage of the GLBA, the Glass-Steagall Act of 1933 had limited
the ability of banks to engage in securities-related businesses, and the Bank
Holding Company Act of 1956 had restricted banks from being affiliated with
insurers. With the passage of the GLBA, among other things, bank holding
companies may acquire insurers, and insurance holding companies may acquire
banks. The ability of banks to affiliate with insurers may affect our U.S.
subsidiaries' product lines by substantially increasing the number, size and
financial strength of potential competitors.

    LEGISLATIVE AND REGULATORY PROPOSALS.  From time to time various regulatory
and legislative changes have been proposed in the insurance and reinsurance
industry. Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers. In addition,
there are a variety of proposals being considered by various state legislatures
(some of which proposals have been enacted). We are unable to predict whether
any of these laws and regulations will be adopted, the form in which any such
laws and regulations would be adopted, or the effect, if any, these developments
would have on our operations and financial condition.

BERMUDA INSURANCE REGULATION

    THE INSURANCE ACT 1978, AS AMENDED, AND RELATED REGULATIONS OF BERMUDA (THE
"INSURANCE ACT"). As a holding company, ACGL is not subject to Bermuda insurance
regulations. The Insurance Act, which will regulate the insurance business of
Arch Re (Bermuda), provides that no person shall carry on any insurance business
in or from within Bermuda unless registered as an insurer under the Insurance
Act by the Bermuda Supervisor of Insurance (the "Supervisor"), who is
responsible for the day-to-day supervision of insurers. Under the Insurance Act,
insurance business includes reinsurance business. The Supervisor, in deciding
whether to grant registration, has broad discretion to act as the Supervisor
thinks fit in the public interest. The Supervisor is required by the Insurance
Act to determine whether the applicant is a fit and proper body to be engaged in
the insurance business and, in particular, whether it has, or has available to
it, adequate knowledge and expertise. The registration

                                       24

of an applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Supervisor may impose from time to
time.

    An Insurance Advisory Committee appointed by the Bermuda Minister of Finance
advises the Supervisor on matters connected with the discharge of the
Supervisor's functions and sub-committees thereof supervise and review the law
and practice of insurance in Bermuda, including reviews of accounting and
administrative procedures.

    The Insurance Act imposes solvency and liquidity standards and auditing and
reporting requirements on Bermuda insurance companies and grants to the
Supervisor powers to supervise, investigate and intervene in the affairs of
insurance companies. Certain significant aspects of the Bermuda insurance
regulatory framework are set forth below.

    CLASSIFICATION OF INSURERS.  The Insurance Act distinguishes between
insurers carrying on long-term business and insurers carrying on general
business. There are four classifications of insurers carrying on general
business, with Class 4 insurers subject to the strictest regulation. Arch Re
(Bermuda) is registered as both a long-term insurer and a Class 4 insurer in
Bermuda, which we refer to in this prospectus supplement as a composite insurer,
and is regulated as such under the Insurance Act.

    CANCELLATION OF INSURER'S REGISTRATION.  An insurer's registration may be
canceled by the Supervisor on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or if, in the opinion of the Supervisor after consultation with
the Insurance Advisory Committee, the insurer has not been carrying on business
in accordance with sound insurance principles.

    PRINCIPAL REPRESENTATIVE.  An insurer is required to maintain a principal
office in Bermuda and to appoint and maintain a principal representative in
Bermuda. For the purpose of the Insurance Act, the principal representative of
Arch Re (Bermuda) is Marsh Management Services (Bermuda) Ltd. and the principal
office of Arch Re (Bermuda) is at the offices of the principal representative at
Victoria Hall, 11 Victoria Street, Hamilton HM 11, Bermuda. Without a reason
acceptable to the Supervisor, an insurer may not terminate the appointment of
its principal representative, and the principal representative may not cease to
act as such, unless 30 days' notice in writing to the Supervisor is given of the
intention to do so. It is the duty of the principal representative, within
30 days of reaching the view that there is a likelihood of the insurer for which
the principal representative acts becoming insolvent or that a reportable
"event" has, to the principal representative's knowledge, occurred or is
believed to have occurred, to make a report in writing to the Supervisor setting
out all the particulars of the case that are available to the principal
representative. Examples of such a reportable "event" include failure by the
insurer to comply substantially with a condition imposed upon the insurer by the
Supervisor relating to a solvency margin or a liquidity or other ratio.

    INDEPENDENT APPROVAL AUDITOR.  Every registered insurer must appoint an
independent auditor who will annually audit and report on the statutory
financial statements and the statutory financial return of the insurer, both of
which, in the case of Arch Re (Bermuda), are required to be filed annually with
the Supervisor. The independent auditor of the insurer must be approved by the
Supervisor and may be the same person or firm which audits the insurer's
financial statements and reports for presentation to its shareholders. Our
independent auditor is PricewaterhouseCoopers (Bermuda).

    APPROVED ACTUARY.  Arch Re (Bermuda), as a registered long-term insurer, is
required to submit an annual actuary's certificate when filing its statutory
financial returns. The actuary, who will normally be a qualified life actuary,
must be approved by the Supervisor. Our approval actuary is John B. Kleiman of
PricewaterhouseCoopers.

    LOSS RESERVE SPECIALIST.  As a registered Class 4 insurer, Arch Re (Bermuda)
is required to submit an opinion of its approval loss reserve specialist with
its statutory financial return in respect of its loss

                                       25

and loss expense provisions. The loss reserve specialist, who will normally be a
qualified casualty actuary, must be approved by the Supervisor. Our approved
loss reserve specialist is Simon Lambert of PricewaterhouseCoopers.

    STATUTORY FINANCIAL STATEMENTS.  An insurer must prepare annual statutory
financial statements. The Insurance Act prescribes rules for the preparation and
substance of such statutory financial statements (which include, in statutory
form, a balance sheet, an income statement, a statement of capital and surplus
and notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The statutory
financial statements are not prepared in accordance with U.S. generally accepted
accounting principles and are distinct from the financial statements prepared
for presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda (the "Companies Act"), which financial statements will be prepared in
accordance with U.S. generally accepted accounting principles. Arch Re
(Bermuda), as a general business insurer, is required to submit the annual
statutory financial statements as part of the annual statutory financial return.
The statutory financial statements and the statutory financial return do not
form part of the public records maintained by the Supervisor.

    ANNUAL STATUTORY FINANCIAL RETURN.  Arch Re (Bermuda) is required to file
with the Supervisor in Bermuda a statutory financial return no later than four
months after its financial year end (unless specifically extended). The
statutory financial return for a Class 4 insurer includes, among other matters,
a report of the approved independent auditor on the statutory financial
statements of such insurer, solvency certificates, the statutory financial
statements themselves, the opinion of the loss reserve specialist and a schedule
of reinsurance ceded. The solvency certificates must be signed by the principal
representative and at least two directors of the insurer who are required to
certify, among other matters, whether the minimum solvency margin has been met
and whether the insurer complied with the conditions attached to its certificate
of registration. The independent approved auditor is required to state whether
in its opinion it was reasonable for the directors to so certify. Where an
insurer's accounts have been audited for any purpose other than compliance with
the Insurance Act, a statement to that effect must be filed with the statutory
financial return.

    MINIMUM SOLVENCY MARGIN AND RESTRICTIONS ON DIVIDENDS AND
DISTRIBUTIONS.  Under the Insurance Act, Arch Re (Bermuda) must ensure that the
value of its long-term business assets exceed the amount of its long-term
business liabilities by at least $250,000. The Insurance Act also provides that
the value of the general business assets of Arch Re (Bermuda), as a Class 4
insurer, must exceed the amount of its general business liabilities by an amount
greater than the prescribed minimum solvency margin. Arch Re (Bermuda):

    - is required, with respect to its general business, to maintain a minimum
      solvency margin (the prescribed amount by which the value of its general
      business assets must exceed its general business liabilities) equal to the
      greatest of:

       (A) $100,000,000,

       (B) 50% of net premiums written (being gross premiums written less any
           premiums ceded by the Company but the Company may not deduct more
           than 25% of gross premiums when computing net premiums written), and

       (C) 15% of loss and other insurance reserves;

    - is prohibited from declaring or paying any dividends during any financial
      year if it is in breach of its minimum solvency margin or minimum
      liquidity ratio or if the declaration or payment of such dividends would
      cause it to fail to meet such margin or ratio (if it has failed to meet
      its minimum solvency margin or minimum liquidity ratio on the last day of
      any financial year, Arch

                                       26

      Re (Bermuda) will be prohibited, without the approval of the Supervisor,
      from declaring or paying any dividends during the next financial year);

    - is prohibited from declaring or paying in any financial year dividends of
      more than 25% of its total statutory capital and surplus (as shown on its
      previous financial year's statutory balance sheet) unless it files (at
      least 7 days before payment of such dividends) with the Supervisor an
      affidavit stating that it will continue to meet the required margins;

    - is prohibited, without the approval of the Supervisor, from reducing by
      15% or more its total statutory capital as set out in its previous year's
      financial statements and any application for such approval must include an
      affidavit stating that it will continue to meet the required margins;

    - is required, at any time if fails to meet its solvency margin, within
      30 days (45 days where total statutory capital and surplus falls to
      $75 million or less) after becoming aware of that failure or having reason
      to believe that such failure has occurred, to file with the Supervisor a
      written report containing certain information;

    - is required to establish and maintain a long-term business fund; and

    - is required to obtain a certain certification from its approved actuary
      prior to declaring or paying any dividends and such certificate will not
      be given unless the value of its long-term business assets exceeds its
      long-term business liabilities, as certified by its approval actuary, by
      the amount of the dividend and at least $250,000. The amount of any such
      dividend shall not exceed the aggregate of the excess referenced in the
      preceding sentence and other funds properly available for the payment of
      dividends, being funds arising out of its business, other than its
      long-term business.

    MINIMUM LIQUIDITY RATIO.  The Insurance Act provides a minimum liquidity
ratio for general business insurers. An insurer engaged in general business is
required to maintain the value of its relevant assets at not less than 75% of
the amount of its relevant liabilities. Relevant assets include cash and time
deposits, quoted investments, unquoted bones and debentures, first liens on real
estate, investment income due and accrued, account and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Supervisor, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates and real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined).

    LONG-TERM BUSINESS FUND.  An insurer carrying on long-term business is
required to keep its accounts in respect of its long-term business separate from
any accounts kept in respect of any other business and all receipts of its
long-term business form part of its long-term business fund. No payment may be
made directly or indirectly from an insurer's long-term business fund for any
purpose other than a purpose related to the insurer's long-term business, unless
such payment can be made out of any surplus certified by the insurer's approved
actuary to be available for distribution otherwise than to policyholders. Arch
Re (Bermuda) may not declare or pay a dividend to any person other than a
policyholder unless the value of the assets in its long-term business fund, as
certified by its approved actuary, exceeds the liabilities of the insurer's
long-term business (as certified by the insurer's approved actuary) by the
amount of the dividend and at least the $250,000 minimum solvency margin
prescribed by the Insurance Act, and the amount of any such dividend may not
exceed the aggregate of that excess (excluding the said $250,000) and any other
funds properly available for payment of dividends, such as funds arising out of
business of the insurer other than long-term business.

                                       27

    RESTRICTIONS ON TRANSFER OF BUSINESS AND WINDING-UP.  Arch Re (Bermuda), as
a long-term insurer, is subject to the following provisions of the Insurance
Act:

    - all or any part of the long-term business, other than long-term business
      that is reinsurance business, may be transferred only with and in
      accordance with the sanction of the applicable Bermuda court; and

    - an insurer or reinsurer carrying on long-term business may only be
      wound-up or liquidated by order of the applicable Bermuda court, and this
      may increase the length of time and costs incurred in the winding-up of
      Arch Re (Bermuda) when compared with a voluntary winding-up or
      liquidation.

    SUPERVISION, INVESTIGATION AND INTERVENTION.  The Supervisor may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Supervisor believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to the Supervisor, the
Supervisor may direct an insure to produce documents or information relating to
matters connected with the insurer's business.

    If it appears to the Supervisor that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Supervisor may, among other things, direct
the insurer (1) not to take on any new insurance business, (2) not to vary any
insurance contract if the effect would be to increase the insurer's liabilities,
(3) not to make certain investments, (4) to realize certain investments, (5) to
maintain in, or transfer to the custody of a specified bank, certain assets,
(6) not to declare or pay any dividends or other distributions or to restrict
the making of such payments and/or (7) to limit its premium income.

    DISCLOSURE OF INFORMATION.  In addition to powers under the Insurance Act to
investigate the affairs of an insurer, the Supervisor may require certain
information from an insurer (or certain other persons) to be produced to him.
Further, the Supervisor has been given powers to assist other regulatory
authorities, including foreign insurance regulatory authorities with their
investigations involving insurance and reinsurance companies in Bermuda but
subject to restrictions. For example, the Supervisor must be satisfied that the
assistance being requested is in connection with the discharge of regulatory
responsibilities of the foreign regulatory authority. Further, the Supervisor
must consider whether to co-operate is in the public interest. The grounds for
disclosure are limited and the Insurance Act provides sanctions for breach of
the statutory duty of confidentiality.

CERTAIN BERMUDA LAW CONSIDERATIONS

    ACGL and Arch Re (Bermuda) have been designated as non-resident for exchange
control purposes by the Bermuda Monetary Authority and are required to obtain
the permission of the Bermuda Monetary Authority for the issue and transfer of
all of their shares. The Bermuda Monetary Authority has given its consent for:

    - The issue and subsequent transfer of ACGL's shares, up to the amount of
      its authorized capital from time to time, to and among persons non
      resident of Bermuda for exchange control purposes;

    - The issue and transfer of up to 20% of ACGL's shares in issue from time to
      time to and among persons resident in Bermuda for exchange control
      purposes.

    Transfers and issues of ACGL's common shares to any resident in Bermuda for
exchange control purposes may require specific prior approval under the Exchange
Control Act 1972. Arch Re (Bermuda)'s common shares cannot be issued or
transferred without the consent of the Bermuda Monetary Authority. Because we
are designated as non-resident for Bermuda exchange control

                                       28

purposes, we are allowed to engage in transactions, and to pay dividends to
Bermuda non-residents who are holders of our common shares, in currencies other
than the Bermuda Dollar.

    In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, we are not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. We will take no notice of any trust
applicable to any of our common shares whether or not we have notice of such
trust.

    ACGL and Arch Re (Bermuda) are incorporated in Bermuda as "exempted
companies." As a result, they are exempt from Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians, but they may not
participate in certain business transactions, including (1) the acquisition or
holding of land in Bermuda (except that required for their business and held by
way of lease or tenancy for terms of not more than 50 years) without the express
authorization of the Bermuda legislature, (2) the taking of mortgages on land in
Bermuda to secure an amount in excess of $50,000 without the consent of the
Minister of Finance, (3) the acquisition of any bonds or debentures secured by
any land in Bermuda, other than certain types of Bermuda government securities
or (4) the carrying on of business of any kind in Bermuda, except in furtherance
of their business carried on outside Bermuda or under license granted by the
Minister of Finance. While an insurer is permitted to reinsure risks undertaken
by any company incorporated in Bermuda and permitted to engage in the insurance
and reinsurance business, generally it is not permitted without a special
license granted by the Minister of Finance to insure Bermuda domestic risks or
risks of persons of, in or based in Bermuda.

    ACGL and Arch Re (Bermuda) also need to comply with the provisions of the
Companies Act regulating the payment of dividends and making distributions from
contributed surplus. A company shall not declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable grounds for
believing that: (a) the company is, or would after the payment be, unable to pay
its liabilities as they become due; or (b) the realizable value of the company's
assets would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts. Under the Companies Act, where
a Bermuda company issues shares at a premium (that is for a price above the par
value), whether for cash or otherwise, a sum equal to the aggregate amount or
value of the premium on those shares must be transferred to an account, called
"the share premium account." The provisions of the Companies Act relating to the
reduction of the share capital of a company apply as if the share premium
account were paid-up share capital of that company, except for certain matters
such as premium arising on a particular class of shares may be used in paying up
unissued shares of the same class to be issued to shareholders as fully paid
bonus shares. The paid-up share capital may not be reduced if on the date the
reduction is to be effected there are reasonable grounds for believing that the
company is, or after the reduction would be, unable to pay its liabilities as
they become due.

    Exempted companies, such as ACGL and Arch Re (Bermuda), must comply with
Bermuda resident representation provisions under the Companies Act. We do not
believe that such compliance will result in any material expense to us.

    The Proceeds of Crime Act 1997 and the Proceeds of Crime (Money Laundering)
Regulations 1998 are anti-money laundering legislation, which apply to regulated
institutions. The legislation is aimed at identifying offenses that give rise to
proceeds of crime, including, in particular, money laundering. In addition to
creating certain specific money laundering offenses, the legislation confers
expansive information gathering powers upon the Bermuda policy relating to
investigations to identify proceeds of crime. The Bermuda court has been
empowered to make confiscation orders.

                                       29

    Regulated institutions have a duty of vigilance which require that they:

    - verify their customers' bona fides;

    - monitor, recognize and report to the policy suspicious transactions;

    - maintain certain records for the time period prescribed; and

    - train employees and staff so as to recognize possible unlawful activities.

    Regulated institutions include a company or society registered under the
Insurance Act to the extent that it is carrying out long-term insurance (but not
reinsurance) business within the meaning of the Insurance Act, other than life
insurance or disability insurance. While life insurance and disability insurance
are not defined in the proceeds of crime legislation nor in the Insurance Act,
such terms may be interpreted (as a guide) by using the meanings of similar
terms defined in the June 2001 by the government authority established under the
proceeds of crime legislation. While the Guidance Notes are not mandatory, they
are represented as good practice procedures to be followed in order to discharge
the duty of vigilance and can provide a statutory defense. In the Guidance
Notes, reference is made to "life assurance, pensions or other risk management
business . . . where the transaction at its simplest . . . may involve placing
cash in the purchase of a single premium product from an insurer followed by
early cancellation and reinvestment." The implication is that a long-term
insurer that conducts variable life insurance or annuity business, and this may
include Arch Re (Bermuda) in the event of carrying on such business, may be a
regulated institution.

    Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not
engage in any gainful occupation in Bermuda without an appropriate governmental
work permit. Our success may depend in part upon the continued services of key
employees in Bermuda. Certain key employees may neither be a Bermudian nor a
spouse of a Bermudian. Accordingly, any such key employee will require specific
approval to work for us in Bermuda. A work permit may be granted or extended
upon showing that, after proper public advertisement, no Bermudian (or spouse of
a Bermudian) is available who meets the minimum standards reasonably required by
the employer. The Bermuda government recently announced a new policy that places
a six year term limit on individuals with work permits, subject to certain
exemptions for key employees.

                                       30

                                  RISK FACTORS

RISKS RELATING TO OUR INDUSTRY

WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT, AND SINCE THE SEPTEMBER 11, 2001
EVENTS, NEW CAPITAL HAS ENTERED THE MARKET; THESE FACTORS MAY MITIGATE THE
BENEFITS THAT THE FINANCIAL MARKETS MAY PERCEIVE FOR THE PROPERTY AND CASUALTY
INSURANCE INDUSTRY, AND WE CANNOT OFFER ANY ASSURANCES THAT WE WILL BE ABLE TO
COMPETE SUCCESSFULLY IN OUR INDUSTRY.

    The insurance industry is highly competitive. Trends toward consolidation in
the insurance industry could also lead to pricing pressure and lower margins for
insurers and reinsurers. In addition, since the September 11, 2001 events,
several newly formed offshore entities have announced their intention to address
the capacity issues in the insurance and reinsurance industry. Several publicly
traded insurance and reinsurance companies have also raised additional capital
to meet perceived demand in the current environment. Since September 11, 2001,
newly formed and existing insurance industry companies have reportedly raised in
excess of $10.0 billion in capital, and some industries (in particular, the
airline industry) have announced that they may form industry consortia to
provide insurance coverage for their members, thereby taking those lines out of
the commercial insurance and reinsurance markets in which we operate. In
addition, financial institutions and other capital markets participants offer
alternative products and services similar to our own or alternative products
that compete with insurance and reinsurance products.

    We can offer no assurances that we will be successful in competing with
others in our industry or that the intensity of competition in our industry will
not erode profitability for insurance and reinsurance companies generally,
including us. In addition, we can offer no assurances that we will participate
at all or to the same extent as more established or other companies in any price
increases or increased profitability in our industry. If we do not share in such
price increases or increased profitability, our financial condition and results
of operations could be materially adversely affected.

THE INSURANCE INDUSTRY IS HIGHLY CYCLICAL AND THE VALUE OF OUR COMMON SHARES MAY
BE ADVERSELY AFFECTED BY THIS CYCLICALITY.

    Historically, insurers and reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic events, levels of capacity, general economic
conditions, changes in legislation, case law and prevailing concepts of
liability and other factors. In particular, demand for reinsurance is influenced
significantly by the underwriting results of primary insurers and prevailing
general economic conditions. The supply of reinsurance is related to prevailing
prices and levels of surplus capacity that, in turn, may fluctuate in response
to changes in rates of return being realized in the reinsurance industry. We can
offer no assurances as to the magnitude or duration of any price increases or
increased profitability in our industry or that factors that previously have
resulted in excess capacity and pricing pressures in our industry will not
recur.

WE COULD FACE UNANTICIPATED LOSSES FROM WAR, TERRORISM AND POLITICAL UNREST, AND
THESE OR OTHER UNANTICIPATED LOSSES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

    We may have substantial exposure to unexpected, large losses resulting from
future man-made catastrophic events, such as acts of war, acts of terrorism and
political instability. Although we may attempt to exclude losses from terrorism
and certain other similar risks from some coverages written by us, we may not be
successful in doing so. These risks are inherently unpredictable, although
recent events may lead to increased frequency and severity of losses. It is
difficult to predict the timing of such events with statistical certainty or
estimate the amount of loss any given occurrence will generate. Accordingly, we
can offer no assurance that our reserves will be adequate to cover losses when
they materialize. It is not possible to eliminate completely our exposure to
unforecasted or unpredictable

                                       31

events, and to the extent that losses from such risks occur, our financial
condition and results of operations could be materially adversely affected.

CLAIMS FOR CATASTROPHIC EVENTS COULD CAUSE LARGE LOSSES AND SUBSTANTIAL
VOLATILITY IN OUR RESULTS OF OPERATIONS, AND, AS A RESULT, THE VALUE OF OUR
COMMON SHARES MAY FLUCTUATE WIDELY.

    We intend to underwrite property catastrophe reinsurance and will have large
aggregate exposure to disasters. Catastrophes can be caused by various events,
including hurricanes, floods, windstorms, earthquakes, hailstorms, explosions,
severe winter weather and fires, and we may have exposures to losses resulting
from acts of war or acts of terrorism (to the extent not excluded from policy
coverage) and political instability. Catastrophes can also cause losses in
non-property lines of business such as workers' compensation or general
liability. In addition to the nature of the property catastrophe business, we
believe that economic and geographic trends affecting insured property,
including inflation, property value appreciation and geographic concentration
tend to generally increase the size of losses from catastrophic events over
time. Therefore, claims for catastrophic events could expose us to large losses
and cause substantial volatility in our results of operations, which could cause
the value of our common shares to fluctuate widely.

UNDERWRITING CLAIMS AND RESERVING FOR LOSSES ARE BASED ON PROBABILITIES AND
RELATED MODELING, WHICH ARE SUBJECT TO INHERENT UNCERTAINTIES.

    Our success is dependent upon our ability to assess accurately the risks
associated with the businesses that we insure and reinsure. Claim reserves
represent estimates involving actuarial and statistical projections, at a given
point in time, of our expectations of the ultimate settlement and administration
costs of claims incurred. We utilize actuarial models as well as historical
insurance industry loss development patterns to assist in the establishment of
appropriate claim reserves. Actual claims and claim expenses paid may deviate,
perhaps substantially, from the reserve estimates reflected in our financial
statements.

    Like other reinsurers, we do not separately evaluate each of the individual
risks assumed under reinsurance treaties. Therefore, we will be largely
dependent on the original underwriting decisions made by ceding companies. We
are subject to the risk that the ceding companies may not have adequately
evaluated the risks to be reinsured and that the premiums ceded may not
adequately compensate us for the risks we assume.

    If our claim reserves are determined to be inadequate, we will be required
to increase claim reserves at the time of such determination with a
corresponding reduction in our net income in the period in which the deficiency
is rectified. It is possible that claims in respect of events that have occurred
could exceed our claim reserves and have a material adverse effect on our
results of operations, in a particular period, or our financial condition in
general. As a compounding factor, although most insurance contracts have policy
limits, the nature of property and casualty insurance and reinsurance is that
losses can exceed policy limits for a variety of reasons and could significantly
exceed the premiums received on the underlying policies, thereby further
adversely affecting our financial condition.

WHILE REINSURANCE AND RETROCESSIONAL COVERAGE WILL BE USED TO LIMIT OUR EXPOSURE
TO RISKS, THE AVAILABILITY OF SUCH ARRANGEMENTS MAY BE LIMITED, AND COUNTERPARTY
CREDIT AND OTHER RISKS ASSOCIATED WITH OUR REINSURANCE ARRANGEMENTS MAY RESULT
IN LOSSES WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

    For the purposes of limiting our risk of loss, we will use reinsurance and
also may use retrocessional arrangements. The availability and cost of
reinsurance and retrocessional protection is subject to market conditions, which
are beyond our control. Currently, the market for these arrangements is
experiencing high demand for various products and it is not certain that we will
be able to obtain adequate protection at cost effective levels.

                                       32

    As a result of such market conditions and other factors, we may not be able
successfully to alleviate risk through reinsurance and retrocessional
arrangements. Further, we are subject to credit risk with respect to our
reinsurance and retrocessions because the ceding of risk to reinsurers and
retrocessionaires does not relieve us of our liability to the clients or
companies we insure or reinsure. Our failure to establish adequate reinsurance
or retrocessional arrangements or the failure of our existing reinsurance or
retrocessional arrangements to protect us from overly concentrated risk exposure
could adversely affect our financial condition and results of operations.

AS A RESULT OF RECENT EVENTS AND INSTABILITY IN THE MARKETPLACE FOR INSURANCE
PRODUCTS, THERE IS THE POTENTIAL FOR GOVERNMENT INTERVENTION IN OUR INDUSTRY
WHICH COULD HINDER OUR FLEXIBILITY AND NEGATIVELY AFFECT THE BUSINESS
OPPORTUNITIES WE PERCEIVE ARE AVAILABLE TO US IN THE MARKET.

    In response to the current tightening of supply in certain insurance
markets, as well as the impact of the September 11, 2001 events, it is possible
that the United States and other governments worldwide may intervene in the
insurance and reinsurance markets. Government regulators are generally concerned
with the protection of policyholders to the exclusion of other constituencies,
including shareholders. While we cannot predict the type of government
intervention that may occur or its timing, such intervention could materially
adversely affect us by:

    - disproportionately benefiting one country's companies over companies in
      other countries;

    - providing insurance and reinsurance capacity in the markets and to the
      customers that we target;

    - regulating the terms of insurance and reinsurance policies; or

    - mandating participation in guaranty associations or other industry pools.

    The insurance industry is also affected by political, judicial and legal
developments which have in the past resulted in new or expanded theories of
liability. These or other changes could impose new financial obligations on us,
require us to make unplanned modifications to the products and services that we
provide, or cause the delay or cancellation of products and services that we
provide. Substantial government intervention could adversely impact our ability
to achieve our goals.

    In addition, we engage in intercompany reinsurance arrangements between our
U.S. operations and our Bermuda reinsurance operations. Some U.S. insurance
companies have been lobbying Congress to pass legislation intended to eliminate
certain perceived tax advantages of U.S. insurance companies with Bermuda
affiliates, which result principally from reinsurance arrangements between or
among U.S. insurance companies and their Bermuda affiliates.

RISKS RELATING TO OUR COMPANY

THE WARBURG PINCUS FUNDS AND THE HELLMAN & FRIEDMAN FUNDS TOGETHER CONTROL A
MAJORITY OF OUR VOTING POWER ON A FULLY DILUTED BASIS AND THESE SHAREHOLDERS
HAVE THE RIGHT TO HAVE DIRECTORS ON OUR BOARD AND THE RIGHT TO APPROVE MOST
TRANSACTIONS OUTSIDE OF THE ORDINARY COURSE OF OUR BUSINESS; THEIR INTERESTS MAY
MATERIALLY DIFFER FROM THE INTERESTS OF THE HOLDERS OF OUR COMMON SHARES.

    On a fully diluted basis and after giving effect to the exercise of all
outstanding options and warrants and the conversion of all preference issues,
the Warburg Pincus funds and the Hellman & Friedman funds own 33.8% and 18.8% of
our common shares, respectively. These shareholders are non-U.S. persons (as
defined in the Internal Revenue Code) and, as such, they are not subject to the
voting limitation contained in our bye-laws. In addition, our shareholders
agreement prevents us from taking many actions outside the ordinary course of
our business without the approval of a director designated by the Warburg Pincus
funds and a director designated by the Hellman & Friedman funds. We have agreed
not to declare any dividend or make any other distribution on our common shares,
and not to repurchase any common shares, until we have repurchased from the
Warburg Pincus funds, the Hellman & Friedman funds and the other holders of
preference shares, pro rata, on the basis of the amount of these shareholders'
investments in us at the time of such repurchase, preference shares

                                       33

having an aggregate value of $250.0 million, at a per share price acceptable to
these shareholders. By reason of their ownership and the shareholders agreement
between us and the holders of preference shares, the Warburg Pincus funds and
the Hellman & Friedman funds are able to strongly influence or effectively
control actions to be taken by us, or our shareholders.

    In addition, the Warburg Pincus funds and the Hellman & Friedman funds are
entitled to nominate a prescribed number of directors based on the respective
retained percentages of their equity securities purchased in November 2001.
Currently, our board consists of nine members, which includes one director
nominated by the Warburg Pincus funds and one director nominated by the
Hellman & Friedman funds. Once we have received the regulatory approvals
required in connection with the capital infusion, the size of our board will be
increased to up to 17 members. As long as the Warburg Pincus funds retain at
least 75% of their original investment and the Hellman & Friedman funds retain
at least 60% of their original investment, these shareholders will be entitled
to nominate six and three directors, respectively. Together they will nominate a
majority of directors to our board. The interests of these shareholders may
differ materially from the interests of the holders of our common shares, and
these shareholders could take actions or make decisions that are not in the
interests of the holders of our common shares.

WE MAY BE REQUIRED TO ISSUE ADDITIONAL PREFERENCE SHARES TO THE INVESTORS IN THE
CAPITAL INFUSION AS A RESULT OF VARIOUS PURCHASE PRICE ADJUSTMENTS AGREED TO IN
CONNECTION WITH IT, AND THE VALUE OF OUR COMMON SHARES MAY, THEREFORE, BE
FURTHER DILUTED.

    The purchase price paid for the securities purchased in the capital infusion
was based on the estimated, unaudited U.S. GAAP book value of our common shares
as of June 30, 2001 (before giving effect to certain agreed transaction costs
incurred in connection with the capital infusion that had not yet been
determined), subject to certain adjustments. We are required to re-calculate, on
designated dates in the future, our June 30, 2001 book value on such dates
(after giving effect to the agreed transaction costs) and if that re-calculated
amount is less than the amount used to calculate the purchase price for the
preference shares and warrants, we will be required to issue additional
securities, convertible into our common shares, to those investors.

    In particular, we agreed to adjust the purchase price paid for the
preference shares:

    - based upon an audit of the book value of our assets at June 30, 2001
      (after giving effect to the agreed transaction costs);

    - if, on or prior to September 19, 2005, the closing price of our common
      shares is at least $30.00 per share for at least 20 out of 30 consecutive
      trading days or a change of control occurs (in which event, the purchase
      price paid per preference share by the Warburg Pincus funds, the
      Hellman & Friedman funds and the other holders of our preference shares
      would be adjusted downward by $1.50);

    - on the second anniversary of the closing date based upon the adjustment
      basket described under the heading "The Capital Infusion--Subscription
      Agreement--Purchase Price Adjustments--Final Adjustments" related to the
      valuation of our core and non-core businesses; and

    - on the fourth anniversary of the closing date based upon an adjustment
      basket related to specified liabilities connected to our asset sale to
      Folksamerica and specified tax and ERISA matters. See "--Recent
      Developments--The Capital Infusion--Subscription Agreement--Purchase Price
      Adjustments--Final Adjustments."

    We currently estimate that, principally because of the deduction of the
agreed transaction costs, we will issue an additional 875,765 preference shares
during the first quarter of 2002 in connection with the adjustments discussed in
the first bullet point above, and we currently estimate that we may be required
to issue an additional 2,831,174 preference shares in connection with the
trading price adjustment described in the second bullet point above.

                                       34

OUR FAILURE TO OBTAIN REGULATORY APPROVAL FOR THE CAPITAL INFUSION WOULD HAVE A
MATERIAL ADVERSE IMPACT ON THE VALUE OF OUR COMMON SHARES.

    In the event that:

    - we fail to obtain the approval of the Florida insurance department with
      respect to the capital infusion before May 20, 2002; or

    - the purchase price adjustment to be made on the second and fourth
      anniversaries of the closing results in a downward adjustment to the
      purchase price of the preference shares aggregating more than
      $250.0 million,

the Warburg Pincus funds, the Hellman & Friedman funds and the other holders of
our preference shares will have the right to exchange their equity securities
for equity securities of a corporate entity which would hold our insurance and
reinsurance operating subsidiaries, other than Arch Re (US). See "--Recent
Developments--The Capital Infusion--Subscription Agreement--Right to Exchange
into Subsidiary Shares." In this event, we would own less than a majority of
those subsidiaries. This situation would have a material adverse impact on the
value of our common shares.

OUR MANAGEMENT TEAM HAS ONLY RECENTLY BEEN ASSEMBLED AND OUR BUSINESS STRATEGY
IS NEWLY FORMULATED; THEREFORE, THERE CAN BE NO ASSURANCE THAT WE WILL BE
SUCCESSFUL IN ACCOMPLISHING OUR GOALS.

    We have recently assembled a new management team and other personnel in
connection with our new underwriting initiative to meet current and future
demand in the global insurance and reinsurance marketplaces. Our future success
depends on the successful integration of our new management team and other
personnel. The success of our management team in their past endeavors is not
necessarily predictive of future results. In addition, we cannot assure you that
we will be successful in integrating such executives and personnel into our
existing operations or that this new management team will have success with our
new underwriting initiative. In addition, the pool of talent from which we
actively recruit is limited. The inability to attract and retain qualified
personnel when available and the loss of services of key personnel could have a
material adverse effect on our financial condition and results of operations.

FUTURE SALES OF OUR COMMON SHARES, WHETHER BY US OR OUR SHAREHOLDERS, COULD
ADVERSELY AFFECT THEIR MARKET PRICE.

    Generally, our board of directors has the power to issue new equity (to the
extent of authorized shares) without shareholder approval, except that
shareholder approval may be required under applicable law or Nasdaq National
Market rules for certain transactions. We may issue new equity to raise
additional capital to support our insurance and reinsurance operations or for
other purposes. Any additional issuance by us would have the effect of diluting
the percentage ownership of our shareholders and could have the effect of
diluting our earnings and our book value per share.

    In addition, the market price of our common shares could fall substantially
if our shareholders sell large amounts of common shares in the public market
following this offering. The availability of a large number of shares for sale
could result in the need for sellers to accept a lower price in order to
complete a sale. After this offering, there will be 22,265,332 common shares
outstanding, assuming no exercise of the underwriters' over-allotment option.
There are up to 45,973,253 common shares issuable upon exercise of options,
conversion of convertible securities or exercise of outstanding class A
warrants.

    We have granted the Warburg Pincus funds and Hellman & Friedman funds demand
registration rights and all of the investors in the capital infusion certain
"piggy-back" registration rights with respect to the common shares issuable to
them upon conversion of the preference shares or exercise of the class A
warrants. Certain other investors who purchased or acquired shares in
unregistered transactions also have demand and piggy-back registration rights.
They can exercise these rights at any time.

                                       35

OUR BUSINESS WILL BE DEPENDENT UPON INSURANCE AND REINSURANCE BROKERS, AND THE
FAILURE TO DEVELOP OR THE LOSS OF IMPORTANT BROKER RELATIONSHIPS COULD
MATERIALLY ADVERSELY AFFECT OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES.

    We intend to market our insurance and reinsurance products primarily through
brokers. We expect that we will derive a significant portion of our business
from a limited number of brokers. Some of our competitors have had longer term
relationships with the brokers which we use than we have. Loss of all or a
substantial portion of the business provided by these brokers could have a
material adverse effect on us.

A DOWNGRADE IN OUR RATINGS OR OUR INABILITY TO OBTAIN A RATING FOR OUR OPERATING
INSURANCE SUBSIDIARIES MAY ADVERSELY AFFECT OUR RELATIONSHIPS WITH CLIENTS AND
BROKERS AND NEGATIVELY IMPACT SALES OF OUR PRODUCTS.

    Financial strength and claims paying ratings from third party rating
agencies are instrumental in establishing the competitive positions of companies
in our industry. Periodically, rating agencies evaluate us to confirm that we
continue to meet their criteria for the ratings assigned to us by them.
Recently, rating agencies have been coming under increasing pressure as a result
of high-profile corporate bankruptcies and may, as a result, increase their
scrutiny of rated companies, revise their rating policies or take other action.
We can offer no assurances that our ratings will remain at their current levels.
A ratings downgrade, or the potential for such a downgrade, could adversely
affect both our relationships with agents, brokers, wholesalers and other
distributors of our existing products and services and new sales of our products
and services.

    In addition, we are seeking ratings for our principal U.S. insurance
subsidiaries. Due to the perceived importance of financial strength ratings in
our industry, our failure to obtain adequate ratings for our unrated insurance
subsidiaries could cause our operations to be removed from the approved lists of
some brokers or clients. Any ratings downgrade or failure to obtain a necessary
rating could adversely affect our ability to compete in our markets and have a
material adverse impact on our financial condition and results of operations.
See "Business--Ratings."

WE SOLD OUR PRIOR REINSURANCE OPERATIONS IN MAY 2000 AND MAY HAVE LIABILITY TO
THE PURCHASER AND CONTINUING LIABILITY FROM THOSE REINSURANCE OPERATIONS IF THE
PURCHASER SHOULD FAIL TO MAKE PAYMENTS ON THE REINSURANCE LIABILITIES IT
ASSUMED.

    On May 5, 2000, we sold our prior reinsurance operations to Folksamerica
Reinsurance Company. The Folksamerica transaction was structured as a transfer
and assumption agreement (and not reinsurance), and, accordingly, the loss
reserves (and any related reinsurance recoverables) relating to the transferred
business are not included as assets or liabilities on our balance sheet. In
addition, in connection with that sale, we made extensive representations and
warranties about us and our reinsurance operations, some of which survived the
closing of the asset sale. Breach of these representations and warranties could
result in liability to us. We also retained our tax and employee benefit
liabilities and other liabilities not assumed by Folksamerica, including all
liabilities not arising under our reinsurance subsidiary's reinsurance
agreements transferred to Folksamerica. In the event that Folksamerica is unable
to make payment for reserved losses transferred to it by us in the May 2000
sale, we would be liable for such claims. In addition, if amounts related to the
transferred liabilities turn out to be more than forecasted, we may be required
to issue additional preference shares to the holders of our preference shares.

SOME OF THE PROVISIONS OF OUR BYE-LAWS AND OUR SHAREHOLDERS AGREEMENT MAY HAVE
THE EFFECT OF HINDERING, DELAYING OR PREVENTING THIRD PARTY TAKEOVERS, WHICH MAY
PREVENT OUR SHAREHOLDERS FROM RECEIVING PREMIUM PRICES FOR THEIR SHARES IN AN
UNSOLICITED TAKEOVER.

    Some provisions of our bye-laws could have the effect of discouraging
unsolicited takeover bids from third parties or the removal of incumbent
management. These provisions may encourage

                                       36

companies interested in acquiring the company to negotiate in advance with our
board of directors, since the board has the authority to overrule the operation
of several of the limitations.

    In addition, pursuant to the shareholders agreement which we entered into in
connection with the capital infusion, we cannot engage in transactions outside
the ordinary course of our business, including mergers and acquisitions, without
the consent of a director designated by the Warburg Pincus funds and a director
designated by the Hellman & Friedman funds. To the extent these provisions
discourage takeover attempts, they could deprive our shareholders of
opportunities to realize takeover premiums for their shares or could depress the
market price of our common shares.

OUR OPERATING INSURANCE AND REINSURANCE SUBSIDIARIES ARE SUBJECT TO REGULATION
IN VARIOUS JURISDICTIONS, AND MATERIAL CHANGES IN THE REGULATION OF THEIR
OPERATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

    Our Bermuda reinsurance subsidiary, Arch Re (Bermuda), conducts its business
from its executive offices in Bermuda and is not licensed or admitted to do
business in any jurisdiction except Bermuda. We do not believe that Arch Re
(Bermuda) is subject to the insurance laws of any state in the United States;
however, recent scrutiny of the insurance and reinsurance industry in the U.S.
and other countries could subject Arch Re (Bermuda) to additional regulation.

    In addition, our U.S. reinsurance subsidiary, Arch Re (US), and our U.S.
insurance subsidiaries, First American Insurance Company, Rock River Insurance
Company, Cross River Insurance Company and American Independent Insurance
Company, write reinsurance and insurance in the United States. These
subsidiaries are subject to extensive regulation under state statutes which
delegate regulatory, supervisory and administrative powers to state insurance
commissioners. Such regulation generally is designed to protect policyholders
rather than investors.

    We periodically review our corporate structure in the United States so that
we can optimally deploy our capital. Changes in that structure require
regulatory approval, and we are in the process of seeking regulatory approval to
maximize our U.S. regulatory capital that will support our U.S. insurance
operations. Delays or failure in obtaining these approvals could limit the
amount of insurance that we can write in the United States.

    If ACGL or any of our subsidiaries were to become subject to the laws of a
new jurisdiction where that subsidiary is not presently admitted, it may not be
in compliance with the laws of the new jurisdiction. Any failure to comply with
applicable laws could result in the imposition of significant restrictions on
our ability to do business, and could also result in fines and other sanctions,
any or all of which could adversely affect our financial condition and results
of operations.

IF OUR BERMUDA REINSURANCE SUBSIDIARY IS UNABLE TO PROVIDE COLLATERAL TO CEDING
COMPANIES, ITS ABILITY TO CONDUCT BUSINESS COULD BE SIGNIFICANTLY AND NEGATIVELY
AFFECTED.

    Arch Re (Bermuda) is a registered Bermuda insurance company and is not
licensed or admitted as an insurer in any jurisdiction in the United States.
Because insurance regulations in the United States do not permit insurance
companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless security is
posted, Arch Re (Bermuda)'s contracts generally require it to post a letter of
credit or provide other security after a reinsured reports a claim. If we are
unable to post security in the form of letters of credit or trust funds when
required, the operations of Arch Re (Bermuda) could be significantly and
negatively affected.

WE ARE SUBJECT TO CHANGES IN BERMUDA LAW OR POLITICAL CIRCUMSTANCES.

    Under current Bermuda law, we are not subject to tax on income or capital
gains. Furthermore, we have obtained from the Minister of Finance of Bermuda
under the Exempted Undertakings Tax Protection Act, 1966, an undertaking that,
in the event that Bermuda enacts legislation imposing tax computed on profits,
income, any capital asset, gain or appreciation, or any tax in the nature of
estate

                                       37

duty or inheritance tax, then the imposition of the tax will not be applicable
to us or our operations until March 28, 2016. We could be subject to taxes in
Bermuda after that date. 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.

    Bermuda's political structure is based upon a parliamentary system with two
major parties, the United Bermuda Party and the Progressive Labour Party. In the
most recent election, the Progressive Labour Party gained control of the
legislative branch for the first time over the incumbent United Bermuda Party.
To date, the government's financial and regulatory policies have not been
changed in ways that we believe would materially affect us or our shareholders.

FOREIGN CURRENCY EXCHANGE RATE FLUCTUATION MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS.

    We will write business on a worldwide basis, and our results of operations
may be affected by fluctuations in the value of currencies other than the U.S.
dollar. Changes in foreign currency exchange rates can reduce our revenues and
increase our liabilities and costs, as measured in the dollar as our functional
currency. We have not attempted and currently do not expect to attempt to reduce
our exposure to these exchange rate risks by using hedging transactions. We may
therefore suffer losses solely as a result of exchange rate fluctuations.

EMPLOYEES OF OUR BERMUDA OPERATIONS ARE REQUIRED TO OBTAIN WORK PERMITS BEFORE
ENGAGING IN A GAINFUL OCCUPATION IN BERMUDA, AND WE CAN OFFER NO ASSURANCE THAT
REQUIRED WORK PERMITS WILL BE GRANTED OR REMAIN IN EFFECT.

    Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not
engage in any gainful occupation in Bermuda without an appropriate governmental
work permit. Our success may depend in part on the continued services of key
employees in Bermuda. A work permit may be granted or renewed upon showing that,
after proper public advertisement, no Bermudian (or spouse of a Bermudian) is
available who meets the minimum standards reasonably required by the employer.
The Bermuda government recently announced a new policy that places a six year
term limit on individuals with work permits, subject to certain exemptions for
key employees. A work permit is issued with an expiry date (up to five years)
and no assurances can be given that any work permit will be issued or, if
issued, renewed upon the expiration of the relevant term.

THE ENFORCEMENT OF CIVIL LIABILITIES AGAINST US MAY BE DIFFICULT.

    We are a Bermuda company and in the future some of our officers and
directors may be residents of various jurisdictions outside the United States.
All or a substantial portion of our assets and of those persons may be located
outside the United States. As a result, it may be difficult for you to effect
service of process within the United States upon those persons or to enforce in
United States courts judgments obtained against those persons.

    We have appointed National Registered Agents, Inc., New York, New York, as
our agent for service of process with respect to actions based on offers and
sales of securities made in the United States. We have been advised by our
Bermuda counsel, Conyers Dill & Pearman, that the United States and Bermuda do
not currently have a treaty providing for reciprocal recognition and enforcement
of judgments of U.S. courts in civil and commercial matters and that a final
judgment for the payment of money rendered by a court in the United States based
on civil liability, whether or not predicated solely upon the U.S. federal
securities laws, would, therefore, not be automatically enforceable in Bermuda.
We also have been advised by Conyers Dill & Pearman that a final and conclusive
judgment obtained in a court in the United States under which a sum of money is
payable as compensatory damages (i.e., not being a sum claimed by a revenue
authority for taxes or other charges of a similar nature by a governmental
authority, or in respect of a fine or penalty or multiple or punitive damages)
may be the subject of an action on a debt in the Supreme Court of Bermuda under
the common law

                                       38

doctrine of obligation. Such an action should be successful upon proof that the
sum of money is due and payable, and without having to prove the facts
supporting the underlying judgment, as long as:

    - the court which gave the judgment had proper jurisdiction over the parties
      to such judgment;

    - such court did not contravene the rules of natural justice of Bermuda;

    - such judgment was not obtained by fraud;

    - the enforcement of the judgment would not be contrary to the public policy
      of Bermuda;

    - no new admissible evidence relevant to the action is submitted prior to
      the rendering of the judgment by the courts of Bermuda; and

    - there is due compliance with the correct procedures under Bermuda law.

A Bermuda court may impose civil liability on us or our directors or officers in
a suit brought in the Supreme Court of Bermuda against us or such persons with
respect to a violation of U.S. federal securities laws, provided that the facts
surrounding such violation would constitute or give rise to a cause of action
under Bermuda law.

RISKS RELATING TO TAXATION

WE AND OUR NON-U.S. SUBSIDIARIES MAY BECOME SUBJECT TO U.S. FEDERAL INCOME
  TAXATION.

    ACGL and its non-U.S. subsidiaries intend to operate their business in a
manner that will not cause them to be treated as engaged in a trade or business
in the United States and, thus, will not be required to pay U.S. federal income
taxes (other than withholding taxes on certain U.S. source investment income) on
their income. However, because there is uncertainty as to the activities which
constitute being engaged in a trade or business in the United States, there can
be no assurances that the U.S. Internal Revenue Service will not contend
successfully that ACGL or its non-U.S. subsidiaries are engaged in a trade or
business in the United States. If ACGL or any of its non-U.S. subsidiaries were
subject to U.S. income tax, our shareholders' equity and earnings could be
adversely affected. We may be a personal holding company in 2002, but do not
currently expect to have "undistributed personal holding company income." See
"--Tax Matters--Taxation of ACGL--United States--Personal Holding Company
Rules."

    We changed our legal domicile from the United States to Bermuda in
November 2000. Legislation has recently been introduced which (if enacted) could
eliminate the tax benefits available to companies, like us, that changed their
legal domiciles to Bermuda. In addition, some U.S. insurance companies have been
lobbying Congress to pass legislation intended to eliminate certain perceived
tax advantages of U.S. insurance companies with Bermuda affiliates resulting
principally from reinsurance between or among U.S. insurance companies and their
Bermuda affiliates. Legislation, if passed, and other changes in U.S. tax laws,
regulations and interpretations thereof to address these issues could adversely
affect us.

U.S. PERSONS WHO HOLD OUR COMMON SHARES MAY BE SUBJECT TO U.S. INCOME TAXATION
AT ORDINARY INCOME RATES ON OUR UNDISTRIBUTED EARNINGS AND PROFITS. IN ADDITION,
THE HEIRS OR ESTATE OF ANY INDIVIDUAL HOLDER MAY NOT BE ENTITLED TO A "STEP-UP"
IN BASIS OF OUR COMMON SHARES WHICH MIGHT OTHERWISE BE AVAILABLE UPON SUCH
HOLDER'S DEATH.

    We believe that we and our foreign subsidiaries currently are controlled
foreign corporations ("CFCs"), although our bye-laws are designed to preclude
any U.S. person from adverse tax consequences as a result of our CFC status. We
also believe that we are likely to be a foreign personal holding company in
2002, but do not currently expect to have undistributed foreign personal holding
company income. We do not believe that we are a passive foreign investment
company. Since these determinations and beliefs are based upon legal and factual
conclusions, some of which are described under "--Tax Matters," no assurances
can be given that the IRS or a court would concur with our conclusions. If they
were not to so concur, U.S. persons who hold our common shares may suffer
adverse tax consequences. See "--Tax Matters."

                                       39

                                  TAX MATTERS

    The following summary of the taxation of ACGL and the taxation of our
shareholders is based upon current law and is for general information only.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary.

    The following legal discussion (including and subject to the matters and
qualifications set forth in such summary) of certain tax considerations
(a) under "--Taxation of ACGL--Bermuda" and "--Taxation of Shareholders--Bermuda
Taxation" is based upon the advice of Conyers Dill & Pearman, Hamilton, Bermuda
and (b) under "--Taxation of ACGL--United States," "--Taxation of
Shareholders--United States Taxation," "--Taxation of Our U.S. Shareholders" and
"--United States Taxation of Non-U.S. Shareholders" is based upon the advice of
Cahill Gordon & Reindel, New York, New York (the advice of such firms does not
include accounting matters, determinations or conclusions relating to the
business or activities of ACGL). The summary is based upon current law and is
for general information only. The tax treatment of a holder of our common
shares, or of a person treated as a holder of our common shares for U.S. federal
income, state, local or non-U.S. tax purposes, may vary depending on the
holder's particular tax situation. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could be retroactive and
could affect the tax consequences to us or to holders of our common shares.

TAXATION OF ACGL

BERMUDA

    Under current Bermuda law, we are not subject to tax on income or capital
gains. We have obtained from the Minister of Finance under the Exempted
Undertakings Tax Protection Act 1966 an assurance that, in the event that
Bermuda enacts legislation imposing tax computed on profits, income, any capital
asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance, the imposition of any such tax shall not be applicable to us or to
any of our operations or our shares, debentures or other obligations until
March 28, 2016. We could be subject to taxes in Bermuda after that date. This
assurance will be subject to the proviso that it is not to be construed so as to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda (we are not so currently affected) or to prevent the
application of any tax payable in accordance with the provisions of the Land Tax
Act 1967 or otherwise payable in relation to any property leased to us or our
insurance subsidiary. We pay annual Bermuda government fees, and our Bermuda
reinsurance subsidiary pays annual insurance license fees. In addition, all
entities employing individuals in Bermuda are required to pay a payroll tax and
there are sundry other taxes payable, directly or indirectly, to the Bermuda
government.

UNITED STATES

    ACGL and its non-U.S. subsidiaries intend to conduct their operations such
that they will not be engaged in a trade or business in the United States and,
therefore, will not be required to pay U.S. federal income taxes (other than
withholding taxes on dividends and certain other U.S. source investment income).
However, because definitive identification of activities which constitute being
engaged in a trade or business in the United States is not provided by the
Internal Revenue Code of 1986, as amended (the "Code"), or regulations or court
decisions, there can be no assurance that the Internal Revenue Service ("IRS")
will not contend successfully that ACGL or its non-U.S. subsidiaries will be
engaged in a trade or business in the United States. A foreign corporation
deemed to be so engaged would be subject to U.S. income tax, as well as the
branch profits tax, on its income, which is treated as effectively connected
with the conduct of that trade or business unless the corporation is entitled to
relief under the permanent establishment provisions of a tax treaty. Such income
tax, if imposed, would be based on effectively connected income computed in a
manner generally analogous

                                       40

to that applied to the income of a domestic corporation, except that deductions
and credits generally are not permitted unless the foreign corporation has
timely filed a U.S. federal income tax return in accordance with applicable
regulations. Penalties may be assessed for failure to file tax returns. The 30%
branch profits tax is imposed on net income after subtracting the regular
corporate tax and making certain other adjustments.

    Under the income tax treaty between Bermuda and the United States (the
"Treaty"), ACGL's Bermuda insurance subsidiaries will be subject to U.S. income
tax on any insurance premium income found to be effectively connected with a
U.S. trade or business only if that trade or business is conducted through a
permanent establishment in the United States. No regulations interpreting the
Treaty have been issued. While there can be no assurances, ACGL does not believe
that any of its Bermuda insurance subsidiaries have a permanent establishment in
the United States. Such subsidiaries would not be entitled to the benefits of
the Treaty if (i) less than 50% of ACGL's stock were beneficially owned,
directly or indirectly, by Bermuda residents or U.S. citizens or residents, or
(ii) any such subsidiary's income were used in substantial part to make
disproportionate distributions to, or to meet certain liabilities to, persons
who are not Bermuda residents or U.S. citizens or residents. While there can be
no assurances, ACGL believes that its Bermuda insurance subsidiaries will be
eligible for Treaty benefits after the sale of shares offered hereby.

    Foreign corporations not engaged in a trade or business in the United States
are nonetheless subject to U.S. income tax on certain "fixed or determinable
annual or periodic gains, profits and income" derived from sources within the
United States as enumerated in Section 881(a) of the Code (such as dividends and
certain interest on investments).

    PERSONAL HOLDING COMPANY RULES.  A corporation will not be classified as a
personal holding company (a "PHC") in a given taxable year unless both (i) at
some time during the last half of such taxable year, five or fewer individuals
(without regard to their citizenship or residency) own or are deemed to own
(pursuant to certain constructive ownership rules) more than 50% of the
corporation's shares by value, and (ii) at least 60% of the adjusted ordinary
gross income of the corporation for such taxable year consists of PHC income (as
defined in Section 543 of the Code). For purposes of the 50% share ownership
test, all of our common shares owned by an investment partnership will be
attributed to each of its partners, if any, who are individuals. As a result of
this attribution rule, we believe that currently five or fewer individuals are
treated as owning more than 50% of the value of our common shares. Consequently,
we or one or more of our subsidiaries could be or become PHCs, depending on
whether we or any of our subsidiaries satisfy the PHC gross income test.

    We will use reasonable best efforts to cause ACGL and each of its
subsidiaries not to satisfy the gross income requirement set forth in
Section 542(a) of the Code. If, however, we or any of our subsidiaries is or
were to become a PHC in a given taxable year, such company would be subject to
PHC tax (at the highest marginal rate on ordinary income applicable to
individuals) on its "undistributed PHC income" (which, in our case and the case
of our foreign subsidiaries, would include only PHC income that is from U.S.
sources and foreign source income to the extent that such income is effectively
connected with the conduct of a trade or business in the U.S.). PHC income
generally would not include underwriting income or, in our case and the case of
our foreign subsidiaries, investment income derived from non-U.S. sources or
dividends received from non-U.S. subsidiaries. If we or any of our subsidiaries
is or becomes a PHC, there can be no assurance that the amount of PHC income
would be immaterial.

    There can be no assurance that we and each of our subsidiaries are not or
will not become a PHC immediately following this offering or in the future
because of factors including factual uncertainties regarding the application of
the PHC rules, the makeup of our shareholder base and other circumstances that
affect the application of the PHC rules to us and our subsidiaries.

                                       41

TAXATION OF SHAREHOLDERS

    The following summary sets forth certain United States federal income tax
considerations related to the purchase, ownership and disposition of our common
shares. Unless otherwise stated, this summary deals only with shareholders
("U.S. Holders") that are United States Persons (as defined below) who hold
their common shares as capital assets. The following discussion is only a
general summary of the United States federal income tax matters described herein
and does not purport to address all of the United States federal income tax
consequences that may be relevant to a particular shareholder in light of such
shareholder's specific circumstances. In addition, the following summary does
not describe the United States federal income tax consequences that may be
relevant to certain types of shareholders, such as banks, insurance companies,
regulated investment companies, real estate investment trusts, financial asset
securitization investment trusts, dealers in securities or traders that adopt a
mark-to-market method of tax accounting, tax exempt organizations, expatriates
or persons who hold the common shares as part of a hedging or conversion
transaction or as part of a straddle, who may be subject to special rules or
treatment under the Code. This discussions is based upon the Code, the Treasury
regulations promulgated thereunder and any relevant administrative rulings or
pronouncements or judicial decisions, all as in effect on the date hereof and as
currently interpreted, and does not take into account possible changes in such
tax laws or interpretations thereof, which may apply retroactively. This
discussion does not include any description of the tax laws of any state or
local governments within the United States, or of any foreign government, that
may be applicable to the common shares or the shareholders. Persons considering
making an investment in the common shares should consult their own tax advisors
concerning the application of the United States federal tax laws to their
particular situations as well as any tax consequences arising under the laws of
any state, local or foreign taxing jurisdiction prior to making such investment.

    If a partnership holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding common shares, you
should consult your tax advisor.

    For purposes of this discussion, the term "United States Person" means:

    - a citizen or resident of the United States,

    - a corporation or entity treated as a corporation created or organized in
      or under the laws of the United States, or any political subdivision
      thereof,

    - an estate the income of which is subject to United States federal income
      taxation regardless of its source,

    - a trust if either (x) a court within the United States is able to exercise
      primary supervision over the administration of such trust and one or more
      United States Persons have the authority to control all substantial
      decisions of such trust or (y) the trust has a valid election in effect to
      be treated as a United States Person for U.S. federal income tax purposes
      or

    - any other person or entity that is treated for U.S. federal income tax
      purposes as if it were one of the foregoing.

BERMUDA TAXATION

    Currently, there is no Bermuda withholding tax on dividends paid by us.

UNITED STATES TAXATION

    TAXATION OF DIVIDENDS.  Subject to the discussions below relating to the
potential application of the CFC and PFIC rules, cash distributions, if any,
made with respect to our common shares will constitute dividends for U.S.
federal income tax purposes to the extent paid out of our current or accumulated

                                       42

earnings and profits (as computed using U.S. tax principles). To the extent such
distributions exceed our earnings and profits, they will be treated first as a
return of the U.S. Holder's basis in our common shares to the extent thereof,
and then as gain from the sale of a capital asset.

    SALE, EXCHANGE OR OTHER DISPOSITION.  Subject to the discussions below
relating to the potential application of the CFC, PFIC and foreign personal
holding company ("FPHC") rules, holders of common shares generally will
recognize capital gain or loss for U.S. federal income tax purposes on the sale,
exchange or disposition of common shares.

TAXATION OF OUR U.S. SHAREHOLDERS

CONTROLLED FOREIGN CORPORATION RULES

    Under our bye-laws, the 9.9% voting restriction applicable to the Controlled
Shares of a U.S. Person (as defined in our bye-laws) generally does not apply to
certain of our investors. As a result of certain attribution rules, we believe,
therefore, that we and our foreign subsidiaries are controlled foreign
corporations ("CFCs"). That status as a CFC does not cause us or any of our
subsidiaries to be subject to U.S. federal income tax. Such status also has no
adverse U.S. federal income tax consequences for any U.S. Holder that is
considered to own less than 10% of the total combined voting power of our common
shares or those of our foreign subsidiaries. Only U.S. Holders that are
considered to own 10% or more of the total combined voting power of our common
shares or those of our foreign subsidiaries (taking into account common shares
actually owned by such U.S. Holder as well as common shares attributed to such
U.S. Holder under the Code or the regulations thereunder) (a "10% U.S. Voting
Shareholder") is affected by our status as a CFC. Our bye-laws are intended to
prevent any U.S. Holder from being considered a 10% U.S. Voting Shareholder by
limiting the votes conferred by the Controlled Shares (as defined in our
bye-laws) of any U.S. Person to 9.9% of the total voting power of all our shares
entitled to vote. However, because under our bye-laws certain funds associated
with Warburg Pincus and Hellman & Friedman generally are entitled to vote their
directly owned common shares in full, a U.S. Holder that is attributed (under
the Code or the regulations thereunder) common shares owned by such funds may be
considered a 10% U.S. Voting Shareholder. If you are a direct or indirect
investor in a fund associated with Warburg Pincus or Hellman & Friedman
additional common shares could be attributed to you for purposes of determining
whether you are considered to be a 10% U.S. Voting Shareholder. As long as we
are a CFC, a U.S. Holder that is considered a 10% U.S. Voting Shareholder will
be subject to current U.S. federal income taxation (at ordinary income tax
rates) to the extent of all or a portion of the undistributed earnings and
profits of ACGL and our subsidiaries attributable to "subpart F income"
(including certain insurance premium income and investment income) and may be
taxable at ordinary income tax rates on any gain realized on a sale or other
disposition (including by way of repurchase or liquidation) of our common shares
to the extent of the current and accumulated earnings and profits attributable
to such shares.

    While our bye-laws are intended to prevent any member from being considered
a 10% U.S. Voting Shareholder (except as described above), there can be no
assurance that a U.S. Holder will not be treated as a 10% U.S. Voting
Shareholder, by attribution or otherwise, under the Code or any applicable
regulations thereunder. See "Risk Factors--Risks Relating to Taxation--U.S.
persons who hold our common shares may be subject to U.S. income taxation at
ordinary income rates on our undistributed earnings and profits."

RELATED PERSON INSURANCE INCOME RULES

    We do not expect the gross "related person insurance income" ("RPII") of any
of our non-U.S. subsidiaries to equal or exceed 20% of its gross insurance
income in any taxable year for the foreseeable future and do not expect the
direct or indirect insureds (and related persons) of any such subsidiary to
directly or indirectly own 20% or more of either the voting power or value of
our

                                       43

common stock. Consequently, we do not expect any U.S. person owning common
shares to be required to include in gross income for U.S. federal income tax
purposes RPII income, but there can be no assurance that this will be the case.

    Section 953(c)(7) of the Code generally provides that Section 1248 of the
Code (which generally would require a U.S. Holder to treat certain gains
attributable to the sale, exchange or disposition of common shares as a
dividend) will apply to the sale or exchange by a U.S. shareholder of shares in
a foreign corporation that is characterized as a CFC under the RPII rules if the
foreign corporation would be taxed as an insurance company if it were a domestic
corporation, regardless of whether the U.S. shareholder is a 10% U.S. Voting
Shareholder or whether the corporation qualifies for either the RPII 20%
ownership exception or the RPII 20% gross income exception. Although existing
Treasury Department regulations do not address the question, proposed Treasury
regulations issued in April 1991 create some ambiguity as to whether
Section 1248 and the requirement to file Form 5471 would apply when the foreign
corporation has a foreign insurance subsidiary that is a CFC for RPII purposes
and that would be taxed as an insurance company if it were a domestic
corporation. We believe that Section 1248 and the requirement to file Form 5471
will not apply to a less than 10% U.S. Shareholder because ACGL is not directly
engaged in the insurance business. There can be no assurance, however, that the
IRS will interpret the proposed regulations in this manner or that the Treasury
Department will not take the position that Section 1248 and the requirement to
file Form 5471 will apply to dispositions of our common shares.

    If the IRS or U.S. Treasury Department were to make Section 1248 and the
Form 5471 filing requirement applicable to the sale of our common shares, we
would notify shareholders that Section 1248 of the Code and the requirement to
file Form 5471 will apply to dispositions of our common shares. Thereafter, we
would send a notice after the end of each calendar year to all persons who were
shareholders during the year notifying them that Section 1248 and the
requirement to file Form 5471 apply to dispositions of our common shares by U.S.
Holders. We would attach to this notice a copy of Form 5471 completed with all
our information and instructions for completing the shareholder information.

FOREIGN PERSONAL HOLDING COMPANY RULES

    A foreign company will not be classified as an FPHC unless both (i) at some
time during the taxable year at issue, five or fewer individuals who are U.S.
citizens or residents own or are deemed to own (pursuant to certain constructive
ownership rules) more than 50% of all classes of its shares measured by voting
power or value and (ii) at least 60% (or in general 50% for any year after the
first year that a corporation is an FPHC) of its gross income is FPHC income (as
defined in Section 553 of the Code) (generally including passive income such as
dividends, interest and gains from the sale of stocks and securities). For
purposes of the share ownership test, all of our common shares owned by an
investment partnership will be attributed to each of its partners, if any, who
are individuals. As a result of this attribution rule, we believe that currently
five or fewer individuals are treated as owning more than 50% of the value of
our common shares. Consequently, we or one or more of our foreign subsidiaries
could be or become FPHCs, depending on whether we or any of our foreign
subsidiaries satisfy the FPHC gross income test.

    We will use reasonable best efforts to cause us and each of our subsidiaries
not to satisfy the gross income requirement set forth in Section 552 of the
Code. If, however, we or any of our subsidiaries are or were to become an FPHC,
a portion of such company's "undistributed foreign personal holding company
income" (as defined in the Code) would be imputed to all of our U.S. Holders.
Such income would be taxable as a dividend, even if no cash dividend were
actually paid. In such event, subsequent cash distributions would first be
treated as a tax-free return of any previously taxed and undistributed amounts.
In addition, if we or any of our subsidiaries are or become an FPHC in any year,
the heirs or estate of any individual U.S. Holder who dies in the immediately
following year (whether or not we or

                                       44

any of our subsidiaries are an FPHC in such year) would not be entitled to a
"step-up" in the basis of the common shares which might otherwise be available
under U.S. income tax laws.

    There can be no assurance that we and each of our subsidiaries are not or
will not become an FPHC because of factors including factual uncertainties
regarding the application of the FPHC rules, the makeup of our shareholder base
and other circumstances that could affect the application of the FPHC rules to
us and our subsidiaries. If we or any of our subsidiaries are or were to become
an FPHC, such company would not be subject to the PHC rules described above.

PASSIVE FOREIGN INVESTMENT COMPANIES

    Sections 1291 through 1298 of the Code contain special rules applicable with
respect to foreign corporations that are "passive foreign investment companies"
("PFICs"). In general, a foreign corporation will be a PFIC if 75% or more of
its income constitutes "passive income" or 50% or more of its assets produce
passive income. If we were to be characterized as a PFIC, U.S. Holders would be
subject to a penalty tax at the time of their sale of (or receipt of an "excess
distribution" with respect to) their common shares. In general, a shareholder
receives an "excess distribution" if the amount of the distribution is more than
125% of the average distribution with respect to the shares during the three
preceding taxable years (or shorter period during which the taxpayer held the
stock). In general, the penalty tax is equivalent to an interest charge on taxes
that are deemed due during the period the shareholder owned the shares, computed
by assuming that the excess distribution or gain (in the case of a sale) with
respect to the shares was taxable in equal portions throughout the holder's
period of ownership. The interest charge is equal to the applicable rate imposed
on underpayments of U.S. federal income tax for such period. A U.S. shareholder
may avoid some of the adverse tax consequences of owning shares in a PFIC by
making a qualified electing fund ("QEF") election. A QEF election is revocable
only with the consent of the Internal Revenue Service and has the following
consequences to a shareholder:

    - For any year in which ACGL is not a PFIC, no income tax consequences would
      result.

    - For any year in which the ACGL is a PFIC, the shareholder would include in
      its taxable income a proportionate share of the net ordinary income and
      net capital gains of ACGL and certain of its non-U.S. subsidiaries.

    The PFIC statutory provisions contain an express exception for income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business...." This exception is
intended to ensure that income derived by a bona fide insurance company is not
treated as passive income, except to the extent such income is attributable to
financial reserves in excess of the reasonable needs of the insurance business.
The PFIC statutory provisions contain a look-through rule that states that, for
purposes of determining whether a foreign corporation is a PFIC, such foreign
corporation shall be treated as if it "received directly its proportionate share
of the income" and as if it "held its proportionate share of the assets" of any
other corporation in which it owns at least 25% of the stock. We will use
reasonable best efforts to cause us and each of our subsidiaries not to
constitute a PFIC within the meaning of Section 1297 of the Code.

    No regulations interpreting the substantive PFIC provisions have yet been
issued. Each U.S. Holder should consult his tax advisor as to the effects of
these rules.

UNITED STATES TAXATION OF NON-U.S. SHAREHOLDERS

TAXATION OF DIVIDENDS

    Cash distributions, if any, made with respect to common shares held by
shareholders who are not United States Persons ("Non-U.S. holders") generally
will not be subject to United States withholding tax.

                                       45

SALE, EXCHANGE OR OTHER DISPOSITION

    Non-U.S. holders of common shares generally will not be subject to U.S.
federal income tax with respect to gain realized upon the sale, exchange or
other disposition of common shares unless such gain is effectively connected
with a U.S. trade or business of the Non-U.S. holder in the United States or
such person is present in the United States for 183 days or more in the taxable
year the gain is realized and certain other requirements are satisfied.

INFORMATION REPORTING AND BACKUP WITHHOLDING

    Non-U.S. holders of common shares will not be subject to U.S. information
reporting or backup withholding with respect to dispositions of common shares
effected through a non-U.S. office of a broker, unless the broker has certain
connections to the United States or is a United States person. No U.S. backup
withholding will apply to payments of dividends, if any, on our common shares.

OTHER TAX LAWS

    Shareholders should consult their own tax advisors with respect to the
applicability to them of the tax laws of other jurisdictions.

ITEM 2. PROPERTIES

    ACGL and its subsidiaries rent space for their offices in Bermuda and the
United States under leases which expire at various times up to 2006. Our future
minimum rental charges for the remaining terms of our existing leases, exclusive
of escalation clauses and maintenance costs and net of rental income, will be
approximately $5,081,000. For the years ended December 31, 2001, 2000 and 1999,
our rental expense (income), including sublease income, was approximately
$(132,000), $190,000 and $576,000, respectively. We believe that the above
described office space is adequate for our needs. However, as we continue to
develop our business, we expect that we will open additional office locations
during 2002.

ITEM 3. LEGAL PROCEEDINGS

    We, in common with the insurance industry in general, are subject to
litigation and arbitration in the normal course of our business. As of
December 31, 2001, we were not a party to any material litigation or arbitration
other than as a part of the ordinary course of business in relation to claims
activity, none of which is expected by management to have a significant adverse
effect on our results of operation and financial condition and liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None.

                                       46

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                               MARKET INFORMATION

    Our common shares are traded on the Nasdaq National Market under the symbol
"ACGL." For the periods presented below, the high and low sales prices and
closing prices for our common shares as reported on the Nasdaq National Market
were as follows:



                                                                    THREE MONTHS ENDED
                                      ------------------------------------------------------------------------------
                                      DECEMBER 31, 2001    SEPTEMBER 30, 2001    JUNE 30, 2001    MARCH 31, 2001(1)
                                      ------------------   -------------------   --------------   ------------------
                                                                                      
High................................        $28.34               $19.20              $17.06             $18.06
Low.................................         16.40                15.45               14.81              14.38
Close...............................         25.75                16.75               15.75              15.88




                                                                  THREE MONTHS ENDED
                                      ---------------------------------------------------------------------------
                                      DECEMBER 31, 2000    SEPTEMBER 30, 2000    JUNE 30, 2000    MARCH 31, 2000
                                      ------------------   -------------------   --------------   ---------------
                                                                                      
High................................        $15.88               $15.88              $16.63           $16.75
Low.................................         13.88                14.63               14.56            11.38
Close...............................         15.00                15.75               14.94            16.38


--------------------------

(1) For the ten trading days ended October 23, 2001, the last trading day prior
    to the announcement of the signing of the subscription agreements for the
    capital infusion and our new underwriting initiative, the average closing
    price of our common shares on the Nasdaq Stock Market was $16.86 per share.

    On March 8, 2002, the high and low sales prices and the closing price for
our common shares as reported on the Nasdaq National Market were $27.14, $26.70
and $26.70, respectively.

                                    HOLDERS

    As of March 8, 2002, there were approximately 53 holders of record of our
common shares and approximately 1,663 beneficial holders of our common shares,
and 23 holders of record and beneficial holders of our preference shares.

                                   DIVIDENDS

    Any determination to pay dividends will be at the discretion of our board of
directors and will be dependent upon our results of operations, financial
condition and other factors deemed relevant by our board of directors. As a
holding company, we will depend on future dividends and other permitted payments
from our subsidiaries to pay dividends to our shareholders. Our subsidiaries'
ability to pay dividends, as well as our ability to pay dividends, is, and is
expected to be, subject to regulatory, contractual, rating agency and other
constraints. Our board of directors currently does not intend to declare
dividends or make any other distributions.

    In addition, pursuant to our shareholders agreement, we have agreed not to
declare any dividend or make any other distribution on our common shares, and
not to repurchase any common shares, until we have repurchased from the Warburg
Pincus funds, the Hellman & Friedman funds and the other holders of our
preference shares, pro rata, on the basis of the amount of those shareholders'
investments in us at the time of such repurchase, preference shares having an
aggregate value of $250.0 million, at a per share price acceptable to those
shareholders.

                    RECENT SALES OF UNREGISTERED SECURITIES

    On November 20, 2001, we issued in a private placement the securities
described under "Business--Recent Developments--The Capital Infusion." The sales
of these securities were exempt

                                       47

from registration under the provisions of Section 4(2) of the Securities Act.
For a description of the purchasers, consideration for and terms of conversion
and exercise of the securities, please refer to the information appearing above
under the subheading "The Capital Infusion" included as part of "Business,"
which information is incorporated by reference.

ITEM 6. SELECTED FINANCIAL DATA

    The following table sets forth summary historical consolidated financial and
operating data for the five-year period ended December 31, 2001. Such data for
the three-year period ended December 31, 2001 should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes.

    Comparisons of our 2001 and 2000 results of operations to each other and to
prior year periods are not relevant due to the changes in our business during
2000 and 2001, including (1) the sale of our prior reinsurance operations in
May 2000, (2) our change of legal domicile and reorganization completed in
November 2000, (3) our recent acquisition activity, (4) our new underwriting
initiative and (5) the capital infusion.



                                                      YEAR ENDED DECEMBER 31,
                                -------------------------------------------------------------------
                                   2001          2000          1999          1998          1997
                                -----------   -----------   -----------   -----------   -----------
                                          (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                                                         
STATEMENT OF OPERATIONS DATA:
Revenues:
  Net premiums written........  $    36,216   $   (10,604)(1) $   306,726 $   234,735   $   144,834
  Net premiums earned.........       30,918        87,530       311,368       206,194       107,372
  Net investment income.......       12,120        15,923        20,173        15,687        14,360
  Net realized investment
    gains (losses)............       18,382        20,045        17,227        25,252          (760)
      Total revenues..........       76,454       127,634       344,800       247,133       120,972
Income (loss) before income
  taxes.......................       24,144           503       (56,199)        2,347         1,598
Net income (loss).............       22,016        (8,012)      (35,636)        2,852         2,039
Average common shares
  outstanding:
  Basic.......................   12,855,668    13,198,075    17,086,732    17,065,165    17,032,601
  Diluted.....................   17,002,231(2)  13,198,075   17,086,732    17,718,223    17,085,788
Net income (loss) per common
  share:
  Basic.......................  $      1.71   $     (0.61)  $     (2.09)  $      0.17   $      0.12
  Diluted.....................  $      1.29   $     (0.61)  $     (2.09)  $      0.16   $      0.12
Cash dividends per share......           --            --            --            --            --


                                       48




                                                           DECEMBER 31,
                                -------------------------------------------------------------------
                                   2001          2000          1999          1998          1997
                                -----------   -----------   -----------   -----------   -----------
                                                          (IN THOUSANDS)
                                                                         
BALANCE SHEET DATA:
Cash and invested assets......  $ 1,019,058   $   276,053   $   579,874   $   586,788   $   505,728
Unpaid losses and loss
  adjustment expenses
  recoverable.................       90,442            --        55,925        30,468            --
Total assets..................    1,313,701       295,907       860,175       757,463       581,247
Reserves for losses and loss
  adjustment expenses:
  Before reinsurance
    recoverable...............      113,507            --       364,554       216,657        70,768
  Net of reinsurance
    recoverable...............       23,065            --       308,629       186,189        70,768
Shareholders' equity..........    1,020,369       272,299       342,330       397,763       401,031




                                                           DECEMBER 31,
                                -------------------------------------------------------------------
                                   2001          2000          1999          1998          1997
                                -----------   -----------   -----------   -----------   -----------
                                                                         
Book value:
    Per common share..........  $     20.05(3) $     21.43  $     20.03   $     23.28   $     23.51
    Diluted...................  $     19.59   $     21.43   $     20.03   $     22.80   $     22.90
Common shares outstanding:
    Actual....................   13,513,538    12,708,818    17,087,970    17,087,438    17,058,462
    Diluted...................   52,097,108(4)  12,708,818   17,087,970    17,445,619    17,508,632


------------------------

(1)  Net premiums written for 2000 includes the reversal of $92.9 million of
     premiums recorded in prior periods in connection with the sale of our prior
    reinsurance operations in May 2000.

(2)  For the purposes of calculating "Net income (loss) per common share,"
     "Average common shares outstanding, Diluted" gives effect to the issuance
    of the following Dilutive Shares, on a weighted average basis, calculated
    using the treasury stock method, where applicable, and does not give effect
    to the issuance of the following Contingently Issuable Shares.


                                                           
Dilutive shares (the "Dilutive Shares"):
    Common shares issuable upon conversion of
      outstanding preference shares.........................  35,687,735
    Common shares issuable upon exercise of
      outstanding class A warrants..........................   1,206,206(a)
                                                              ----------
        Subtotal............................................  36,893,941

Common shares issuable upon conversion or exercise of
  contingently issuable (the "Contingently Issuable
  Shares"):
    Preference shares(b)....................................     875,765
    Preference shares(c)....................................   2,831,174
    Class B warrants(d).....................................      33,495
                                                              ----------
        Subtotal............................................   3,740,434
                                                              ----------
          Total.............................................  40,634,375
                                                              ==========


    (a) Calculated using the treasury stock method. Class A warrants to purchase
       an aggregate of 5,401,707 common shares were outstanding as of March 8,
       2002. The class A warrants are currently exercisable at $20.00 per share
       and expire on September 19, 2002.

                                       49

    (b) Represents our current estimate of the number of additional preference
       shares that will be issued during the first quarter of 2002 pursuant to a
       post-closing purchase price adjustment under the subscription agreement
       entered into in connection with the capital infusion.

    (c) Represents an estimate of the number of additional preference shares
       that would be issued under the subscription agreement entered into in
       connection with the capital infusion in the event that, on or prior to
       September 19, 2005, the closing price of our common shares is at least
       $30.00 per share for at least 20 out of 30 consecutive trading days or a
       change of control occurs.

    (d) Calculated using the treasury stock method. Class B warrants to purchase
       an aggregate of 150,000 common shares were outstanding as of
       December 31, 2001 and expire on September 19, 2005. Class B warrants
       become exercisable at $20.00 per share if the closing price of our common
       shares is at least $30.00 per share for at least 20 out of 30 consecutive
       trading days or a change of control occurs.

(3)  For the purposes of calculating "Book value, Historical, Per common share"
     shareholders' equity at December 31, 2001 excludes the aggregate
    liquidation preference of $749.4 million for the preference shares issued in
    the capital infusion.

(4)  "Diluted" information gives effect to the Dilutive Shares and the issuance
     of 1,689,629 restricted shares issued as part of the capital infusion but
    does not include the issuance of any Contingently Issuable Shares. Such
    information excludes the effects of our outstanding stock options
    (4,068,311) at December 31, 2001.

                                       50

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                    GENERAL

    We are a Bermuda public limited liability company with $1.0 billion in
equity capital and, through operations in Bermuda and the United States, are
positioned to write insurance and reinsurance on a worldwide basis. While we are
positioned to provide a full range of property and casualty insurance and
reinsurance lines, we are focusing on writing specialty lines of insurance and
reinsurance profitably and earning a superior return on equity as we establish
an enduring underwriting franchise.

    Recent events have provided a significant market opportunity for well
capitalized insurance companies that are not burdened by the uncertainties
resulting from prior years' underwriting losses and material reinsurance
recoverable balances. As a result, we recently launched an underwriting
initiative that included the recruitment of new insurance and reinsurance
management teams and an equity capital infusion of $763.2 million. It is our
belief that our existing Bermuda and U.S.-based underwriting platform, our
strong management team and our $1.0 billion in capital that is unencumbered by
significant exposure to pre-2002 risks have enabled us both to establish an
immediate presence in an increasingly attractive insurance marketplace and to
actively participate in the January 1, 2002 reinsurance renewal season. Since
January 1, 2002, we have entered into approximately 800 reinsurance treaties and
other reinsurance arrangements which are expected to provide approximately
$500 million of gross written reinsurance premiums during 2002.

NEW UNDERWRITING INITIATIVE AND NOVEMBER 20, 2001 CAPITAL INFUSION

    On October 24, 2001, we announced the launch of a new underwriting
initiative to meet current and future demand in the global insurance and
reinsurance markets. Simultaneously with the launch of this new underwriting
initiative, we entered into agreements with the Warburg Pincus funds and the
Hellman & Friedman funds and certain members of management to purchase from us
in a private placement, for $763.2 million in cash, 35,687,735 series A
convertible preference shares and 3,776,025 class A warrants. This capital
infusion was consummated on November 20, 2001. The proceeds of the capital
infusion were primarily contributed to our Bermuda and U.S. subsidiaries to
support the new underwriting initiative.

EVENTS PRIOR TO THE NEW UNDERWRITING INITIATIVE

    2001 ACQUISITIONS.  On February 28, 2001, we acquired one of our investee
companies, American Independent Insurance Company ("American Independent").
American Independent underwrites private passenger automobile liability and
physical damage insurance primarily in the Commonwealth of Pennsylvania. During
2001, 70% of American Independent's written premiums were ceded to third-party
reinsurers. During 2002, we expect that approximately 20% of American
Independent's written premiums will be ceded to third-party reinsurers.

    On June 22, 2001, we acquired all of the remaining ownership interests in
Arch Risk Transfer Services Ltd. ("ART Services"), which provides insurance and
alternative risk transfer services through rent-a-captive and other facilities.
First American Insurance Company, a subsidiary of ART Services, is an admitted
insurer in 49 states with an A.M. Best rating of "A-" (Excellent). During 2001,
approximately 71% of ART Services' written premiums were ceded to third-party
reinsurers. During 2002, we expect that less than half of ART Services' written
premiums will be ceded to third-party reinsurers.

    The results of operations of American Independent and ART Services are
included in our financial statements from the respective dates of acquisition.
Prior to the date of acquisition of ART Services, we accounted for our 27%
initial ownership interest in ART Services under the equity method.

                                       51

    We entered into a definitive agreement on September 24, 2001 to acquire Rock
River Insurance Company, an approved excess and surplus lines insurer in 45
states and the District of Columbia and an admitted insurer in two other states,
for $19.3 million. We consummated this acquisition on February 1, 2002. Under
the terms of the acquisition agreement, the existing policies and other
liabilities of Rock River reinsured or otherwise assumed by the seller, Sentry
Insurance, a mutual company, which has an A.M. Best rating of "A+" (Superior).
At February 1, 2002, Rock River had net assets of approximately $17.0 million.

FORMATION OF BERMUDA-BASED REINSURANCE SUBSIDIARY

    On May 21, 2001, we formed our wholly owned Bermuda-based reinsurance
subsidiary, Arch Re (Bermuda). Under the Insurance Act of 1978, Arch Re
(Bermuda) is registered as a Class 4 and long-term insurer and reinsurer and, in
December 2001, Arch Re (Bermuda) and Arch Re (US), our wholly owned U.S.-based
reinsurance subsidiary, were assigned ratings of "A-" (Excellent) by A.M. Best.

CHANGE OF LEGAL DOMICILE TO BERMUDA

    On November 8, 2000, we completed an internal reorganization that resulted
in our changing our legal domicile to Bermuda. In that transaction, the
shareholders of Arch Capital (US) (formerly Risk Capital Holdings Inc.) became
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.

MAY 2000 SALE OF OUR PRIOR REINSURANCE OPERATIONS

    On May 5, 2000, we sold our prior reinsurance operations to Folksamerica
Reinsurance Company. The Folksamerica transaction was structured as a transfer
and assumption agreement (and not reinsurance), and, accordingly, the loss
reserves (and any related reinsurance recoverables) relating to the transferred
business are not included as assets or liabilities on our balance sheet.
However, in the event that Folksamerica is unable to make payment of claims on
the reinsurance business assumed by it in the May 2000 sale, we would be liable
for such claims. Folksamerica has an A.M. Best rating of "A-" (Excellent). See
Note 3, "Acquisition of Subsidiaries and Disposition of Prior Reinsurance
Operations," of the notes accompanying our financial statements. See "Risk
Factors--Risks Relating to Our Company--We sold our prior reinsurance operations
in May 2000 and may have liability to the purchaser and continuing liability
from those reinsurance operations if the purchaser should fail to make payments
on the reinsurance liabilities it assumed."

    In connection with that sale we placed $20.0 million of the purchase price
in escrow. The agreement required that these funds would be held for a period of
five years to reimburse Folksamerica if certain loss reserves transferred to it
in the asset sale became deficient as measured at the end of such five-year
period or to satisfy certain indemnity claims Folksamerica may have had during
such period. In February 2002, we reached a definitive settlement agreement with
Folksamerica pursuant to which we will satisfy all of our obligations under the
escrow agreement for an amount equal to approximately $17.0 million, plus
accrued interest income of $1.8 million, in cash.

LIQUIDITY AND CAPITAL RESOURCES

    ACGL is a holding company whose assets primarily consist of the shares in
its subsidiaries. Generally, 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, and we may need to utilize

                                       52

funds from such sources in connection with acquisitions. ACGL does not currently
intend to declare any dividends or make any other distributions.

    The ability of our regulated insurance subsidiaries to pay dividends or make
distributions is dependent on their ability to meet applicable regulatory
standards. Prior approval of the Bermuda Supervisor of Insurance is required if
any dividend payments or other distributions of Arch Re (Bermuda) would reduce
its total statutory capital by 15% or more. At December 31, 2001, Arch Re
(Bermuda) had statutory capital of $508 million. As of December 31, 2001 our
U.S. insurance and reinsurance subsidiaries may not pay any significant
dividends or distributions during 2002 without prior regulatory approval. In
addition, the ability of our insurance subsidiaries to pay dividends could be
constrained by our dependence on financial strength ratings from independent
rating agencies. Our ratings from these rating agencies depend to a large extent
on the capitalization levels of our insurance subsidiaries.

    Pursuant to a shareholders agreement that we entered into in connection with
the capital infusion, we have agreed not to declare any dividend or make any
other distribution on our common shares, and not to repurchase any common
shares, until we have repurchased from the Warburg Pincus funds, the Hellman &
Friedman funds and the other holders of our preference shares, pro rata, on the
basis of the amount of each of these shareholders' investment in us at the time
of such repurchase, preference shares having an aggregate value of
$250.0 million, at a per share price acceptable to these shareholders.

    Our new underwriting initiative and related capital infusion are designed to
position us to address current and anticipated future needs for capacity in the
global insurance marketplace. During the fourth quarter of 2001, we expanded our
underwriting activities, initially with a primary focus on reinsurance, and we
intend to continue to expand significantly our insurance and reinsurance
underwriting activities in the future.

    Our aggregate invested assets, including cash and short-term investments,
totaled $1.0 billion at December 31, 2001, compared to $276.1 million at
December 31, 2000. The increase in cash and invested assets from 2000 to 2001
resulted primarily from the receipt of the proceeds from the capital infusion in
November 2001.

    As of December 31, 2001, our readily available cash, short-term investments
and marketable securities, excluding amounts held by our regulated insurance
subsidiaries, totaled $108.5 million. Such amount consisted of $26.4 million of
cash and short-term investments and $82.1 million of fixed maturity investments.
As of that date, investments that are restricted or generally unavailable for
liquidity purposes (other than our ownership interests in our subsidiaries and
the invested assets of our regulated insurance subsidiaries) included
$35.4 million of privately held securities and $22.2 million of fixed maturity
investments held in escrow in connection with the sale of our prior reinsurance
operations to Folksamerica in May 2000. In addition, at December 31, 2001, we
had investment commitments relating to our privately held investment,
Distribution Investors, LLC, of approximately $0.6 million. In connection with
the capital infusion on November 20, 2001, we were released from our obligations
to make any further capital contributions to Trident II, other than with respect
to outstanding capital calls of approximately $6.5 million, which we funded in
November 2001.

    Cash flows are provided by premiums collected, fee income, investment income
(excluding net realized investment gains) and collected reinsurance receivable
balances, offset by reinsurance premiums payable, loss and loss expense payments
and operating costs. Consolidated cash flows provided by (used for) operating
activities for the years ended December 31, 2001, 2000 and 1999 were
approximately ($5.6) million, $2.6 million and $7.5 million, respectively. The
decline in cash flow in 2001 was primarily due to an increase in reinsurance
recoverables at American Independent, and start-up costs related to the new
underwriting initiative.

                                       53

    Our expanded underwriting activities will initially be supported by our
capital, and we expect that our other 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 premiums and investment income and proceeds on the sale
or maturity of our investments.

    We have an effective shelf registration statement with the Securities and
Exchange Commission. It permits us to issue various types of securities,
including unsecured debt securities, preference shares and common shares, from
time to time, up to an aggregate of $500 million.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

    Set forth below, in tabular form, is information as of December 31, 2001 for
the periods indicated below concerning our obligations and commitments to make
future payments under long-term obligations:



                                                              CONTRACTUAL OBLIGATIONS
                                                              -----------------------
                                                        LESS THAN                             MORE THAN
                                              TOTAL      1 YEAR      1-3 YEARS    4-5 YEARS    5 YEARS
                                             --------   ---------   -----------   ---------   ---------
                                                                   (IN THOUSANDS)
                                                                               
Operating Leases...........................   $5,081     $1,213       $2,751       $1,117          --
                                              ======     ======       ======       ======      ======


    We are in the process of putting in place a letter of credit facility for up
to $200 million. We expect that this facility will have a one-year term. The
purpose of this facility is to issue standby letters of credit in favor of
primary insurance or reinsurance counterparties with which we have entered into
reinsurance arrangements. Such letters of credit when issued will be secured by
a first priority, perfected security interest in investment securities. Any
issued letters of credit will expire 364 days from the date of issuance.

    We have agreed to make a non-recourse loan of up to $13.5 million to our
Chairman, which will be used to pay income and self-employment taxes, payable in
April 2002, on restricted shares granted to him on October 23, 2001. See
Note 9, "Commitments," of the notes accompanying our financial statements.

INVESTMENTS

    At December 31, 2001, consolidated cash and invested assets totaled
approximately $1.0 billion, consisting of $486.8 million of cash and short-term
investments, $468.3 million of publicly traded fixed maturity investments,
$22.2 million of short-term investments held in escrow, $41.6 million of
privately held securities and $0.2 million of publicly traded equity securities.

    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
December 31, 2001, our private equity portfolio consisted of eight investments,
with additional investment portfolio commitments in an aggregate amount of
approximately $3.7 million. See Note 4, "Investment Information," of the notes
accompanying our consolidated financial statements.

    At December 31, 2001, almost all of our fixed maturity and short-term
investments were rated investment grade by Moody's or Standard & Poor's and had
an average Standard & Poor's quality rating of "AA-" and an average duration of
approximately 1.9 years.

                                       54

    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. Our investments in
mortgage-backed securities, which amounted to approximately $91.1 million at
December 31, 2001, or 8.9% of cash and invested assets, are classified as
available for sale and are not held for trading purposes.

RESULTS OF OPERATIONS

    Comparisons of our 2001 and 2000 results of operations to each other and to
prior year periods are not relevant due to the changes in our business during
2000 and 2001, including (1) the sale of our prior reinsurance operations in
May 2000, (2) our change of legal domicile and reorganization completed in
November 2000, (3) our recent acquisition activity, (4) our new underwriting
initiative and (5) the capital infusion. In addition, because of these factors,
as well as the other factors noted in "Cautionary Note Regarding Forward-Looking
Statements," our historical financial results do not provide you with a
meaningful measure of our future results. We have attempted to describe certain
of these potential changes below.

    Statement of Financial Accounting Standards No. 131 requires certain
disclosures about operating segments in a manner that is consistent with how
management evaluates the performance of the segment. At December 31, 2001, our
primary operating segment was insurance. In 2002, we expect to operate in two
different business segments, insurance and reinsurance.

    We had consolidated net income (loss) of $22.0 million, ($8.0) million and
($35.6) million for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase in net income is primarily a result of the effects of
the sale of our prior reinsurance operations in May 2000, the realignment of our
investment portfolio in connection with the sale of our prior reinsurance
operations (and the realization of gains thereon in connection therewith), and
the reversal of a portion of the deferred tax valuation allowance, which was
originally established as a result of that sale. Such reversal resulted
primarily from the expected tax effects of the new underwriting initiative at
our U.S.-based underwriting operations.

    Based on all information available to us to date, we believe that our
insurance and reinsurance subsidiaries do not have any material exposures to the
events of September 11, 2001.

UNDERWRITING ACTIVITIES

    For the year ended December 31, 2001, premiums written, losses incurred and
commissions and brokerage resulted primarily from the acquisitions of American
Independent and ART Services. The corresponding amounts for the years ended
December 31, 2000 and December 31, 1999 reflect the results of our prior
reinsurance operations which were sold in May 2000. Approximately 55% of the
2001 net premiums written were attributable to American Independent, and
approximately 40% were attributable to ART Services. The remaining 5% was
attributable to new business written by Arch Re (Bermuda) effective
December 31, 2001. We expect that our new underwriting initiative and improving
market conditions will produce very substantial growth in our direct, assumed
and net premiums written in 2002.

                                       55

    A summary of premiums written is as follows:



                                                               YEAR ENDED DECEMBER 31,
                                                           -------------------------------
                                                             2001       2000        1999
                                                           --------   ---------   --------
                                                                    (IN MILLIONS)
                                                                         
Direct premiums written..................................   $117.4     $   --      $   --
Assumed premiums written.................................      1.8      102.0       386.8
                                                            ------     ------      ------
  Gross premiums written.................................    119.2      102.0       386.8
Ceded premiums written...................................    (83.0)     (19.7)      (80.1)
                                                            ------     ------      ------
  Subtotal...............................................     36.2       82.3       306.7
Unearned premium portfolio transfer and assumption.......       --      (92.9)         --
                                                            ------     ------      ------
  Net premiums written...................................   $ 36.2     $(10.6)     $306.7
                                                            ======     ======      ======


REINSURANCE CEDED

    We follow the customary industry practice of reinsuring a portion of our
exposures, paying to reinsurers and retrocessionaires a part of the premiums
received on the policies we write. We monitor the financial condition of our
reinsurers and retrocessionaires and attempt to place coverages only with
substantial, financially sound carriers. During 2001, we ceded approximately
two-thirds of our business written on a proportional basis in accordance with
our then current business plan. Comparisons of premiums written between 2001 and
2000 are not meaningful because of the changes in our business discussed above.
At December 31, 2001, substantially all of our reinsurance recoverables were due
from carriers which had an A.M. Best rating of "A-" or better and we had no
amounts recoverable from a single entity or group of entities that exceeded 5%
of shareholders' equity. As a result of the new underwriting initiative and our
enhanced financial position, we expect to retain a significant amount of
business written by American Independent and ART Services as well as premiums
written by Arch Re (Bermuda) and Arch Re (US). In 2002, reinsurance may be
purchased on both a facultative and treaty basis primarily to reduce net
liability on individual risks and, if deemed necessary, to reduce our exposure
to catastrophic losses.

NET INVESTMENT INCOME

    At December 31, 2001, approximately 94% of our invested assets consisted of
fixed maturity and short-term investments, exclusive of securities held in
escrow, compared to 53% at December 31, 2000. Net investment income was
approximately $12.1 million in 2001, compared to $15.9 million in 2000 and
$20.2 million in 1999. Such amounts for 2001, 2000 and 1999 are net of
investment expenses of $0.1 million, $0.9 million and $5.5 million,
respectively. The investment expense amounts include investment advisory fees of
$0.7 million, $0.8 million and $2.0 million, respectively. The 2001 and 2000 net
investment expenses are offset by advisory fee income that we received from MMC
Capital, Inc. in the amount of $1.25 million.

    The decrease in net investment income in 2001 compared with 2000 reflected
primarily the decline in our average invested asset base resulting from the sale
of our prior reinsurance operations. The impact was partially offset by
investment income earned on the proceeds received from the capital infusion in
November 2001 as well as the inclusion of the results of American Independent
and ART Services. The decrease in net investment income in 2000 compared with
1999 primarily reflected the decline in our average invested asset base
resulting from the sale of our prior reinsurance operations, partially offset by
the decrease in investment expenses described above and a higher interest rate
environment.

                                       56

    Our investment yields at amortized cost were as follows for the periods set
forth below:



                                                       YEAR ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2001       2000       1999
                                                    --------   --------   --------
                                                                 
Investment yields:
  Pre-tax.........................................    5.2%       4.3%       3.6%
  Net of tax......................................    4.6%       3.1%       2.7%


    Proceeds from the capital infusion were initially invested in short
duration, high quality fixed maturities and short-term investments. Yields on
future investment income may vary based on investment allocation decisions,
economic conditions and other factors. Investment yields in 2000 and 1999
reflect a significant allocation of the total investment portfolio in equity
securities, which yield less current income than fixed maturity investments. At
December 31, 2000 and 1999, public and private equity securities approximated
40% and 41%, respectively, of total cash and invested assets. Additionally such
investment yields exclude the equity in net income or loss of private equity
investments accounted for under the equity method of accounting.

RESERVE FOR LOSS OF ESCROWED ASSETS

    In connection with the definitive settlement agreement reached with
Folksamerica in February 2002 (as described above under "--General--May 2000
Sale of Our Prior Reinsurance Operations"), for 2001, we recorded an after-tax
benefit of $0.4 million to reflect the net effects of this agreement. During
2000, our net loss included an after-tax charge of $9.8 million related to the
escrowed assets. See Note 3, "Acquisition of Subsidiaries and Disposition of
Prior Reinsurance Operations," of the notes accompanying our consolidated
financial statements.

OTHER OPERATING EXPENSES

    Other operating expenses were $27.7 million in 2001, compared to
$6.9 million and $14.2 million for the years ended December 31, 2000 and 1999,
respectively. The increase in operating expenses is primarily due to the 2001
acquisitions. In addition, during the fourth quarter of 2001, we incurred
approximately $4.0 million of costs from the formation of our new reinsurance
operations. We expect that we will incur a significant amount of additional
costs in 2002 in connection with the expected increase in our insurance and
reinsurance operations.

PROVISION FOR NON-CASH COMPENSATION

    During 2001, we made certain grants to new and existing employees under our
stock incentive plans and other arrangements, resulting in pre-tax charges of
$2.8 million. These grants were made primarily in connection with our new
underwriting initiative, which resulted in the increase in non-cash compensation
in 2001. As a result of the new initiative, we expect to reflect a significant
increase in non-cash compensation in 2002. In 2000 and 1999, we made grants
under our stock incentive plans and other arrangements that resulted in pre-tax
charges of $1.1 million and $0.6 million, respectively.

                                       57

NET REALIZED GAINS (LOSSES) ON INVESTMENTS

    Our sources of net realized investment gains (losses) were as follows:



                                                              YEARS ENDED DECEMBER 31,
                                                           ------------------------------
                                                             2001       2000       1999
                                                           --------   --------   --------
                                                                   (IN THOUSANDS)
                                                                        
Fixed maturities.........................................  $(2,116)   $(15,550)  $(1,776)
Publicly traded equity securities........................   22,896      30,088    16,798
Privately held securities................................   (2,398)        177     2,205
                                                           -------    --------   -------
  Subtotal...............................................   18,382      14,715    17,227
Loss on fixed maturities included in gain on sale of
  prior reinsurance operations...........................       --       5,330        --
                                                           -------    --------   -------
    Net realized investment gains........................   18,382      20,045    17,227
Income tax expense.......................................    7,242       7,408     6,029
                                                           -------    --------   -------
    Net realized investment gains, net of tax............  $11,140    $ 12,637   $11,198
                                                           =======    ========   =======


INCOME TAXES

    Under current Bermuda law, we are 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 and our Bermuda and other non-U.S. subsidiaries will be subject to U.S.
federal income tax to the extent that they derive 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. They will
be subject to a withholding tax on dividends from U.S. investments and interest
from certain U.S. payors. In addition, Arch Re (Bermuda) will be subject to
excise taxes on United States insurance and reinsurance premiums received by it.

    We do not consider ACGL or our Bermuda or other non-U.S. subsidiaries to be
engaged in a trade or business within the United States and, consequently, do
not expect them to be subject to direct U.S. income taxation. See "Risk
Factors--Risks Relating to Taxation" and "Business--Tax Matters." Our U.S.
subsidiaries will continue to be subject to U.S. income taxes on their worldwide
income.

    Our 2001 income tax expense was $2.1 million, resulting in an effective tax
rate of 9%. The effective tax rate was lower than the U.S. federal income tax
rate of 35% primarily as a result of a reduction in the valuation allowance on
certain deferred tax assets, which was slightly offset by foreign losses not
subject to U.S. tax. This reduction resulted primarily from the expected tax
effects of the new underwriting initiative at our U.S.-based underwriting
operations, which included an increase in our on-shore investment portfolio.

    Our 2000 income tax expense was $8.5 million, compared with an income tax
benefit of $20.9 million in 1999. In 2000, income tax expense on our pre-tax net
loss included a charge to establish a valuation allowance of $5.7 million that
adjusted our deferred income tax asset to its estimated realizable value. Income
tax expense for 2000 also included the write-off of certain deferred tax assets
in the amount of $3.0 million in connection with our change of legal domicile to
Bermuda. In

                                       58

1999, Arch Re (US)'s underwriting results had significantly deteriorated,
resulting in a pre-tax net loss that generated an income tax benefit for the
year.

    At December 31, 2001, the net deferred income tax asset was $13.7 million
after reflecting a valuation allowance of $9.6 million recorded to reduce the
net deferred income tax asset to the amount that management expects to more
likely than not be realized. This valuation allowance primarily relates to
certain deferred income tax assets of ART Services, which was acquired during
2001, and also reflects the reduction in the valuation allowance recorded at
December 31, 2000 due to the expected tax effects of the new underwriting
initiative, as discussed above. At December 31, 2000, we had a valuation
allowance of $5.7 million that adjusted the net deferred income tax asset to its
estimated realizable value of $8.2 million. At December 31, 1999, we did not
have a valuation allowance because we believed at that time the entire deferred
tax asset was realizable due to our ability to generate future taxable income.
See "--Critical Accounting Policies, Estimates and Recent Accounting
Pronouncements--Valuation Allowance."

    We have net operating loss carryforwards totaling $43.3 million at
December 31, 2001. Such net operating losses are currently available to offset
our future taxable income and expire between 2011 and 2021. We also have an
alternative minimum tax credit carryforward in the amount of $1.0 million which
can be carried forward without expiration.

    On November 20, 2001, we underwent an ownership change for U.S. federal
income tax purposes as a result of the capital infusion. As a result of this
ownership change, limitations are imposed upon the utilization of our existing
net operating losses.

    Upon our change of legal domicile to Bermuda in November 2000, Arch Capital
(US) distributed substantially all of its public equity portfolio to its Bermuda
parent, ACGL, at the then current market values and realized gains for tax
purposes of $21.0 million. The associated U.S. federal income tax expense of
$7.4 million reduced our net operating loss carryforwards by a corresponding
amount. However, for financial reporting purposes, since the securities had not
been sold to an unrelated third party, the realized gain had been deferred and
was reported as unrealized appreciation in our consolidated financial
statements. Accordingly, the income tax expense was also deferred and reduced
unrealized appreciation in the consolidated financial statements. In 2001, we
divested of this public equity portfolio in its entirety and, accordingly, have
recognized the U.S. federal income tax expense of $7.4 million in our
consolidated financial statements for the year ended December 31, 2001. See
Note 7, "Income Taxes," of the notes accompanying our consolidated financial
statements.

MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

    The following analysis presents hypothetical losses in cash flows, earnings
and fair values of market sensitive instruments which are held by us as of
December 31, 2001 and are sensitive to changes in interest rates and equity
security prices. This risk management discussion and the estimated amounts
generated from the following sensitivity analysis represent forward-looking
statements of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from these projected results
due to actual developments in the global financial markets. The methods used by
us to assess and mitigate risk should not be considered projections of future
events or losses.

    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. The focus of the SEC's market risk rules is on price risk. For
purposes of specific risk analysis, we employ 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.

    The financial instruments included in the following sensitivity analysis
consist of all of our cash and invested assets, excluding investments carried
under the equity method of accounting.

                                       59

EQUITY PRICE RISK

    We are exposed to equity price risks on the private equity securities
included in our investment portfolio. All of our privately held securities were
issued by insurance and reinsurance companies or companies providing services to
the insurance and reinsurance industry. We typically do not attempt to reduce or
eliminate our market exposure on these securities. 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. Investments in privately held securities
issued by privately held companies may include both equity securities and
securities convertible into, or exercisable for, equity securities (some of
which may have fixed maturities).

    Our privately held equity securities, which at December 31, 2001 were
carried at a fair value of $41.6 million, have exposure to price risk. The
estimated potential losses in fair value for our privately held equity
portfolios resulting from a hypothetical 10% decrease in quoted market prices,
dealer quotes or fair value is $4.2 million.

INTEREST RATE RISK

    The aggregate hypothetical loss generated from an immediate adverse shift in
the treasury yield curve of 100 basis points would result in a decrease in total
return of 1.9%, which would produce a decrease in market value of $8.6 million
on our fixed maturity investment portfolio, valued at $468.3 million at
December 31, 2001. There would be no material impact on our short-term
investments.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

    The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
(including reserves), revenues and expenses, and related disclosures of
contingent liabilities. On an ongoing basis, we evaluate our estimates,
including those related to insurance and other reserves, intangible assets, bad
debts, income taxes, pensions, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe that the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

PREMIUM REVENUES AND RELATED EXPENSES

    Insurance premiums written are recorded in accordance with the terms of the
underlying policies. Reinsurance premiums assumed are recognized as income on a
straight line basis over the terms of the related reinsurance contracts. These
amounts are based on reports received from ceding companies, supplemented by our
own estimates of premiums for which ceding company reports have not been
received. Subsequent differences arising on such estimates are recorded in the
period they are determined. Unearned premium reserves represent the portion of
premiums written that relates to the unexpired terms of contracts in force.
Certain of our contracts included provisions that adjusted premiums or
acquisition costs based upon the experience under the contracts. Premiums
written and earned as well as related acquisition expenses under those contracts
are recorded based upon the expected ultimate experience under these contracts.

                                       60

    Acquisition costs, which vary with and are primarily related to the
acquisition of policies, consisting principally of commissions and brokerage
expenses incurred at the time a contract is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred acquisition
costs are carried at their estimated realizable value based on the related
unearned premiums and take into account anticipated losses and loss adjustment
expenses, based on historical and current experience and anticipated investment
income.

LOSSES AND LOSS ADJUSTMENT EXPENSES

    Insurance reserves are inherently subject to uncertainty. Loss and loss
adjustment expense reserves represent estimates involving actuarial and
statistical projections at a given point in time of our expectations of the
ultimate settlement and administration costs of claims incurred. We utilize
actuarial models as well as historical insurance and reinsurance industry loss
development patterns to assist in the establishment of appropriate claim
reserves. In contrast to casualty claims, which frequently can be determined
only through lengthy and unpredictable litigation, non-casualty property claims
tend to be reported promptly and usually are settled within a shorter period of
time. Nevertheless, for both casualty and property claims, actual losses and
loss adjustment expenses paid may deviate, perhaps substantially, from the
reserve estimates reflected in our financial statements. For reinsurance
assumed, such reserves are based on reports received from ceding companies,
supplemented by our estimates of reserves for which ceding company reports have
not been received, and our own historical experience.

    If our loss and loss adjustment expense reserves are determined to be
inadequate, we will be required to increase the reserves with a corresponding
reduction in net income in the period in which the deficiency is determined. It
is possible that claims in respect of events that have occurred could exceed our
reserves and have a material adverse effect on our results of operations in a
particular period or our financial condition in general.

    Even though most insurance contracts have policy limits, the nature of
property and casualty insurance and reinsurance is that losses can exceed policy
limits for a variety of reasons and could very significantly exceed the premiums
received on the underlying policies.

    We will attempt to limit our risk of loss through reinsurance and
retrocessional arrangements. The availability and cost of reinsurance and
retrocessional protection is subject to market conditions, which are beyond our
control.

COLLECTION OF INSURANCE BALANCES

    We maintain allowances for doubtful accounts for probable losses resulting
from our inability to collect premiums. In addition, we are subject to credit
risk with respect to our reinsurance and retrocessions because the ceding of
risk to reinsurers and retrocessionaires does not relieve us of our liability to
the companies we reinsure. If the financial condition of our reinsurers or
retrocessionaires were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

VALUATION ALLOWANCE

    We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and feasible tax planning strategies in assessing the need
for a valuation allowance, in the event we were to determine that we would not
be able to realize all or part of our deferred tax assets in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made. In addition, if we subsequently assessed that the
valuation allowance was no longer needed, then a benefit would be recorded to
income in the period such determination was made.

                                       61

INVESTMENTS

    We currently classify all of our publicly traded fixed maturity, short-term
investments and equity securities as "available for sale" and, accordingly, they
are carried at estimated fair value. The fair value of publicly traded fixed
maturity securities and publicly traded equity securities is estimated using
quoted market prices or dealer quotes.

STOCK ISSUED TO EMPLOYEES

    We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and related interpretations in accounting
for our employee stock options because the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Accordingly, under APB No. 25, compensation
expense for stock option grants is recognized by us to the extent that the fair
value of the underlying stock exceeds the exercise price of the option at the
measurement date. In addition, under APB No. 25, we do not recognize
compensation expense for stock issued to employees under our stock purchase
plan. See Note 10, "Stock and Stock Option Plans," of the notes accompanying our
financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

    In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires, among other things, the
purchase method of accounting to be applied for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. We do not
expect the application of SFAS No. 141 to have a material impact on our
financial position or results of operations.

    In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which became effective for us on January 1, 2002. SFAS No. 142
requires, among other things, the discontinuance of the amortization of goodwill
and the introduction of impairment testing in its place. In addition, SFAS
No. 142 includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. At December 31,
2001, we had goodwill of approximately $26.3 million. Pursuant to SFAS No. 142,
we will test our goodwill for impairment upon adoption and, if impairment is
indicated, record such impairment as a cumulative effect of an accounting
change. We have not yet developed an estimate of the impact of the adoption of
SFAS No. 142 on our consolidated results of operations. We believe that the
adoption of SFAS No. 142 will not have a material impact on our consolidated
financial condition.

    In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends portions of Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and we adopted it on January 1, 2002. We do not expect the application of SFAS
No. 144 to have a material impact on our financial position or results of
operations.

INFLATION

    Inflation may have an effect on us because inflationary factors can increase
damage awards and potentially result in larger claims. Our underwriting
philosophy is to adjust premiums in response to

                                       62

inflation, although this may not always be possible due to competitive pressure.
Inflationary factors will be considered in determining the premium level on any
multi-year policies at the time contracts are written.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Please refer to the information appearing above under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Market
Sensitive Instruments and Risk Management."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See our consolidated financial statements and notes thereto and required
financial statement schedules on pages F-1 through F-44 and S-1 through S-7.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    None.

                                       63

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The following individuals are our directors and executive officers and other
members of senior management:



NAME                                          AGE                       POSITION
----                                        --------   ------------------------------------------
                                                 
Robert Clements...........................     69      Chairman and Director of ACGL

Peter A. Appel............................     40      President, Chief Executive Officer and
                                                       Director of ACGL

Paul B. Ingrey............................     62      Chief Executive Officer of Arch Re
                                                       (Bermuda) and Director of ACGL

Constantine Iordanou......................     52      Chief Executive Officer of Arch Capital
                                                       (US) and Director of ACGL

John D. Vollaro...........................     57      Executive Vice President and Chief
                                                       Financial Officer of ACGL

John L. Bunce, Jr.........................     43      Director of ACGL

Kewsong Lee...............................     36      Director of ACGL

James J. Meenaghan........................     63      Director of ACGL

John M. Pasquesi..........................     42      Executive Vice Chairman and Director of
                                                       ACGL

Robert F. Works...........................     54      Director of ACGL

Dwight R. Evans...........................     49      President of Arch Re (Bermuda)

Debra M. O'Connor.........................     42      Senior Vice President, Controller and
                                                       Treasurer

Louis T. Petrillo.........................     36      Senior Vice President, General Counsel and
                                                       Secretary


    ROBERT CLEMENTS was elected chairman and director of ACGL at the time of our
formation in March 1995. From March 1996 to February 2001, he was an advisor to
MMC Capital, with whom he served as chairman and chief executive officer from
January 1994 to March 1996. Prior thereto, he served as president of Marsh &
McLennan Companies, Inc. since 1992, having been vice chairman during 1991. He
was chairman of J&H Marsh & McLennan, Incorporated (formerly Marsh & McLennan,
Incorporated), a subsidiary of Marsh & McLennan Companies, Inc., from 1988 until
March 1992. He joined Marsh & McLennan, Ltd., a Canadian subsidiary of Marsh &
McLennan Companies, Inc., in 1959. Mr. Clements was a director of XL Capital
from 1986 to 2002 and was formerly a director of Annuity and Life Re
(Holdings), Ltd. and Stockton Reinsurance Limited and ACE Ltd. He is chairman
emeritus of the board of overseers of the School of Risk Management, Insurance
and Actuarial Science of St. John's University and a member of Rand Corp.
President's Council.

    PETER A. APPEL has been president and chief executive officer of ACGL since
May 5, 2000 and a director of ACGL since November 1999. He was executive vice
president and chief operating officer of ACGL from November 1999 to May 5, 2000,
and general counsel and secretary of ACGL from November 1995 to May 5, 2000.
Mr. Appel previously served as a managing director of ACGL from November 1995 to
November 1999. From September 1987 to November 1995, Mr. Appel practiced law
with the New York firm of Willkie Farr & Gallagher, where he was a partner from
January 1995. Mr. Appel is currently a member of the board of overseers and a
member of the executive committee of the School of Risk Management, Insurance
and Actuarial Science of St. John's University.

                                       64

    PAUL B. INGREY has served as a director of ACGL and as chief executive
officer of Arch Re (Bermuda) since October 2001. He was the founder of F&G
Re Inc., a reinsurance subsidiary of USF&G Corporation, and served as its
chairman and chief executive officer from 1983 to 1996. Prior to that, he was
senior vice president of Prudential Reinsurance, an underwriter of property and
casualty reinsurance. He has also served as a director of USF&G Corporation
(until its sale to The St. Paul Companies, Inc. in 1978) and E.W. Blanch
Holdings, Inc., the holding company for E.W. Blanch Co., which provides risk
management and distribution services through several subsidiaries (until its
sale to Benfield Greig, the London-based international reinsurance broker, in
April 2001) and is currently on the board of Fairfax Financial Holdings Limited,
an insurance and reinsurance company with a focus on property and casualty
insurance.

    CONSTANTINE IORDANOU has served as a director of ACGL and as chief executive
officer of Arch Capital (U.S.) Inc. since January 1, 2002. From March 1992
through December 2001, Mr. Iordanou served in various capacities for Zurich
Financial Services and its affiliates, including as senior executive vice
president of group operations and business development of Zurich Financial
Services, president of Zurich-American Specialties Division, chief operating
officer and chief executive officer of Zurich-American and chief executive
officer of Zurich North America. Prior to joining Zurich, he served as president
of the commercial casualty division of the Berkshire Hathaway Group and served
as senior vice president with the American Home Insurance Company, a member of
the American International Group.

    JOHN D. VOLLARO has been executive vice president and chief financial
officer since January 2002. Prior to joining us, Mr. Vollaro acted as an
independent consultant in the insurance industry since March 2000. Prior to
March 2000, Mr. Vollaro was president and chief operating officer of W.R.
Berkley Corporation from January 1996 and a director from September 1995 until
March 2000. Mr. Vollaro was chief executive officer of Signet Star
Holdings, Inc., a joint venture between W.R. Berkley Corporation and General Re
Corporation, from July 1993 to December 1995. Mr. Vollaro served as executive
vice president of W.R. Berkley Corporation from 1991 until 1993, chief financial
officer and treasurer of W.R. Berkley Corporation from 1983 to 1993 and senior
vice president of W.R. Berkley Corporation from 1983 to 1991.

    JOHN L. (JACK) BUNCE, JR.  has served as director of ACGL since
November 2001. Mr. Bunce has served as a managing director at Hellman & Friedman
since 1988. Before joining Hellman & Friedman, Mr. Bunce was vice president of
TA Associates. Previously, he was employed in the Mergers & Acquisitions and
Corporate Finance Departments of Lehman Brothers Kuhn Loeb. He is currently also
a director of Digitas, Inc., National Information Consortium, Inc., and Western
Wireless Corporation. He has also served as a director of Duhamel Falcon Cable
Mexico, Eller Media Company, Falcon Cable TV, National Radio Partners,
VoiceStream Wireless Corporation, and Young & Rubicam, Inc. Mr. Bunce also was
an advisor to American Capital Corporation and Post Oak Bank.

    KEWSONG LEE has served as a director of ACGL since October 2001. Mr. Lee has
served as a member and managing director of Warburg Pincus LLC and a general
partner of Warburg Pincus & Co. since January 1, 1997. He has been employed at
Warburg Pincus since 1992. Prior to joining Warburg Pincus LLC, Mr. Lee was a
consultant at McKinsey & Company, Inc., a management consulting company, from
1990 to 1992. His present service as a director includes membership on the
boards of Knoll, Inc., Eagle Family Foods, Inc. and several privately held
companies.

    JAMES J. MEENAGHAN has been a director of the Company since October 2001.
From October 1986 to 1993, Mr. Meenaghan was chairman, president and chief
executive officer of Home Insurance Companies. He also served as President and
Chief Executive Officer of John F. Sullivan Co. from 1983 to 1986. Prior
thereto, Mr. Meenaghan held various positions over 20 years with the Fireman's
Fund Insurance Company, including President and Chief Operating Officer and Vice
Chairman of its parent company, American Express Insurance Services Inc.

    JOHN M. PASQUESI has been our vice chairman and a director since
November 2001. Mr. Pasquesi has been the managing member of Otter Capital LLC, a
private equity investment firm founded by him in January 2001. Prior to
January 2001, Mr. Pasquesi was a managing director of Hellman & Friedman LLC
since 1988.

                                       65

    ROBERT F. WORKS has been a Director of the Company since June 1999.
Mr. Works was a Managing Director of Jones Lang LaSalle (previously LaSalle
Partners) until he retired on December 31, 2001. He joined Jones Lang LaSalle in
1981, where he has served in various capacities, including manager of both the
Property Management and Investment Management teams of the Eastern Region of the
United States. Mr. Works was also manager for the Times Square Development
Advisory and Chelsea Piers Lease Advisory on behalf of New York State and the
President of GCT Ventures and the Revitalization of Grand Central Terminal for
the Metropolitan Transportation Authority until he retired on December 31, 2001.

    DWIGHT R. EVANS has served as president of Arch Re (Bermuda) since
October 2001. From 1998 until October 2001, Mr. Evans was executive vice
president of St. Paul Re. From 1983 until 1998, Mr. Evans was employed as
executive vice president for F&G Re Inc. Prior to that, Mr. Evans served as
assistant vice president at Skandia Reinsurance Company and as a reinsurance
underwriter at Prudential Reinsurance Company (now Everest Re Company).

    DEBRA M. O'CONNOR has been senior vice president, controller and treasurer
of ACGL since June 9, 2000. From 1995 to June 9, 2000, Ms. O'Connor was senior
vice president and controller of Arch Re (US). From 1986 until 1995,
Ms. O'Connor served at NAC Re Corp. in various capacities, including vice
president and controller. Prior to that, Ms. O'Connor was employed by General Re
Corp. and the accounting firm of Coopers & Lybrand. Ms. O'Connor is a certified
public accountant.

    LOUIS T. PETRILLO has been senior vice president, general counsel and
secretary of ACGL since May 5, 2000. From 1996 until May 5, 2000, Mr. Petrillo
was vice president and associate general counsel of ACGL's reinsurance
subsidiary. Prior to that time, Mr. Petrillo practiced law at the New York firm
of Willkie Farr & Gallagher.

BOARD OF DIRECTORS COMPOSITION

    Pursuant to our shareholders agreement, we have agreed to restrictions on
the composition of our board of directors. Pursuant to this agreement, the
Warburg Pincus funds and the Hellman & Friedman funds are entitled to nominate a
prescribed number of directors based on the respective retained percentages of
their preference shares purchased in November 2001. Currently, our board
consists of nine members, including one director nominated by the Warburg Pincus
funds and one director nominated by the Hellman & Friedman funds. Once we have
received the remaining regulatory approvals required in connection with the
capital infusion, the size of our board may be increased to up to 17 members. As
long as the Warburg Pincus funds retain at least 75% of their original
investment and Hellman & Friedman funds retain at least 60% of their original
investment, these shareholders together will be entitled to nominate a majority
of directors to our board.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers, and persons who own more than 10% of our common shares,
to file with the SEC initial reports of beneficial ownership and reports of
changes in beneficial ownership of our common shares. Such persons are also
required by SEC regulation to furnish us with copies of all Section 16(a)
reports they file. To our knowledge, based solely on a review of the copies of
such reports furnished to us and representations that no other reports were
required, we believe that all persons subject to the reporting requirements of
Section 16(a) filed the required reports on a timely basis during the year ended
December 31, 2001.

ITEM 11. EXECUTIVE COMPENSATION

    The following table sets forth information regarding compensation paid to
our executive officers for services rendered during fiscal years 2001, 2000 and
1999.

                                       66

SUMMARY COMPENSATION TABLE



                                                                                      LONG TERM COMPENSATION
                                                                                ----------------------------------
                                                                                                            PAY-
                                                                                       AWARD(S)             OUTS
                                                  ANNUAL COMPENSATION           -----------------------   --------
                                          -----------------------------------   RESTRICTED
                                                                 OTHER ANNUAL     SHARE      SECURITIES     LTIP      ALL OTHER
NAME AND PRINCIPAL                                               COMPENSATION     AWARDS     UNDERLYING   PAYOUTS    COMPENSATION
POSITION                         YEAR     SALARY($)   BONUS($)       ($)          ($)(1)     OPTIONS(#)     ($)         ($)(2)
------------------             --------   ---------   --------   ------------   ----------   ----------   --------   ------------
                                                                                             
Peter A. Appel...............    2001      375,000         --            --       750,000      422,407                  50,841
  President, Chief Executive     2000      375,000    500,000            --       756,250      100,000         --       49,711(5)
  Officer and a Director of      1999      375,000    250,000            --            --           --         --       51,339
  ACGL

Paul B. Ingrey...............    2001      143,200         --            --     7,366,778      422,407         --           --
  Chairman and Chief
  Executive Officer of Arch
  Reinsurance Ltd. and a
  Director of ACGL(3)

Dwight R. Evans..............    2001       95,500         --            --       872,000      100,000         --           --
  President of Arch
  Reinsurance Ltd.(3)

Debra M. O'Connor............    2001      188,300    175,000            --            --       20,000         --       21,170
  Senior Vice President,         2000      170,000    118,000            --            --       10,000         --       19,800(5)
  Controller and Treasurer(4)

Louis T. Petrillo............    2001      206,200    400,000            --        75,000       50,000         --       21,116
  Senior Vice President,         2000      174,000    120,000            --            --       10,000         --       19,932(5)
  General Counsel and
  Secretary(4)


--------------------------

(1) The value of each restricted share award is based upon the closing price of
    the common shares as reported on the Nasdaq National Market as of the grant
    date of such award. As of December 31, 2001, 422,407 unvested restricted
    shares, with a value of $10,876,980, were held by Mr. Ingrey. Subject to the
    applicable award agreement, such restricted shares will vest on October 23,
    2004. An aggregate of 145,000 restricted shares vested to the named
    executive officers from 1996 through 2001. During the vesting period, cash
    dividends (if any) would be paid on outstanding shares of restricted stock.
    Stock dividends issued with respect to such shares (if any) would be subject
    to the same restrictions and other terms and conditions that apply to
    restricted shares with respect to which such dividends are issued.

(2) Includes: (1) matching contributions under an employee 401(k) plan in the
    amounts of (A) $7,650, $6,310 and $7,200 to Mr. Appel for 2001, 2000 and
    1999, respectively; (B) $7,650 and $6,070 to Ms. O'Connor for 2001 and 2000,
    respectively; and (C) $7,650 and $6,310 to Mr. Petrillo for 2001 and 2000,
    respectively; (2) pension contributions under a money purchase pension plan
    in the amounts of (A) $12,980, $13,190 and $12,370 to Mr. Appel for 2001,
    2000 and 1999, respectively; and (B) $12,980 and $13,190 to each of
    Ms. O'Connor and Mr. Petrillo, respectively, for 2001 and 2000;
    (3) contributions to Mr. Appel under an executive supplemental non-qualified
    savings and retirement plan in the amounts $29,725, $29,725 and $31,175 for
    2001, 2000 and 1999, respectively; and (4) term life insurance premiums in
    the amounts of (A) $486, $486 and $594 to Mr. Appel for 2001, 2000 and 1999,
    respectively; (B) $540 to Ms. O'Connor for 2001 and 2000; and (C) $486 and
    $432 to Mr. Petrillo for 2001 and 2000, respectively.

(3) Mr. Evans was appointed president of Arch Re (Bermuda), and Mr. Ingrey was
    appointed to the board of directors of AGCL and as chief executive officer
    of Arch Re (Bermuda) on October 23, 2001. See "--Employment Arrangements"
    for a description of their respective employment arrangements.

(4) On June 9, 2000, Ms. O'Connor, formerly senior vice president and controller
    of the company's reinsurance subsidiary, became our senior vice president,
    controller and treasurer. On May 5, 2000, Mr. Petrillo, formerly vice
    president and associate general counsel of the company's reinsurance
    subsidiary, became our senior vice president, general counsel and secretary.

(5) See "--Change in Control Arrangements" for a description of certain payments
    made upon the closing of the sale of our prior reinsurance operations on May
    2000.

    The following table provides information regarding grants of stock options
made during fiscal year 2001 to each of the named executive officers.

                                       67

                       OPTION GRANTS IN LAST FISCAL YEAR



                                                INDIVIDUAL GRANTS
                                     ---------------------------------------
                                     NUMBER OF     % OF TOTAL                               POTENTIAL REALIZABLE VALUE AT
                                     SECURITIES     OPTIONS                                    ASSUMED ANNUAL RATES OF
                                     UNDERLYING    GRANTED TO                                STOCK PRICE APPRECIATION FOR
                                      OPTIONS     EMPLOYEES IN   EXERCISE OR                        OPTION TERM(3)
                                      GRANTED        FISCAL      BASE PRICE    EXPIRATION   ------------------------------
NAME                                   (#)(1)       YEAR(2)        ($/SH)         DATE           5%              10%
----                                 ----------   ------------   -----------   ----------   -------------   --------------
                                                                                          
Peter A. Appel.....................   422,407         22.1%        $20.00       10/23/11     $5,312,990      $13,464,159
Paul B. Ingrey.....................   422,407         22.1%         20.00       10/23/11      5,312,990       13,464,159
Dwight R. Evans....................   100,000          5.2%         20.00       10/23/11      1,257,789        3,187,485
Debra M. O'Connor..................    10,000          0.5%      20.00 15.00    10/23/11        125,779          318,748
                                       10,000          0.5%                     01/30/11         82,699          203,692
Louis T. Petrillo..................    40,000          2.1%         20.00       10/23/11        503,116        1,274,994
                                       10,000          0.5%         15.00       01/30/11         82,699          203,692


------------------------

(1) The terms for the options, including vesting schedules, are described below
    under the caption "Incentive Compensation for Management and Directors."

(2) Pursuant to applicable SEC rules, percentages listed are based on options to
    purchase a total of 1,915,690 common shares granted to employees during
    fiscal year 2001.

(3) Potential realizable value is calculated based on an assumption that the
    fair market value of our common shares appreciates at the annual rates shown
    (5% and 10%), compounded annually, from the date of grant until the end of
    the option term. The 5% and 10% assumed rates are mandated by the SEC for
    purposes of calculating realizable value and do not represent our estimates
    or projections of future share prices.

    The following table provides information regarding the number and value of
options held by each of our named executive officers as of December 31, 2001. No
options were exercised by any executive officer during 2001.

AGGREGATED 2001 FISCAL YEAR-END OPTION VALUES



                                                     NUMBER OF SECURITIES
                                                    UNDERLYING UNEXERCISED      VALUE OF UNEXERCISED IN-THE-
                                                          OPTIONS AT                  MONEY OPTIONS AT
                                                       DECEMBER 31, 2001            DECEMBER 31, 2001(1)
                                                  ---------------------------   -----------------------------
NAME                                              EXERCISABLE   UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
----                                              -----------   -------------   -------------   -------------
                                                                                    
Peter A. Appel..................................    315,800        372,407       $2,103,556      $2,141,340

Paul B. Ingrey..................................    140,802        281,605          809,613       1,619,229

Dwight R. Evans.................................     33,333         66,667          191,665         383,335

Debra M. O'Connor...............................     57,332          6,668          354,203          38,341

Louis T. Petrillo...............................     61,126         26,674          396,170         153,376


------------------------

(1) For purposes of the above table, options are "in-the-money" if the market
    price of the common shares on December 31, 2001 (I.E., $25.75) exceeded the
    exercise price of such options. The value of such options is calculated by
    determining the difference between the aggregate market price of the common
    shares subject to the options on December 31, 2001 and the aggregate
    exercise price of such options.

EMPLOYMENT ARRANGEMENTS

    In connection with the capital infusion, Arch Re (Bermuda) appointed a new
management team, consisting of Paul B. Ingrey and Dwight R. Evans. In addition,
we appointed John M. Pasquesi as our executive vice chairman. We also appointed
Constantine Iordanou as chief executive officer of Arch Capital

                                       68

Group (U.S.) Inc. We further appointed John D. Vollaro as our executive vice
president and chief financial officer. Set forth below is a summary of the
material terms of the employment, restricted share and option agreements with
each of Messrs. Ingrey, Evans, Pasquesi, Iordanou and Vollaro. You should read
these summaries in conjunction with our new 2001 Long-Term Incentive Plan for
New Employees (the "Incentive Plan") and the employment, restricted share and
option agreements, which are filed as exhibits hereto and incorporated herein by
reference.

PAUL B. INGREY AND DWIGHT R. EVANS

    Mr. Ingrey has been appointed to our board of directors and as chief
executive officer of Arch Re (Bermuda). His employment agreement provides for an
annual base salary of $750,000.

    Mr. Evans has been appointed president of Arch Re (Bermuda). His employment
agreement provides for an annual base salary of $500,000.

    The annual base salary is subject to review annually for increase at the
discretion of the board. The target rate for the annual cash bonus is 100% of
the annual base salary. Messrs. Ingrey and Evans are eligible to receive annual
cash bonuses and stock-based awards at the discretion of our board and to
participate in our employee benefit programs. The initial term of each
employment agreement ends on October 23, 2004, but we or the executive may
terminate his employment at any time. The agreement will be automatically
extended for additional one-year periods, unless we or the executive gives
notice at least 60 days prior to the expiration of the original term or any
extended term. The agreement provides that if the employment of Mr. Ingrey or
Mr. Evans is terminated without cause or for good reason before October 23,
2004, he will be entitled to receive an amount equal to his annual base salary.

    Each of Messrs. Ingrey and Evans agreed that, during the employment period
and for the period of two years after termination of employment, he will not
compete with the businesses of the company or any of its subsidiaries as such
businesses exist or are in process or being planned as of the date of
termination. The noncompetition period will be one year following termination if
we terminate his employment without cause, he terminates for good reason or he
gives notice of his intent not to extend his employment term in accordance with
the employment agreement. In such case, we may extend the noncompetition period
to up to an additional six months following this one-year period if we pay his
base salary for the additional six-month period. Each of Messrs. Ingrey and
Evans also agreed that he will not, for a period of two years following
termination, induce or attempt to induce any of our employees to leave his or
her position with the company or induce any customer to cease doing business
with us.

    On October 23, 2001, as inducements essential to their entering into
employment agreements, we granted Messrs. Ingrey and Evans restricted shares and
options under the Incentive Plan as set forth in the table below.



NAME                                                   OPTIONS    RESTRICTED SHARES
----                                                   --------   -----------------
                                                            
Paul B. Ingrey.......................................  422,407    422,407

Dwight R. Evans......................................  100,000    50,000


    The options are exercisable at $20.00 per share and expire on October 23,
2011. For each of Messrs. Ingrey and Evans, one-third of his options vested and
became exercisable at the closing of the investments, one-third will become
exercisable on October 23, 2002 and the remaining one-third will become
exercisable on October 23, 2003. If we terminate Mr. Evans without cause, the
terminated employee's options will remain exercisable (to the extent then
exercisable) for 90 days following termination of employment (but not beyond the
term of the option). In the event that Mr. Evans ceases to be an employee due to
death or permanent disability, all such employee's options will vest in full and
remain exercisable for the remainder of the term of the option.

    In the event that Mr. Ingrey's employment terminates due to his death or
permanent disability, all of his options shall immediately vest and become
exercisable. In the event that Mr. Ingrey is terminated for

                                       69

cause, all of his options will cease to be exercisable and will be immediately
forfeited. In the event that we terminate his employment other than for cause or
he resigns for good reason, Mr. Ingrey's options will vest according to the
schedule in the preceding paragraph and have a remaining term of three years
following termination. In the event of termination for any other reason, all
vested options held by Mr. Ingrey will remain exercisable for a period of
90 days from termination. To the extent that any of Mr. Ingrey's options have
not vested at the time of his termination, the options will be forfeited.

    The restricted shares will vest on October 23, 2004 for Messrs. Ingrey and
Evans. If Mr. Evans is terminated due to his death or permanent disability, the
restricted shares granted to him will vest based upon the following schedule:



                                                            VESTED AMOUNT UPON
                   DATE OF TERMINATION                         TERMINATION
----------------------------------------------------------  ------------------
                                                         
Prior to first anniversary of grant date..................  1/3 of shares

Prior to second anniversary of grant date, but after first
  anniversary of grant date...............................  2/3 of shares

After second anniversary of grant date....................  All shares


    Any unvested shares held by Mr. Evans will be forfeited if he otherwise
terminates his service with us. Further, in the event that Mr. Evans is
terminated within two years after a change of control without cause or due to
permanent disability or he terminates his employment for good reason, all of his
restricted shares will vest immediately upon such termination.

    In the event that Mr. Ingrey's employment terminates due to his death or
permanent disability or his employment is terminated by us without cause or he
resigns for good reason, all of his restricted shares will immediately vest. In
the event that Mr. Ingrey's employment is terminated by us without cause or he
resigns for good reason, his restricted shares will become fully transferable
pursuant to the normal vesting schedule (except that, following such
termination, he may sell an amount of shares to fund any income and employment
taxes relating to the award). In the event of termination for any other reason,
all restricted shares held by Mr. Ingrey will be forfeited.

JOHN M. PASQUESI

    Mr. Pasquesi has been appointed our executive vice chairman. Mr. Pasquesi's
employment agreement provides for an annual base salary of $30,000. The term of
the employment agreement ends on October 24, 2003, but we or Mr. Pasquesi may
terminate his employment at any time. The agreement provides that if
Mr. Pasquesi's employment is terminated without cause or for good reason before
October 24, 2003, he will be entitled to receive an amount equal to six months
of his monthly base salary, reduced by amounts he receives from other employment
or self employment during such period. As one of our executive officers, he is
not entitled to any additional compensation for his service as a director.
Mr. Pasquesi agreed that he will not, for a period of two years following
termination of employment, induce or attempt to induce any of our employees to
leave his or her position with us.

    On October 23, 2001, as an inducement essential to his entering into the
employment agreement, we granted Mr. Pasquesi options under our Incentive Plan
to purchase 375,473 common shares at an exercise price of $20.00 per share.
These options will vest on October 23, 2003 and expire on October 23, 2011. If
Mr. Pasquesi's employment is terminated without cause or for good reason or due
to his death or permanent disability, these options will vest and be exercisable
for the remainder of the option period. If he terminates his employment without
good reason or his employment is terminated by us with cause his unvested
options will be forfeited, and his vested options, to the extent then
exercisable, may be exercised for the remainder of the option period.

    In addition, on October 23, 2001, in consideration for his providing
structuring and advisory services to us in connection with the investment, we
granted Mr. Pasquesi options to purchase 750,946 common shares at an exercise
price of $20.00 per share. These options vested upon grant and expire on
October 23, 2011.

                                       70

This grant of options to purchase 750,946 common shares will be rescinded if it
is not approved by our shareholders prior to October 23, 2002. We will seek
shareholder approval of this grant at our next annual general meeting, and the
investors have committed to vote in favor of approval of these grants.

CONSTANTINE IORDANOU

    In January 2002, Mr. Iordanou was appointed to our board of directors and as
chief executive officer of Arch Capital Group (U.S.) Inc. As chief executive
officer of Arch Capital Group (U.S.) Inc., Mr. Iordanou will be responsible for
the general management and oversight of the U.S. insurance operations of Arch
Capital Group (U.S.) Inc. and its affiliates.

    His employment agreement provides for an annual base salary of $1,000,000.
His base salary is subject to review annually for increase at the discretion of
the board. Mr. Iordanou is eligible to participate in an annual bonus plan on
terms established from time to time and to participate in our employee benefit
programs. The target rate for the annual cash bonus is 100% of his annual base
salary.

    The initial term of Mr. Iordanou's employment agreement ends on January 1,
2007, but we or Mr. Iordanou may terminate his employment at any time. The
agreement provides that it will be automatically extended for successive
one-year periods after the initial five-year term unless either we or
Mr. Iordanou gives at least 12 months notice of the intention not to renew.

    The agreement provides that if Mr. Iordanou's employment is terminated by
his death, he will receive a prorated portion of his bonus that would have been
paid for the year of his death and an amount equal to two times the sum of his
base salary and target annual bonus payable in a lump sum. His agreement also
provides that if his employment is terminated by permanent disability, he will
receive a prorated portion of his bonus that would have been paid for the year
in which he becomes disabled, as determined by the board, and an amount equal to
40% of his base salary payable in monthly installments during the period of his
disability extending through the time period provided for the company's
disability plan. The agreement further provides that if we terminate
Mr. Iordanou's employment without cause or he resigns for good reason, he will
receive a prorated portion of his bonus that would have been paid for the year
of his termination and an amount equal to two times the sum of his base salary
and target annual bonus payable over an 18-month period in equal monthly
installments. Mr. Iordanou's major medical insurance coverage benefits pursuant
to his employment agreement shall continue for 18 months after the date of
termination in the event that (1) his employment ends due to death or permanent
disability, (2) he is terminated other than for cause or (3) he resigns for good
reason (or until such time as he has major medical insurance coverage under the
plan of another employer). The agreement also provides that if Mr. Iordanou's
employment is terminated by the company for cause or he resigns other than for
good reason, he will receive his base salary through the date of termination.

    Mr. Iordanou has agreed that, during the employment period and for the
period of 18 months after termination of employment, he will not compete with
the businesses of the company or any of its subsidiaries as such businesses
exist or are in process or being planned as of the date of termination. If we
terminate Mr. Iordanou's employment without cause or he terminates for good
reason, the term of his non-competition period will extend only as long as he is
receiving benefits under the company's major medical insurance coverage.
Further, Mr. Iordanou has agreed to extend the non-competition period for a
period of 18 months in the event of termination due to the expiration of the
five-year term of his agreement if he is paid an amount equal to two times his
base salary and annual target bonus (payable in equal monthly installments over
that period) and he remains covered by the company's major medical insurance
plan. Mr. Iordanou also agreed that he will not, for an 18-month period
following his date of termination, induce or attempt to induce any of our
employees to leave his or her position with the company or induce any customer
to cease doing business with us.

    As inducements essential to his entering into his employment agreement, as
of January 1, 2002, we granted Mr. Iordanou, under the Incentive Plan, 106,383
restricted shares as a signing bonus, 325,000

                                       71

additional restricted shares and options to purchase 425,000 common shares at an
exercise price equal to $23.50 per share.

    Mr. Iordanou's options expire on January 1, 2012. One-third of his options
vested and became exercisable on the date of grant; one-third will become
exercisable on January 1, 2003; and the remaining one-third will become
exercisable on January 1, 2004. In the event that his employment terminates due
to his death or permanent disability, all of Mr. Iordanou's options shall
immediately vest and become exercisable. In the event that Mr. Iordanou is
terminated for cause, all of his options will cease to be exercisable and will
be immediately forfeited. In the event that we terminate his employment other
than for cause or he resigns for good reason, Mr. Iordanou's options will vest
according to the schedule described above and have a remaining term of three
years following termination. In the event of termination for any other reason,
all vested options held by Mr. Iordanou will remain exercisable for a period of
90 days from termination. To the extent that any of Mr. Iordanou's options have
not vested at the time of his termination, the options will be forfeited.

    The restricted shares Mr. Iordanou received as a signing bonus will vest on
December 31, 2002, and the remainder of his restricted shares will vest on
December 31, 2006. In the event that his employment terminates due to his death
or permanent disability or his employment is terminated by the company without
cause or he resigns for good reason, all of his restricted shares will
immediately vest. In the case of termination by the company without cause or
resignation for good reason, however, the newly vested shares may not be
transferred (1) in the case of restricted shares granted as a signing bonus,
until December 31, 2002 and (2) in the case of all other restricted shares,
until December 31, 2006 (except that, following such termination, he may sell an
amount of shares to fund any income and employment taxes relating to the award).
In the event of termination for any other reason, all restricted shares held by
Mr. Iordanou will be forfeited.

JOHN D. VOLLARO

    Mr. Vollaro has been appointed as our executive vice president and chief
financial officer. Mr. Vollaro's employment agreement provides for an annual
base salary of $400,000. Mr.Vollaro is eligible to participate in an annual
bonus plan on terms established from time to time by our board and to
participate in our employee benefit programs. The target rate for the annual
bonus is 100% of his annual base salary.

    The term of his employment agreement ends on January 18, 2005, but we or
Mr. Vollaro may terminate his employment at any time. The agreement provides
that it will be automatically extended for successive one-year periods after the
initial three-year term unless either we or Mr. Vollaro gives at least 60 days
notice of the intention not to renew.

    The agreement provides that if Mr. Vollaro's employment is terminated
without cause or for good reason before January 18, 2005, he will be entitled to
receive an amount equal to the greater of (1) 18 months of his base salary and
(2) the total remaining base salary which would have been paid for the remainder
of his employment term (payable in equal monthly installments commencing on the
first month anniversary of the date of termination). The agreement also provides
that if Mr. Vollaro's employment is terminated for cause, as a result of his
resignation or leaving employment other than for good reason, as a result of
death or permanent disability, or by written notice of the intention not to
renew the agreement by us or Mr. Vollaro, he will be entitled to receive solely
his base salary through the date of termination. The agreement further provides
that if Mr. Vollaro's employment is terminated by reason of death or permanent
disability, he will also be entitled to receive his annual bonus prorated
through the date of termination, provided that such bonus will not be less than
the average annual bonus received for the preceding three years; and, if he has
not received bonuses for three years, he will receive a prorated portion of the
average of the bonuses received, if any, but not less than a prorated portion of
90% of his base salary.

                                       72

    Mr. Vollaro has agreed that, during the employment period and for a period
of two years after termination of employment for cause or as a result of his
resignation or leaving employment other than for good reason, he will not
compete with the businesses of ACGL or any of its subsidiaries as such
businesses exist or are in process or being planned as of the date of
termination. If we terminate Mr. Vollaro's employment without cause or he
terminates for good reason, the term of his non-competition period will extend
only as long as he is receiving his severance payments and benefits under our
major medical insurance coverage. Further, Mr. Vollaro has agreed to a
non-competition period of two years if his termination results from notice of
the intent not to renew the agreement by us or Mr. Vollaro, and we agree in
writing to pay him the sum of base salary and target annual bonus for such
period, payable in monthly installments over such period. Mr. Vollaro also
agreed that he will not, for a period of two years following his date of
termination, induce or attempt to induce any of our employees to leave his or
her position with us or induce any customer to cease doing business with us.

    As inducements essential to his entering into his employment agreement, on
January 18, 2002 we granted Mr. Vollaro, under our Incentive Plan, 50,000
restricted shares and options to purchase 85,000 common shares at an exercise
price of $25.30 per share.

    Mr. Vollaro's options expire on January 18, 2012. One-third of his options
vested and became exercisable on the date of grant; one-third will become
exercisable on January 18, 2003; and the remaining one-third will become
exercisable on January 18, 2004. In the event that his employment terminates due
to his death or permanent disability, all of Mr. Vollaro's options shall
immediately vest and become exercisable. In the event that Mr. Vollaro is
terminated for cause, all of his options will cease to be exercisable and will
be immediately forfeited. In the event of termination for any other reason, all
vested options held by Mr. Vollaro will remain exercisable for a period of
90 days from termination. To the extent that any of Mr. Vollaro's options have
not vested at the time of his termination, the options will be forfeited.

    Mr. Vollaro's restricted shares will vest on January 18, 2007. In the event
that his employment terminates due to his death or permanent disability or his
employment is terminated by the company without cause or he resigns for good
reason, or if his employment terminates due to written notice by us of the
intent not to extend his employment contract, a pro rata number of restricted
shares subject to the award will vest in full on the date of termination,
determined by multiplying the total number of restricted shares subject to the
award by a fraction, the numerator of which is the number of months or part of a
month elapsed since January 18, 2002 and the denominator of which is 60. In the
case of termination by us without cause or resignation by Mr. Vollaro for good
reason, however, the newly vested shares may not be transferred until
January 18, 2007 (except that, following such termination, he may sell an amount
of shares to fund any income and employment taxes relating to the award). In the
event of termination for any other reason, all restricted shares held by
Mr. Vollaro will be forfeited. In the event that, within two years following a
change of control of ACGL, Mr. Vollaro's employment terminates due to his death
or permanent disability or his employment is terminated by us without cause or
he resigns for good reason, all of his restricted shares will immediately vest.

INCENTIVE COMPENSATION FOR MANAGEMENT AND DIRECTORS

    Also in connection with the investments, certain directors and members of
management were granted stock-based awards under our existing incentive
compensation plans or otherwise, as described below. You should read these
summaries in conjunction with the restricted share and option agreements, which
are filed as exhibits hereto and incorporated by reference.

ROBERT CLEMENTS

    Mr. Clements, our chairman, was granted a total of 1,689,629 restricted
shares. Of this total, 1,668,157 restricted shares were granted on October 23,
2001 and 21,472 restricted shares were granted on November 19, 2001. The
restricted shares will vest in five equal annual installments commencing on

                                       73

October 23, 2002. However, if Mr. Clements' service as chairman is terminated by
us or is not continued by us for any reason, or his service terminates due to
his death or permanent disability, the restricted shares will vest in full upon
such termination of service. Any unvested shares will be forfeited if
Mr. Clements otherwise terminates his service with us. In addition,
Mr. Clements has agreed that, in the event his service is terminated by us prior
to the fifth anniversary of the date of grant, he will not compete with us
during the period ending on the later of such fifth anniversary or one year
following such termination of service. These grants to Mr. Clements will be
rescinded if they are not approved by our shareholders prior to October 23,
2002. We will seek shareholder approval of these grants to Mr. Clements at our
next annual general meeting, and the investors have committed to vote in favor
of approval of these grants.

    In connection with these transactions, we entered into a retention agreement
with Mr. Clements, which replaced our existing retention and change in control
agreement with Mr. Clements. Under the retention agreement, he will continue to
receive compensation at an annual rate equal to one-half of the salary of ACGL's
chief executive officer, payable in restricted shares that vest on January 1 of
the following year. For 2001, under this formula, he received 7,282 restricted
shares ($187,500 divided by $25.75, the closing market price of our common
shares on January 1, 2001), which will vest on January 1, 2002. Mr. Clements
will continue to be eligible to receive a cash bonus at the discretion of the
compensation committee. If Mr. Clements's service as chairman of our board is
terminated for any reason, he will be entitled to receive an amount equal to a
prorated portion of his compensation for that year. In addition, a subsidiary of
ACGL has agreed to make a loan of $13,530,000 to Mr. Clements, which will be
used to pay income and self employment taxes, payable in April 2002, on the
restricted shares granted to him on October 23, 2001. The loan will bear
interest at the applicable federal rate and mature on the fifth anniversary of
borrowing. If we terminate Mr. Clements' service as chairman of the board for
cause, the loan will become immediately payable. Mr. Clements will receive
additional compensation in cash in an amount sufficient to defray the interest
cost. In addition, we have agreed to make gross-up payments to him in the event
of certain tax liabilities. Mr. Clements agreed that, for a period of one year
after termination of service, he will not induce or attempt to induce any of our
employees to leave his or her position with the company. In connection with
these arrangements, Mr. Clements waived his right to receive any non-employee
director compensation. Mr. Clements' previous retention and change in control
agreement provided that upon involuntary termination (other than for cause) or
constructive termination within 24 months following a change in control,
Mr. Clements would be entitled to a payment equal to 2.99 times the sum of his
annual compensation plus his bonus for the previous year. This provision is no
longer in effect.

    PETER APPEL.  Mr. Appel, our chief executive officer, was granted options to
purchase a total of 422,407 common shares at an exercise price of $20.00 per
share. Of these options, 50,000 vested and became exercisable upon grant;
172,407 will become vested and exercisable on the Vesting Date, and 200,000 will
become vested on the Vesting Date and become exercisable on the later of
(x) the Vesting Date and (y) the earliest of (i) our common shares trading at or
above $30.00 per share for 20 out of 30 consecutive trading days, (ii) the
occurrence of a change of control and (iii) the date on which no class B
warrants are outstanding. "Vesting Date" means the earlier of (1) the date we
have consummated the sale or other disposition or settlement of at least 50% of
certain of our non-core assets and (2) October 23, 2002. If we terminate
Mr. Appel's service as chief executive officer for any reason, his service
terminates due to his death or permanent disability, or he terminates his
service for good reason, any unvested options granted to Mr. Appel will vest in
full upon such termination of service and continue to be exercisable for the
remainder of the option period. In the event that Mr. Appel terminates his
service without good reason, any vested options will continue to be, or become,
exercisable for the remainder of the option period, but any unvested options
will be forfeited. In addition, Mr. Appel has agreed that during the term of his
employment and, in the event his service with us is terminated for any reason,
for a period ending two years after his termination, (1) he will not compete
with any of our or our subsidiaries' insurance or reinsurance businesses as they
exist on the date of his termination and (2) he will not induce or attempt to
induce any of our employees to leave his or her position with the company.

                                       74

    DEBRA O'CONNOR AND LOUIS PETRILLO.  Mr. Petrillo was granted options to
purchase 40,000 common shares and Ms. O'Connor was granted options to purchase
10,000 common shares. These options are exercisable at an exercise price of
$20.00 per share. One-third of these options became exercisable at the closing,
one-third will become exercisable on October 23, 2002 and the remaining
one-third will become exercisable on October 23, 2003. If we terminate
Mr. Petrillo or Ms. O'Connor without cause, the terminated employee's options
will remain exercisable (to the extent then exercisable) for 90 days following
termination of employment (but not beyond the option period). In the event that
any such employee ceases to be an employee due to death or permanent disability,
all such employee's options will vest in full and remain exercisable for the
remainder of the option period.

    Ms. O'Connor's terms of employment provide for an annual base salary of
$225,000. The salary is subject to review annually for increase at the
discretion of the board. The target rate for the annual cash bonus for
Ms. O'Connor is 50% of her annual base salary. Ms. O'Connor is eligible to
receive an annual cash bonus and stock-based awards at the discretion of the
board and to participate in our employee benefit programs. The company or
Ms. O'Connor may terminate her employment at any time.

    Mr. Petrillo's terms of employment provide for an annual base salary of
$275,000. The salary is subject to review annually for increase at the
discretion of the board. The target rate for the annual cash bonus for
Mr. Petrillo is 75% of his annual base salary. Mr. Petrillo is eligible to
receive an annual cash bonus and stock-based awards at the discretion of the
board and to participate in our employee benefit programs. The company or
Mr. Petrillo may terminate his employment at any time.

    DIRECTORS.  In addition, each current director of the company (other than
Messrs. Clements and Appel), and Mr. Ian Heap, who resigned from the board in
2001, were granted options to purchase 15,000 common shares at an exercise price
of $20.00 per share. These options vested upon grant and expire on October 23,
2011.

    OTHER.  The restricted share awards and option grants for Messrs. Ingrey,
Evans, Pasquesi, Iordanou and Vollaro are described under "--Employment
Arrangements."

CHANGE IN CONTROL ARRANGEMENTS

    The sale of our prior reinsurance operations to Folksamerica Reinsurance
Company in May 2000 constituted a change in control for purposes of our prior
change in control arrangements. Under these arrangements, all unvested stock
options and restricted shares held by our employees and the members of our board
of directors (other than Mr. Clements) vested in connection with the asset sale.
In addition, the following payments were made to our executive officers upon
closing of the asset sale: Mark D. Mosca, $2,716,714; Peter A. Appel,
$1,476,563; Paul J. Malvasio, $1,220,625; and Debra M. O'Connor, $475,440. These
amounts were equal to a specified multiple of the sum of such executive
officer's annual base salary and target annual bonus (or, in the case of
Mr. Mosca, a notional target amount equal to 100% of his annual base salary).
The specified multiple was 2.99 for Mr. Mosca, 2.25 for Messrs. Appel and
Malvasio, and 2.0 for Ms. O'Connor. Such payments did not exceed an amount that
would trigger the payment of excise taxes, and were not subject to mitigation in
the event that such officer receives any compensation from other employment
following his termination. In addition, a prorated portion of the following
executive officer's target annual bonus (or, in the case of Mr. Mosca, a
prorated portion of a notional target amount equal to 100% of his annual base
salary) was paid to such officers at the closing of the asset sale, as follows:
Mr. Mosca: $156,398; Mr. Appel: $96,823; Mr. Malvasio: $80,040; Ms. O'Connor:
$30,457; and Mr. Petrillo: $30,446. Each executive officer is also entitled to
continuance of his health care, dental, disability and group-term and life
insurance benefits for prescribed periods. In addition, Robert Clements,
chairman of our board, received a special bonus

                                       75

of $300,000 upon the consummation of the asset sale. There are no continuing
change in control arrangements with our present officers and employees, except
that in connection with his employment as general counsel and secretary, we
entered into a change in control arrangement with Mr. Petrillo which provides
that upon involuntary termination (other than for cause) or constructive
termination within 24 months following a change in control, Mr. Petrillo would
be entitled to a payment equal to 2.0 times the sum of his annual base salary
and target annual bonus. In addition, upon termination of his employment
following a change in control, we will pay him a prorated portion of his target
annual bonus for such year and continue health care, dental, disability and
group-term and life insurance benefits for 24 months.

DIRECTOR COMPENSATION

    Each non-employee member of our board of directors is entitled to receive an
annual cash retainer fee in the amount of $25,000. Commencing with the 1999-2000
annual period, each non-employee director is entitled, at his option, to receive
this retainer fee in the form of common shares instead of cash. If so elected,
the number of shares distributed to the non-employee director is equal to 120%
of the amount of the annual retainer fee otherwise payable divided by the fair
market value of our common shares. Each non-employee director also receives from
the company a meeting fee of $1,000 for each board or committee meeting
attended. In addition, each non-employee director serving as chairman of the
(1) executive committee or compensation committee received an annual fee of
$3,000 and (2) audit committee received an annual fee of $5,000. All
non-employee directors are entitled to reimbursement for their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the board or committees. Directors who are also employees of the
company or its subsidiaries receive no cash compensation for serving as
directors or as members of board committees.

    In 2001, pursuant to our long-term incentive and share award plans, upon
joining the board, each non-employee director received an option to purchase 300
common shares at an exercise price per share equal to the then market price of a
common share. In 2001, our plans also provided for automatic annual grants to
non-employee directors of options to purchase common shares on January 1 of each
year. Commencing January 1, 2000, the amount of shares covered by this annual
grant was increased from 500 to 1,500 shares.

COMPENSATION AND STOCK AWARDS COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION

    The compensation committee of our board of directors currently consists of
John Bunce (chairman), Kewsong Lee, James Meenaghan and Robert Works. None of
the members of the committees are or have been officers or employees of the
company. In addition, no executive officer of the company served on any board of
directors or compensation committee of any entity (other than the company) with
which any member of our board serves as an executive officer. Pursuant to the
shareholders agreement entered into in connection with the private placement,
Messrs. Bunce and Lee have been designated as members of our board of directors
by funds affiliated with Hellman & Friedman LLC and Warburg Pincus LLC,
respectively.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table sets forth information available to us as of March 8,
2002 with respect to the ownership of our voting shares by (1) each person known
to us to be the beneficial owner of more than 5% of any class of our outstanding
voting shares, (2) each director and executive officer of ACGL, and (3) all of
the directors and executive officers of ACGL as a group. Except as otherwise
indicated, each person named below has sole investment and voting power with
respect to the securities shown.

                                       76

    Please note that this table addresses ownership of voting shares; it does
not address the voting power of those shares, which, in some cases, is different
than the percentage set forth below.



                                              COMMON SHARES
---------------------------------------------------------------------------------------------------------
                                                       (A)                   (B)                 (C)
                                                    NUMBER OF
                                                  COMMON SHARES           RULE 13D-3        FULLY-DILUTED
                                                BENEFICIALLY OWNED   PERCENTAGE OWNERSHIP    PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER                   (1)                   (1)                 (2)
------------------------------------            ------------------   --------------------   -------------
                                                                                   
Warburg Pincus (3) ...........................      20,943,229                57.1%             33.8%
  c/o 466 Lexington Avenue
  New York, New York 10017

H&F Corporate Investors IV
  (Bermuda), Ltd. (4) ........................      11,636,491                42.5              18.8
  c/o A.S.&K. Services Ltd.
  41 Cedar Avenue
  Hamilton HM 12, Bermuda

Insurance Private Equity Investors, L.L.C.           2,585,583                14.1               4.2
  (5) ........................................
  3003 Summer Street
  Stamford, CT 06905

EQSF Advisers, Inc. and M.J. Whitman
  Advisers, Inc. (6) .........................       2,426,905                15.4               3.9
  767 Third Avenue
  New York, New York 10017

Marsh & McLennan Risk Capital
  Holdings, Ltd. (7) .........................       1,632,231                10.3               2.6
  1166 Avenue of the Americas
  New York, New York 10036

Trident II, L.P. (8) .........................       1,713,681                 9.8               2.8
  Craig Appin House
  8 Wesley Street
  Hamilton HM 11 Bermuda

The Trident Partnership, L.P. (9) ............       1,636,079                 9.5               2.6
  Craig Appin House
  8 Wesley Street
  Hamilton, HM11, Bermuda

Farallon Partners, L.L.C. (10) ...............       1,292,791                 7.6               2.1
  One Maritime Plaza
  Suite 1325
  San Francisco, CA 94111

Artisan Partners Limited Partnership (11) ....       1,162,684                 7.4               1.9
  1000 North Water Street, #1770
  Milwaukee, Wisconsin 53202

Beck, Mack & Oliver LLC (12) .................       1,113,850                 7.1               1.8
  330 Madison Avenue
  New York, New York 10017

Steinberg Priest Capital Management                  1,438,147                 9.1               2.3


                                       77




                                              COMMON SHARES
---------------------------------------------------------------------------------------------------------
                                                       (A)                   (B)                 (C)
                                                    NUMBER OF
                                                  COMMON SHARES           RULE 13D-3        FULLY-DILUTED
                                                BENEFICIALLY OWNED   PERCENTAGE OWNERSHIP    PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER                   (1)                   (1)                 (2)
------------------------------------            ------------------   --------------------   -------------
                                                                                   
  Co., Inc. (13) .............................
  12 East 49th Street
  New York, New York 10017

Franklin Resources, Inc. (14) ................         842,900                 5.3               1.4
  777 Mariners Island Boulevard
  San Mateo, California 94404

Crabbe Huson Group, Inc. (15) ................         809,887                 5.1               1.3
  121 SW Morrison, Suite 1400
  Portland, Oregon 97204

Robert Clements (16)..........................       2,315,751                14.3               3.9

Peter A. Appel (17)...........................         502,406                 3.1               1.4

John L. Bunce, Jr. (18).......................      11,636,491                42.5              18.8

Paul B. Ingrey (19)...........................         666,632                 4.2               1.5

Constantine Iordanou (20).....................         573,050                 3.6               1.4

Kewsong Lee (21)..............................      20,944,592                57.1              33.9

James J. Meenaghan (22).......................          17,113                   *                 *

John M. Pasquesi (23).........................       1,138,784                 6.7               2.5

Robert F. Works (24)..........................          23,972                   *                 *

Dwight R. Evans (25)..........................         104,017                   *                 *

John D. Vollaro (26)..........................          78,333                   *                 *

Debra M. O'Connor (27)........................          72,319                   *                 *

Louis T. Petrillo (28)........................          70,131                   *                 *

All directors and executive officers (13            38,143,591                75.9%             64.2%
  persons)....................................




                              SERIES A CONVERTIBLE PREFERENCE SHARES
---------------------------------------------------------------------------------------------------
                                                     NUMBER OF PREFERENCE           RULE 13D-3
                                                   SHARES BENEFICIALLY OWNED   PERCENTAGE OWNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER                         (29)                      (29)
------------------------------------               -------------------------   --------------------
                                                                         
Warburg Pincus (3)...............................         18,939,311                   53.1%

H&F Corporate Investors IV (Bermuda), Ltd. (4)...         10,521,839                   29.5

Insurance Private Equity Investors, L.L.C. (5)...          2,338,186                    6.6

Robert Clements (16).............................             93,527                      *

Peter A. Appel (17)..............................             46,763                      *

John L. Bunce, Jr. (18)..........................         10,521,839                   29.5

Paul B. Ingrey (19)..............................             93,527                      *

Constantine Iordanou.............................                  0                      0


                                       78




                              SERIES A CONVERTIBLE PREFERENCE SHARES
---------------------------------------------------------------------------------------------------
                                                     NUMBER OF PREFERENCE           RULE 13D-3
                                                   SHARES BENEFICIALLY OWNED   PERCENTAGE OWNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER                         (29)                      (29)
------------------------------------               -------------------------   --------------------
                                                                         
Kewsong Lee (21).................................         18,939,311                   53.1

James J. Meenaghan...............................                  0                      0

John M. Pasquesi (23)............................            350,728                    1.0

Robert F. Works..................................                  0                      0

Dwight R. Evans (25).............................             18,705                      *

Debra O'Connor...................................                  0                      0

Louis T. Petrillo................................                  0                      0

All directors and executive officers (13
  persons).......................................         30,064,400                   84.2%


------------------------

*   Denotes beneficial ownership of less than 1.0%.

(1) Pursuant to Rule 13d-3 promulgated under the Exchange Act, amounts shown
    include common shares that may be acquired by a person within 60 days of
    March 8, 2002. Therefore, column (B) has been computed based on
    (a) 15,765,332 common shares actually outstanding as of March 8, 2002 and
    (b) common shares that may be acquired within 60 days of March 8, 2002 upon
    the exercise of options and warrants and conversion of preference shares
    held only by the person whose Rule 13d-3 Percentage Ownership of Common
    Shares is being computed. Each preference share is convertible into one
    common share, subject to adjustments. The preference shares are mandatorily
    convertible under certain circumstances. Under the subscription agreements,
    the purchase price for the preference shares is subject to certain
    adjustments, which may result in the issuance of additional preference
    shares and class A warrants to the purchasers. For a description of the
    adjustments, see "Business--Recent Developments--The Capital
    Infusion--Subscription Agreement--Purchase Price Adjustments."

(2) Amounts shown under column (C) in the above table have been computed based
    on (a) 15,765,332 common shares actually outstanding as of March 8, 2002
    and, (b) common shares that may be acquired upon the exercise of all
    outstanding options and warrants and conversion of all preference shares,
    whether or not such options and warrants are exercisable within 60 days held
    by all persons, and as of March 8, 2002, there were outstanding
    (i) class A warrants to purchase an aggregate of 5,401,707 common shares,
    (ii) class B warrants to purchase an aggregate of 150,000 common shares,
    (iii) options to purchase an aggregate of 4,883,811 common shares and
    (iv) 35,687,735 preference shares. The class A warrants are currently
    exercisable at $20 per share and expire on September 19, 2002. The class B
    warrants are exercisable at $20 per share at any time after our common
    shares have traded at or above $30 per share for 20 out of 30 consecutive
    trading days or a change of control has occurred and expire on
    September 19, 2005. See note (1) for a description of the preference shares.

(3) The security holders are Warburg Pincus (Bermuda) Private Equity VIII, L.P.
    ("WP VIII Bermuda"), Warburg Pincus (Bermuda) International Partners, L.P.
    ("WPIP Bermuda"), Warburg Pincus Netherlands International Partners I, C.V.
    ("WPIP Netherlands I") and Warburg Pincus Netherlands International Partners
    II, C.V. ("WPIP Netherlands II"). Warburg Pincus (Bermuda) Private
    Equity Ltd. ("WP VIII Bermuda Ltd.") is the sole general partner of WP VIII
    Bermuda. Warburg Pincus (Bermuda) International Ltd. ("WPIP Bermuda Ltd.")
    is the sole general partner of WPIP Bermuda. Warburg, Pincus & Co. ("WP") is
    the sole general partner of WPIP Netherlands I and WPIP Netherlands II. WP
    VIII Bermuda, WPIP Bermuda, WPIP Netherlands I

                                       79

    and WPIP Netherlands II are managed by Warburg Pincus LLC ("WP LLC"). The
    foregoing is based on a Schedule 13D and a Form 3 dated November 30, 2001
    filed with the SEC by these entities. Amounts in columns (A), (B) and
    (C) reflect common shares issuable upon conversion of preference shares or
    exercise of class A warrants issued under the subscription agreements.

(4) The security holders are HFCP IV (Bermuda), L.P. ("HFCP IV Bermuda"), H&F
    International Partners IV-A (Bermuda), L.P. ("HFIP IV-A Bermuda"), H&F
    International Partners IV-B (Bermuda), L.P. ("HFIP IV-B Bermuda") and H&F
    Executive Fund IV (Bermuda), L.P. ("HFEF Bermuda," and together with HFCP IV
    Bermuda, HFIP IV-A Bermuda and HFIP IV-B Bermuda, the "H&F Funds"). H&F
    Investors IV (Bermuda), L.P. ("HFI IV Bermuda") is the sole general partner
    of the H&F Funds. H&F Corporate Investors IV (Bermuda) Ltd. ("HFCI Bermuda")
    is the sole general partner of HFI IV Bermuda. HFI IV Bermuda may be deemed
    to control the H&F Funds. The foregoing is based on a Schedule 13D and a
    Form 3 dated November 30, 2001 filed with the SEC by these entities. Amounts
    in columns (A), (B) and (C) reflect (a) common shares issuable upon
    conversion of preference shares or exercise of class A warrants issued under
    the subscription agreements, (b) 1,263 common shares owned by Mr. Bunce for
    the benefit of these entities and (c) 100 common shares issuable upon
    exercise of currently exercisable options held by Mr. Bunce for the benefit
    of these entities.

(5) Insurance Private Equity Investors, L.L.C. ("Insurance") is a wholly owned
    subsidiary of General Electric Pension Trust ("GEPT"), which is an employee
    benefit plan for the benefit of employees of General Electric Company
    ("GE"). GE Asset Management Incorporated ("GEAM"), a wholly owned subsidiary
    of GE, acts as manager of Insurance and as investment manager of GEPT.
    Insurance, GEPT and GEAM may be deemed to share beneficial ownership.
    Excludes securities held by Orbital Holdings, Ltd., which is an indirect
    wholly owned subsidiary of GE, as to which Insurance, GEPT and GEAM disclaim
    beneficial ownership. Based on a Schedule 13D filed on November 30, 2001 by
    these entities. Amounts in columns (A), (B) and (C) reflect common shares
    issuable upon conversion of preference shares or exercise of class A
    warrants issued under the subscription agreements.

(6) Based upon a Schedule 13G/A dated February 5, 2002, filed with the SEC
    jointly by EQSF Advisers, Inc. and M.J. Whitman Advisers, Inc. ("MJWA"),
    each an investment advisor, and Martin J. Whitman. In the Schedule 13G/A,
    EQSF reported that it has sole voting power and sole dispositive power with
    respect to 1,203,500 common shares and MJWA reported that it has sole
    dispositive power with respect to 1,223,405 common shares and sole voting
    power with respect to 1,144,355 common shares.

(7) Amounts in columns (A), (B) and (C) reflect common shares issuable upon
    conversion of preference shares or exercise of class A warrants issued under
    the subscription agreements and 1,536,005 common shares owned directly by
    MMRCH. The preference shares and class A warrants are held by Marsh &
    McLennan Capital Professionals Fund, L.P. and Marsh & McLennan Employees'
    Securities Company, L.P., which are beneficially owned by employees of
    Marsh & McLennan, Inc. A subsidiary of MMRCH is the sole general partner of
    these funds, as well as the sole general partner of Trident II L.P. and The
    Trident Partnership L.P.

(8) Amounts in columns (A), (B) and (C) reflect common shares issuable upon
    conversion of preference shares or exercise of class A warrants issued under
    the subscription agreements.

(9) Amounts in columns reflect (a) 250,000 common shares owned directly by The
    Trident Partnership, L.P. and (b) 1,386,079 common shares issuable upon the
    exercise of class A warrants held by The Trident Partnership, L.P. Based
    upon a Schedule 13D dated March 27, 1998, filed with the SEC by The Trident
    Partnership, L.P. The sole general partner of the partnership is a
    subsidiary of MMRCH.

                                       80

(10) The security holders are Farallon Capital Partners, L.P., Farallon Capital
    Institutional Partners II, L.P., Farallon Capital Institutional Partners
    III, L.P. and RR Capital Partners, L.P. Farallon Partners, L.L.C. is the
    sole general partner of each of these holders. Amounts in columns (A),
    (B) and (C) reflect common shares issuable upon conversion of preference
    shares or exercise of class A warrants issued under the subscription
    agreements.

(11) Based upon a Schedule 13G dated February 13, 2002, filed with the SEC by
    Artisan Partners Limited Partnership and certain of its affiliates
    (collectively, "Artisan"). In the Schedule 13G, Artisan reported that it has
    sole voting power and sole dispositive power with respect to 1,162,684
    common shares beneficially owned by one or more discretionary clients of
    Artisan.

(12) Based upon a Schedule 13G dated February 11, 2002, filed with the SEC by
    Beck, Mack & Oliver LLC, an investment advisor. In the Schedule 13G, Beck
    reported that it has shared dispositive power with respect to 1,113,850
    common shares beneficially owned by its clients.

(13) Based upon a Schedule 13G dated January 28, 2002, filed with the SEC
    jointly by Steinberg Priest Capital Management Co., Inc. ("SPCM"), an
    investment advisor, and Michael A. Steinberg & Co., Inc., a broker-dealer.
    In the Schedule 13G, SPCM reported that it has sole voting power with
    respect to 659,450 common shares and sole dispositive power with respect to
    1,416,277 common shares, and Steinberg & Co. reported that it has sole
    dispositive power with respect to 21,870 common shares.

(14) Based upon a Schedule 13G dated February 14, 2002, filed with the SEC by
    Franklin Resources, Inc. and certain of its affiliates (collectively,
    "FRI"). In the Schedule 13G, FRI reported that it has sole voting power and
    sole dispositive power with respect to 842,900 common shares beneficially
    owned by one or more managed accounts which are advised by investment
    advisory subsidiaries of FRI.

(15) Based upon a Schedule 13G dated February 3, 2000, filed with the SEC by the
    Crabbe Huson Group, Inc., an investment advisor. In the Schedule 13G, Crabbe
    Huson reported that it has shared voting power with respect to 774,287
    common shares and shared dispositive power with respect to 809,887 common
    shares beneficially owned by its clients.

(16) Amounts in columns (A) and (B) reflect (a) 1,810,600 common shares owned
    directly by Mr. Clements (including 1,696,911 restricted shares, which are
    subject to vesting), (b) 200,000 common shares issuable upon exercise of
    class A warrants owned directly by Mr. Clements, (c) 107,125 common shares
    issuable upon exercise of currently exercisable options owned directly by
    Mr. Clements, (d) 55,000 common shares owned by Taracay Investors,
    (e) 39,603 common shares issuable upon exercise of class A warrants owned by
    Taracay Investors and (f) common shares issuable upon conversion of
    preference shares or exercise of class A warrants owned by SoundView
    Partners, L.P. The amount in column (C) includes 107,198 common shares
    issuable upon exercise of class B warrants, which are not currently
    exercisable within 60 days of the date hereof. Taracay Investors is a
    general partnership, the general partners of which consist of Mr. Clements
    and members of his family and the managing partner of which is
    Mr. Clements. Mr. Clements is the general partner of SoundView.

(17) Amounts in columns (A) and (B) reflect (a) 134,895 common shares owned
    directly by Mr. Appel, (b) 315,800 common shares issuable upon exercise of
    currently exercisable options and (c) common shares issuable upon conversion
    of preference shares or exercise of class A warrants. The amount in column
    (C) includes 372,407 common shares issuable upon exercise of stock options
    that are not likely to become exercisable within 60 days of the date hereof.

(18) Amounts in all columns reflect securities held by or the benefit of the
    entities listed in note (5). Mr. Bunce is a member of an investment
    committee of HFCI Bermuda which has investment discretion over the
    securities held by the H&F Funds. Mr. Bunce is a 9.9% shareholder of HFCI

                                       81

    Bermuda. All shares indicated as owned by Mr. Bunce are included because he
    is a member of our board and is affiliated with HFCI Bermuda. Mr. Bunce may
    be deemed to have an indirect pecuniary interest (within the meaning of
    Rule 16a-1 under the Exchange Act) in an indeterminate portion of the shares
    beneficially owned by the H&F Funds. Mr. Bunce disclaims beneficial
    ownership of all shares owned by the H&F Funds, except to the extent of his
    indirect pecuniary interest in the issuer held through the H&F Funds. Based
    on a Form 3 dated November 30, 2001 filed with the SEC by Mr. Bunce.

(19) Amounts in columns (A) and (B) reflect (a) 422,407 restricted shares (all
    of which are subject to vesting), (b) 140,802 common shares issuable upon
    exercise of currently exercisable options and (c) common shares issuable
    upon conversion of preference shares or exercise of class A warrants. The
    amount in column (C) includes 281,605 common shares issuable upon exercise
    of stock options that are not currently exercisable within 60 days of the
    date hereof.

(20) Amounts in columns (A) and (B) reflect (a) 431,383 restricted shares (all
    of which are subject to vesting) and (b) 141,667 common shares issuable upon
    exercise of currently exercisable options. The amount in column (C) include
    283,333 common shares issuable upon exercise of stock options that are not
    currently exercisable within 60 days of the date hereof.

(21) Amounts reflect (a) securities held by the entities listed in note (4),
    (b) 1,263 common shares owned directly by Mr. Lee and (c) 100 common shares
    issuable upon exercise of currently exercisable options. Mr. Lee is a
    general partner of WP, a managing director and member of WP LLC and a
    beneficial owner of certain shares of capital stock of WP VIII Bermuda Ltd.
    and WPIP Bermuda Ltd. All shares indicated as owned by Mr. Lee are included
    because he is a member of our board and is affiliated with these Warburg
    Pincus entities. Mr. Lee may be deemed to have an indirect pecuniary
    interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
    indeterminate portion of the shares owned by WP VIII Bermuda, WPIP Bermuda,
    WPIP Netherlands I and WPIP Netherlands II. Mr. Lee disclaims beneficial
    ownership of all shares owned by these Warburg Pincus entities. Based on a
    Form 3 dated November 30, 2001 filed with the SEC by Mr. Lee.

(22) Amounts in columns (A) and (B) reflect 1,813 common shares owned directly
    by Mr. Meenaghan and 15,300 common shares issuable upon exercise of
    currently exercisable options. The amount in column (C) includes 1,500
    common shares issuable upon exercise of stock options that are not currently
    exercisable within 60 days of the date hereof.

(23) Amounts in columns (A) and (B) reflect (a) 750,946 common shares issuable
    upon exercise of currently exercisable options and (b) common shares
    issuable upon conversion of preference shares or exercise of class A
    warrants. The amount in column (C) includes 375,473 common shares issuable
    upon exercise of stock options that are not currently exercisable within
    60 days of the date hereof.

(24) Amounts in columns (A) and (B) reflect 5,672 common shares owned directly
    by Mr. Works and 18,300 common shares issuable upon exercise of currently
    exercisable options. The amount in column (C) includes 1,500 common shares
    issuable upon exercise of stock options that are not currently exercisable
    within 60 days hereof.

(25) Amounts in columns (A) and (B) reflect (a) 50,000 restricted shares (all of
    which are subject to vesting), (b) 33,333 common shares issuable upon
    exercise of currently exercisable options and (c) common shares issuable
    upon conversion of preference shares or exercise of class A warrants. The
    amount in column (C) includes 66,667 common shares issuable upon exercise of
    stock options that are not currently exercisable within 60 days of the date
    hereof.

(26) Amounts in columns (A) and (B) reflect (a) 50,000 restricted shares (all of
    which are subject to vesting) and (b) 28,333 common shares issuable upon
    exercise of currently exercisable options. The

                                       82

    amount in column (C) includes 56,667 common shares issuable upon exercise of
    stock options that are not currently exercisable within 60 days hereof.

(27) Amounts in columns (A) and (B) reflect (a) 14,986 common shares owned
    directly by Ms. O'Connor and (b) 57,333 common shares issuable upon exercise
    of currently exercisable options. The amount in column (C) includes 6,667
    common shares issuable upon exercise of stock options that are not currently
    exercisable within 60 days hereof.

(28) Amounts in columns (A) and (B) reflect (a) 8,998 common shares owned
    directly by Mr. Petrillo and (b) 61,133 common shares issuable upon exercise
    of currently exercisable options. The amount in column (C) includes 26,667
    common shares issuable upon exercise of stock options that are not currently
    exercisable within 60 days hereof.

(29) Under the subscription agreements, the purchase price for the preference
    shares is subject to certain adjustments, which may result in the issuance
    of additional preference shares to the purchasers. For a description of the
    adjustments, please see "Business--Recent Developments--The Capital
    Infusion--Subscription Agreement--Purchase Price Adjustments."

                                       83

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                              THE CAPITAL INFUSION

    Please refer to the information appearing above under the subheading "The
Capital Infusion" included as part of "Business," which information is
incorporated by reference. In addition, prior to the capital infusion, we also
had entered into certain non-binding letters of intent to acquire three
fee-based businesses, including Tri-City Brokerage, Inc. ("Tri-City"), each of
which would have been considered a non-core business. In connection with our
decision to concentrate our attention exclusively on building our insurance and
reinsurance business, our board of directors determined not to proceed with any
of these acquisitions. Our board of directors was informed that if the company
were not to pursue the acquisition of Tri-City, certain members of our
management, including Peter Appel, our president and chief executive officer,
and Robert Clements, our chairman, may participate, as investors, in an
acquisition of Tri-City. Subsequently, Messrs. Appel and Clements, together with
members of Tri-City management and certain other investors, including
Distribution Investors LLC, a private equity fund affiliated with Hales &
Company Inc. described below, acquired Tri-City. No member of our management has
any management responsibilities with Tri-City.

             TRANSACTIONS INVOLVING AFFILIATES OF MARSH & MCLENNAN

    On November 8, 2001, ACGL, funds affiliated with Warburg Pincus and
Hellman & Friedman, The Trident Partnership, L.P. ("Trident I"), Trident II,
L.P., Marsh & McLennan Risk Capital Holdings, Ltd. ("MMRCH") and employee
co-investment funds affiliated with MMRCH entered into an agreement. Trident I
and Trident II, L.P. are affiliates of MMRCH and MMRCH and MMC Capital are
affiliates of each other. Under this agreement, the Warburg Pincus investors
assigned their right and commitment to purchase $35.0 million of the preference
shares and Class A warrants to Trident II and the co-investment funds. MMRCH
agreed to exchange all of its existing Class A warrants for newly issued common
shares (assuming that they had been exercised pursuant to a cashless exercise)
and to exchange all of its Class B warrants for cash at a price equal to $7.50
per Class B warrant (see Note 12 of the notes accompanying our consolidated
financial statements).

    In addition, the board observer and board nomination rights of MMRCH and
Trident I were terminated, and the company was also released from its remaining
$11.0 million capital commitment to Trident II for new investments. During 1999,
the company had committed to invest $25 million as a limited partner in Trident
II, a partnership managed by MMC Capital.

    Pursuant to a certain investment advisory agreement, which terminates in
2003 (subject to renewal or early termination under certain circumstances), MMC
Capital provides the company with certain services. Fees incurred under the
agreements during fiscal years 2001, 2000 and 1999 were approximately $262,000,
$298,000 and $1.5 million, respectively. In connection with its amended
investment advisory agreement with MMC Capital, the company receives from MMC
Capital $1.25 million per annum during the initial four-year term, subject to
certain conditions (see Note 8 of the notes accompanying our consolidated
financial statements).

    On June 22, 2001, the company completed the acquisition of all of the
remaining ownership interests in one of its investee companies, Arch Risk
Transfer Services Ltd., for a purchase price of approximately $38.8 million. Of
such amount, $38.4 million was paid in cash to MMRCH and Trident I in return for
their interests in ART Services, and the balance was paid in the form of our
common shares to certain management shareholders of ART Services. See Note 3 of
the notes accompanying our consolidated financial statements. In addition, the
company has made investments in entities in which affiliates of Marsh and
Trident have invested (see Note 4 of the notes accompanying our consolidated
financial statements).

    Commencing in 1996, MMC Capital subleased office space from the company for
a term expiring in October 2002. Future minimum rental income, exclusive of
escalation clauses and maintenance costs,

                                       84

under the remaining term of the sublease will be approximately $832,000. Rental
income was $1,032,000, $636,000 and $430,000 in 2001, 2000 and 1999,
respectively.

    Affiliates of MMC Capital's ultimate parent, Marsh & McLennan
Companies, Inc. ("Marsh"), may act as reinsurance intermediaries or brokers for
our reinsurance and insurance operations (see note 15 of the notes accompanying
our consolidated financial statements). The company has also utilized affiliates
of Marsh as insurance brokers for the company's insurance needs.

                          DISTRIBUTIONS INVESTORS, LLC

    As of December 31, 2001, the company has committed to invest approximately
$1.5 million as a member of Distribution Investors, LLC, the general partner of
a fund affiliated with our subsidiary, Hales & Company (see Note 4 of the notes
accompanying our consolidated financial statements). With $50 million of
committed capital, such fund focuses on equity investments in insurance
distribution and distribution-related service companies, and its target
investment amount is $3 million to $5 million.

                                     OTHER

    We have agreed to make a non-recourse loan of up to $13.5 million to our
chairman, which will be used to pay income and self employment taxes, payable in
April 2002, on restricted shares granted to him on October 23, 2001. See
Note 9, "Commitments," of the notes accompanying our financial statements.

    Graham B. Collis, a director of certain of our non-U.S. subsidiaries, is
partner in the law firm of Conyers Dill & Pearman, which provides legal services
to the company and its subsidiaries.

    In April 1996, we acquired a 33% economic interest (9.75% voting interest)
in Island Heritage Insurance Company, Ltd., a Cayman Islands insurer, for an
aggregate purchase price of $4.5 million. Certain of our directors and other
investors invested in the securities of Island Heritage at the same per share
price paid by us. In February 1999, we made an additional investment in Island
Heritage in the amount of approximately $1.0 million.

    Investors affiliated with certain of our directors have certain rights to
require us to register under the Securities Act of 1933 the securities they
hold, and to "piggyback" on registrations that we make. In connection with all
such registrations, we are required to bear all registration and selling
expenses (other than underwriting fees and commissions and the fees of any
counsel for the holders participating in such registrations).

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

                       FINANCIAL STATEMENTS AND SCHEDULES

    Financial statements and schedules listed in the accompanying index to our
financial statements and schedules on page F-1 are filed as part of this report,
and are included in Item 8.

                                    EXHIBITS

    The exhibits listed in the accompanying exhibit index are filed as part of
this report. These exhibits include, without limitation, certain management
contracts and compensatory plans as described therein.

                              REPORTS ON FORM 8-K

    We filed a report on Form 8-K during the 2001 fourth quarter on November 9,
2001 to report the capital infusion. We also filed Form 8-K on January 4, 2002
(and an amendment thereto on January 7, 2002) to report the consummation of that
transaction and to file certain exhibits relating to it.

                                       85

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) 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)

                                                       By:  /s/ PETER A. APPEL
                                                            -----------------------------------------
                                                            Name: Peter A. Appel
                                                            Title: President & Chief Executive Officer


March 18, 2002

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



                    NAME                                     TITLE                        DATE
                    ----                                     -----                        ----
                                                                             
             /s/ PETER A. APPEL                President and Chief Executive
    ------------------------------------         Officer (Principal Executive        March 18, 2002
               Peter A. Appel                    Officer) and Director

                      *
    ------------------------------------       Chairman and Director                 March 18, 2002
               Robert Clements

                                               Executive Vice President and Chief
             /s/ JOHN D. VOLLARO                 Financial Officer (Principal
    ------------------------------------         Financial and Principal             March 18, 2002
               John D. Vollaro                   Accounting Officer)

                      *
    ------------------------------------       Director                              March 18, 2002
             John L. Bunce, Jr.

                      *
    ------------------------------------       Director                              March 18, 2002
               Paul B. Ingrey

                      *
    ------------------------------------       Director                              March 18, 2002
            Constantine Iordanou

                      *
    ------------------------------------       Director                              March 18, 2002
                 Kewsong Lee

                      *
    ------------------------------------       Director                              March 18, 2002
             James J. Meenaghan


                                       86




                    NAME                                     TITLE                        DATE
                    ----                                     -----                        ----
                                                                             
                      *
    ------------------------------------       Director                              March 18, 2002
              John M. Pasquesi

                      *
    ------------------------------------       Director                              March 18, 2002
               Robert F. Works


------------------------

*   By John D. Vollaro, as attorney-in-fact and agent, pursuant to a power of
    attorney, a copy of which has been filed with the Securities and Exchange
    Commission as Exhibit 24 to this report.


                                                                                 
      /s/ JOHN D. VOLLARO
      --------------------------------------
      Name: John D. Vollaro
      Attorney-in-Fact


                                       87

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES



                                                                                       PAGES
                                                                                      --------
                                                                                
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

  Report of Independent Accountants on Financial Statements.........................   F-2

  Consolidated Balance Sheets at December 31, 2001 and 2000.........................   F-3

  Consolidated Statements of Income for the years ended December 31, 2001, 2000 and
    1999............................................................................   F-4

  Consolidated Statements of Changes in Shareholders' Equity for the years ended
    December 31, 2001, 2000 and 1999................................................   F-5

  Consolidated Statements of Comprehensive Income for the years ended December 31,
    2001, 2000 and 1999.............................................................   F-6

  Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000
    and 1999........................................................................   F-7

  Notes to Consolidated Financial Statements........................................   F-8

SCHEDULES

  Report of Independent Accountants on Financial Statement Schedules................   S-1

  I.                    Summary of Investments Other Than Investments in Related
                          Parties at December 31, 2001..............................   S-2

  II.                   Condensed Financial Information of Registrant...............   S-3

  III.                  Supplementary Insurance Information for the years ended
                          December 31, 2001, 2000 and 1999..........................   S-6

  IV.                   Reinsurance for the years ended December 31, 2001, 2000 and
                          1999......................................................   S-7


    Schedules other than those listed above are omitted for the reason that they
are not applicable.

                                      F-1

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Arch Capital Group Ltd. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers
Hamilton, Bermuda
February 28, 2002, except as to the matters described in Note 18 to the
consolidated financial statements which are as of March 7, 2002

                 See Notes to Consolidated Financial Statements

                                      F-2

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                       (IN THOUSANDS, EXCEPT SHARE DATA)



                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2001        2000
                                                              ----------   --------
                                                                     
ASSETS
Investments:
Fixed maturities available for sale, at fair value
  (amortized cost: 2001, $467,154; 2000, $37,849)...........  $  468,269   $ 38,475
Short-term investments available for sale, at fair value
  (amortized cost: 2001, $477,058; 2000, $97,387)...........     476,820     97,387
Publicly traded equity securities available for sale, at
  fair value (cost: 2001, $960; 2000, $24,987)..............         235     51,322
Securities held in escrow, at fair value (amortized cost:
  2001, $22,156; 2000, $20,887).............................      22,156     20,970
Privately held securities (cost: 2001, $41,587; 2000,
  $57,913)..................................................      41,608     56,418
                                                              ----------   --------
Total investments...........................................   1,009,088    264,572
                                                              ----------   --------
Cash........................................................       9,970     11,481
Accrued investment income...................................       7,572      1,432
Premiums receivable.........................................      59,463         --
Unpaid losses and loss adjustment expenses recoverable......      90,442         --
Paid losses and loss adjustment expenses recoverable........      14,418         --
Prepaid reinsurance premiums................................      58,961         --
Goodwill....................................................      26,336      6,111
Deferred income tax asset...................................      13,716      8,192
Deferred policy acquisition costs...........................       5,412         --
Other assets................................................      18,323      4,119
                                                              ----------   --------
TOTAL ASSETS................................................  $1,313,701   $295,907
                                                              ==========   ========
LIABILITIES
Reserve for losses and loss adjustment expenses.............  $  113,507   $     --
Unearned premiums...........................................      88,539         --
Reinsurance balances payable................................      47,029         --
Reserve for loss of escrowed assets.........................      18,833     15,000
Other liabilities...........................................      25,424      8,608
                                                              ----------   --------
TOTAL LIABILITIES...........................................     293,332     23,608
                                                              ----------   --------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3 AND NOTE 9)
SHAREHOLDERS' EQUITY
Preference shares ($.01 par value, 50,000,000 shares
  authorized, issued: 2001, 35,687,735; 2000, 0)............         357         --
Common shares ($.01 par value, 200,000,000 shares
  authorized, issued: 2001, 13,513,538; 2000, 12,708,818)...         135        127
Additional paid-in capital..................................   1,039,887    288,016
Deferred compensation under share award plan................      (8,230)      (341)
Retained earnings (deficit).................................     (11,610)   (33,626)
Accumulated other comprehensive income consisting of
  unrealized appreciation (decline) in value of investments,
  net of income tax.........................................        (170)    18,123
                                                              ----------   --------
TOTAL SHAREHOLDERS' EQUITY..................................   1,020,369    272,299
                                                              ----------   --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY....................  $1,313,701   $295,907
                                                              ==========   ========


                 See Notes to Consolidated Financial Statements

                                      F-3

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                       (IN THOUSANDS, EXCEPT SHARE DATA)



                                                               YEARS ENDED DECEMBER 31,
                                                        ---------------------------------------
                                                           2001          2000          1999
                                                        -----------   -----------   -----------
                                                                           
REVENUES
Net premiums written..................................  $    36,216   $   (10,604)  $   306,726
(Increase) decrease in unearned premiums..............       (5,298)       98,134         4,642
                                                        -----------   -----------   -----------
Net premiums earned...................................       30,918        87,530       311,368
Net investment income.................................       12,120        15,923        20,173
Net realized investment gains (losses)................       18,382        20,045        17,227
Fee income............................................       12,426            --            --
Equity in net income (loss) of investees..............        2,608         1,945        (3,968)
Gain on sale of prior reinsurance operations..........           --         2,191            --
                                                        -----------   -----------   -----------
TOTAL REVENUES........................................       76,454       127,634       344,800
                                                        -----------   -----------   -----------
EXPENSES
Losses and loss adjustment expenses...................       23,448        76,263       305,841
Net commissions and brokerage.........................          813        26,756        80,540
Other operating expenses..............................       27,692         6,855        14,188
Provision for non-cash compensation...................        2,771         1,098           628
Provision for loss of escrowed assets, net of other
  related reserves....................................       (2,414)       15,000            --
Foreign exchange (gain) loss..........................           --         1,159          (198)
                                                        -----------   -----------   -----------
TOTAL EXPENSES........................................       52,310       127,131       400,999
                                                        -----------   -----------   -----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
  EFFECT OF ACCOUNTING CHANGE.........................       24,144           503       (56,199)
                                                        -----------   -----------   -----------
Income taxes:
Current...............................................          656            --        (9,021)
Deferred..............................................        1,472         8,515       (11,925)
                                                        -----------   -----------   -----------
Income tax expense (benefit)..........................        2,128         8,515       (20,946)
                                                        -----------   -----------   -----------
Income (Loss) Before Cumulative Effect of Accounting
  Change..............................................       22,016        (8,012)      (35,253)
Cumulative effect of accounting change................           --            --          (383)
                                                        -----------   -----------   -----------
NET INCOME (LOSS).....................................  $    22,016   $    (8,012)  $   (35,636)
                                                        ===========   ===========   ===========
NET INCOME (LOSS) PER SHARE DATA
Basic.................................................  $      1.71   $     (0.61)  $     (2.09)
Diluted...............................................  $      1.29   $     (0.61)  $     (2.09)
AVERAGE SHARES OUTSTANDING
Basic.................................................   12,855,668    13,198,075    17,086,732
Diluted...............................................   17,002,231    13,198,075    17,086,732


                 See Notes to Consolidated Financial Statements

                                      F-4

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                 (IN THOUSANDS)



                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                 2001        2000       1999
                                                              ----------   --------   --------
                                                                             
PREFERENCE SHARES
Balance at beginning of year................................          --         --         --
Preference shares issued....................................  $      357         --         --
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................         357         --         --
                                                              ----------   --------   --------
COMMON SHARES
Balance at beginning of year................................         127   $    171   $    171
Common shares issued........................................          11          4         --
Common shares retired.......................................          (3)       (48)        --
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................         135        127        171
                                                              ----------   --------   --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year................................     288,016    342,034    341,878
Common shares issued........................................      11,345      5,736        156
Common shares retired.......................................         (48)   (59,754)        --
Preference shares issued....................................     740,380         --         --
Stock options issued........................................         194         --         --
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................   1,039,887    288,016    342,034
                                                              ----------   --------   --------
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year................................        (341)      (317)    (1,062)
Restricted common shares (issued) cancelled.................     (10,466)    (1,122)       117
Deferred compensation expense recognized....................       2,577      1,098        628
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................      (8,230)      (341)      (317)
                                                              ----------   --------   --------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year................................     (30,916)   (22,175)    10,261
Adjustment to retroactively adopt the equity method of
  accounting for the original investment in ART Services....      (2,710)    (3,439)      (239)
                                                              ----------   --------   --------
Balance at beginning of year, as adjusted...................     (33,626)   (25,614)    10,022
Net income (loss)...........................................      22,016     (8,012)   (35,636)
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................     (11,610)   (33,626)   (25,614)
                                                              ----------   --------   --------
TREASURY SHARES, AT COST
Balance at beginning of year................................          --       (387)      (284)
Treasury shares purchased...................................         (48)   (59,415)      (103)
Treasury shares retired.....................................          48     59,802         --
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................          --         --       (387)
                                                              ----------   --------   --------
ACCUMULATED OTHER COMPREHENSIVE INCOME UNREALIZED
  APPRECIATION (DECLINE) IN VALUE OF INVESTMENTS, NET OF
  INCOME TAX
Balance at beginning of year................................      18,432     27,188     47,038
Adjustment to retroactively adopt the equity method of
  accounting for the original investment in ART Services....        (309)      (745)        --
                                                              ----------   --------   --------
Balance at beginning of year, as adjusted...................      18,123     26,443     47,038
Change in unrealized appreciation (decline).................     (18,293)    (8,320)   (20,595)
                                                              ----------   --------   --------
BALANCE AT END OF YEAR......................................        (170)    18,123     26,443
                                                              ----------   --------   --------
TOTAL SHAREHOLDERS' EQUITY..................................  $1,020,369   $272,299   $342,330
                                                              ==========   ========   ========


                 See Notes to Consolidated Financial Statements

                                      F-5

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                 (IN THOUSANDS)



                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                           
COMPREHENSIVE INCOME (LOSS)
Net income..................................................  $22,016    $ (8,012)  $(35,636)
Other comprehensive income (loss), net of tax
  Unrealized appreciation (decline) of investments:
    Unrealized holding gains (losses) arising during year...   (7,153)      4,317     (9,397)
    Less: reclassification of net realized gains included in
      net income............................................   11,140      12,637     11,198
                                                              -------    --------   --------
  Other comprehensive income (loss).........................  (18,293)     (8,320)   (20,595)
                                                              -------    --------   --------
COMPREHENSIVE INCOME (LOSS).................................  $ 3,723    $(16,332)  $(56,231)
                                                              =======    ========   ========


                 See Notes to Consolidated Financial Statements

                                      F-6

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)



                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              ---------   ---------   --------
                                                                             
OPERATING ACTIVITIES
Net income (loss)...........................................  $  22,016   $  (8,012)  $(35,636)
    Adjustments to reconcile net income (loss) to net cash
      provided by (used for) operating activities:
        Net investment gains................................    (18,382)    (11,542)   (17,227)
        Provision for non-cash compensation.................      2,771       1,098        628
        Reserve for loss of escrowed assets.................      3,733      15,000         --
        Changes in:
          Reserve for losses and loss adjustment expenses,
            net.............................................      8,309       7,069    147,897
          Unearned premiums.................................      8,558      (5,226)    (4,642)
          Premiums receivable...............................     (8,331)     10,733    (30,710)
          Accrued investment income.........................     (5,181)      3,095     (1,895)
          Reinsurance recoverables..........................    (13,568)    (11,093)   (31,938)
          Reinsurance balances payable......................        560      (5,121)     9,270
          Deferred policy acquisition costs.................     (1,076)        344        (70)
          Deferred income tax asset.........................      1,665       6,855    (10,327)
          Other liabilities.................................     (1,605)      8,098     11,695
          Other items, net..................................     (5,098)     (8,669)   (29,499)
                                                              ---------   ---------   --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES........     (5,629)      2,629      7,546
                                                              ---------   ---------   --------
INVESTING ACTIVITIES
Purchases of fixed maturity investments.....................   (560,246)   (131,788)  (374,862)
Sales of fixed maturity investments.........................    182,904     228,456    270,325
Purchases of equity securities..............................         --     (18,233)   (39,364)
Sales of equity securities..................................     47,144      89,862     92,045
Net sales (purchases) of short-term investments.............   (365,238)   (171,173)    41,898
Acquisition of ART Services, net of cash....................    (34,546)         --         --
Acquisition of American Independent Insurance Holding
  Company, net of cash......................................        102          --         --
Acquisition of Hales........................................         --      (1,792)        --
Sales or disposal (purchases) of furniture, equipment and
  other.....................................................     (6,311)          6       (338)
Proceeds from sale of prior reinsurance operations..........         --         517         --
                                                              ---------   ---------   --------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........   (736,191)     (4,145)   (10,296)
                                                              ---------   ---------   --------
FINANCING ACTIVITIES
Common shares issued, primarily stock based compensation....     10,923       5,620        156
Preference shares issued....................................    740,737          --         --
Purchase of treasury shares.................................        (48)      3,430       (103)
Deferred compensation on restricted shares..................    (10,466)     (1,122)       117
Debt retirement.............................................       (450)         --         --
Shares issued in connection with acquisitions...............       (387)     (4,388)        --
                                                              ---------   ---------   --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES........    740,309       3,540        170
                                                              ---------   ---------   --------
Increase (decrease) in cash.................................     (1,511)      2,024     (2,580)
Cash beginning of year......................................     11,481       9,457     12,037
                                                              ---------   ---------   --------
CASH END OF YEAR............................................  $   9,970   $  11,481   $  9,457
                                                              =========   =========   ========
Net income taxes paid (received)............................  $     330          --   $ (8,605)
                                                              =========   =========   ========


                 See Notes to Consolidated Financial Statements

                                      F-7

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED STATEMENTS

1. ORGANIZATION

    Arch Capital Group Ltd. ("ACGL") is a Bermuda public limited liability
company with more than $1 billion in equity capital, providing insurance and
reinsurance on a worldwide basis through its wholly owned subsidiaries.

    ACGL was formed in September 2000 and became the sole shareholder of Arch
Capital Group (U.S.) Inc. ("Arch-U.S.") pursuant to an internal reorganization
transaction completed in November 2000, as described below. Arch-U.S. is a
Delaware company formed in March 1995 under the original name of "Risk Capital
Holdings, Inc." Arch-U.S. commenced operations following the completion of its
initial public offering in September 1995. In connection with its initial public
offering, the Company issued 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. Class A Warrants are immediately exercisable at $20 per
share and expire September 19, 2002. Class B Warrants will become exercisable at
$20 per share after the Common Shares have traded at or above $30 per share for
20 out of 30 consecutive trading days or a change of control (as defined in the
Class B Warrants) has occurred. The Class B Warrants expire on September 19,
2005.

    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").

    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.

    As used herein, 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
$0.01, of ACGL, except when referring to periods prior to November 8, 2000, when
it means the common stock of Arch-U.S.

    On October 24, 2001, the Company announced the launch of a new underwriting
initiative to meet current and future demand in the global insurance and
reinsurance markets. Simultaneously with the launch of its new underwriting
initiative, the Company entered into subscription agreements with investors led
by Warburg Pincus investment funds and Hellman & Friedman investment funds (the
"principal investors") and certain members of management. On November 20, 2001,
the Company issued 35,687,735 Series A convertible preference shares and
3,776,025 Class A Warrants in exchange for $763.2 million in cash under such
agreements (see Note 12). In a related transaction, upon the closing of this
investment, 905,397 previously existing Class A Warrants held by Marsh &
McLennan Risk Capital Holdings, Ltd. ("MMRCH") were canceled in exchange for
140,380 newly issued Common Shares, and Class B Warrants to purchase 1,770,601
Common Shares held by MMRCH were canceled in exchange for a cash payment by the
Company of $7.50 per Class B Warrant (approximately $13.3 million in the
aggregate) (see Note 8).

                                      F-8

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES

    (A) BASIS OF PRESENTATION

    The 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 Reinsurance Ltd. ("Arch Re Bermuda"),
Arch-U.S., Hales & Company Inc. ("Hales"), American Independent Insurance
Holding Company ("AIHC"), Arch Risk Transfer Services Ltd., formerly known as
Altus Holdings, Ltd. ("ART Services"), Arch Re and Cross River Insurance Company
("Cross River"). All significant intercompany transactions and balances have
been eliminated in consolidation. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.

    (B) PREMIUM REVENUES AND RELATED EXPENSES

    Insurance premiums written are recorded in accordance with the terms of the
underlying policies. Reinsurance premiums assumed are recognized as income on a
pro rata basis over the terms of the related reinsurance contracts. These
amounts are based on reports received from ceding companies, supplemented by the
Company's own estimates of premiums for which ceding company reports have not
been received. Subsequent differences arising on such estimates are recorded in
the period they are determined. Unearned premium reserves represent the portion
of premiums written that relates to the unexpired terms of contracts in force.
Certain of the Company's contracts included provisions that adjusted premiums or
acquisition costs based upon the experience under the contracts. Premiums
written and earned as well as related acquisition expenses under those contracts
are recorded based upon the expected ultimate experience under these contracts.

    Acquisition costs, which vary with and are primarily related to the
acquisition of policies, consisting principally of commissions and brokerage
expenses incurred at the time a contract is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred acquisition
costs are carried at their estimated realizable value based on the related
unearned premiums and take into account anticipated losses and loss adjustment
expenses, based on historical and current experience, and anticipated investment
income.

    (C) REINSURANCE CEDED

    In the normal course of business, the Company seeks to reduce the loss that
may arise from events that could cause unfavorable underwriting results by
reinsuring certain levels of risk with other insurance enterprises or
reinsurers. The Company uses quota-share, surplus share and excess of loss
reinsurance contracts. Reinsurance commissions are recognized as income on a pro
rata basis over the period of risk. The portion of such commissions that will be
earned in the future is deferred and reported as a reduction to policy
acquisition costs. The accompanying consolidated statement of income reflects
premiums and losses and loss adjustment expenses and policy acquisition costs,
net of reinsurance ceded (see Note 6). Ceded unearned premiums are reported as
prepaid reinsurance premiums and estimated amounts of reinsurance recoverable on
unpaid losses are included as unpaid losses and loss adjustment expenses
recoverable. Reinsurance premiums and unpaid losses and loss adjustment expenses
recoverable are estimated in a manner consistent with that of the original
policies

                                      F-9

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
issued and the terms of the reinsurance contracts. To the extent that any
reinsurer does not meet its obligations under reinsurance agreements, the
Company must discharge the liability. Provision is made for estimated
unrecoverable reinsurance.

    (D) FEE INCOME

    Fee income in connection with advisory services is recognized when all
services have been performed and the underlying transactions are substantially
completed. Policy related fee income, such as billing, cancellation and
reinstatement fees are primarily recognized when billed.

    (E) INVESTMENTS

    The Company currently classifies all of its publicly traded fixed maturity,
short-term investments and equity securities as "available for sale" and,
accordingly, they are carried at estimated fair value. The fair value of
publicly traded fixed maturity securities and publicly traded equity securities
is estimated using quoted market prices or dealer quotes.

    Investments in privately held securities, issued by privately and publicly
held companies, may include both equity securities and securities convertible
into, or exercisable for, equity securities (some of which may have fixed
maturities) and debt securities. 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 initially records an investment at cost, and then records its
proportionate share of comprehensive income or loss for such investment after
the date of acquisition. The estimated fair value of investments in privately
held securities, other than those carried under the equity method, 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.

    Investment gains or losses realized on the sale of investments are
determined by the first-in first-out method and reflected in net income.
Unrealized appreciation or decline in value of securities which are carried at
fair value is excluded from net income and recorded as a separate component of
other comprehensive income, net of applicable deferred income tax.

    Net investment income, consisting of dividends and interest, net of
investment expenses, is recognized when earned. The amortization of premium and
accretion of discount for fixed maturity investments is computed utilizing the
interest method. Anticipated prepayments and expected maturities are used in
applying the interest method for certain investments such as mortgage and other
asset-backed securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The

                                      F-10

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
net investment in such securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of the
security. Such adjustments, if any, are included in net investment income.

    (F) LOSSES AND LOSS ADJUSTMENT EXPENSES

    The reserve for losses and loss adjustment expenses consists of estimates of
unpaid reported losses and loss expenses and estimates for losses incurred but
not reported. These reserves are based on case basis evaluations and statistical
analysis, and are not discounted. For reinsurance assumed, such reserves are
based on reports received from ceding companies, supplemented by the Company's
estimates of reserves for which ceding company reports have not been received,
and the Company's own historical experience. To the extent that the Company's
own historical experience is inadequate for estimating reserves, such estimates
are determined based upon industry experience and management's judgment. The
ultimate liability may vary from such estimates, and any adjustments to such
estimates are reflected in income in the period in which they are determined.
Losses and loss adjustment expenses are recorded without consideration of
potential salvage or subrogation recoveries which are estimated to be
immaterial. Such recoveries, when realized, are reflected as a reduction of
losses incurred.

    (G) FOREIGN EXCHANGE

    The United States dollar is the functional currency for the Company's
foreign business. Gains and losses on the translation into United States dollars
of amounts that are denominated in foreign currencies are included in net
income. Foreign currency revenue and expenses are translated at average exchange
rates during the year. Unhedged monetary assets and liabilities denominated in
foreign currencies are translated at the rate of exchange in effect at the
balance sheet date.

    (H) INCOME TAXES

    The Company utilizes the balance sheet method of accounting for income
taxes. Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. A valuation allowance is
recorded if it is "more-likely-than-not" that some or all of a deferred tax
asset may not be realized.

    (I) EARNINGS PER SHARE DATA

    Earnings per share are computed in accordance with SFAS No. 128, "Earnings
per share" (see Note 13 for the Company's earnings per share computations).
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 Preference Shares, Class A and B warrants,
nonvested restricted shares and employee stock options were exercised for 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.

                                      F-11

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    (J) STOCK OPTIONS

    The Company follows Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") requires use of option valuation models that were
not developed for use in valuing employee stock options. Accordingly, under APB
No. 25, compensation expense for stock option grants is recognized by the
Company to the extent that the fair value of the underlying stock exceeds the
exercise price of the option at the measurement date. In addition, under APB
No. 25, the Company does not recognize compensation expense for stock issued to
employees under its stock purchase plan.

    In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25 (the "Interpretation"). The
Interpretation became effective July 1, 2000 and is required to be applied
prospectively (subject to certain exceptions) to all new awards, modifications
to outstanding awards, and changes in employee status after that date. While
there are certain exceptions to prospective application, the Company has adopted
the Interpretation and its requirements are applied prospectively.

    (K) AMORTIZATION OF INTANGIBLE ASSETS

    Goodwill of acquired businesses represents the difference between the
purchase price and the fair value of the net assets of the acquired businesses
and is 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 relating to its acquisitions of Hales, AIHC and ART Services
and has not allocated any amounts to other intangible assets relating to such
acquisitions. The Company evaluates the recoverability of the carrying value of
goodwill relating 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.

    In connection with the Company's acquisitions of privately held equity
securities recorded under the equity method of accounting, goodwill is amortized
on a straight-line basis over 25 years (see Note 2 (n) and Note 4).

    (L) RECLASSIFICATIONS

    The Company has reclassified the presentation of certain prior year
information to conform to the current presentation. Such reclassifications had
no effect on the Company's net income, shareholders' equity or cash flows.

    (M) RESTATEMENTS

    The Company filed with the Securities and Exchange Commission ("SEC") an
amended Form 10-K for the year ended December 31, 2000 and an amended Form 10-Q
for the quarter ended March 31, 2001 to restate the financial statements
included in such filings. The restatements were required as a result of the
Company's acquisition of the remaining ownership interests in ART Services in
June 2001. The Company was required under generally accepted accounting
principles governing a

                                      F-12

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"step acquisition" of an investee company to retroactively adopt the equity
method of accounting for its original minority ownership interest in ART
Services for the periods prior to the acquisition and to restate its historical
financial results (see Note 3). The accompanying consolidated financial
statements include the effects of this required restatement and should be read
in conjunction with the restated financial statements contained in such amended
SEC filings.

    (N) RECENT ACCOUNTING PRONOUNCEMENTS

    In June 2001, the Financial and Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations." SFAS No. 141 establishes accounting and reporting standards for
business combinations and requires the purchase method of accounting be applied
for all business combinations initiated after June 30, 2001 and eliminates among
other things, the pooling-of-interests method. The Company has accounted for its
recently completed acquisitions using the purchase method of accounting and does
not expect the application of SFAS No. 141 to have any material impact on its
financial position or results of operations.

    In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which will become effective for the Company on January 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of the amortization of
goodwill and the introduction of impairment testing in its place. The adoption
of SFAS No. 142 will result in the Company's discontinuation of amortization of
its goodwill beginning in 2002. The Company will continue to be required to test
goodwill for impairment under the new standard, which could have an adverse
effect on future results of operations to the extent an impairment exists. Under
SFAS No. 142, goodwill recorded after June 30, 2001 will not be amortized.
Goodwill recorded prior to July 1, 2001 has been amortized through the year
ended December 31, 2001. The Company did not record goodwill subsequent to
June 30, 2001 (see Note 3). In addition, the standard includes provisions for
the reclassification of certain existing recognized intangibles such as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.
Pursuant to SFAS No. 142, the Company will test goodwill for impairment upon
adoption and, if impairment is indicated, record such impairment as a cumulative
effect of an accounting change. The Company is currently evaluating the effect
that the adoption may have on the consolidated results of operations and
financial position. The Company has not yet developed an estimate of the impact
of the adoption of SFAS No. 142 on its consolidated results of operations. The
Company does believe that the adoption of SFAS No. 142 will not have a material
impact on consolidated financial condition.

    In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and, consequently, amends portions of Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and will be adopted by the Company on January 1, 2002. The Company does not
expect that the application of SFAS No. 144 will have a material impact on its
financial position or results of operations.

                                      F-13

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS

    AMERICAN INDEPENDENT INSURANCE HOLDING COMPANY

    On February 28, 2001, the Company completed a transaction pursuant to which
the Company acquired all of the common stock of AIHC, previously one of its
investee companies (see Note 4). 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 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 $11.0 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.

    ARCH RISK TRANSFER SERVICES LTD.

    On June 22, 2001, the Company completed the acquisition of all of the
remaining ownership interests in one of its investee companies, ART Services,
for a purchase price of approximately $38.8 million. The purchase price
consisted of approximately $38.4 million in cash and 24,200 ACGL Common Shares.

    Through its wholly owned subsidiaries, including First American Insurance
Company ("First American"), an admitted insurer with licenses in 49 states and
an A.M. Best rating "A- (Excellent)," ART Services provides insurance and
alternative risk transfer services through rent-a-captive and other facilities.

    After the Company's acquisition of its initial 27.9% ownership interest in
ART Services in March 1998, the investment was carried at its estimated fair
value from the initial purchase through March 31, 2001 in accordance with
generally accepted accounting principles. The Company accounted for its initial
interest in ART Services under "fair value" because the Company did not have the
ability to exercise significant influence over this investment due to the
Company's limited voting and consent rights. Upon acquiring the remaining
ownership interests in ART Services, the Company was required under generally
accepted accounting principles governing a "step acquisition" of an investee
company

                                      F-14

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS
(CONTINUED)
to retroactively adopt the equity method of accounting for its original minority
ownership interest in ART Services for the periods prior to the acquisition and
to restate its historical financial results.

    The required change to the equity method of accounting for this investment
resulted in a reduction in the Company's book value at December 31, 2001 in the
amount of $3.5 million and decreased net income by $475,000 for the year ended
December 31, 2001. Restating the amounts previously reported decreased the net
loss for the year ended December 31, 2000 by $729,000 and increased the net loss
for the year ended December 31, 1999 by $3.2 million, respectively (see
Note 4).

    PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

    The following unaudited pro forma financial information includes the audited
financial information for ART Services and AIHC for the year ended December 31,
2001 and 2000 as if the acquisitions had occurred on January 1, 2000. The
unaudited pro forma financial information for the year ended December 31, 2000
excludes the acquisition of Hales (which occurred on December 4, 2000) because
it was not significant.

    The pro forma financial information is based upon information available and
includes certain assumptions that the Company's management believes are
reasonable. The pro forma financial information does not purport to be
indicative of the Company's results of operations that would have occurred or
resulted had the transactions been completed on such dates nor is the
information intended to be a projection of the Company's results of operations
or financial condition for any future periods.



                                                 (IN THOUSANDS, EXCEPT SHARE DATA)
                                                         PRO FORMA RESULTS
                                                     YEARS ENDED DECEMBER 31,
                                                 ---------------------------------
                                                      2001              2000
                                                 ---------------   ---------------
                                                             
Total Revenues.................................     $101,872          $174,139

Net Income (Loss)..............................     $ 24,876          $(20,854)

Basic earnings (loss) per share................     $   1.93          $  (1.58)
Diluted earnings (loss) per share..............     $   1.46          $  (1.58)


    HALES & COMPANY

    On December 4, 2000, the Company acquired substantially all of the assets of
Hales Capital Advisors, LLC, a privately held merchant banking firm specializing
in the insurance industry. Founded in 1973, Hales is a merger and acquisition
advisor to middle-market insurance organizations and the manager of the general
partner of Distribution Partners Investment Capital, L.P., a private equity fund
with $51 million of committed capital. Distribution Partners focuses on equity
investments in insurance distribution and distribution-related service
companies. The purchase price for the Hales assets consisted of 300,000 Common
Shares (which shares are subject to a two-year lock-up through December 4, 2002)
and $1.9 million in cash, representing a total purchase price of approximately
$6.4 million (based on the closing market price of the Common Shares on
December 4, 2000). Substantially all of this amount is reflected as goodwill.

                                      F-15

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS
(CONTINUED)
    Hales provides merger and acquisition advisory and valuation services to its
clients. Hales' clients include insurance distributors, insurance companies,
banks and other financial institutions with interests in insurance distribution.

    GOODWILL RELATING TO ACQUISITIONS

    The carrying amount of goodwill at December 31, 2001 was $26.3 million,
consisting of $5.7 million, $13.6 million and $7.0 million, respectively,
relating to the acquisitions of Hales, AIHC and ART Services. At December 31,
2000, goodwill consisted of $6.1 million relating to the acquisition of Hales.
Amortization of goodwill for the year ended December 31, 2001 was $1.4 million
(see Note 2(n)).

    FOLKSAMERICA TRANSACTION

    On May 5, 2000, the Company sold the prior reinsurance operations of Arch Re
pursuant to an agreement entered into as of January 10, 2000 with Folksamerica
Reinsurance Company and Folksamerica Holding Company (collectively,
"Folksamerica"). Folksamerica Reinsurance Company assumed Arch Re's liabilities
under the reinsurance agreements transferred in the asset sale and Arch Re
transferred to Folksamerica Reinsurance Company assets estimated in an aggregate
amount equal in book value to the book value of the liabilities assumed. In
consideration for the transfer of Arch Re's book of business, Folksamerica paid
$20.084 million (net of a credit equal to $251,000 granted to Folksamerica for
certain tax costs) in cash at the closing, subject to post-closing adjustments
based on an independent actuarial report of the claim liabilities transferred
and an independent audit of the net assets sold. Following the completion of
such report and audit, the parties agreed upon net post-closing adjustments in
the amount of approximately $3.2 million payable by the Company, which consisted
of a $4.2 million reduction in the purchase price less $1 million in net book
value of the assets and liabilities actually transferred at closing.

    Under the terms of the agreement, $20 million of the purchase price has been
placed 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. 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 would 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. The
agreement also provided that an additional amount of up to $5 million would be
placed in escrow for a period of five years to the extent that Arch Re's
reserves at closing on all business other than that covered by the $20 million
escrow were less by at least a specified amount than those estimated by its
independent actuaries. No such supplemental escrow was required.

    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

                                      F-16

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS
(CONTINUED)
actuarial analysis, the Company recorded 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
losses and loss adjustment expenses incurred as of December 31, 2000.

    In February 2002, the Company reached a definitive settlement agreement with
Folksamerica to satisfy its obligations under the escrow agreement for
consideration of $17.0 million, plus accrued interest income of $1.8 million.
Accordingly, during the 2001 fourth quarter, the Company recorded an after-tax
benefit of $0.4 million, which consisted of a charge of $2.5 million, offset by
a reversal of a related reserve in the amount of $2.9 million. The related
reserve had been provided for the purchase of reinsurance, which is no longer
required due to the fact that the escrow arrangements have been terminated under
the above settlement agreement.

    Under the terms of the agreement, the Company had also purchased in 2000
reinsurance protection covering the Company's transferred 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 if a loss is incurred that exceeds
$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 has
denied the validity of any such potential claim.

                                      F-17

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS
(CONTINUED)

    The net book value gain resulting from the sale of the Company's prior
reinsurance operations to Folksamerica was calculated as follows (in thousands):


                                                           
Consideration received, consisting of the following:
Total liabilities transferred...............................  $514,330
Cash premium received.......................................    16,920
                                                              --------
                                                               531,250
                                                              --------
Assets transferred..........................................   478,687
Amortization of deferred policy acquisition costs...........    23,242
Transaction costs...........................................    21,800
                                                              --------
                                                               523,729
                                                              --------
Pre-tax gain on sale of reinsurance operations..............     7,521
Realized loss on securities transferred at market value.....    (5,330)
                                                              --------
Net pre-tax gain............................................     2,191
Income tax expense (1)......................................     4,137
                                                              --------
Net loss reflected in the consolidated statement of
  income....................................................    (1,946)
Change in net unrealized appreciation of investments, net of
  tax (2)...................................................     5,330
                                                              --------
Comprehensive income and net book value gain................  $  3,384
                                                              ========


------------------------

       (1) The income tax benefit of $1.5 million relating to post-closing
           adjustments of $4.2 million was offset by an equivalent deferred tax
           asset valuation allowance.

       (2) The income tax benefit of $1.9 million relating to the realized loss
           on securities transferred at market value was offset by an equivalent
           deferred tax asset valuation allowance.

    Transaction costs consisted of the following (in millions):


                                                           
Severance and other related costs...........................   $11.0
Reinsurance costs...........................................     4.8
Investment banking, legal and accounting fees...............     2.3
Write-off of furniture, equipment and leasehold
  improvements..............................................     1.7
Write-off of lease obligation...............................     1.3
Other.......................................................     0.7
                                                               -----
Total.......................................................   $21.8
                                                               =====


    As of December 31, 2001, accrued and unpaid transaction costs amounted to
approximately $477,000. Of such amount, $453,000 relates to the write-off of the
Company's lease obligation expected to be paid over the remainder of the lease
term expiring in October 2002. During the 2001 fourth quarter, the Company
reversed approximately $4.4 million of such accrued and unpaid transaction costs
that had been provided for the purchase of reinsurance, which is no longer
required due to the fact

                                      F-18

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3. ACQUISITION OF SUBSIDIARIES AND DISPOSITION OF PRIOR REINSURANCE OPERATIONS
(CONTINUED)
that the purchase price escrow has been terminated under the definitive
settlement agreement between the Company and Folksamerica, as described above.

    The GAAP book value of the assets and liabilities transferred to
Folksamerica at closing were as follows (in millions):


                                                           
Fixed maturities, short-term investments and accrued
  interest income...........................................   $249.9
Premiums receivable.........................................    108.6
Reinsurance recoverable.....................................     73.2
Deferred policy acquisition costs...........................     23.2
Deferred income tax asset...................................     13.5
Other insurance assets......................................     47.0
                                                               ------
Total assets................................................   $515.4
                                                               ------
Reserve for losses and loss adjustment expenses.............   $371.6
Net unearned premium reserve................................    103.4
Reinsurance premiums payable................................      9.5
Other insurance liabilities.................................     29.8
                                                               ------
Total liabilities...........................................   $514.3
                                                               ------
Net book value of assets and liabilities transferred........   $  1.1
                                                               ======


    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 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.

                                      F-19

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION

    NET INVESTMENT INCOME

    The components of net investment income were derived from the following
sources:



                                                           (IN THOUSANDS)
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2001       2000       1999
                                                   --------   --------   --------
                                                                
Fixed maturities.................................  $ 6,750    $ 9,728    $14,924
Short-term investments...........................    4,969      5,167      5,677
Publicly traded equity securities................      371      1,373      4,019
Privately held securities........................      146        513      1,007
                                                   -------    -------    -------
Gross investment income..........................   12,236     16,781     25,627
Investment expenses..............................      116        858      5,454
                                                   -------    -------    -------
Net investment income............................  $12,120    $15,923    $20,173
                                                   =======    =======    =======


    REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)

    Net realized investment gains (losses) were as follows:



                                                          (IN THOUSANDS)
                                                     YEARS ENDED DECEMBER 31,
                                                  ------------------------------
                                                    2001       2000       1999
                                                  --------   --------   --------
                                                               
Fixed maturities................................  $(2,116)   $(15,550)  $(1,776)
Publicly traded equity securities...............   22,896      30,088    16,798
Privately held securities.......................   (2,398)        177     2,205
                                                  -------    --------   -------
                                                   18,382      14,715    17,227
Loss on fixed maturities included in gain on
  sale of prior reinsurance operations..........       --       5,330        --
                                                  -------    --------   -------
Net realized investment gains...................   18,382      20,045    17,227
Income tax expense..............................    7,242       7,408     6,029
                                                  -------    --------   -------
Net realized investment gains, net of tax.......  $11,140    $ 12,637   $11,198
                                                  =======    ========   =======


    In 2000, net realized gains included $11.0 million of pre-tax losses, or
$8.7 million, after-tax, recorded during the 2000 fourth quarter resulting from
the restructuring of the Company's investment portfolio in connection with its
redomestication to Bermuda on November 8, 2000.

                                      F-20

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION (CONTINUED)
    The following tables reconcile estimated fair value and carrying value to
the amortized cost of fixed maturities and equity securities:



                                                                       (IN THOUSANDS)
                                                                     DECEMBER 31, 2001
                                                      ------------------------------------------------
                                                      ESTIMATED
                                                      FAIR VALUE
                                                         AND         GROSS        GROSS
                                                       CARRYING    UNREALIZED   UNREALIZED   AMORTIZED
                                                        VALUE        GAINS       (LOSSES)      COST
                                                      ----------   ----------   ----------   ---------
                                                                                 
Fixed maturities:
  U.S. government and government agencies...........   $137,861      $2,026       $  (782)   $136,617
  Corporate bonds...................................    239,261       1,414        (1,538)    239,385
  Mortgage and asset backed securities..............     91,147         321          (326)     91,152
                                                       --------      ------       -------    --------
                                                        468,269       3,761        (2,646)    467,154
                                                       --------      ------       -------    --------
Equity securities:
  Publicly traded...................................        235          --          (725)        960
  Privately held....................................     41,608          21            --      41,587
                                                       --------      ------       -------    --------
                                                         41,843          21          (725)     42,547
                                                       --------      ------       -------    --------
  Total.............................................   $510,112      $3,782       $(3,371)   $509,701
                                                       ========      ======       =======    ========




                                                                       (IN THOUSANDS)
                                                                     DECEMBER 31, 2000
                                                      ------------------------------------------------
                                                      ESTIMATED
                                                      FAIR VALUE
                                                         AND         GROSS        GROSS
                                                       CARRYING    UNREALIZED   UNREALIZED   AMORTIZED
                                                        VALUE        GAINS       (LOSSES)      COST
                                                      ----------   ----------   ----------   ---------
                                                                                 
Fixed maturities:
  U.S. government and government agencies...........   $ 27,122      $   523      $   (32)   $ 26,631
  Corporate bonds...................................      5,835           92          (14)      5,757
  Mortgage and asset backed securities..............      5,518           57           --       5,461
                                                       --------      -------      -------    --------
                                                         38,475          672          (46)     37,849
                                                       --------      -------      -------    --------
Fixed maturities held in escrow -- municipal
  Bonds.............................................     20,970           84           (1)     20,887
                                                       --------      -------      -------    --------
Equity securities:
  Publicly traded...................................     51,322       26,335           --      24,987
  Privately held....................................     56,418           --       (1,495)     57,913
                                                       --------      -------      -------    --------
                                                        107,740       26,335       (1,495)     82,900
                                                       --------      -------      -------    --------
  Total.............................................   $167,185      $27,091      $(1,542)   $141,636
                                                       ========      =======      =======    ========


                                      F-21

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION (CONTINUED)
    Privately held securities consist of the following:



                                                                 (IN THOUSANDS)
                                                                  DECEMBER 31,
                                                  PERCENTAGE   -------------------
                                                  OWNERSHIP      2001       2000
                                                  ----------   --------   --------
                                                                 
CARRIED UNDER THE EQUITY METHOD:
The ARC Group, LLC..............................       27.0%   $ 8,725    $ 8,468
Arx Holding Corp................................       35.2%     3,714      3,514
Island Heritage Insurance Company, Ltd..........       33.4%     4,950      4,534
New Europe Insurance Ventures...................       14.6%       609        642
Sunshine State Holding Corporation..............       23.0%     1,838      1,766
Arch Risk Transfer Services Ltd.................       27.9%        --     12,981
                                                               -------    -------
                                                                19,836     31,905
                                                               -------    -------
CARRIED AT FAIR VALUE:
Stockton Holdings Limited.......................        1.7%    10,000     10,000
Trident II, L.P.................................        2.0%    10,876      6,813
American Independent Insurance Holding Company..                    --      7,350
Distribution Investors, LLC.....................        2.5%       896        100
GuideStar Health Systems, Inc...................        2.6%         0        250
                                                               -------    -------
                                                                21,772     24,513
                                                               -------    -------
Total...........................................               $41,608    $56,418
                                                               =======    =======


    The Company had investment commitments relating to its privately held
securities in the amounts of $3.7 million and $22.6 million at December 31, 2001
and 2000, respectively.

    Goodwill in privately held equity securities at December 31, 2001 and 2000
was $7.6 million and $8.0 million, respectively. Amortization of goodwill
included in equity in net income (loss) of investees in 2001, 2000 and 1999, was
approximately $0.4 million in each year (see Note 2(n)).

    Set forth below is certain information relating to the Company's investments
and investment commitments in privately held securities at December 31, 2001.

    INVESTMENTS CARRIED UNDER THE EQUITY METHOD:

    THE ARC GROUP, LLC

    In 1997, the Company acquired a 27.0% economic and voting interest in The
ARC Group, LLC ("ARC") for approximately $9.5 million. ARC, founded in 1986, is
an independent wholesale insurance broker and managing general agent
specializing in the placement of professional liability insurance, primarily
directors and officers' liability coverage. The Company is a co-investor with
MMRCH, MMC Capital, Inc.'s ("MMC Capital") parent, and ARC's founders, who
continue to have managerial control over the daily operations.

    The Company records its equity in the operating results of ARC on a
two-month lag basis and has received cumulative distributions from ARC in the
amount of $8.5 million, which have been recorded as reductions to the carrying
value of the investment.

                                      F-22

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION (CONTINUED)
    ARX HOLDING CORP.

    In December 1997, the Company acquired a 35.2% economic and voting interest
in Arx Holding Corp. ("ARX") for $2,425,000. ARX, through its wholly owned
subsidiary American Strategic Insurance Corp., underwrites homeowners policies
in the State of Florida produced in the open market, and may also seek to offer
other lines of insurance in Florida and other states. The investment in Arx is
recorded under the equity method of accounting and the Company records the
operating results of Arx on a quarter-lag basis.

    ISLAND HERITAGE INSURANCE COMPANY, LTD.

    In 1996, the Company acquired a 33.4% economic interest (9.75% voting
interest) in Island Heritage Insurance Company, Ltd. ("Island Heritage"), a
Cayman Islands insurer, for an aggregate purchase price of $4.5 million. Island
Heritage commenced operations in May 1996 as an insurer of high value personal
and commercial property insurance in the Caribbean. Certain directors of the
Company and other investors invested in the securities of Island Heritage at the
same per share price as that paid by the Company. In February 1999, the Company
made an additional investment in Island Heritage in the amount of approximately
$1.0 million.

    The investment in Island Heritage is recorded under the equity method of
accounting and the Company records the operating results of Island Heritage on a
quarter-lag basis.

    NEW EUROPE INSURANCE VENTURES

    In 1997, the Company, through a wholly owned special purpose subsidiary,
committed to pay $5 million over the long term to fund its partnership interest,
currently at 14.6%, in New Europe Insurance Ventures ("NEIV"), a Scottish
limited partnership that targets private equity investments in insurance and
insurance-related companies in Eastern Europe.

    The Company records its participation in this partnership under the equity
method of accounting and applies the specialized accounting practices for
investment companies. Unrealized gains and losses on private equity investments,
consisting mostly of foreign exchange fluctuations, are recorded in the income
statement when such investments are revalued into United States dollars each
quarter.

    During June 2000, the partners of NEIV determined to attempt to sell NEIV's
current investment holdings, and that further investments in existing portfolio
companies may be made but only on an exceptional basis and as part of a clear
exit strategy.

    The Company's $609,000 investment balance at December 31, 2001 represents
four investments in Eastern Europe in insurance related companies. The Company's
remaining unfunded commitment remaining at December 31, 2001 was approximately
$3.2 million.

    SUNSHINE STATE HOLDING CORPORATION

    In 1997, the Company acquired a 21.5% economic and voting interest in
Sunshine State Holding Corporation ("Sunshine State") for $1.4 million. The
investment in Sunshine State is recorded under the equity method of accounting
and the Company records the operating results of Sunshine State on a quarter-lag
basis.

                                      F-23

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION (CONTINUED)
    Sunshine State and its subsidiaries, which includes Sunshine State Insurance
Company, a Florida-domiciled insurer, underwrite homeowners policies in the
State of Florida obtained from the Florida Residential Property and Casualty
Joint Underwriting Association in accordance with the Market Challenge Program
of the Florida Department of Insurance. Sunshine State also insures homeowners
policies produced through the open market and offers other lines of insurance in
Florida and other states.

    ARCH RISK TRANSFER SERVICES LTD.

    The Company owned approximately 27.9% of ART Services through June 22, 2001.
On such date, the remaining ownership interests in ART Services were acquired by
the Company and, accordingly, the financial results of ART Services have been
consolidated with the Company (see Note 3).

    INVESTMENTS CARRIED AT FAIR VALUE:

    STOCKTON HOLDINGS LIMITED

    In June 1998, the Company acquired for $10 million a 1.7% interest in
Stockton Holdings Limited ("Stockton"), a Cayman Islands insurance holding
company. Stockton conducts a world-wide reinsurance business through its wholly
owned subsidiary, Stockton Reinsurance Limited. The Company's investment was
made as part of a private placement by Stockton.

    TRIDENT II, L.P.

    Trident II, L.P. ("Trident II") is an investment partnership, which makes
private equity and equity related investments in the global insurance,
reinsurance and related industries. The fund targets investments in existing
companies that are in need of growth capital or are under performing as well as
in newly formed companies.

    On June 4, 1999, the Company committed to invest $25 million as a limited
partner of Trident II a partnership managed by MMC Capital. On November 8, 2001,
the Company was released from its remaining $11.0 capital commitment to Trident
II pursuant to an agreement entered into between ACGL, the principal investors,
The Trident Partnership, LP. ("Trident"), Trident II, and MMRCH (see Note 8).

    The term of Trident II expires in 2009. However, the term may be extended
for up to a maximum of three one-year periods at the discretion of MMC Capital
to permit orderly dissolution.

    During the first six years of the fund, the Company will pay an annual
management fee, payable semi-annually in advance, equal to 1.5% of the Company's
aggregate $25.0 million commitment as well as a percentage of cumulative net
gains on invested funds. After such six-year period, the annual management fee
will be 1.5% of the aggregate funded commitments.

    During the year ended December 31, 2001, the Company funded $6.5 million of
its investment commitment to Trident II and wrote-down its carrying value in
Trident II by $2.1 million. Fees and expenses of $404,000, $375,000 and $250,000
were paid in 2001, 2000 and 1999, respectively, to MMC Capital relating to its
management of Trident II.

                                      F-24

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION (CONTINUED)
    AMERICAN INDEPENDENT INSURANCE HOLDING COMPANY

    On February 28, 2001, the Company completed a transaction pursuant to which
the Company acquired all of the common stock of AIHC. In connection with the
acquisition, the Company's outstanding loans to AIHC were contributed to AIHC's
capital and the Company also returned certain warrants to purchase shares of
AIHC (see Note 3).

    DISTRIBUTION INVESTORS, LLC

    In connection with the Company's acquisition of Hales, the Company has
committed to invest approximately $1.5 million as a member of Distribution
Investors, LLC ("Distribution Partners"), which is the general partner of
Distribution Partners Investment Capital, L.P. (the "Fund"), a private equity
fund affiliated with Hales. As part of the transaction, the Company also
acquired Hales' existing $100,000 investment in Distribution Investors. For the
year ended December 31, 2001, the Company funded $836,000 of its capital
commitment to the Fund. Distribution Investors, at $51 million of total
committed capital, focuses on equity investments of $3 million to $10 million in
insurance distribution and distribution-related service companies.

    FIXED MATURITIES

    Contractual maturities of fixed maturities at December 31, 2001 are shown
below. Expected maturities, which are management's best estimates, will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.



                                                             (IN THOUSANDS)
                                                            DECEMBER 31, 2001
                                                          ---------------------
                                                          ESTIMATED
                                                            FAIR      AMORTIZED
                                                            VALUE       COST
                                                          ---------   ---------
                                                                
Available for sale:
  Due in one year or less...............................  $  9,351    $ 10,438
  Due after one year through five years.................   322,923     321,315
  Due after five years through 10 years.................    34,751      31,445
  Due after 10 years....................................    10,097      12,804
                                                          --------    --------
                                                           377,122     376,002
  Mortgage and asset-backed securities..................    91,147      91,152
                                                          --------    --------
Total...................................................  $468,269    $467,154
                                                          ========    ========


    As of December 31, 2001, the weighted average contractual and expected
maturities of the fixed maturity investments, based on fair value, were
3.2 years and 1.9 years, respectively.

    Proceeds from the sale of fixed maturities during 2001, 2000 and 1999 were
approximately $183 million, $228 million and $270 million, respectively. Gross
gains of $2,668,000, $1,097,000 and $1,522,000 were realized on those sales
during 2001, 2000 and 1999, respectively. Gross losses of $4,784,000,
$16,647,000 (of which $7,611,000 million related to losses resulting from
restructuring the Company's investment portfolio in connection with its
redomestication to Bermuda in November 2000) and $3,298,000 were realized during
2001, 2000 and 1999, respectively.

                                      F-25

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

4. INVESTMENT INFORMATION

    Approximately 100% of the fixed maturity investments held by the Company at
December 31, 2001 were rated investment grade by Standard & Poor's Corporation
or Moody's Investors Service, Inc.

    There were no investments in any entity in excess of 10% of the Company's
shareholders' equity at December 31, 2001 other than investments issued or
guaranteed by the United States government or its agencies.

    SECURITIES PLEDGED AND ON DEPOSIT

    At December 31, 2001, securities with a face amount of $15.3 million were on
deposit with the Insurance Department of the State of Nebraska and other states
in order to comply with insurance laws.

5. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

    The following table represents an analysis of losses and loss adjustment
expenses and a reconciliation of the beginning and ending reserve for losses and
loss adjustment expenses for the years indicated:



                                                                      (IN THOUSANDS)
                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                           
Reserve for losses and loss adjustment expenses at beginning
  of year...................................................        --   $364,554   $216,657
Unpaid losses and loss adjustment expenses recoverable......        --    (55,925)   (30,468)
                                                              --------   --------   --------
Net unpaid losses and loss adjustment expenses at beginning
  of year...................................................        --    308,629    186,189
Increase in net losses and loss adjustment expenses incurred
  relating to losses occurring in:
    Current year............................................  $ 23,025     73,563    275,455
    Prior years.............................................       423      2,700     30,386
                                                              --------   --------   --------
        Total net incurred losses and loss expenses.........    23,448     76,263    305,841
Net losses and loss adjustment expense reserves acquired....    14,320         --         --
Less net losses and loss adjustment expenses paid relating
  to losses occurring in:
    Current year............................................    10,635    311,330     95,367
    Prior years.............................................     4,068     73,562     88,034
                                                              --------   --------   --------
        Total net paid losses...............................    14,703    384,892    183,401
Net reserve for losses and loss adjustment expenses at end
  of year...................................................    23,065         --    308,629

Unpaid losses and loss adjustment expenses recoverable......    90,442         --     55,925
                                                              --------   --------   --------
Reserve for losses and loss expenses at end of year.........  $113,507   $     --   $364,554
                                                              ========   ========   ========


    The Company believes that its exposure, if any, to environmental impairment
liability and asbestos-related claims was minimal since no business had been
written for periods prior to 1996.

    Subject to the following, the Company believes that the reserves for unpaid
losses and loss adjustment expenses are adequate to cover the ultimate cost of
losses and loss adjustment expenses

                                      F-26

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

5. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
incurred through December 31, 2001. The reserves are based on estimates of
losses and loss adjustment expenses incurred and, therefore, due to the inherent
uncertainties of estimating claims and claims expense the ultimate reserves may
be more or less than such estimates. To the extent reserves prove to be
inadequate, the Company may have to augment such reserves and incur a charge to
earnings. Such a development could occur and result in a material charge to
earnings or stockholders' equity in future periods. Actual losses and loss
adjustment expenses paid may deviate, perhaps materially, from estimates
reflected in the Companies reserves reported in its financial statements.

    Estimates of prior accident year claims were increased by approximately
$3 million in 2000 primarily due to aviation and property business. Estimates of
prior accident year claims were increased by approximately $30 million in 1999.
A substantial portion of this amount resulted from (i) the Company's review of
additional claims information and actuarial analysis of the business produced by
a certain managing underwriting agency, (ii) notification of additional
satellite losses received in 1999 pertaining to 1998, (iii) aviation losses,
principally the 1998 Swiss Air crash, and (iv) property losses reported on
several international treaties that were in run-off in 1999.

6. REINSURANCE

    In the normal course of business, the Company's insurance subsidiaries cede
a substantial portion of their premium through quota share, surplus, excess of
loss and facultative reinsurance agreements. Reinsurance recoverables are
recorded as assets, predicated on the reinsurers' ability to meet their
obligations under the reinsurance agreements. If the reinsurers are unable to
satisfy their obligations under the agreements, the Company's insurance
subsidiaries would be liable for such defaulted amounts.

    With respect to 2001 results reflected below, the following table sets forth
the effects of reinsurance on the Company's insurance subsidiaries, which were
acquired during 2001. With respect to 2000 results reflected below, the
following table sets forth the effects of reinsurance on the Company's prior
reinsurance operations, which were sold on May 5, 2000 to Folksamerica.



                                                        (IN THOUSANDS)
                                                   YEARS ENDED DECEMBER 31,
                                                ------------------------------
                                                  2001       2000       1999
                                                --------   --------   --------
                                                             
PREMIUMS WRITTEN:
Direct........................................  $117,406         --         --
Assumed.......................................     1,796   $102,034   $386,848
Ceded.........................................   (82,986)   (19,731)   (80,122)
Unearned premium portfolio transfer and
  assumption..................................        --    (92,907)        --
                                                --------   --------   --------
Net...........................................  $ 36,216   $(10,604)  $306,726
                                                ========   ========   ========
PREMIUMS EARNED:
Direct........................................  $110,022         --         --
Assumed.......................................       619   $107,404   $380,880
Ceded.........................................   (79,723)   (19,874)   (69,512)
                                                --------   --------   --------
Net...........................................  $ 30,918   $ 87,530   $311,368
                                                ========   ========   ========


                                      F-27

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

6. REINSURANCE (CONTINUED)



                                                        (IN THOUSANDS)
                                                   YEARS ENDED DECEMBER 31,
                                                ------------------------------
                                                  2001       2000       1999
                                                --------   --------   --------
                                                             
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED:
Direct........................................  $ 99,761         --         --
Assumed.......................................     1,091   $ 88,676   $348,979
Ceded.........................................   (77,404)   (12,413)   (43,138)
                                                --------   --------   --------
Net...........................................  $ 23,448   $ 76,263   $305,841
                                                ========   ========   ========


7. 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 U.S. 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 U.S. and, consequently, does not
expect to be subject to direct U.S. income taxation. However, because there is
uncertainty as to the activities which constitute being engaged in a trade or
business within the United States, there can be no assurances that the U.S.
Internal Revenue Service will not contend successfully that ACGL or non-U.S.
subsidiaries are engaged in a trade or business in the United States. If ACGL or
any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGL's
shareholders' equity and earnings could be adversely affected. ACGL's U.S.
subsidiaries will continue to be subject to U.S. income taxes on their worldwide
income.

                                      F-28

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)
    The components of income taxes attributable to operations for the years
ended December 31, 2001, 2000 and 1999 were as follows:



                                                           (IN THOUSANDS)
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2001       2000       1999
                                                   --------   --------   --------
                                                                
Current (benefit) expense:
  U.S. Federal...................................  $   506         --    $ (9,021)
  U.S. State.....................................      150         --          --
  Non-U.S........................................       --         --          --
                                                   -------     ------    --------
                                                   $   656         --    $ (9,021)
                                                   -------     ------    --------
Deferred (benefit) expense:
  U.S. Federal...................................    1,472     $8,515     (11,925)
  U.S. State.....................................       --         --          --
  Non-U.S........................................       --         --          --
                                                   -------     ------    --------
                                                     1,472      8,515     (11,925)
                                                   -------     ------    --------
Total income tax (benefit) expense...............  $ 2,128     $8,515    $(20,946)
                                                   =======     ======    ========


    A reconciliation from the federal statutory income tax rate of 35% to the
Company's effective tax rate for the years ended December 31, 2001, 2000 and
1999 follows:



                                                           (IN THOUSANDS)
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2001       2000       1999
                                                   --------   --------   --------
                                                                
Income tax (benefit) expense computed on pre-tax
  income at the federal statutory rate...........  $ 8,450     $  176    $(19,670)
  Valuation allowance............................   (8,518)     5,650          --
  Write-off of deferred tax asset................      251      2,993          --
  Goodwill.......................................      360         --          --
  Tax-exempt investment income...................      (12)      (341)       (733)
  Dividend received deduction....................       --       (250)       (958)
  Limitation on executive compensation...........       --        397          --
  Foreign (income) loss..........................      880       (278)         --
  Other..........................................      717        168         415
                                                   -------     ------    --------
  Income tax expense (benefit)...................  $ 2,128     $8,515    $(20,946)
                                                   =======     ======    ========


    The Company had no current federal tax expense or benefit for the years
ended December 31, 2001 and 2000 due to its net operating losses and the full
utilization of the two year carry-back provision at December 31, 1999. During
2000, the Company recovered $8.6 million of previously paid income taxes. Actual
federal income taxes paid in 1999 was $1.9 million. The amount paid in 1999 was
the final installment related to the 1998 tax return.

    The Company has net operating loss carryforwards totaling $43.3 million at
December 31, 2001. Such net operating losses are currently available to offset
future taxable income of the Company and

                                      F-29

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)
expire between 2011 and 2021. The Company also has an alternative minimum tax
("AMT") credit carryforward in the amount of $1.0 million which can be carried
forward without expiration.

    On November 20, 2001, the Company underwent an ownership change for U.S.
federal income tax purposes as a result of the investment led by Warburg Pincus
funds and Hellman & Friedman funds. As a result of this ownership change,
limitations are imposed upon the utilization of existing net operating losses.

    In 2000, upon the Company's redomestication to Bermuda, Arch-U.S.
distributed substantially all of its public equity of $21.0 million. The
associated income tax expense of $7.4 million reduced the Company's net
operating loss carryforwards by a corresponding amount. However, for financial
reporting purposes, since the securities had not been sold to an unrelated third
party, the realized gain was deferred and was reported as unrealized
appreciation in the consolidated financial statements. Accordingly, the related
income tax expense was also deferred and reduced unrealized appreciation in the
consolidated financial statements. In 2001, the Company divested its public
equity portfolio in its entirety and, accordingly, has recognized U.S. federal
income tax expense of $7.4 million in its consolidated financial statements. In
addition, in 2000, the Company had written off $2.0 million of deferred tax
assets relating to losses recognized in the consolidated financial statements on
the Company's privately held investments, which amount will not be deductible in
future U.S. income tax returns since Arch-U.S. distributed these investments to
ACGL, its Bermuda parent.

    Deferred income tax assets and liabilities reflect temporary differences
based on enacted tax rates, between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. Significant
components of the Company's deferred income tax assets and liabilities as of
December 31, 2001 and 2000 were:



                                                               (IN THOUSANDS)
                                                                DECEMBER 31,
                                                             -------------------
                                                               2001       2000
                                                             --------   --------
                                                                  
Deferred income tax assets:
  Net operating loss.......................................  $15,151     $7,215
  Reserve for loss of escrowed assets......................    5,950      5,250
  AMT credit carryforward..................................      965        651
  Discounting of net unpaid loss reserves..................      335         --
  Net unearned premium reserve.............................    1,975         --
  Unrealized loss on marketable securities.................       --        606
  Compensation liabilities.................................       --        250
  Other, net...............................................    1,403         48
                                                             -------     ------
Total deferred tax assets..................................   25,779     14,020
                                                             -------     ------
Deferred income tax liabilities:
  Equity in net income on investees, net...................     (551)      (117)
  Deferred policy acquisition cost.........................   (1,718)        --
  Net unrealized appreciation of investments...............     (240)       (61)
                                                             -------     ------
Total deferred tax liabilities.............................   (2,509)      (178)
                                                             -------     ------
Valuation allowance........................................   (9,554)    (5,650)
                                                             -------     ------
Net deferred income tax asset..............................  $13,716     $8,192
                                                             =======     ======


                                      F-30

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)
    As of December 31, 2001, the Company has provided a valuation allowance to
reduce certain deferred tax assets to an amount which management expects to more
likely than not be realized. In addition, as a result of the Company's pursuit
of U.S.-based underwriting operations, which included an increase in the
Company's on-shore investment portfolio, the Company reversed a valuation
allowance on certain other deferred tax assets and recorded a benefit of
$7.8 million for the year ended December 31, 2001.

    As of December 31, 2000, the Company had a valuation allowance of
$5.7 million that adjusted the net deferred income tax asset to its estimated
realizable value of $8.2 million. Deferred income tax expense for the year ended
December 31, 2000 included a charge for such allowance of $5.7 million.

8. AGREEMENTS WITH RELATED PARTIES

    On November 8, 2001, ACGL, the principal investors, Trident, Trident II,
MMRCH and employee co-investment funds affiliated with MMRCH entered into an
agreement. Under this agreement, the Warburg Pincus investors assigned their
right and commitment to purchase $35.0 million of the preference shares and
Class A Warrants to Trident II and the co-investment funds. MMRCH agreed to
exchange all of its existing Class A Warrants for newly issued Common Shares
(assuming that they had been exercised pursuant to a cashless exercise) and to
exchange all of its Class B Warrants for cash at a price equal to $7.50 per
Class B Warrant (see Note 12).

    In addition, the board observer and board nomination rights of MMRCH and
Trident were terminated, and the Company was also released from its remaining
$11.0 million capital commitment to Trident II for new investments. During 1999,
the Company had committed to invest $25 million as a limited partner in Trident
II, a partnership managed by MMC Capital.

    Effective July 1, 1999, the Company amended its investment advisory
agreement with MMC Capital, which governs management of the Company's portfolio
of public equity securities ("Public Portfolio") and a portion of its portfolio
of privately held equity securities, primarily in issuers engaged in, or
providing services to, the insurance and reinsurance business ("Private
Portfolio"). MMC Capital is also an investment advisor to Trident, a dedicated
insurance industry private equity fund organized by MMC Capital and other
sponsors. MMC Capital's direct parent, MMRCH, owns 1,632,231 shares, or
approximately 12% of the outstanding Common Shares. At December 31, 2001,
Trident owns 250,000 shares, or approximately 2%, of the outstanding Common
Shares, and Class A warrants to purchase 1,386,079 Common Shares.

    Pursuant to the amended agreement, which has a term of four years (subject
to renewal or early termination under certain circumstances), MMC Capital
provides the Company with investment management and advisory services with
respect to investments in the Private Portfolio whose value exceeds
(i) $10 million during the first year of the term, (ii) $15 million during the
second year of the term, and (iii) $20 million during the third and fourth years
of the term. Under such amendments, the Company pays MMC Capital an annual fee
equal to (x) 20% (previously 7.5%) of cumulative net realized gains including
dividends, interest and other distributions, received on the Private Portfolio
over (y) cumulative compensation previously paid in prior years on cumulative
net realized gains (as defined in the agreement) on the Private Portfolio
managed by MMC Capital, but the Company will not pay MMC Capital a management
fee (previously 1.5% per annum of the quarterly carrying value of the Private
Portfolio). With respect to the management of the Company's Public Portfolio,
the Company pays MMC Capital a fee equal to 0.50% of the first $50 million under
MMC Capital's

                                      F-31

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

8. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
management and 0.35% of all amounts in excess of $50 million (subject to a
minimum fee of $250,000 per annum). Fees incurred under the agreements during
fiscal years 2001, 2000 and 1999 were approximately $262,000, $298,000 and
$1.5 million, respectively. In connection with its amended investment advisory
agreement with MMC Capital, the Company receives from MMC Capital $1.25 million
per annum during the initial four-year term, subject to certain conditions.

    On June 22, 2001, the Company completed the acquisition of all of the
remaining ownership interests in one of its investee companies, ART Services,
for a purchase price of approximately $38.8 million. Of such amount,
$38.4 million was paid in cash to MMRCH and Trident in return for their
interests in ART Services and the balance was paid in the form of Common Shares
to certain management shareholders of ART Services (see Note 3).

    Commencing in 1996, MMC Capital subleased office space from the Company for
a term expiring in October 2002. Future minimum rental income, exclusive of
escalation clauses and maintenance costs, under the remaining term of the
sublease will be approximately $832,000. Rental income was $1,032,000, $636,000
and $430,000 in 2001, 2000 and 1999, respectively.

    As of December 31, 2001, the Company has committed to invest approximately
$1.5 million as a member of the general partner of a fund affiliated with Hales
(see Note 4).

    On March 2, 2000, the Company repurchased from XL Capital, then its single
largest shareholder, all of the Common Shares held by XL Capital in a
transaction described in Note 12.

    Prior to sale of the Company's reinsurance operations on May 5, 2000,
affiliates of MMC Capital's ultimate parent, Marsh & McLennan Companies, Inc.
("Marsh"), acted as reinsurance intermediaries to Arch Re as indicated in
Note 15. The Company has also utilized affiliates of Marsh as insurance brokers
for the Company's insurance needs.

    The Company also agreed to provide a loan to the Chairman of the Board of
Directors of the Company, which will be used to pay income and self-employment
taxes on restricted shares granted to him on October 23, 2001 (see Note 9).

    In addition, the Company has made investments in entities in which
affiliates of Marsh, Trident and XL Capital have invested (see Note 4).

                                      F-32

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

9. COMMITMENTS

    LEASES

    At December 31, 2001, the future minimum rental commitments, exclusive of
escalation clauses and maintenance costs and net of rental income for all of the
Company's operating leases with remaining non-cancelable terms in excess of one
year are as follows:



                                                              (IN THOUSANDS)
                                                              --------------
                                                           
2002........................................................      $1,213
2003........................................................         918
2004........................................................         931
2005........................................................         902
2006........................................................       1,117
Thereafter..................................................          --
                                                                  ------
                                                                  $5,081
                                                                  ======


    All of these leases are for the rental of office space, with expiration
terms that range from 2002 to 2006. During 2001, 2000 and 1999, rental (income)
expense, net of income from subleases, was approximately ($132,000), $190,000
and $576,000, respectively.

    EMPLOYMENT AND OTHER ARRANGEMENTS

    At December 31, 2001, the Company has entered into employment agreements
with certain of its executive officers for periods extending up to
October 2006. Such employment arrangements provide for compensation in the form
of base salary, annual bonus, stock-based awards, participation in the Company's
employee benefit programs and the reimbursements of expenses.

    The Company has agreed to make a loan of up to $13.5 million to the Chairman
of the Board of Directors of the Company, which will be used to pay income and
self-employment taxes, payable in April 2002, on restricted shares granted to
him on October 23, 2001 (see Note 10).

10. STOCK AND STOCK OPTION PLANS

    1995 LONG TERM INCENTIVE AND SHARE AWARD PLAN

    In September 1995, the Company adopted the 1995 Long Term Incentive and
Share Award Plan (the "1995 Stock Plan"), which is administered by the Company's
Board of Directors and its Stock Awards Committee. The Company may grant,
subject to certain restrictions, stock options, stock appreciation rights,
restricted shares, restricted share units payable in Common Shares or cash,
stock awards in lieu of cash awards, and other stock-based awards to eligible
employees and directors of the Company. Awards relating to not more than
1,700,000 Common Shares may be made over the ten-year term of the 1995 Stock
Plan.

    In April 1999, the Company adopted the 1999 Long Term Incentive and Share
Award Plan (the "1999 Stock Plan"). The 1999 Stock Plan, like its predecessor,
is intended to provide incentives to attract, retain and motivate employees and
directors in order to achieve the Company's long-term growth and profitability
objectives. The 1999 Stock Plan provides for the grant to eligible employees and
directors of stock options, stock appreciation rights, restricted shares,
restricted share units payable in Common Shares or cash, stock awards in lieu of
cash awards, dividend equivalents and other stock

                                      F-33

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

10. STOCK AND STOCK OPTION PLANS (CONTINUED)
based awards. The 1999 Stock Plan also provides the non-employee directors with
the opportunity to receive the annual Board retainer fee in Common Shares. An
aggregate of 900,000 Common Shares has been reserved for issuance under the 1999
Stock Plan (of which no more than 300,000 of such shares may be issued pursuant
to grants of restricted shares, restricted share units, performance shares and
performance units), subject to anti-dilution adjustments in the event of certain
changes in the Company's capital structure.

    At December 31, 2001, substantially all of the shares reserved for issuance
under the 1995 and 1999 Stock Plans had been issued.

    In October 2001, the Company adopted the 2001 Long Term Incentive Plan for
New Employees (the "2001 Stock Plan"). The 2001 Stock Plan is intended to
provide incentives to new employees as an inducement essential to such employees
entering into employment arrangements with the Company. An aggregate of
4,600,000 common shares has been reserved for issuance under the 2001 Stock
Plan.

    RESTRICTED COMMON SHARES

    During 2001, 2000 and 1999, the Company granted an aggregate of 627,949,
74,218, and 2,500 shares, respectively, of restricted shares for financial
statement purposes. In addition, the Chairman of the Board of the Company was
granted a total of 1,689,629 restricted shares. Of such amount, 1,668,157
restricted shares were granted on October 23, 2001 and 21,472 restricted shares
were granted on November 19, 2001. These grants could be rescinded if they are
not approved by the Company's shareholders prior to October 23, 2002, and,
accordingly, are not reflected in the Company's consolidated financial
statements at December 31, 2001. The Company records deferred compensation equal
to the market value of the shares at the measurement date, which is amortized
and charged to income over the vesting period. The deferred compensation was
$10.5 million, $1.1 million and ($117,000), and the amortization of the deferred
compensation was $2.6 million, $1.1 million and $628,000, for 2001, 2000 and
1999, respectively. The issuance of restricted shares and amortization thereon
has no effect on consolidated shareholders' equity.

    STOCK OPTIONS

    The Company generally issues stock options to officers and directors, with
exercise prices equal to the fair market values of the Common Shares on the
grant dates. Options to officers generally vest and become exercisable in three
equal installments commencing on the grant date and thereafter on the first and
second anniversary thereof and expire ten years after the grant date. Initial
options granted to non-employee directors vest and become exercisable in three
equal installments, commencing on the grant date and annually thereafter. Annual
options granted to non-employee directors in office on January 1 of each year
vest on the first anniversary of the grant date.

                                      F-34

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

10. STOCK AND STOCK OPTION PLANS (CONTINUED)
    Information relating to the Company's stock options is set forth below:



                                                 YEARS ENDED DECEMBER 31,
                                           ------------------------------------
                                              2001         2000         1999
                                           ----------   ----------   ----------
                                                            
NUMBER OF OPTIONS
Outstanding, beginning of year...........   1,222,775    1,281,356    1,347,075
Granted..................................   2,898,036      146,000       18,800
Canceled.................................     (52,500)    (204,581)     (84,519)
Exercised................................          --           --           --
Outstanding, end of year.................   4,068,311    1,222,775    1,281,356
Exercisable, end of year.................   2,698,052    1,122,000      683,388

AVERAGE EXERCISE PRICE
Granted..................................  $    19.97   $    15.13   $    17.25
Canceled.................................  $    15.33   $    21.02   $    21.81
Exercised................................          --           --           --
Outstanding, end of year.................  $    20.09   $    20.18   $    20.90
Exercisable, end of year.................  $    19.83   $    20.23   $    20.45


    Exercise prices for options outstanding at December 31, 2001 ranged from
$12.66 to $24.25. The weighted-average remaining contractual life of these
options is approximately eight years.

    PRO FORMA INFORMATION

    As provided under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to continue to account for stock-based compensation in
accordance with APB No. 25 and has provided the required additional pro forma
disclosures. Such information has been determined for the Company as if the
Company had accounted for its employee stock options under the fair value method
of this statement. The fair value for the Company's employee stock options has
been estimated at the date of grant using a Black-Scholes option valuation
model, with the following weighted-average assumptions for options issued in
2001, 2000 and 1999, respectively: dividend yield of 0.0% for 2001, 2000 and
1999; expected volatility of 41.0% in 2001, 32.0% in 2000 and 25.0% in 1999;
risk free interest rate of 4.0% in 2001, 5.0% in 2000 and 6.5% in 1999; and an
average expected option life of six years for 2001, 2000 and 1999. The
weighted-average fair value of options granted during the years ended
December 31, 2001, 2000 and 1999 was $26.0 million, $866,000 and $123,000,
respectively.

                                      F-35

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

10. STOCK AND STOCK OPTION PLANS (CONTINUED)
    For purposes of the required pro forma information, the estimated fair value
of employee stock options is amortized to expense over the options' vesting
period. The Company's net income (loss) and net income (loss) per share would
have been adjusted to the pro forma amounts indicated below:



                                                          (IN THOUSANDS,
                                                      EXCEPT PER SHARE DATA)
                                                     YEARS ENDED DECEMBER 31,
                                                  ------------------------------
                                                    2001       2000       1999
                                                  --------   --------   --------
                                                               
Net income (loss), as reported..................  $22,016    $(8,012)   $(35,636)
Pro forma net income (loss).....................  $16,378    $(9,902)   $(37,294)
Earnings (loss) per share as reported:
  Basic.........................................  $  1.71    $ (0.61)   $  (2.09)
  Diluted.......................................  $  1.29    $ (0.61)   $  (2.09)
Pro forma earnings (loss) per share:
  Basic.........................................  $  1.27    $ (0.75)   $  (2.18)
  Diluted.......................................  $  0.96    $ (0.75)   $  (2.18)


    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models, such as the Black-Scholes
model, require the input of highly subjective assumptions (particularly with
respect to the Company, which has a limited stock-trading history), including
expected stock price volatility. As the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the Company believes that the existing option valuation
models, such as the Black-Scholes model, may not necessarily provide a reliable
single measure of the fair value of employee stock options.

    The effects of applying SFAS No. 123 as shown in the pro forma disclosures
may not be representative of the effects on reported net income for future
years.

    The effect on net income and earnings per share after applying SFAS
No. 123's fair valuation method to stock issued to employees under the Company's
Employee Stock Purchase Plan does not materially differ from the pro forma
information set forth above with respect to the Company's employee stock
options.

11. RETIREMENT PLANS

    For employee retirement benefits, the Company maintains defined contribution
retirement plans, which vary for each subsidiary. Contributions are based on the
participants' eligible compensation. In 2001, 2000 and 1999, the Company
expensed $0.4 million, $0.3 million and $0.6 million, respectively, related to
these retirement plans.

12. SHARE CAPITAL

    The authorized share capital of the Company consists of 200,000,000 common
shares, par value U.S. $0.01 per share, and 50,000,000 preferred shares, par
value U.S. $0.01 per share. Prior to the reorganization described in Note 1,
authorized share capital of Arch-U.S. consisted of 80,000,000 shares

                                      F-36

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

12. SHARE CAPITAL (CONTINUED)
of common stock, par value U.S. $0.01 per share, and 20,000,000 shares of
preferred stock, par value U.S. $0.01 per share.

    At December 31, 2001, the bye-laws of ACGL contained a provision limiting
the voting rights of any person who owns (directly, indirectly or constructively
under the United States Internal Revenue Code) Common Shares with more than 9.9%
of the total voting power of all shares entitled to vote generally at an
election of directors to 9.9% of such voting power. This provision will not
restrict the ability of any person holding Common Shares that were either
(1) converted from shares of Arch-U.S. owned on September 8, 2000 or (2) issued
upon exercise of warrants owned by such person on September 8, 2000 which were
assumed by ACGL, from voting such shares except with respect to the election of
directors. This provision is intended to prevent ACGL from being characterized
as a controlled foreign corporation which could cause U.S. persons owning 10% or
more of the Common Shares to suffer adverse U.S. tax consequences.

    The bye-laws of ACGL also contained a provision limiting the rights of any
group (within the meaning of the United States Securities Exchange Act of 1934)
that owns shares with more than 9.9% of the total voting power of all shares
entitled to vote generally at an election of directors to 9.9% of such voting
power. This provision will not restrict (a) the ability of any such group
holding Common Shares that were converted from shares of Arch-U.S. by such
person on September 8, 2000 or acquired upon exercise of warrants owned by such
person on September 8, 2000 which were assumed by ACGL or (b) any person or
group that the board of directors, by the affirmative vote of at least 75% of
the existing board, may exempt from this provision, from voting such shares.

    See Note 18--Subsequent Event.

    XL CAPITAL SHARE REPURCHASE

    On March 2, 2000, the Company repurchased from XL Capital, then the
Company's single largest shareholder, all of the 4,755,000 Common Shares held by
it for a purchase price of $12.45 per share, or a total of $59.2 million. The
per share repurchase price was determined as the lesser of (1) 85% of the
average closing market price of the Common Shares during the 20 trading days
beginning on the third business day following public announcement of the share
repurchase and asset sale (January 21, 2000), which was $14.65, and (2) $15.

    The Company paid XL the consideration for the repurchase with: (i) the
Company's interest in privately held LARC Holdings, Ltd. (parent of Latin
American Reinsurance Company Ltd.), valued at $25 million, and (ii) all of the
Company's interest in Annuity and Life Re (Holdings), Ltd., valued at $25.38 per
share and $18.50 per warrant, or $37.8 million in the aggregate. XL paid the
Company in cash the difference (equal to $3.6 million) between the repurchase
price and the value of the Company's interests in LARC Holdings and Annuity and
Life Re. The value per share of Annuity and Life Re was determined by taking the
average of the closing price of Annuity and Life Re shares for the same period
used in determining the repurchase price of the Common Shares. The value of the
warrants was determined using a Black Scholes methodology. The cost of the share
repurchase of $59.2 million was recorded as a reduction to shareholders' equity
reflected as treasury shares, which shares were subsequently cancelled.

                                      F-37

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

12. SHARE CAPITAL

    SERIES A CONVERTIBLE PREFERENCE SHARES AND CLASS A WARRANTS

    On November 20, 2001, the Company issued 35,687,735 preference shares and
3,776,025 Class A Warrants for $763.2 million in cash. The purchase price for
the preference shares and Class A Warrants paid at closing was based on book
value of the Common Shares at June 30, 2001. Subject to the limitation described
below, each preference share will be convertible into one Common Share. This
conversion ratio is subject to customary anti-dilution protection. The
preference shares vote, together with the Common Shares, on an as-converted
basis.

    The purchase price may be subject to a post-closing adjustment based on an
audit of the Company's balance sheet as of June 30, 2001. In addition, if on or
prior to September 19, 2005 (1) the closing price of the Common Shares is at
least $30.00 per share for at least 20 out of 30 consecutive trading days or
(2) a change of control occurs, the purchase price under the subscription
agreement will be adjusted downward by $1.50 per preference share purchased. The
purchase price under the subscription agreement will also be adjusted based on
actual loss experience on the Company's pre-closing insurance operations and
certain other balance sheet developments during the period from July 1, 2001
through the second anniversary of closing (or such earlier date as is agreed
upon by the investors and the Company), with the possibility of a limited
further adjustment thereafter based on specified tax and other matters. Any
purchase price adjustment in favor of the investors will be made through the
issuance of additional preference shares.

    Pursuant to the Company's bye-laws (until amended by the shareholders), each
investor's voting rights were limited to 9.9% of the total voting power of all
outstanding voting shares. In addition, prior to shareholder approval,
conversion of the preference shares was limited so that the amount of Common
Shares issued did not exceed the amount permitted to be issued under Nasdaq
rules without shareholder approval. See Note 18--Subsequent Event. Finally,
prior to regulatory approval, conversion of the preference shares will be
limited so that the amount of Common Shares issued does not exceed the amount
permitted to be issued without regulatory approval. If the shareholder or
regulatory approvals are not obtained, or if the ultimate purchase price
adjustment exceeds $250.0 million, at the investors' option, the preference
shares will become convertible into a pro rata portion (assuming that all issued
preference shares are convertible) of the shares of a newly-formed subsidiary of
the Company that will hold all of the Company's core insurance and reinsurance
operations.

    As a condition to the obligations of the investors to purchase the
securities, the Company has entered into a shareholders agreement with the
investors (the "Shareholders Agreement"). Pursuant to the Shareholders
Agreement, since the closing, Warburg Pincus has the right to designate one
director for appointment to the Company's Board and H&F has the right to
designate one director for appointment to the Company's Board. In addition,
after receipt of the shareholder and regulatory approvals described above,
Warburg Pincus and H&F will have the right to designate additional directors.
After giving effect to the resignations and appointments contemplated, designees
of Warburg Pincus and H&F collectively will constitute a majority of the Board
of Directors. The Shareholders Agreement also provided the investors with
certain registration rights.

    Pursuant to the subscription agreement, the Company agreed to hold a special
meeting of its shareholders, (1) to approve the issuance of such number of
Common Shares issuable upon conversion of the preference shares, that together
with the number of Common Shares issuable upon exercise of the Class A Warrants,
is in excess of the amount that may be issued without shareholder approval under
the Nasdaq Stock Market rules, (2) to approve the adoption of amendments to the
Company's

                                      F-38

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

12. SHARE CAPITAL (CONTINUED)
bye-laws that restrict voting rights of shareholders and that require directors
of certain subsidiaries of the Company to be elected directly by shareholders of
the Company and (3) to elect Mr. Paul Ingrey as a director of Arch Re Bermuda
(see Note 18--Subsequent Event).

13. EARNINGS PER SHARE

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



                                                           (IN THOUSANDS, EXCEPT SHARE DATA)
                                                               YEARS ENDED DECEMBER 31,
                                                        ---------------------------------------
                                                           2001          2000          1999
                                                        -----------   -----------   -----------
                                                                           
BASIC EARNINGS PER SHARE:
Net income (loss).....................................  $    22,016   $    (8,012)  $   (35,636)
Divided by:
Weighted average shares outstanding for the period....   12,855,668    13,198,075    17,086,732
                                                        ===========   ===========   ===========
Basic earnings (loss) per share.......................  $      1.71   $     (0.61)  $     (2.09)
                                                        ===========   ===========   ===========
DILUTED EARNINGS PER SHARE:
Net income (loss).....................................  $    22,016   $    (8,012)  $   (35,636)
Divided by:
Weighted average shares outstanding for the period....   12,855,668    13,198,075    17,086,732
Effect of dilutive securities:
    Preference shares.................................    4,106,534            --            --
    Warrants..........................................           --            --            --
    Nonvested restricted shares.......................        5,987            --            --
    Employee stock options............................       34,042            --            --
                                                        -----------   -----------   -----------
Total shares..........................................   17,002,231    13,198,075    17,086,732
                                                        ===========   ===========   ===========
Diluted earnings (loss) per share.....................  $      1.29   $     (0.61)  $     (2.09)
                                                        ===========   ===========   ===========


    Stock options to purchase 1,237,305, 1,101,004 and 1,273,856 Common Shares
at per share prices averaging $21.33, $20.82 and $20.93 were outstanding as of
December 31, 2001, 2000 and 1999, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market prices of the Common Shares of $17.71,
$15.17 and $15.40, respectively. In addition, Class A Warrants to purchase
Common Shares at $20 per share were outstanding as of December 31, 2001, 2000,
and 1999 but were not included in the computation of diluted earnings per share
because the warrants' exercise price of $20.00 per share was greater than the
average market price of the Common Shares for such year. Diluted per share
amounts are computed using basic average shares outstanding when a loss occurs
since the inclusion of dilutive securities in dilutive earnings per share would
be anti-dilutive.

14. STATUTORY INFORMATION

    BERMUDA

    Under The Insurance Act of 1978 (as amended) and related regulations of
Bermuda, Arch Re Bermuda, the Company's Bermuda reinsurance subsidiary, is
required to prepare statutory financial

                                      F-39

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

14. STATUTORY INFORMATION (CONTINUED)
statements and file a statutory financial return in Bermuda. The Insurance Act
also requires Arch Re Bermuda to maintain certain measures of solvency and
liquidity during the year. Declaration of dividends from retained earnings and
distributions from additional paid-in-capital is subject to these solvency and
liquidity requirements being met. At December 31, 2001, such requirements were
met.

    Statutory capital and surplus for Arch Re Bermuda was $508 million at
December 31, 2001, and statutory net income was $18,000 for the year ended
December 31, 2001. The primary difference between statutory net income and
statutory capital and surplus and net income and shareholders' equity presented
in accordance with GAAP are deferred acquisition costs and non-admitted assets.
Under the Insurance Act, Arch Re Bermuda is registered as a Class 4 insurer and
reinsurer, and is restricted with respect to the payment of dividends in any one
financial year to 15% of the prior year's statutory capital and surplus.

    UNITED STATES

    The Company's U.S. insurance and reinsurance subsidiaries file financial
statements prepared in accordance with statutory accounting practices prescribed
or permitted by insurance regulators. Statutory net income and surplus, as
reported to the insurance regulatory authorities, differs in certain respects
from the amounts prepared in accordance with GAAP. The main differences between
statutory net income and GAAP net income relate to deferred acquisition costs
and deferred income taxes. In addition to deferred acquisition costs and
deferred income tax assets, the main differences between statutory surplus and
shareholder's equity are unrealized appreciation or depreciation on investments
and non-admitted assets.

    Combined statutory surplus of the Company's U.S. insurance and reinsurance
subsidiaries was $306.8 million, $29.9 million and $290.1 million at
December 31, 2001, 2000 and 1999, respectively. The combined statutory net
income of these operations was $7.9 million, $59.6 million and $44.6 million for
the years ended December 31, 2001, 2000 and 1999, respectively.

    The Company's U.S. insurance and reinsurance subsidiaries are subject to
insurance laws and regulations in the jurisdictions in which they operate. The
ability of the Company's regulated insurance subsidiaries to pay dividends or
make distributions is dependent on their ability to meet applicable regulatory
standards. These regulations include restrictions that limit the amount of
dividends or other distributions, such as loans or cash advances, available to
shareholders without prior approval of the insurance regulatory authorities. As
of December 31, 2001, the Company's insurance and reinsurance subsidiaries may
not pay any significant dividends or distributions during 2002 without prior
regulatory approval.

    The National Association of Insurance Commissioners (the "NAIC") adopted the
Codification of Statutory Accounting Principles guidance, which replaces the
current Accounting Practices and Procedures manual, as the NAIC's primary
guidance on statutory accounting as of January 1, 2001. The accounting
codification did not have a material impact on the results of operations or
policyholders' surplus of the Company's insurance subsidiaries.

15. SEGMENT INFORMATION

    SFAS No. 131 requires certain disclosures about operating segments in a
manner that is consistent with how management evaluates the performance of the
segment. At December 31, 2001, the Company

                                      F-40

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

15. SEGMENT INFORMATION (CONTINUED)
had only one reportable operating segment--insurance.   The Company's insurance
operating segment includes the operations of the following five business
entities: ART Services, which provides insurance and alternative risk transfer
services through rent-a-captive and other facilities; AIHC, which markets and
underwrites non-standard personal automobile liability and physical damage lines
of insurance, primarily in Pennsylvania; Arch Re Bermuda, the Company's
Bermuda-based reinsurance subsidiary, and Arch Re and Cross River, U.S.-based
reinsurance and insurance subsidiaries of the Company.

    At December 31, 2001, the Company's insurance operating segment included
total assets of $1.2 billion. For the year ended December 31, 2001, the
insurance operating segment generated revenues of $59.9 million and net income
of $12.4 million. The remaining portion of the Company's net income was
generated through the Company's investment activities, offset by other operating
expenses.

    The results of the Company's advisory business conducted by Hales was not
material to the Company's consolidated results of operations or financial
position.

    For the year ended December 31, 2001, the Company produced its business
through general agents and managing general agents, none of which accounted for
more than 10% of total gross premiums written. Since the Company sold its prior
reinsurance operations on May 5, 2000, the following data relating to 1999 is
not meaningful for 2000 or future years. During 1999, one client contributed
$42.1 million, or 13.7%, of net premiums written and $33.8 million, or 13.5%, of
net premiums earned, and a second client contributed $39.2 million, or 12.8%, of
net premiums written and $43.7 million, or 14%, of net premiums earned.

    The following lists individual broker business greater than 10% of the
1999 year's net premiums written:


                                                           
Balis & Co., Inc. (1).......................................    15.0%
Guy Carpenter & Co. (1).....................................    10.7%
Aon Group...................................................    17.4%
                                                                ----
Total.......................................................    43.1%
                                                                ====


------------------------

       (1) In addition, approximately 7.4% of net premiums written in 1999 were
           produced by other brokers who are affiliated with Marsh & McLennan
           Companies, Inc.

    Net premiums written and earned recorded from client companies which were
Lloyd's syndicates or were located in the United Kingdom, Bermuda and
Continental Europe (some which are denominated in U.S. dollars) were
$46.9 million and $58.0 million, respectively, which represented 15.3% and 18.6%
of net premiums written and earned for the year ended December 31, 1999.

                                      F-41

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

16. OTHER COMPREHENSIVE INCOME

    The related tax effects allocated to each component of the change in other
comprehensive income (loss) were as follows:



                                                              BEFORE TAX   TAX EXPENSE   NET OF TAX
                                                                AMOUNT      (BENEFIT)      AMOUNT
                                                              ----------   -----------   ----------
                                                                                
YEAR ENDED DECEMBER 31, 2001
Unrealized appreciation (decline) on investments:
Unrealized holding gains (losses) arising during year.......   $ (6,993)     $    160     $ (7,153)
Less reclassification of net realized gains included in net
  income....................................................     18,382         7,242       11,140
                                                               --------      --------     --------
Change in other comprehensive income (loss).................   $(25,375)     $ (7,082)    $(18,293)
                                                               ========      ========     ========
YEAR ENDED DECEMBER 31, 2000
Unrealized appreciation (decline) on investments:
Unrealized holding gains (losses) arising during year.......   $  4,745      $    428     $  4,317
Less reclassification of net realized gains included in net
  income....................................................     20,045         7,408       12,637
                                                               --------      --------     --------
Change in other comprehensive income (loss).................   $(15,300)     $ (6,980)    $ (8,320)
                                                               ========      ========     ========
YEAR ENDED DECEMBER 31, 1999
Unrealized appreciation (decline) on investments:
Unrealized holding gains (losses) arising during year.......   $(14,319)     $ (4,922)    $ (9,397)
Less reclassification of net realized gains included in net
  income....................................................     17,227         6,029       11,198
                                                               --------      --------     --------
Change in other comprehensive income (loss).................   $(31,546)     $(10,951)    $(20,595)
                                                               ========      ========     ========


                                      F-42

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

    The following is a summary of quarterly financial data:



                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                     QUARTER ENDED
                                                  ---------------------------------------------------
                                                  DECEMBER 31,   SEPTEMBER 30,   JUNE 30,   MARCH 31,
                                                      2001           2001          2001       2001
                                                  ------------   -------------   --------   ---------
                                                                                
INCOME STATEMENT DATA:
Net premiums written............................    $ 12,212        $14,448      $  6,719    $ 2,837
Net premiums earned.............................      11,921         11,799         5,565      1,633
Fee income......................................       3,476          3,524         3,711      1,715
Net investment income...........................       3,373          2,509         3,078      3,160
Net realized investment gains (losses)..........         (37)          (190)        9,605      9,004
Equity in net income (loss) of investees........         721            966            33        888
Operating expenses..............................      20,639         17,207         9,363      5,101
Net income (loss)...............................    $  4,731        $   892      $  8,400    $ 7,993
PER SHARE DATA:
Net income (loss)
  Basic.........................................    $   0.37        $  0.07      $   0.65    $  0.63
  Diluted.......................................    $   0.16        $  0.07      $   0.65    $  0.63
COMMON SHARE PRICES:
  High..........................................    $  28.34        $ 19.20      $  17.06    $ 18.06
  Low...........................................    $  16.40        $ 15.45      $  14.81    $ 14.38
  Close.........................................    $  25.75        $ 16.75      $  15.75    $ 15.88




                                                  DECEMBER 31,   SEPTEMBER 30,   JUNE 30,   MARCH 31,
                                                      2000           2000          2000       2000
                                                  ------------   -------------   --------   ---------
                                                                                
INCOME STATEMENT DATA:
Net premiums written............................          --             --      $(63,493)   $52,889
Net premiums earned.............................          --             --        29,368     58,162
Net investment income...........................    $  3,017        $ 3,359         4,257      5,290
Net realized investment gains (losses)..........     (12,789)           728          (367)    32,473
Equity in net income (loss) of investees........         434            878           853       (220)
Operating expenses..............................      17,205          1,502        34,069     74,355
Net income (loss)...............................    $(15,388)       $ 2,286      $ (2,607)   $ 7,697
STATUTORY COMBINED RATIO:.......................          --             --            --      126.4%
Per Share Data:
Net income (loss)
  Basic and diluted.............................    $  (1.23)       $  0.18      $  (0.21)   $  0.50
COMMON SHARE PRICES:
  High..........................................    $  15.88        $ 15.88      $  16.63    $ 16.75
  Low...........................................    $  13.88        $ 14.63      $  14.56    $ 11.38
  Close.........................................    $  15.00        $ 15.75      $  14.94    $ 16.38


                                      F-43

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

18. SUBSEQUENT EVENT

    ACGL held a special meeting of its shareholders as required by the
subscription agreement, as indicated in Note 12. At such meeting, the
shareholders approved, among other things, (1) the issuance of such number of
Common Shares issuable upon conversion of the preference shares, that together
with the number of Common Shares issuable upon exercise of the Class A Warrants,
is in excess of the amount that may be issued without shareholder approval under
the Nasdaq Stock Market rules and (2) the adoption of amendments to the
provision of ACGL's bye-laws that limits voting rights of shareholders to 9.9%
of the total voting power of all outstanding voting shares to provide that such
voting limitation applies only to votes conferred (directly or indirectly or by
attribution) by shares of ACGL held by any U.S. person. Regulatory approvals
required in connection with the private placement completed in November 2001
have been obtained in Nebraska, Missouri and Wisconsin, and required regulatory
approvals are pending in Pennsylvania and Florida.

                                      F-44

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULES

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

    Our audits of the consolidated financial statements referred to in our
report dated February 28, 2002, except as to the matters described in Note 18 to
the consolidated financial statements which are as of March 7, 2002, appearing
on Page F-2 of this Annual Report on Form 10-K also included an audit of the
financial statement schedules listed on Page F-1. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers
Hamilton, Bermuda
February 28, 2002

                                      S-1

                                                                      SCHEDULE I

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                             SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES
                                 (IN THOUSANDS)



                                                                     DECEMBER 31, 2001
                                                           -------------------------------------
                                                                                       AMOUNT
                                                                                      AT WHICH
                                                                                      SHOWN IN
                                                           AMORTIZED       FAIR      THE BALANCE
                                                              COST        VALUE         SHEET
                                                           ----------   ----------   -----------
                                                                            
Type of Investment:
FIXED MATURITY SECURITIES
U.S. government and government agencies and
  authorities............................................  $  136,617   $  137,861   $  137,861
Mortgage and asset-backed securities.....................      91,152       91,147       91,147
Corporate bonds..........................................     239,385      239,261      239,261
                                                           ----------   ----------   ----------
  Total Fixed Maturities.................................     467,154      468,269      468,269
EQUITY SECURITIES
Publicly traded..........................................         960          235          235
Privately held...........................................      41,587       41,608       41,608
                                                           ----------   ----------   ----------
  Total Equity Securities................................      42,547       41,843       41,843
SHORT-TERM INVESTMENTS
Unrestricted.............................................     477,058      476,820      476,820
Held in escrow...........................................      22,156       22,156       22,156
                                                           ----------   ----------   ----------
  Total Short-Term Investments...........................     499,214      498,976      498,976
                                                           ==========   ==========   ==========
  Total Investments......................................  $1,008,915   $1,009,088   $1,009,088
                                                           ==========   ==========   ==========


                                      S-2

                                                                     SCHEDULE II

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEET
                             (PARENT COMPANY ONLY)
                             (DOLLARS IN THOUSANDS)



                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2001        2000
                                                              ----------   --------
                                                                     
ASSETS
Investment in wholly owned subsidiaries.....................  $  878,814   $ 57,271
Fixed maturities available for sale, at fair value
  (amortized cost: 2001, $79,717, 2000, $28,230)............      79,872     28,646
Short-term investments available for sale, at fair value....      11,536     75,746
Publicly traded equity securities available for sale, at
  fair value (cost: 2000, $44,074)..........................          --     49,366
Securities held in escrow, at fair value (amortized cost:
  2001, $22,156, 2000, $20,887).............................      22,156     20,970
Privately held securities (cost: 2001, $26,722, 2000,
  $42,086)..................................................      26,722     41,777
Cash........................................................          11
Other assets................................................       5,918      1,133
                                                              ----------   --------
    TOTAL ASSETS............................................  $1,025,029   $274,909
                                                              ==========   ========
LIABILITIES
Accounts payable and other liabilities......................  $    4,660   $  2,610
SHAREHOLDERS' EQUITY
Preference shares, $0.01 par value: 50,000,000 shares
  authorized (issued: 2001, 35,687,735; 2000, 0)............         357         --
Common shares, $0.01 par value: 200,000,000 shares
  authorized (issued: 2001, 13,513,538; 2000, 12,708,818)...         135        127
Additional paid-in capital..................................   1,039,887    288,016
Deferred compensation under share award plan................      (8,230)      (341)
Retained earnings (deficit).................................     (11,610)   (33,626)
Accumulated other comprehensive income consisting of
  unrealized appreciation (decline) in value of investments,
  net of income tax.........................................        (170)    18,123
                                                              ----------   --------
    TOTAL SHAREHOLDERS' EQUITY..............................   1,020,369    272,299
                                                              ----------   --------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..............  $1,025,029   $274,909
                                                              ==========   ========


                                      S-3

                                                                     SCHEDULE II

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
        CONDENSED FINANCIAL INFORMATION OF REGISTRANT       (CONTINUED)
                              STATEMENT OF INCOME
                             (PARENT COMPANY ONLY)
                             (DOLLARS IN THOUSANDS)



                                                          SUCCESSOR (1)               PREDECESSOR
                                                     ------------------------   -----------------------
                                                                   FOR THE        FOR THE
                                                       YEAR      PERIOD FROM    PERIOD FROM      YEAR
                                                      ENDED     NOV. 8, 2000    JAN.1, 2000     ENDED
                                                     DEC. 31,        TO              TO        DEC. 31,
                                                       2001     DEC. 31, 2000   NOV. 7, 2000     1999
                                                     --------   -------------   ------------   --------
                                                                                   
REVENUES
Net investment income..............................  $ 5,945       $ 1,245          $1,032     $    641
Net investment gains/(losses)......................   (2,350)          (11)             (1)          --
Loss on sale of reinsurance operations.............                     --            (442)          --
                                                     -------       -------          ------     --------
Total revenues.....................................    3,595         1,234             589          641

OPERATING COSTS AND EXPENSES
Operating expenses.................................    6,881           502             794          485
                                                     -------       -------          ------     --------
Income before income tax expense...................   (3,286)          732            (205)         156

Income tax expense.................................       --            --             (67)          55
                                                     -------       -------          ------     --------
Net income before equity in earnings in
  subsidiaries, investee company and cumulative
  effect of accounting change......................   (3,286)          732            (138)         101
Equity in net income (loss) of wholly owned
  subsidiaries.....................................   25,361        (8,950)            563      (35,725)
Equity in net income(loss) of investee.............      (59)         (219)
Cumulative effect of accounting change.............       --            --              --          (12)
                                                     -------       -------          ------     --------
NET INCOME (LOSS)..................................  $22,016       $(8,437)         $  425     $(35,636)
                                                     =======       =======          ======     ========


------------------------

(1) Refer to reorganization described in Note 1 of the notes accompanying the
    consolidated financial statements.

                                      S-4

                                                                     SCHEDULE II

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
        CONDENSED FINANCIAL INFORMATION OF REGISTRANT       (CONTINUED)
                            STATEMENT OF CASH FLOWS
                             (PARENT COMPANY ONLY)
                                 (IN THOUSANDS)



                                                        SUCCESSOR (1)                PREDECESSOR
                                                  --------------------------   -----------------------
                                                                  FOR THE        FOR THE
                                                     YEAR       PERIOD FROM    PERIOD FROM      YEAR
                                                    ENDED      NOV. 8, 2000    JAN.1, 2000     ENDED
                                                   DEC. 31,         TO              TO        DEC. 31,
                                                     2001      DEC. 31, 2000   NOV. 7, 2000     1999
                                                  ----------   -------------   ------------   --------
                                                                                  
OPERATING ACTIVITIES
Net income (loss)...............................  $  22,016      $ (8,437)       $   425      $(35,636)
Adjustments to reconcile net income (loss) to
  net cash provided by (used for) operating
  activities:
    Equity in net (income) loss of wholly owned
      subsidiaries..............................    (25,361)        8,950           (563)       35,725
    Net investment (gains)/losses...............      2,350            11              1            --
    Provisions for non-cash compensation........      2,771            --             --           628
    Net change in other assets and
      liabilities...............................     (1,074)        2,243          7,109           137
                                                  ---------      --------        -------      --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......        702         2,767          6,972           854

INVESTING ACTIVITIES:
    Purchases of fixed maturities...............   (490,256)      (14,007)        (3,500)       (3,000)
    Sales of fixed maturities...................    159,991        16,012          4,000         5,000
    Net change in short-term investments........   (350,142)       (4,772)        (3,077)       (2,036)
    Acquisition of subsidiaries.................    (61,043)
                                                  ---------      --------        -------      --------
NET CASH PROVIDED BY (USED FOR) INVESTING
  ACTIVITIES....................................   (741,450)       (2,767)        (2,577)          (36)

FINANCING ACTIVITIES:
    Common shares issued........................     10,923            --          1,223            66
    Preference shares issued....................    740,737            --             --            --
    Purchase of treasury shares.................        (48)           --          3,430          (103)
    Deferred compensation on restricted
      shares....................................    (10,466)           --         (1,122)          117
    Shares issued in connection with
      acquisition...............................       (387)           --             --            --
                                                  ---------      --------        -------      --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......    740,759            --          3,531            80

Increase in cash................................         11             0          7,926           898
Cash at beginning of period.....................          0             0          4,313         3,415
                                                  ---------      --------        -------      --------
Cash at end of period...........................  $      11      $      0        $12,239      $  4,313
                                                  =========      ========        =======      ========


------------------------

(1) Refer to reorganization described in Note 1 of the notes accompanying the
    consolidated financial statements.

                                      S-5

                                                                    SCHEDULE III

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                      SUPPLEMENTARY INSURANCE INFORMATION
                                 (IN THOUSANDS)


                                                         FUTURE POLICY                                       BENEFITS,
                                                           BENEFITS,                                          CLAIMS,
                                            DEFERRED     LOSSES, LOSSES                                        LOSSES
                                             POLICY         AND LOSS                               NET          AND
                                           ACQUISITION     ADJUSTMENT     UNEARNED   PREMIUM    INVESTMENT   SETTLEMENT
                                              COSTS         EXPENSES      PREMIUMS   REVENUE      INCOME      EXPENSES
                                           -----------   --------------   --------   --------   ----------   ----------
                                                                                           
DECEMBER 31, 2001
  Property-Casualty......................    $ 5,412         $ 23,065     $29,578    $ 30,918     $12,120     $ 23,448
                                             -------         --------     -------    --------     -------     --------
    Total................................    $ 5,412         $ 23,065     $29,578    $ 30,918     $12,120     $ 23,448
                                             =======         ========     =======    ========     =======     ========

DECEMBER 31, 2000
  Property-Casualty......................         --               --          --    $ 60,402     $15,923     $ 56,600
  Accident and Health....................         --               --          --      27,128          --       19,663
  Unearned premium portfolio transfer and
    assumption...........................         --               --          --          --          --           --
                                             -------         --------     -------    --------     -------     --------
    Total................................         --               --          --    $ 87,530     $15,923     $ 76,263
                                             =======         ========     =======    ========     =======     ========

DECEMBER 31, 1999
  Property-Casualty......................    $23,585         $277,271     $98,133    $261,029     $20,173     $267,622
  Accident and Health....................         --           31,358          --      50,339          --       38,219
                                             -------         --------     -------    --------     -------     --------
    Total................................    $23,585         $308,629     $98,133    $311,368     $20,173     $305,841
                                             =======         ========     =======    ========     =======     ========



                                           AMORTIZATION
                                           OF DEFERRED
                                              POLICY        OTHER
                                           ACQUISITION    OPERATING   PREMIUMS
                                              COSTS       EXPENSES    WRITTEN
                                           ------------   ---------   --------
                                                             
DECEMBER 31, 2001
  Property-Casualty......................     $   813      $27,692    $ 36,216
                                              -------      -------    --------
    Total................................     $   813      $27,692    $ 36,216
                                              =======      =======    ========
DECEMBER 31, 2000
  Property-Casualty......................     $18,996      $ 6,855    $ 56,316
  Accident and Health....................       7,760           --      25,987
  Unearned premium portfolio transfer and
    assumption...........................          --           --     (92,907)
                                              -------      -------    --------
    Total................................     $26,756      $ 6,855    $(10,604)
                                              =======      =======    ========
DECEMBER 31, 1999
  Property-Casualty......................     $64,279      $14,188    $256,388
  Accident and Health....................      16,261                   50,338
                                              -------      -------    --------
    Total................................     $80,540      $14,188    $306,726
                                              =======      =======    ========


                                      S-6

                                                                     SCHEDULE IV

                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                                  REINSURANCE
                                 (IN THOUSANDS)



                                                             ASSUMED FROM                PERCENTAGE OF
                                            CEDED TO OTHER      OTHER                    AMOUNT ASSUMED
                             GROSS AMOUNT     COMPANIES       COMPANIES     NET AMOUNT       TO NET
                             ------------   --------------   ------------   ----------   --------------
                                                                          
DECEMBER 31, 2001
Premiums Written:
  Property-Casualty........    $117,406        $(82,986)       $  1,796      $ 36,216          5.0%
                               --------        --------        --------      --------        -----
    Total..................    $117,406        $(82,986)       $  1,796      $ 36,216          5.0%
                               ========        ========        ========      ========        =====

DECEMBER 31, 2000
Premiums Written:
  Property-Casualty........          --        $ 19,731        $ 76,047      $ 56,316        135.0%
  Accident and Health......          --              --          25,987        25,987        100.0%
  Unearned premium
    portfolio transfer and
    assumption.............          --              --         (92,907)      (92,907)          --
                               --------        --------        --------      --------        -----
    Total..................          --        $ 19,731        $  9,127      $(10,604)         N/M
                               ========        ========        ========      ========        =====

DECEMBER 31, 1999
Premiums Written:
  Property-Casualty........          --        $ 80,122        $336,510      $256,388        131.3%
  Accident and Health......          --              --          50,338        50,338        100.0%
                               --------        --------        --------      --------        -----
    Total..................          --        $ 80,122        $386,848      $306,726        126.1%
                               ========        ========        ========      ========        =====


                                      S-7

                                 EXHIBIT INDEX



       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
                     
       3.1              Memorandum of Association of Arch Capital Group Ltd.
                        ("ACGL")(n)
       3.2              Bye-Laws of ACGL(n)
       3.3              Form of Amended and Restated Bye-law 45 and Bye-law 75(w)
       3.4              Certificate of Designations of Series A Convertible
                        Preference Shares(w)
       4.1              Specimen Common Share Certificate(s)
       4.2.1            Class A Common Share Purchase Warrants issued to Marsh &
                        McLennan Risk Capital Holdings, Ltd. ("MMRCH") on September
                        19, 1995(b) and September 28, 1995(c)
       4.2.2            Class A Common Share Purchase Warrants issued to The Trident
                        Partnership, L.P. ("Trident") on September 19, 1995(b) and
                        September 28, 1995(c)
       4.2.3            Class A Common Share Purchase Warrants issued to Taracay
                        Investors ("Taracay") on September 19, 1995(b) and September
                        28, 1995(c)
       4.3              Class B Common Share Purchase Warrants issued to MMRCH on
                        September 19, 1995(b) and September 28, 1995(c)
       4.4              Form of Class A Warrant Certificate(w)
       4.5              Shareholders Agreement, dated November 20, 2001, among ACGL
                        and the shareholders party thereto, conformed to reflect
                        amendments dated January 3, 2002 and March 15, 2002 (filed
                        herewith)
       4.6              Subscription Agreement, dated as of October 24, 2001,
                        between ACGL and the purchasers party thereto, conformed to
                        reflect amendments dated November 20, 2001, January 3, 2002
                        and March 15, 2002 (filed herewith)
      10.1.1            Amended and Restated Subscription Agreement, between ACGL
                        and Trident(b)
      10.1.2            Amendment, dated October 31, 2000, to Subscription
                        Agreement, dated as of June 28, 1995, between ACGL and
                        Trident(o)
      10.2.1            Amended and Restated Subscription Agreement, between ACGL
                        and MMRCH(b)
      10.2.2            Amendment, dated October 31, 2000, to Subscription
                        Agreement, dated as of June 28, 1995, between ACGL and
                        MMRCH(o)
      10.3              Amended and Restated Subscription Agreement, between ACGL
                        and Taracay(b)
      10.4.1            Investment Advisory Agreement, between ACGL and MMC Capital,
                        Inc. ("MMC Capital")(b)
      10.4.2            Investment Advisory Agreement, between Arch Reinsurance
                        Company (formerly known as Risk Capital Reinsurance Company,
                        "Arch Re") and MMC Capital(b)
      10.5.1            Sublease Agreement, dated as of March 18, 1996, between Arch
                        Re and Coca-Cola Bottling Company of New York, Inc.
                        ("Coca-Cola")(b)
      10.5.2            Sublease Amendment Agreement and Consent, dated as of
                        November 11, 1997, between Arch Re and Coca-Cola(e)
      10.5.3            Sub-Sublease Agreement, dated as of March 18, 1996, between
                        Arch Re and MMC Capital(f)
      10.5.4            Amendment to Sub-Sublease Agreement, between Arch Re and MMC
                        Capital(k)
      10.6.1            Tax Sharing Agreement, between Arch U.S. and Arch Re
                        (amended)(e)
      10.6.2            Addition of Cross River Insurance Company to Tax Sharing
                        Agreement(g)
      10.6.3            Addition of Hales & Company Inc. ("Hales") to Tax Sharing
                        Agreement(s)
      10.7.1            ACGL 1999 Long Term Incentive and Share Award Plan(h)+
      10.7.2            ACGL 1995 Long Term Incentive and Share Award Plan (the
                        "1995 Stock Plan")(b)+
      10.7.3            First Amendment to the 1995 Stock Plan(c)+


                                      E-1




       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
                     
      10.7.4            ACGL Long Term Incentive Plan for New Employees(y)+
      10.8.1            Restricted Share Agreements--Executive Officers(d)+
      10.8.2            Restricted Share Agreement--Peter A. Appel--April 24, 2000
                        grant(p)+ and as of January 30, 2001 grants(v)+
      10.8.3            Restricted Share Agreements--Robert Clements--May 5, 2000
                        grants,(p)+ January 1, 2001 grant(s)+, as of January 30,
                        2001 grants(v)+, October 23, 2001 grant(w)+ and November 19,
                        2001 grant(w)+
      10.8.4            Restricted Share Agreement, dated as of January 1, 2002,
                        between ACGL and Constantine Iordanou(w)+
      10.8.5            Restricted Share Agreement, dated as of January 1, 2002,
                        between ACGL and Constantine Iordanou(w)+
      10.8.6            Restricted Share Agreement, dated as of January 18, 2002,
                        between ACGL and John Vollaro (filed herewith)+
      10.8.7            Restricted Share Agreement, dated as of October 23, 2001,
                        between ACGL and Paul Ingrey(v)+
      10.8.9            Restricted Share Agreement, dated as of October 23, 2001,
                        between ACGL and Dwight Evans(v)+
      10.8.10           Restricted Share Agreement, dated as of October 23, 2001,
                        between ACGL and Marc Grandisson(v)+
      10.8.11           Restricted Share Agreement, dated as of January 30, 2001,
                        between ACGL and Louis Petrillo(v)+
      10.9.1            Stock Option Agreements--Executive Officers--1995 and 1996
                        grants,(d) 1997 and 1998 grants(g) and 2000 grants(p)+
      10.9.2            Stock Option Agreements--Robert Clements--1996 grant,(d)
                        1997 grant(e) and 1998 grant(g)
      10.9.3            Amendments to Stock Option Agreements--Robert Clements
                        (dated March 22, 2000)(p) and Executive Officers+ and
                        Directors (dated May 5, 2000)(s)+
      10.9.4            Stock Option Agreements--Non-Employee Directors--1996 and
                        1997 annual grants,(c)+ 1998 annual grants,(e)+ 1999 annual
                        grants,(g)+ 2000 annual grants(j)+ and 2001 annual
                        grants(s)+
      10.9.5            Stock Option Agreements--Non-Employee Directors--initial
                        grants(g)(j)+
      10.9.6            Share Option Agreement, dated October 23, 2001, between ACGL
                        and Ian Heap(aa)+
      10.9.7            Employee Share Option Agreement, dated October 23, 2001,
                        between ACGL and John M. Pasquesi(w)+
      10.9.8            Share Option Agreement, dated as of October 23, 2001,
                        between ACGL and John M. Pasquesi(w)+
      10.9.9            Share Option Agreement, dated as of October 23, 2001,
                        between ACGL and Peter A. Appel(w)+
      10.9.10           Stock Option Agreement, dated as of October 23, 2001,
                        between ACGL and Paul Ingrey(v)+
      10.9.11           Stock Option Agreement, dated as of October 23, 2001,
                        between ACGL and Dwight Evans(v)+
      10.9.12           Stock Option Agreement, dated as of October 23, 2001,
                        between ACGL and Marc Grandisson(v)+
      10.9.13           Share Option Agreement, dated as of January 1, 2002, between
                        ACGL and Constantine Iordanou(w)+
      10.9.14           Stock Option Agreement, dated as of January 18, 2002,
                        between ACGL and John Vollaro (filed herewith)+


                                      E-2




       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
                     
      10.9.15           Stock Option Agreements, dated as of January 30, 2001 and
                        October 23, 2001, between ACGL and Debra O'Connor(v)+
      10.9.16           Stock Option Agreements, dated as of January 30, 2001 and
                        October 23, 2001, between ACGL and Louis Petrillo(v)+
      10.10.1           Retention Agreement, dated January 4, 2002, among ACGL, Arch
                        U.S. and Robert Clements, including Form of Promissory
                        Note(w)+
      10.10.2           Employment Agreement dated as of June 9, 2000 between ACGL
                        and Debra M. O'Connor(m)+
      10.10.3           Employment and Change in Control Agreement, dated as of May
                        5, 2000, between ACGL and Louis T. Petrillo(m)+
      10.10.4           Employment Agreement, dated as of October 23, 2001, among
                        ACGL, Arch Reinsurance Ltd. (Arch Re Bermuda) and Paul
                        Ingrey(w)+
      10.10.5           Employment Agreement, dated as of October 23, 2001, among
                        ACGL, Arch Re Bermuda and Dwight Evans(w)+
      10.10.6           Employment Agreement, dated as of October 23, 2001, among
                        ACGL, Arch Re Bermuda and Marc Grandisson(w)+
      10.10.7           Employment Agreement, dated as of December 20, 2001, among
                        ACGL, Arch U.S. and Constantine Iordanou(w)+
      10.10.8           Employment Agreement, dated as of January 18, 2002, between
                        ACGL and John Vollaro (filed herewith)+
      10.10.9           Employment Agreement, dated October 23, 2001, between ACGL
                        and John M. Pasquesi(w)+
      10.11             Assumption of Change in Control Agreements(s)
      10.12.1           ACGL 1995 Employee Stock Purchase Plan(a)+
      10.12.2           Arch Re Money Purchase Pension Plan (the "Pension Plan")(b)+
      10.12.3           Amendment and Restatement of the Adoption Agreement relating
                        to the Pension Plan(c)+
      10.12.4           Amendment to the Adoption Agreement relating to the Pension
                        Plan(g)+
      10.12.5           Arch Re Employee Savings Plan (the "Savings Plan")(b)+
      10.12.6           Amendment and Restatement of the Adoption Agreement relating
                        to the Savings Plan(c)+
      10.12.7           Amendment to the Adoption Agreement relating to the Savings
                        Plan(g)+
      10.12.8           Arch Re Executive Supplemental Non-Qualified Savings and
                        Retirement Plan (the "Supplemental Plan") and related Trust
                        Agreement(b)+
      10.12.9           Amendment No. 1 to the Adoption Agreement relating to the
                        Supplemental Plan(c)+
      10.12.10          Amendment No. 2 to the Adoption Agreement relating to the
                        Supplemental Plan(g)+
      10.13             Asset Purchase Agreement, dated as of January 10, 2000,
                        among Arch-U.S., Folksamerica Holding Company, Inc. ("FHC")
                        and Folksamerica Reinsurance Company ("FRC")(i)
      10.14             Transfer and Assumption Agreement, dated May 5, 2000,
                        between Arch Re and FRC(l)
      10.15             Escrow Agreement, dated December 28, 2000, among ACGL, FHC,
                        FRC and the Escrow Agent(s)
      10.16             Agreement, dated May 5, 2000, among Arch-U.S., Arch Re, FHC
                        and FRC regarding Aviation Business(l)
      10.17             Agreement and Plan of Merger, dated as of September 25,
                        2000, among Arch-U.S., ACGL, The Arch Purpose Trust and Arch
                        Merger Corp.(n)
      10.18             Asset Purchase Agreement, dated as of October 31, 2000,
                        among Arch-U.S., Hales Capital Advisors, LLC, its members
                        and Hales(q)
      10.19             Reorganization Agreement, dated as of December 31, 2000,
                        among ACGL, American Independent Insurance Holding Company
                        and other signatories thereto(r)


                                      E-3




       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
                     
      10.20             Stock Repurchase Agreement, dated January 17, 2000, among
                        ACGL, Arch Re and XL Capital Ltd(i)
      10.21             Form of Voting and Disposition Agreement, among Arch U.S.,
                        Arch Re and XL Capital Ltd(i)
      10.22             Agreement, dated November 20, 2001, among ACGL, Warburg
                        Pincus Private Equity VIII, L.P., Warburg Pincus
                        International Partners, L.P., Warburg Pincus Netherlands
                        International Partners I, C.V., Warburg Pincus Netherlands
                        International II, C.V. and HFCP IV (Bermuda), L.P.
                        (collectively, the "Original Signatories") and Orbital
                        Holdings, Ltd.(w)
      10.23             Agreement, dated November 20, 2001, among ACGL, the Original
                        Parties and Insurance Private Equity Investors, L.L.C.(w)
      10.24             Agreement, dated November 20, 2001, among ACGL, the Original
                        Parties and Farallon Capital Partners, L.P., Farallon
                        Capital Institutional Partners II, L.P., Farallon Capital
                        Institutional Partners III, L.P. and RR Capital Partners,
                        L.P.(w)
      10.25             Agreement, dated as of November 8, 2001, among ACGL, the
                        Investors, Trident, Trident II, L.P., MMRCH, Marsh &
                        McLennan Capital Professionals Fund, L.P. and Marsh &
                        McLennan Employees' Securities Company, L.P.(v)
      10.26             Management Subscription Agreement, dated as of October 24,
                        2001, between ACGL and certain members of management(v)
      10.27             Reorganization Agreement, dated as of March 23, 2001, by and
                        among Altus Holdings, Ltd., Trident, TRYCO II, Ltd., MMRCH,
                        Glenn L. Ballew, David G. May and ACGL(u)
      10.28             Administrative Services Agreement, between ACGL and Arch
                        U.S.(t)
      21                Subsidiaries of Registrant (filed herewith)
      23                Consent of PricewaterhouseCoopers (filed herewith)
      24                Powers of Attorney (filed herewith)


------------------------

(a) Filed as an exhibit to our Registration Statement on Form S-8
    (No. 33-99974), as filed with the SEC on December 4, 1995, and incorporated
    by reference.

(b) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 1995, as filed with the SEC on March 30, 1996, and incorporated
    by reference.

(c) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 1996, as filed with the SEC on March 31, 1997, and incorporated
    by reference.

(d) Filed as an exhibit to our Report on Form 10-Q for the period ended
    June 30, 1997, as filed with the SEC on August 14, 1997, and incorporated by
    reference.

(e) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 1997, as filed with the SEC on March 27, 1998, and incorporated
    by reference.

(f) Filed as an exhibit to our Report on Form 10-Q for the period ended
    June 30, 1998, as filed with the SEC on August 14, 1998, and incorporated by
    reference.

(g) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 1998, as filed with the SEC on March 30, 1999, and incorporated
    by reference.

(h) Filed as an exhibit to our Definitive Proxy Statement, as filed with the SEC
    on April 14, 1999, and incorporated by reference.

(i) Filed as an exhibit to our Report on Form 8-K as filed with the SEC on
    January 18, 2000, and incorporated by reference.

(j) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 1999, as filed with the SEC on March 30, 2000, and incorporated
    by reference.

                                      E-4

(k) Filed as an exhibit to our Report on Form 10-Q for the period ended
    March 31, 2000, as filed with the SEC on May 15, 2000, and incorporated by
    reference.

(l) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    May 19, 2000, and incorporated by reference.

(m) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    September 8, 2000, and incorporated by reference.

(n) Filed as an annex to our Definitive Proxy Statement/Prospectus included in
    our Registration Statement on Form S-4 (No. 333-45418), as filed with the
    SEC on September 26, 2000, and incorporated by reference.

(o) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    November 9, 2000, and incorporated by reference.

(p) Filed as an exhibit to our Report on Form 10-Q for the period ended
    September 30, 2000, as filed with the SEC on November 14, 2000, and
    incorporated by reference.

(q) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    December 5, 2000, and incorporated by reference.

(r) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    March 15, 2001, and incorporated by reference.

(s) Filed as an exhibit to our Annual Report on Form 10-K for the year ended
    December 31, 2000, as filed with the SEC on April 2, 2001, and incorporated
    by reference.

(t) Filed as an exhibit to our Report on Form 10-Q for the period ended
    March 31, 2001, as filed with the SEC on May 15, 2001, and incorporated by
    reference.

(u) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    July 6, 2001, and incorporated by reference.

(v) Filed as an exhibit to our Report on Form 10-Q for the period ended
    September 30, 2001, as filed with the SEC on November 14, 2001, and
    incorporated by reference.

(w) Filed as an exhibit to our Report on Form 8-K, as filed with the SEC on
    January 4, 2002, and incorporated by reference.

(x) Filed as an exhibit to our Report on Form 8-K/A, as filed with the SEC on
    January 7, 2002, and incorporated by reference.

(y) Filed as an exhibit to our Registration Statement on Form S-8
    (No. 333-72182), as filed with the SEC on January 8, 2002, and incorporated
    by reference.

(z) Filed as an exhibit to our Registration Statement on Form S-3
    (No. 333-82612), as filed with the SEC on February 12, 2002, and
    incorporated by reference.

(aa) Filed as an exhibit to our Registration Statement on Form S-8
    (No. 333-82772), as filed with the SEC on February 14, 2002, and
    incorporated by reference.

+   A management contract or compensatory plan or arrangement required to be
    filed pursuant to Item 14(c) of Form 10-K.

                                      E-5