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

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

                                    FORM 10-Q

(Mark One)
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the quarterly period ended March 31, 2002

                                       Or

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

     For the transition period ___________________ to _____________________

Commission file number:  0-26456

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

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

         Wessex House, 3rd Floor
             45 Reid Street
            Hamilton, Bermuda                            HM 12
(Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (441) 278-9250

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

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

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

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

               Class                       Outstanding at March 31, 2002
               -----                       -----------------------------
   Common Shares, $0.01 par value                    15,790,332

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



                             ARCH CAPITAL GROUP LTD.

                                      INDEX


                                                                        PAGE NO.
                                                                        --------
                                                                       
PART I. FINANCIAL INFORMATION

ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS

Review Report of Independent Accountants                                   2

Consolidated Balance Sheets                                                3
  March 31, 2002 and December 31, 2001

Consolidated Statements of Income                                          4
  For the three month periods ended March 31, 2002 and 2001

Consolidated Statements of Changes in Shareholders' Equity                 5
  For the three month periods ended March 31, 2002 and 2001

Consolidated Statements of Comprehensive Income                            6
  For the three month periods ended March 31, 2002 and 2001

Consolidated Statements of Cash Flows                                      7
  For the three month periods ended March 31, 2002 and 2001

Notes to Consolidated Financial Statements                                 8

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

ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      27

PART II. OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS                                               28

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             28

ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K                                29


                                        1


                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of Arch Capital
Group Ltd. and its subsidiaries as of March 31, 2002, and the related
consolidated statements of income, comprehensive income and, changes in
shareholders' equity and cash flows for each of the three month periods ended
March 31, 2002 and 2001 and the consolidated statement of cash flows for the
three-month periods ended March 31, 2002 and 2001. These financial statements
are the responsibility of the Company's management.

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

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

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

/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
New York, New York
May 3, 2002

                                        2


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



                                                                                           (UNAUDITED)
                                                                                            MARCH 31,              DECEMBER 31,
                                                                                              2002                    2001
                                                                                       -------------------     -------------------
                                                                                                             
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost:  2002, $677,645;
2001, $467,154).....................................................................       $    671,693            $    468,269
Short-term investments available for sale, at fair value (amortized cost:  2002,
$328,034; 2001, $477,058)...........................................................            326,737                 476,820
Publicly traded equity securities available for sale, at fair value (cost: 2002, --;
2001, $960).........................................................................                 --                     235
Securities held in escrow, at fair value (amortized cost:  2002, --; 2001, $22,156).                 --                  22,156
Privately held securities (cost:  2002, $40,696; 2001, $41,587).....................             40,797                  41,608
                                                                                       -------------------     -------------------
Total investments...................................................................          1,039,227               1,009,088
                                                                                       -------------------     -------------------

Cash................................................................................             18,977                   9,970
Accrued investment income...........................................................              8,897                   7,572
Premiums receivable.................................................................            242,686                  59,463
Unpaid losses and loss adjustment expenses recoverable .............................            130,710                  90,442
Paid losses and loss adjustment expenses recoverable................................             18,739                  14,418
Prepaid reinsurance premiums........................................................             54,159                  58,961
Goodwill............................................................................             28,540                  26,336
Deferred income tax asset...........................................................             14,661                  13,716
Deferred acquisition costs..........................................................             34,844                   5,412
Other assets........................................................................             19,317                  18,323
                                                                                       -------------------     -------------------
TOTAL ASSETS........................................................................       $  1,610,757            $  1,313,701
                                                                                       ===================     ===================

LIABILITIES
Reserve for losses and loss adjustment expenses.....................................       $    194,802            $    113,507
Unearned premiums...................................................................            296,918                  88,539
Reinsurance balances payable........................................................             41,774                  47,029
Reserve for loss of escrowed assets.................................................                 --                  18,833
Other liabilities...................................................................             57,106                  25,424
                                                                                       -------------------     -------------------
TOTAL LIABILITIES...................................................................            590,600                 293,332
                                                                                       -------------------     -------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2002 and
2001, 35,687,735)...................................................................                357                     357
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2002,
15,790,332, 2001, 13,513,538).......................................................                158                     135
Additional paid-in capital..........................................................          1,100,930               1,039,887
Deferred compensation under share award plan........................................            (65,483)                 (8,230)
Retained earnings (deficit).........................................................             (7,644)                (11,610)
Accumulated other comprehensive income consisting of unrealized
appreciation (decline) in value of investments, net of income tax...................             (8,161)                   (170)
                                                                                       -------------------     -------------------
TOTAL SHAREHOLDERS' EQUITY..........................................................          1,020,157               1,020,369
                                                                                       -------------------     -------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................................       $  1,610,757            $  1,313,701
                                                                                       ===================     ===================


                 See Notes to Consolidated Financial Statements

                                        3


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



                                                                                                      (UNAUDITED)
                                                                                                   THREE MONTHS ENDED
                                                                                                       MARCH 31,
                                                                                              2002                    2001
                                                                                       -------------------     -------------------
                                                                                                             
REVENUES
Net premiums written................................................................       $    280,710            $      2,837
Increase in unearned premiums.......................................................           (213,183)                 (1,204)
                                                                                       -------------------     -------------------
Net premiums earned.................................................................             67,527                   1,633
Net investment income...............................................................              9,167                   3,160
Net realized investment gains (losses)..............................................             (1,465)                  9,004
Equity in net income of investees...................................................                798                     888
Fee income..........................................................................              3,574                   1,715
Net commission income...............................................................                 --                     482
                                                                                       -------------------     -------------------
TOTAL REVENUES......................................................................             79,601                  16,882

EXPENSES
Losses and loss adjustment expenses.................................................             50,539                   1,545
Net commissions and brokerage.......................................................              7,311                      --
Other operating expenses............................................................             13,324                   3,679
Provision for non-cash compensation.................................................              4,128                     359
Foreign exchange loss...............................................................                108                      --
                                                                                       -------------------     -------------------
TOTAL EXPENSES......................................................................             75,410                   5,583

INCOME BEFORE INCOME TAXES..........................................................              4,191                  11,299

Income taxes:
Current expense.....................................................................                584                     201
Deferred expense (benefit)..........................................................               (359)                  3,105
                                                                                       -------------------     -------------------
Income tax expense..................................................................                225                   3,306
                                                                                       -------------------     -------------------
NET INCOME..........................................................................       $      3,966            $      7,993
                                                                                       ===================     ===================

NET INCOME PER SHARE DATA
Basic...............................................................................       $       0.30            $       0.63
Diluted.............................................................................       $       0.08            $       0.63

AVERAGE SHARES OUTSTANDING
Basic...............................................................................         13,018,631              12,786,631
Diluted.............................................................................         51,996,949              12,792,448


                 See Notes to Consolidated Financial Statements

                                        4


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



                                                                                                      (UNAUDITED)
                                                                                                  THREE MONTHS ENDED,
                                                                                                        MARCH 31,
                                                                                               2002                    2001
                                                                                       -------------------     -------------------
                                                                                                             
PREFERENCE SHARES
Balance at beginning of year........................................................       $        357                      --
                                                                                       -------------------     -------------------
Balance at end of period............................................................                357                      --
                                                                                       -------------------     -------------------

COMMON SHARES
Balance at beginning of year........................................................                135            $        127
Common shares issued................................................................                 23                       1
                                                                                       -------------------     -------------------
Balance at end of period............................................................                158                     128
                                                                                       -------------------     -------------------

ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year........................................................          1,039,887                 288,016
Common shares issued................................................................             60,963                   1,861
Stock options.......................................................................                 80                      --
                                                                                       -------------------     -------------------
Balance at end of period............................................................          1,100,930                 289,877
                                                                                       -------------------     -------------------

DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year........................................................             (8,230)                   (341)
Restricted common shares issued.....................................................            (61,301)                 (1,612)
Deferred compensation expense recognized............................................              4,048                     359
                                                                                       -------------------     -------------------
Balance at end of period............................................................            (65,483)                 (1,594)
                                                                                       -------------------     -------------------

RETAINED EARNINGS (DEFICIT)
Balance at beginning of year, as previously reported................................            (11,610)                (30,916)
Adjustment to retroactively adopt the equity method of accounting for the original
  investment in ART Services........................................................                 --                  (2,710)
                                                                                       -------------------     -------------------
Balance at beginning of year, as adjusted...........................................            (11,610)                (33,626)
Net income..........................................................................              3,966                   7,993
                                                                                       -------------------     -------------------
Balance at end of period............................................................             (7,644)                (25,633)
                                                                                       -------------------     -------------------

TREASURY SHARES, AT COST
Balance at beginning of year........................................................                 --                      --
Treasury shares purchased...........................................................                 --                     (48)
                                                                                       -------------------     -------------------
Balance at end of period............................................................                 --                     (48)
                                                                                       -------------------     -------------------

ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED APPRECIATION (DECLINE) IN VALUE OF INVESTMENTS, NET OF INCOME TAX
Balance at beginning of year........................................................               (170)                 18,432
Adjustment to retroactively adopt the equity method of accounting for the original
  investment in ART Services........................................................                 --                    (309)
                                                                                       -------------------     -------------------
Balance at beginning of year, as adjusted...........................................               (170)                 18,123
Change in unrealized appreciation (decline).........................................             (7,991)                (11,425)
                                                                                       -------------------     -------------------
Balance at end of period............................................................             (8,161)                  6,698
                                                                                       -------------------     -------------------
TOTAL SHAREHOLDERS' EQUITY..........................................................       $  1,020,157            $    269,428
                                                                                       ===================     ===================


                 See Notes to Consolidated Financial Statements

                                        5


                    ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)



                                                                                                      (UNAUDITED)
                                                                                                  THREE MONTHS ENDED,
                                                                                                        MARCH 31,
                                                                                               2002                    2001
                                                                                       -------------------     -------------------
                                                                                                             
COMPREHENSIVE INCOME (LOSS)
Net income..........................................................................       $      3,966            $      7,993
Other comprehensive income (loss), net of tax
  Unrealized appreciation (decline) in value of investments:
    Unrealized holding gains (losses) arising during period.........................             (9,152)                 (5,273)
    Less:  reclassification of net realized (gains) losses included in net income...              1,161                  (6,152)
                                                                                       -------------------     -------------------
  Other comprehensive income (loss).................................................             (7,991)                (11,425)
                                                                                       -------------------     -------------------
COMPREHENSIVE INCOME (LOSS).........................................................       $     (4,025)           $     (3,432)
                                                                                       ===================     ===================


                 See Notes to Consolidated Financial Statements

                                        6


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



                                                                                                       (UNAUDITED)
                                                                                                   THREE MONTHS ENDED,
                                                                                                        MARCH 31,
                                                                                               2002                    2001
                                                                                       -------------------     -------------------
                                                                                                             
OPERATING ACTIVITIES
Net income..........................................................................       $      3,966            $      7,993
  Adjustments to reconcile net income to net cash provided
   by operating activities:
     Net realized investment (gains) losses.........................................              1,465                  (9,004)
     Provision for non-cash compensation............................................              4,128                     359
     Changes in:
      Reserve for losses and loss adjustment expenses, net..........................             47,788                     236
      Unearned premiums.............................................................            212,889                   2,771
      Premiums receivable...........................................................           (183,323)                 (2,478)
      Accrued investment income.....................................................             (1,090)                   (820)
      Reinsurance recoverables......................................................             (4,216)                 (1,542)
      Reinsurance balances payable..................................................             (5,862)                  1,103
      Deferred acquisition costs....................................................            (29,432)                   (241)
      Deferred income tax asset.....................................................               (359)                    213
      Other liabilities.............................................................              2,408                  (1,820)
      Other items, net..............................................................                (76)                  3,786
                                                                                       -------------------     -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...........................................             48,286                     556
                                                                                       -------------------     -------------------

INVESTING ACTIVITIES
Purchases of fixed maturity investments.............................................           (315,446)                (46,708)
Release of escrowed assets..........................................................            (18,833)                     --
Sales of fixed maturity investments.................................................            122,652                  13,117
Sales of equity securities..........................................................                232                  17,986
Net sales of short-term investments.................................................            175,405                  23,954
Acquisition of Rock River Insurance Company, net of cash and investments............             (2,513)                     --
Acquisition of American Independent Insurance Holding Company, net of cash..........                 --                     224
Purchases of furniture, equipment and other.........................................               (752)                    (22)
                                                                                       -------------------     -------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES................................            (39,255)                  8,551
                                                                                       -------------------     -------------------

FINANCING ACTIVITIES
Purchase of treasury shares.........................................................                 --                     (48)
Debt retirement and other...........................................................                (24)                   (250)
                                                                                       -------------------     -------------------
NET CASH USED FOR FINANCING ACTIVITIES..............................................                (24)                   (298)
                                                                                       -------------------     -------------------

Increase in cash....................................................................              9,007                   8,809
Cash beginning of year..............................................................              9,970                  11,481
                                                                                       -------------------     -------------------
CASH END OF PERIOD..................................................................       $     18,977            $     20,290
                                                                                       ===================     ===================


                 See Notes to Consolidated Financial Statements

                                        7


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

1.  ORGANIZATION

     Arch Capital Group Ltd. ("ACGL") is a Bermuda public limited liability
company with approximately $1 billion in equity capital, providing insurance and
reinsurance on a worldwide basis through its wholly owned subsidiaries. Please
refer to ACGL's Annual Report on Form 10-K for the year ended December 31, 2001
for detailed information regarding ACGL and its subsidiaries (collectively, the
"Company").

2.  GENERAL

     The interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP") and include the accounts of ACGL, Arch Reinsurance Ltd. ("Arch Re
Bermuda"), Arch Capital Group (U.S.) Inc. ("Arch-U.S."), Hales & Company Inc.
("Hales"), American Independent Insurance Holding Company ("AIHC"), Arch Risk
Transfer Services Ltd. ("ART Services"), Arch Reinsurance Company ("Arch Re
U.S."), Cross River Insurance Company ("Cross River") and Rock River Insurance
Company ("Rock River"). All intercompany transactions and balances have been
eliminated in consolidation.

     The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of management, the accompanying interim consolidated
financial statements reflect all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of results on an interim basis. The
results of any interim period are not necessarily indicative of the results for
a full year or any future periods.

3.  RECLASSIFICATIONS

     Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the 2002 presentation. Such reclassifications had no
effect on the Company's net income, shareholders' equity or cash flows.

4.  GOODWILL

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which became effective for the Company on January 1, 2002. In adopting
SFAS No. 142, the Company discontinued amortizing goodwill and will periodically
test goodwill for impairment. SFAS No. 142 also requires that, upon adoption,
the Company complete a transitional goodwill impairment test six months from the
date of adoption. The Company tested its goodwill for impairment at each
reporting unit as of January 1, 2002 in accordance with SFAS No. 142 and, based
on such evaluation, it was determined that goodwill was not impaired. Goodwill
will be tested for impairment on an annual basis and between annual tests in
certain circumstances. The adoption of SFAS No. 142 did not have a material
impact on the Company's consolidated results of operations or its consolidated
financial condition.

                                        8


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

4.  GOODWILL (CONTINUED)

     Net income and earnings per share for the three months ended March 31, 2001
adjusted to exclude amortization expense (net of taxes) is as follows:



                                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                       THREE MONTHS ENDED
                                                                                         MARCH 31, 2001
                                                                            ---------------------------------------
                                                                               AS REPORTED            AS ADJUSTED
                                                                            ----------------        ---------------
                                                                                                  
       NET INCOME......................................................           $  7,993              $  8,128

       EARNINGS PER SHARE:
         Basic.........................................................           $   0.63              $   0.64
         Diluted.......................................................           $   0.63              $   0.64


5.  ACQUISITION

     On February 1, 2002, the Company acquired Rock River, an approved excess
and surplus lines insurer in 46 states and the District of Columbia and an
admitted insurer in one other state, from Sentry Insurance, A Mutual Company
("Sentry") for $19.5 million. At closing, Rock River, which is included in our
insurance segment (see Note 7), had net assets of approximately $17.0 million.
Sentry, which has an A.M Best rating of "A+" (Superior) as of December 31, 2001,
agreed to reinsure or otherwise assume all liabilities arising out of Rock
River's business prior to the closing of the acquisition by the Company.

6.  CONTINGENCIES RELATING TO THE SALE OF PRIOR REINSURANCE OPERATION

     On May 5, 2000, the Company sold the prior reinsurance operations of Arch
Re U.S. pursuant to an agreement entered into as of January 10, 2000 with
Folksamerica Reinsurance Company and Folksamerica Holding Company (collectively,
"Folksamerica"). The Folksamerica transaction was structured as 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 the Company's balance
sheet. Folksamerica assumed Arch Re U.S.'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 U.S.'s
obligations and that, unless the reinsureds object to the assumption, Arch Re
U.S. will be released from its obligations to those reinsured. None of such
reinsureds objected to the assumption. However, Arch Re U.S. 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 U.S. may incur losses relating to the reinsurance agreements transferred
in the asset sale. Folksamerica has an A.M. Best rating of "A-" (Excellent).

Under the terms of the agreement, $20 million of the purchase price had been
placed in escrow for a period of five years. Such amounts represented restricted
funds that appeared under a separate caption entitled "Securities held in
escrow" on the Company's consolidated balance sheet at December 31, 2001. These
funds were to 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 U.S. by a certain
managing underwriting agency were deficient as measured at the end of such
five-year period or to satisfy certain indemnity claims Folksamerica may have
had during such period. On February 25, 2002, the Company

                                        9


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

6.  CONTINGENCIES RELATING TO THE SALE OF PRIOR REINSURANCE OPERATION
    (CONTINUED)

reached a definitive settlement agreement with Folksamerica pursuant to which
the Company satisfied 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 was 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.

7.  SEGMENT INFORMATION

     The Company classifies its businesses into two underwriting segments -
reinsurance and insurance - and a corporate segment (non-underwriting). Segment
performance is evaluated based on underwriting profit or loss. Other revenue and
expense items are not evaluated by segment. The accounting policies of the
segments are the same as those used for the consolidated financial statements.
Insurance business reinsured on an inter-segment basis has been reflected in the
segment accountable for the underwriting results.

     The reinsurance segment consists of the Company's reinsurance underwriting
subsidiaries, Arch Re Bermuda, based in Bermuda, and Arch Re U.S., based in the
United States. The reinsurance segment's strategy is to write significant
portions of business on a select number of specialty property and casualty
treaties. Classes of business focused on include property catastrophe
reinsurance, other property business (losses on a single risk, both excess of
loss and pro rata), casualty, other specialty business, marine, aviation and
space, casualty clash and non-traditional business.

     The insurance segment includes the Company's primary underwriting
subsidiaries, which include First American, Rock River, Cross River and American
Independent. The insurance segment is comprised of seven profit centers
including property, casualty, executive assurance, medical malpractice,
professional liability insurance, program business and other (currently
identified as the non-standard auto business of American Independent and the
lenders business of First American).

     The corporate segment (non-underwriting) includes net investment income and
net realized gains or losses and other corporate expenses incurred by the
Company. The corporate segment also includes the results of Hales, the Company's
merchant banking subsidiary.

                                       10


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

7.  SEGMENT INFORMATION (CONTINUED)

     The following table sets forth an analysis of the Company's underwriting
profit or loss by segment, together with a reconciliation of underwriting profit
or loss to net income. Due to the significant changes in the Company's
operations due to the new underwriting initiative, comparisons of 2002 to 2001
results are not meaningful.



                                                                                      (IN THOUSANDS)
                                                                                    THREE MONTHS ENDED
                                                                                      MARCH 31, 2002
                                                                 ----------------------------------------------------------
OPERATING INFORMATION BY SEGMENT                                    REINSURANCE           INSURANCE              TOTAL
                                                                 -----------------    ----------------     ----------------
                                                                                                      
Gross premiums written.......................................        $  264,861          $   58,721            $ 323,582
Net premiums written.........................................           264,861              15,849              280,710
Net premiums earned..........................................            55,533              11,994               67,527
Fee income...................................................                --               1,168                1,168
Losses and loss adjustment expenses..........................            40,904               9,635               50,539
Net commissions and brokerage................................             7,262                  49                7,311
Operating expenses (1).......................................             3,518               3,502                7,020
                                                                 -----------------    ----------------     ----------------
GAAP underwriting profit (loss)..............................        $    3,849          $      (24)           $   3,825
                                                                 =================    ================

Net investment income........................................                                                      9,167
Net realized losses on investments...........................                                                     (1,465)
Equity in net income of investees............................                                                        798
Other fee income.............................................                                                      2,406
Other corporate expenses.....................................                                                      6,304
Provision for non-cash compensation..........................                                                      4,128
Foreign exchange loss........................................                                                        108
Income tax expense...........................................                                                        225
                                                                                                           ----------------
NET INCOME...................................................                                                  $   3,966
                                                                                                           ================

STATUTORY BASIS (2)
Loss ratio...................................................              73.7%               80.3%                74.8%
Commissions and brokerage ratio (3)..........................              13.0%              (13.3%)               11.6%
Other operating expense ratio................................               2.1%               27.5%                 3.6%
                                                                 -----------------    ----------------     ----------------
Combined ratio...............................................              88.8%               94.5%                90.0%
                                                                 -----------------    ----------------     ----------------

GAAP BASIS (2)
Loss ratio..................................................               73.7%               80.3%                74.8%
Commissions and brokerage ratio (3).........................               13.1%               (9.3%)                9.1%
Other operating expense ratio...............................                6.3%               29.2%                10.4%
                                                                 -----------------    ----------------     ----------------
Combined ratio..............................................               93.1%              100.2%                94.3%
                                                                 -----------------    ----------------     ----------------


(1) Excludes certain holding company level expenses included in other corporate
    expenses.
(2) The loss ratios for statutory and GAAP are based on earned premiums. The
    statutory expense ratios are based on net premiums written, while the GAAP
    expense ratios are based on net premiums earned. In calculating expenses
    incurred under GAAP, the Company is deferring only a portion of its
    underwriting expenses; accordingly, when premiums are growing rapidly, the
    GAAP expense ratio will be higher than the statutory expense ratio.
(3) Ratio is based on commissions and brokerage expenses, adjusted to include
    certain policy-related fee income.

                                       11


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

8.  REINSURANCE

     In the normal course of business, the Company's insurance subsidiaries cede
a 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 2002 results reflected below, the following table sets
forth the effects of reinsurance on the Company's reinsurance and insurance
subsidiaries. With respect to 2001 results, the table sets forth the effects of
reinsurance on American Independent, acquired by the Company in February 2001.



                                                                                               (IN THOUSANDS)
                                                                                             THREE MONTHS ENDED
                                                                                                  MARCH 31,
                                                                                     -------------------------------------
                                                                                           2002                 2001
                                                                                     -----------------     ---------------
                                                                                                         
       PREMIUMS WRITTEN:
         Direct.............................................................             $   58,747            $  9,180
         Assumed............................................................                264,835                  --
         Ceded..............................................................                (42,872)             (6,343)
                                                                                     -----------------     ---------------
         Net................................................................             $  280,710            $  2,837
                                                                                     =================     ===============

       PREMIUMS EARNED:
         Direct.............................................................             $   43,496            $  6,410
         Assumed............................................................                 53,015                  --
         Ceded..............................................................                (28,984)             (4,777)
                                                                                     -----------------     ---------------
         Net................................................................             $   67,527               1,633
                                                                                     =================     ===============

       LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED:
         Direct.............................................................             $   41,707            $  5,454
         Assumed............................................................                 38,962                  --
         Ceded..............................................................                (30,130)             (3,909)
                                                                                     -----------------     ---------------
         Net................................................................             $   50,539            $  1,545
                                                                                     =================     ===============


9.  INVESTMENT INFORMATION

     The following tables reconcile estimated fair value and carrying value to
the amortized cost of fixed maturities and equity securities at March 31, 2002
and December 31, 2001:



                                                                              (IN THOUSANDS)
                                                                              MARCH 31, 2002
                                                  ------------------------------------------------------------------------
                                                    ESTIMATED
                                                    FAIR VALUE
                                                       AND                GROSS               GROSS
                                                     CARRYING           UNREALIZED          UNREALIZED        AMORTIZED
                                                      VALUE               GAINS              (LOSSES)            COST
                                                  ---------------    ----------------    ---------------    -------------
                                                                                                  
     Fixed maturities......................         $  671,693            $  2,131          $  (8,083)        $ 677,645
     Privately held securities.............             40,797                 101                 --            40,696
                                                  ---------------    ----------------    ---------------    --------------
     Total.................................         $  712,490            $  2,232          $  (8,083)        $ 718,341
                                                  ===============    ================    ===============    =============


                                       12


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

9.  INVESTMENT INFORMATION (CONTINUED)



                                                                              (IN THOUSANDS)
                                                                            DECEMBER 31, 2001
                                                  -----------------------------------------------------------------------
                                                    ESTIMATED
                                                    FAIR VALUE
                                                       AND               GROSS               GROSS
                                                     CARRYING          UNREALIZED          UNREALIZED        AMORTIZED
                                                      VALUE              GAINS              (LOSSES)           COST
                                                  ---------------    ----------------    ---------------    -------------
                                                                                                  
       Fixed maturities......................       $  468,269            $  3,761          $  (2,646)        $ 467,154
       Publicly traded equity securities.....              235                  --               (725)              960
       Privately held securities.............           41,608                  21                 --            41,587
                                                  ---------------    ----------------    ---------------    -------------
       Total.................................       $  510,112            $  3,782          $  (3,371)        $ 509,701
                                                  ===============    ================    ===============    =============


     Privately held securities consisted of the following at March 31, 2002 and
December 31, 2001:




                                                                                              (IN THOUSANDS)
                                                                  PERCENTAGE           MARCH 31,           DECEMBER 31,
                                                                  OWNERSHIP              2002                  2001
                                                                ---------------     ----------------     ----------------
                                                                                                     
        CARRIED UNDER THE EQUITY METHOD:
          The ARC Group, LLC............................                 27.0%          $   7,930             $   8,725
          Arx Holding Corp. ............................                 35.2%              4,155                 3,714
          Island Heritage Insurance Company, Ltd. ......                 33.4%              5,010                 4,950
          New Europe Insurance Ventures.................                 14.6%                499                   609
          Sunshine State Holding Corporation............                 23.0%              1,771                 1,838
                                                                                    ----------------     ----------------
                                                                                           19,365                19,836
                                                                                    ----------------     ----------------

        CARRIED AT FAIR VALUE:
          Stockton Holdings Limited.....................                  1.7%             10,000                10,000
          Trident II, L.P. .............................                  2.0%             10,413                10,876
          Distribution Investors, LLC...................                  2.5%              1,019                   896
                                                                                    ----------------     ----------------
                                                                                           21,432                21,772
                                                                                    ----------------     ----------------
        Total...........................................                                $  40,797             $  41,608
                                                                                    ================     ================


     During the three months ended March 31, 2002, the Company received
distributions from The ARC Group, LLC ("ARC") totaling $1.4 million. On April
12, 2002, the Company sold its investment in ARC to Trident II, L.P. and two
limited partnerships associated with Marsh & McLennan Companies, Inc. for $13.8
million and an additional amount, payable by September 30, 2002, equal to 27% of
the net income of ARC for the three month period ended March 31, 2002.

     At March 31, 2002, the Company had investment commitments relating to its
privately held securities totaling approximately $3.6 million. The Company was
released from its obligations to make any further capital contributions to
Trident II in November 2001.

     During the 2002 first quarter, the Company also funded a capital call made
by Distribution Investors, LLC, the general partner of Distribution Partners
Investment Capital, L.P., a private equity fund affiliated with Hales which
focuses on investing in insurance distribution entities, , in the amount of
$123,000. At March 31, 2002, the Company had funded a total of $1.1 million of
its $1.5 million capital commitment to Distribution Investors, LLC.

                                       13


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

10. EARNINGS PER SHARE

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



                                                                               (IN THOUSANDS, EXCEPT SHARE DATA)
                                                                                       THREE MONTHS ENDED
                                                                                           MARCH 31,
                                                                           -------------------------------------------
                                                                                  2002                   2001
                                                                           --------------------   --------------------
                                                                                                 
   BASIC EARNINGS PER SHARE:
   Net income......................................................            $       3,966           $       7,993
   Divided by:
   Weighted average shares outstanding for the period..............               13,018,631              12,786,631
                                                                            ===================    ===================
   Basic earnings per share........................................            $        0.30           $        0.63
                                                                            ===================    ===================

   DILUTED EARNINGS PER SHARE:
   Net income......................................................            $       3,966           $       7,993
   Divided by:
   Weighted average shares outstanding for the period..............               13,018,631              12,786,631
   Effect of dilutive securities:
     Preference shares.............................................               35,687,735                      --
     Warrants......................................................                1,323,255                      --
     Nonvested restricted shares...................................                1,232,239                      --
     Stock options.................................................                  735,089                   5,817
                                                                            -------------------    -------------------
   Total shares....................................................               51,996,949              12,792,448
                                                                            ===================    ===================
   Diluted earnings per share......................................            $        0.08           $        0.63
                                                                            ===================    ===================


     On April 8, 2002, ACGL issued 7,475,000 of its common shares and received
net proceeds of approximately $179.2 million. In addition, in April 2002,
1,559,257 Class A warrants were canceled in exchange for 446,608 newly issued
common shares of ACGL.

11. 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.

                                       14


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

11. INCOME TAXES (CONTINUED)

     A reconciliation from the federal statutory income tax rate of 35% to the
Company's effective tax rate for the three months ended March 31, 2002 and 2001
follows:



                                                                                       (IN THOUSANDS)
                                                                                     THREE MONTHS ENDED
                                                                                         MARCH 31,
                                                                         -----------------------------------------
                                                                                 2002                  2001
                                                                         -------------------   -------------------
                                                                                                 
     Income tax (benefit) expense computed on pre-tax
       income at the federal statutory rate..........................            $  1,466              $  3,955
       Valuation allowance...........................................                 162                  (174)
       Write-off of deferred tax asset...............................                  --                   251
       Dividend received deduction...................................                  --                   (15)
       Foreign income not subject to income tax......................              (1,430)                 (787)
       Other.........................................................                  27                    76
                                                                         -------------------   -------------------
     Income tax expense..............................................            $    225              $  3,306
                                                                         ===================   ===================


     The Company has net operating loss carryforwards totaling $58.8 million at
March 31, 2002. Such net operating losses are currently available to offset
future taxable income of the Company and expire between 2011 and 2022. 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 investment
funds affiliated with Warburg Pincus LLC and Hellman & FriedmanLLC. As a result
of this ownership change, limitations are imposed upon the utilization of
existing net operating losses.

     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 March 31, 2002 and December 31, 2001 were as follows:



                                                                                      (IN THOUSANDS)
                                                                             MARCH 31,            DECEMBER 31,
                                                                               2002                   2001
                                                                        -------------------   -------------------
                                                                                             
     DEFERRED INCOME TAX ASSETS:
      Net operating loss carryforwards..............................         $    20,578           $    15,151
      Reserve for contingent loss of escrowed assets................                  --                 5,950
      AMT credit carryforward.......................................                 965                   965
      Discounting of unpaid loss reserves...........................                 426                   335
      Net unearned premium reserve..................................               2,587                 1,975
      Compensation liabilities......................................                 456                    --
      Net unrealized decline in value of investments................                 344                    --
      Other, net....................................................               1,457                 1,403
                                                                        -------------------   -------------------
     Total deferred tax assets......................................              26,813                25,779
                                                                        -------------------   -------------------
     DEFERRED INCOME TAX LIABILITIES:
      Equity in net income of investees, net........................                (628)                 (551)
      Deferred acquisition costs....................................              (1,732)               (1,718)
      Net unrealized appreciation in value of investments.... ......                  --                  (240)
                                                                        -------------------   -------------------
     Total deferred tax liabilities.................................              (2,360)               (2,509)
                                                                        -------------------   -------------------
     Valuation allowance............................................              (9,792)               (9,554)
                                                                        -------------------   -------------------
     Net deferred income tax asset..................................         $    14,661           $    13,716
                                                                        ===================   ===================


                                       15


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

GENERAL

     THE COMPANY

     We are a Bermuda public limited liability company with approximately $1.2
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.

     NEW UNDERWRITING INITIATIVE

     In October, we launched an underwriting initiative to meet current and
future demand in the global insurance and reinsurance markets 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 $1.2
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. During April, we completed an offering of
7,475,000 of our common shares and received net proceeds of $179.2 million. We
will use the proceeds of the offering to support the future growth of our
insurance and reinsurance operations.

RESULTS OF OPERATIONS

     The following table summarizes the Company's first quarter financial
performance for the three month periods ended March 31, 2002 and 2001. After-tax
operating income is defined as net income, excluding net realized investment
gains or losses on investment sales, equity in net income or loss of investees,
non-cash compensation charges, and foreign exchange gains or losses. The
increase in diluted average shares outstanding is due to the issuance of
convertible preference shares and Class A warrants in connection with the
Company's capital infusion in November 2001.



                                                                                        (UNAUDITED)
                                                                                     THREE MONTHS ENDED
                                                                                         MARCH 31,
                                                                         -----------------------------------------
SUMMARY OF RESULTS (IN THOUSANDS, EXCEPT SHARE DATA)                            2002                  2001
                                                                         -------------------   -------------------
                                                                                             
Gross premiums written.................................................      $    323,582          $      9,180
Net premiums written...................................................           280,710                 2,837
Net premiums earned....................................................            67,527                 1,633
Total revenues.........................................................            79,601                16,882
After-tax operating income.............................................             8,368                 1,608
Net income.............................................................             3,966                 7,993

Per share results:
  After-tax operating income...........................................      $       0.16          $       0.13
  Net income...........................................................      $       0.08          $       0.63
Diluted average shares outstanding.....................................        51,996,949            12,792,448


                                       16


     The first quarter of 2002 reflects the first full quarter of results from
our new underwriting initiative. Comparisons of 2002 and 2001 results of
operations are not meaningful due to the changes in our business during 2001
resulting from this initiative and the related capital infusion of $763 million.
We reported 2002 first quarter after-tax operating income of $8.4 million, or
$0.16 per diluted share, compared to after-tax operating income of $1.6 million,
or $0.13 per diluted share, in the 2001 first quarter. Net income for the 2002
first quarter was $4.0 million, or $0.08 per diluted share, which includes
after-tax net realized investment losses of $1.2 million, or $0.02 per diluted
share, after-tax equity in net income of investees of $540,000, or $0.01 per
diluted share, after-tax non-cash compensation charges of $3.7 million, or $0.07
per diluted share and an after-tax foreign exchange loss of $108,000. These
amounts correspond to net income for the 2001 first quarter of $8.0 million, or
$0.63 per diluted share, which includes after-tax net realized investment gains
of $6.2 million, or $0.48 per diluted share, after-tax equity in net income of
investees of $540,000, or $0.04 per diluted share, and after-tax non-cash
compensation charges of $307,000, or $0.02 per diluted share. In connection with
our new insurance operations, we incurred start-up costs of approximately $1.1
million after-tax, or $0.02 per diluted share in the 2002 first quarter.

     UNDERWRITING ACTIVITIES

     During the period from January 1 to April 30, 2002, our reinsurance
subsidiaries have entered into more than 1,000 reinsurance treaties and other
reinsurance arrangements with over 350 clients, which are expected to provide
approximately $600 million of annualized net reinsurance premiums written.
During the first four months of 2002, we also made significant progress in
expanding our insurance operations, which have received a significant increase
in the amount of business submitted.

     Net premiums written for the 2002 first quarter were $280.7 million,
compared to $2.8 million for the first quarter of 2001. The increase is
primarily due to net written premiums of $264.9 million generated by the
Company's newly-formed reinsurance operations. These net written premiums
represent the current period's portion of the annualized net premiums written
during the January 1 renewal season. The quarterly net premiums written differ
from the annualized net premiums written due to the timing of recording premiums
for contracts written on a pro rata and excess of loss basis. For business
written on a pro rata basis, premiums are recorded as the underlying policies
are written, generally over a twelve-month period. For excess of loss treaties,
the minimum annual premium is recorded as written as of the date of the treaty.
Approximately 65% of the $506 million of annualized premiums written through
March 31, 2002 were generated from pro rata contracts and 35% were derived from
excess of loss treaties.

     Following is a summary of net premiums written by class of business for
each business segment for the three month period ended March 31, 2002. Insurance
business reinsured on an inter-segment basis has been reflected in the segment
accountable for the underwriting results.

                                       17




                                                                                        (UNAUDITED)
                                                                                    THREE MONTHS ENDED
                                                                                      MARCH 31, 2002
                                                                        ------------------------------------------
                                                                             PREMIUMS
(In thousands)                                                               WRITTEN                % OF TOTAL
                                                                        ------------------      ------------------
                                                                                                   
REINSURANCE SEGMENT
Gross Premiums Written Produced By:
 Bermuda Operation (1)................................................       $  183,906                   69.4%
 U.S. Operation.......................................................           80,955                   30.6%
                                                                        ------------------      ------------------
 Total............................................................           $  264,861                  100.0%
                                                                        ==================      ==================

NET PREMIUMS WRITTEN BY CLASS OF BUSINESS:

REINSURANCE SEGMENT
 Property catastrophe.................................................       $   50,715                   19.1%
 Other property business..............................................           42,672                   16.1%
 Casualty.............................................................           40,740                   15.4%
 Other specialty business.............................................           30,255                   11.4%
 Marine, aviation and space...........................................           18,959                    7.2%
 Casualty clash.......................................................           11,150                    4.2%
 Non-traditional business.............................................           70,370                   26.6%
                                                                        ------------------      ------------------
 Total................................................................       $  264,861                  100.0%
                                                                        ==================      ==================

INSURANCE SEGMENT:
 Program business.....................................................           $2,267                   14.3%
 Executive assurance..................................................            1,912                   12.1%
 Other................................................................           11,670                   73.6%
                                                                        ------------------      ------------------
 Total................................................................       $   15,849                  100.0%
                                                                        ==================      ==================


(1) Excludes certain intercompany transactions.

     We classify our businesses into two underwriting segments, reinsurance and
insurance. The reinsurance segment consists of our reinsurance underwriting
subsidiaries, Arch Re Bermuda, based in Bermuda, and Arch Re U.S., based in the
United States. The reinsurance segment's strategy is to write significant
portions of business on a select number of specialty property and casualty
treaties. Classes of business focused on by our reinsurance subsidiaries include
property catastrophe reinsurance; other property business (losses on a single
risk, both excess of loss and pro rata); casualty; other specialty business;
marine, aviation and space; casualty clash; and non-traditional business.

     The insurance segment includes our primary underwriting subsidiaries, First
American Insurance Company, Rock River Insurance Company, Cross River Insurance
Company and American Independent Insurance Company. The insurance segment is
comprised of seven profit centers, including property, casualty, executive
assurance, medical malpractice, professional liability insurance, program
business, and other (currently identified as the non-standard auto business of
American Independent and the lenders business of First American).

     One traditional means of measuring the underwriting performance of a
property/casualty insurer is the statutory composite ratio. This ratio, which is
based upon statutory accounting principles, reflects underwriting experience,
but does not reflect income from investments. A statutory composite ratio under
100% indicates underwriting profitability, while a composite ratio exceeding
100% indicates an underwriting loss.

     The following table details components of the combined ratio for our total
underwriting operations, which include reinsurance and insurance on both a
generally accepted accounting principles ("GAAP") and statutory basis. The
difference between the GAAP and statutory combined ratios shown below results
from a difference

                                       18


in the expense ratios. In calculating expenses incurred under GAAP, only a
portion of the underwriting expenses are deferred; accordingly, when premiums
are growing rapidly, the GAAP expense ratio will be higher than the statutory
expense ratio.



                                                                                        (UNAUDITED)
                                                                                    THREE MONTHS ENDED
                                                                                      MARCH 31, 2002
OPERATING INFORMATION BY SEGMENT                                ----------------------------------------------------------
(In thousands)                                                     REINSURANCE           INSURANCE              TOTAL
                                                                -----------------    ----------------     ----------------
                                                                                                   
Gross premiums written......................................       $  264,861           $  58,721           $  323,582
Net premiums written........................................          264,861              15,849              280,710
Net premiums earned.........................................           55,533              11,994               67,527
GAAP underwriting profit (loss).............................            3,849                 (24)               3,825

STATUTORY BASIS (1), (2)
Loss ratio..................................................             73.7%               80.3%                74.8%
Commissions and brokerage ratio (3).........................             13.0%              (13.3%)               11.6%
Other operating expense ratio...............................              2.1%               27.5%                 3.6%
                                                                -----------------    ----------------     ----------------
Combined ratio..............................................             88.8%               94.5%                90.0%
                                                                -----------------    ----------------     ----------------

GAAP BASIS (1), (2)
Loss ratio (3)..............................................             73.7%               80.3%                74.8%
Commissions and brokerage ratio.............................             13.1%               (9.3%)                9.1%
Other operating expense ratio...............................              6.3%               29.2%                10.4%
                                                                -----------------    ----------------     ----------------
Combined ratio..............................................             93.1%              100.2%                94.3%
                                                                -----------------    ----------------     ----------------


(1) Excludes certain holding company level expenses included in other corporate
    expenses.
(2) The loss ratios for statutory and GAAP are based on earned premiums. The
    statutory expense ratios are based on net premiums written, while the GAAP
    expense ratios are based on net premiums earned. In calculating expenses
    incurred under GAAP, the Company is deferring only a portion of its
    underwriting expenses; accordingly, when premiums are growing rapidly, the
    GAAP expense ratio will be higher than the statutory expense ratio.
(3) Ratio is based on statutory commissions and brokerage expenses, adjusted to
    include certain policy-related fee income.

     Underwriting results represent net premiums earned less net loss and loss
adjustment expenses incurred and underwriting expenses incurred. As a relatively
new insurance and reinsurance company, very limited historical information has
been reported to us as of March 31, 2002. In establishing loss and loss
adjustment expense reserves for our reinsurance business as of March 31, 2002,
we made various assumptions relating to the pricing of our reinsurance
contracts, historical industry experience and current industry conditions. In
the reserving process, we recognized that there is a possibility of adverse
deviation from the assumptions made due to the immature nature of the business
written.

     For the 2002 first quarter, our reinsurance operations generated $264.9
million of net premiums written and $55.5 million of net premiums earned, with a
reported statutory combined ratio of 88.8% and a GAAP combined ratio of 93.1%.
Our reinsurance activity is continuing at a very high level with a significant
amount of new submissions received, spanning a wide range of opportunities
across various classes of business.

     For the 2002 first quarter, the insurance operations reported a statutory
combined ratio of 94.5% and a GAAP combined ratio of 100.2%. The combined ratios
included $1.6 million of start-up costs, which increased the statutory and GAAP
operating expense ratios by 10.1% and 12.5%, respectively. The insurance segment
operating expenses are net of certain policy-related fee income. The insurance
group has all of its key profit center leadership in place and we have started
to write and issue policies in our new areas of focus.

                                       19


     REINSURANCE CEDED

     We follow the customary industry practice of reinsuring a portion of our
exposures, paying to reinsurers a part of the premiums received on the policies
we write. We monitor the financial condition of our reinsurers 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 2002 and 2001 are not meaningful because of the changes in our
business discussed above.

     At March 31, 2002, 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. In 2002, we are retaining a greater amount of our
insurance premiums written as compared to 2001 as a result of the new
underwriting initiative and our enhanced financial position. We are also
currently retaining 100% of our reinsurance premiums written. We may purchase
reinsurance 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.



                                                                                               (UNAUDITED)
                                                                                           THREE MONTHS ENDED
                                                                                                MARCH 31,
                                                                                 -------------------------------------
(In thousands)                                                                         2002                 2001
                                                                                 ----------------     ----------------
                                                                                                    
Direct premiums written......................................................        $  58,747            $   9,180
Assumed premiums written.....................................................          264,835                   --
                                                                                 ----------------     ----------------
 Gross premiums written......................................................          323,582                9,180
Ceded premiums written.......................................................          (42,872)              (6,343)
                                                                                 ----------------     ----------------
 Net premiums written........................................................        $ 280,710            $   2,837
                                                                                 ================     ================


     NET INVESTMENT INCOME

     Net investment income for the 2002 first quarter was $9.2 million, compared
with $3.2 million for the 2001 first quarter. The increase in net investment
income in 2002 compared with 2001 is primarily due to the increase in the
Company's invested assets resulting from the $763.2 million capital infusion,
which closed in November 2001.

     The Company's pre-tax and net of tax investment yields in the first three
months of 2002 were 3.6% and 3.2%, respectively, compared to 4.9% and 4.6%,
respectively, for the same prior year period. Assuming a stable interest rate
environment, we anticipate the 2002 yields to moderately increase as new cash
flow and funds invested in short-term securities are allocated into fixed
maturity investments.

     NET REALIZED GAINS (LOSSES) ON INVESTMENTS

     For the three month periods ended March 31, 2002 and 2001, our sources of
net realized investment gains (losses) were as follows:



                                                                                        (UNAUDITED)
                                                                                    THREE MONTHS ENDED
                                                                                         MARCH 31,
(In thousands)                                                                  2002                  2001
                                                                         ------------------    -----------------
                                                                                                
Fixed maturities.......................................................         $   (747)             $    53
Publicly traded equity securities......................................             (728)               8,951
Privately held securities..............................................               10                   --
                                                                         ------------------    -----------------
Total..................................................................         $ (1,465)             $ 9,004
                                                                         ==================    =================


     The net realized losses on our fixed maturity portfolio of $747,000 for the
three month period ended March 31, 2002 were primarily attributable to
repositioning the portfolio.

                                       20


     OTHER OPERATING EXPENSES

     Other operating expenses were $13.3 million for the three months ended
March 31, 2002, compared to $3.7 million for the same period in 2001. The
increase in operating expenses was due to acquisitions completed in 2001 along
with operating expenses associated with our new underwriting initiative,
including start-up costs of $1.6 million incurred by our insurance segment. 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 and 2002, we made certain grants to new employees and to our
Chairman under our stock incentive plans and other arrangements. These grants
were made primarily in connection with our new underwriting initiative and
resulted in an increase in pre-tax non-cash compensation of $4.1 million for the
three months ended March 31, 2002, compared to $359,000 for the same period in
2001. As a result of the new initiative, we expect to record a significant
increase in non-cash compensation in 2002. For restricted shares granted, we
record deferred compensation equal to the market value of the shares at the
measurement date, which is amortized and charged to income as non-cash
compensation over the vesting period. These restricted shares are recorded as
outstanding upon issuance (regardless of any vesting period).

     INCOME TAXES

     Income tax expense for the three months ended March 31, 2002 was $225,000.
The effective income tax rate of 5.4% differs from the statutory federal income
tax rate of 35% principally because of foreign sourced income.

     Income tax expense for the three months ended March 31, 2001 of $3.3
million included recognizing a portion of the deferred taxes relating to the
investment gains realized during such period as certain securities, which had
been distributed by Arch-U.S. to ACGL in November 2000, were sold to third
parties.

     In connection with our November 2001 reorganization transaction, Arch-U.S.
distributed substantially all of its public equity portfolio to its Bermuda
parent, ACGL, at the current market values and realized gains for tax purposes
of $21.0 million. The associated income tax expense of $7.4 million reduced
Arch-U.S.'s net operating loss carryforwards by such 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 reflected as
unrealized appreciation in our consolidated financial statements. Accordingly,
the income tax expense was also deferred and reduced unrealized appreciation in
our consolidated financial statements.

     See note 11 under the caption "Income Taxes" of the notes accompanying our
consolidated financial statements.

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. ACGL does not currently intend
to declare any dividends.

     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 November 2001 capital infusion, we have agreed not to declare any
dividend or make any other distribution on our common shares, and

                                       21


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
increased our underwriting activities, initially with a primary focus on
reinsurance, and we continue to expand significantly our insurance and
reinsurance underwriting activities.

     Our aggregate invested assets, including cash and short-term investments,
totaled $1.1 billion and $1.0 billion at March 31, 2002 and December 31, 2001,
respectively. As of March 31, 2002, our readily available cash, short-term
investments and marketable securities, excluding amounts held by our regulated
insurance subsidiaries, totaled $94.2 million. Such amount consisted of $30.4
million of cash and short-term investments and $63.8 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 $34.4 million of privately held securities. In addition, at March 31,
2002, we had investment commitments relating to our privately held investment,
Distribution Investors, LLC, of approximately $0.4 million. In April 2002, in
connection with the restructuring of our U.S.-based insurance group, we
contributed approximately $40 million of our readily available cash, short-term
investments and marketable securities to our U.S.-based insurance subsidiaries.

     Cash flows are provided by premiums collected, fee income, investment
income and collected reinsurance recoverables, offset by losses and loss
adjustment expense payments, reinsurance premiums payable and operating costs.
Consolidated cash flows provided by operating activities for the three months
ended March 31, 2002 and 2001 were approximately $48.3 million and $556,000,
respectively.

     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. During April, we issued
7,475,000 of our common shares and received net proceeds of approximately $179.2
million.

     ACQUISITION OF ROCK RIVER INSURANCE COMPANY

     On February 1, 2002, we acquired Rock River Insurance Company ("Rock
River"), an approved excess and surplus lines insurer in 46 states and the
District of Columbia and an admitted insurer in one other state, from Sentry
Insurance, A Mutual Company ("Sentry") for $19.5 million. At closing, Rock River
had net assets of approximately $17.0 million. Sentry, which has an A.M Best
rating of "A+" (Superior) as of December 31, 2001, agreed to reinsure or
otherwise assume all liabilities arising out of Rock River's business prior to
the closing of the acquisition.

     CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     In April 2002, we entered into a letter of credit facility for up to $200
million with Fleet National Bank. This facility expires December 30, 2003. The
purpose of this facility is to issue evergreen 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 portion of our investment portfolio.

     On April 10, 2002, we made a non-recourse loan in the amount of $13.5
million to our Chairman, which was used to pay income and self-employment taxes,
payable in April 2002, on restricted shares granted to him on October 23, 2001.

     On February 25, 2002, we reached a definitive settlement agreement with
Folksamerica pursuant to which we satisfied our obligations under the escrow
agreement relating to the sale of our prior reinsurance operations

                                       22


for consideration of $17.0 million, plus accrued interest income of $1.8
million. Accordingly, during the 2001 fourth quarter, we 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 was no longer
required due to the fact that the escrow arrangements have been terminated under
the above settlement agreement. See note 6 under the caption "Contingencies
Relating to the Sale of Prior Reinsurance Operations" of the notes accompanying
our consolidated financial statements.

INVESTMENTS

     At March 31, 2002, consolidated cash and invested assets totaled
approximately $1.1 billion, consisting of $345.7 million of cash and short-term
investments, $671.7 million of publicly traded fixed maturity investments and
$40.8 million of privately held securities.

     As part of our investment strategy, we seek to establish a level of cash
and highly liquid short-term and intermediate-term securities which, combined
with expected cash flow, is believed by us to be adequate to meet our
foreseeable payment obligations. We also attempt to maintain an appropriate
relationship between the average duration of our investment portfolio and the
approximate duration of our claims and other liabilities.

     At March 31, 2002, substantially 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
2.1 years.

     Investments included in our private portfolio include securities issued by
privately held companies that are generally restricted as to resale or are
otherwise illiquid and do not have readily ascertainable market values. The risk
of investing in such securities is generally greater than the risk of investing
in securities of widely held, publicly traded companies. Lack of a secondary
market and resale restrictions may result in an inability by us to sell a
security at a price that would otherwise be obtainable if such restrictions did
not exist and may substantially delay the sale of a security we seek to sell. At
March 31, 2002, our private equity portfolio consisted of eight investments,
with additional investment portfolio commitments in an aggregate amount of
approximately $3.8 million. See note 9, "Investment Information," of the notes
accompanying our consolidated financial statements.

INCOME TAXES

     At March 31, 2002, the net deferred income tax asset was $14.7 million
after reflecting a valuation allowance of $9.8 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 our subsidiary, Arch Risk Transfer
Services Ltd., which was acquired during 2001. In light of the new underwriting
initiative and restructuing of our U.S-based insurance group, management is
continuing to evaluate this valuation allowance.

     We have net operating loss carryforwards totaling $58.8 million at March
31, 2002. Such net operating losses are currently available to offset our future
taxable income and expire between 2011 and 2022. We also have an alternative
minimum tax credit carryforward in the amount of $1.0 million which can be
carried forward without expiration. See note 11, "Income Taxes," of the notes
accompanying our consolidated financial statements.

BOOK VALUE PER SHARE

     At March 31, 2002 and December 31, 2001, our consolidated shareholders'
equity was approximately $1.02 billion. On a diluted basis, the per share book
value at March 31, 2002 was $19.36, compared with $19.59 at December 31, 2001.
The decline in diluted book value per share is primarily attributable to
additional restricted common shares issued during 2002 to new employees in
connection with our new underwriting initiative. The diluted per share book
value reflects the outstanding convertible preference shares and Class A
warrants, but does not take into account certain potential adjustments described
below.

                                       23


     On April 8, 2002, we completed an offering of 7,475,000 common shares, for
which we received net proceeds of approximately $179.2 million. The net proceeds
of the offering will be used principally to support the future growth of our
insurance and reinsurance operations. On a pro forma basis, after giving effect
to the offering, book value per share at March 31, 2002 would have been $19.93
per share on a diluted basis. If the potential adjustments described below were
triggered, the diluted pro forma book value at March 31, 2002 would have been
reduced by $1.16 per share.

     CALCULATION OF BOOK VALUE PER SHARE

     The following actual book value per share calculations are based on
shareholders' equity of $1,020,157 at March 31, 2002 (unaudited) and $1,020,369
at December 31, 2001 (audited). The pro forma results at March 31, 2002 include
$179.2 million in net proceeds received by us from our recent common share
offering that was completed in April 2002, which resulted in shareholders'
equity of $1,199,405 and the issuance of 7,475,000 common shares.



                                      (UNAUDITED)                      (UNAUDITED)
                                     MARCH 31, 2002                   MARCH 31, 2002                 DECEMBER 31, 2001
                                        ACTUAL                          PRO FORMA                          ACTUAL
                            ------------------------------   ------------------------------   ------------------------------
                               COMMON                           COMMON                           COMMON
                             SHARES AND                       SHARES AND                       SHARES AND
                             POTENTIAL        CUMULATIVE      POTENTIAL        CUMULATIVE      POTENTIAL        CUMULATIVE
                               COMMON         BOOK VALUE        COMMON         BOOK VALUE        COMMON         BOOK VALUE
                               SHARES         PER SHARE         SHARES         PER SHARE         SHARES         PER SHARE
                            --------------  --------------   --------------  --------------   --------------  --------------
                                                                                                 
Per common share (1)......    15,790,332         $ 17.14       23,265,332         $ 19.34       13,513,538         $ 20.05
Series A convertible
preference shares (2).....    35,687,735         $ 19.82       35,687,735         $ 20.35       35,687,735         $ 20.74
Dilutive Class A
warrants (3)..............     1,215,960         $ 19.36        1,215,960         $ 19.93        1,206,206         $ 20.24
Restricted common
shares (4)................            --                               --                        1,689,629         $ 19.59
                            --------------                   --------------                   --------------
Common shares and
potential common shares...    52,694,027                       60,169,027                       52,097,108
                            ==============                   ==============                   ==============


     (1) Book value per common share is determined by dividing (i) the
     difference between total shareholders' equity and the aggregate liquidation
     preference of the Series A convertible preference shares of $749.4 million
     by (ii) the number of common shares outstanding.

     (2) Includes preference shares that were issued on November 20, 2001 in
     exchange for $763.1 million of cash. The number of preference shares issued
     was based on the estimated per share price of $21.38. The estimated per
     share price was based on (i) total shareholders' equity as of June 30, 2001
     (adjusted for certain amounts as described in the subscription agreement
     entered into in connection with the November 2001 capital infusion),
     divided by (ii) the total number of common shares outstanding as of June
     30, 2001, which was 12,863,079. Each preference share is convertible at any
     time and from time to time at the option of the holder thereof into one
     fully paid and nonassessable common share, subject to possible adjustment.

     (3) Includes the number of common shares that would be issued under the
     Class A warrants, primarily issued in connection with the capital infusion
     transaction, for purposes of calculating diluted book value per share under
     the treasury stock method. Class A warrants to purchase an aggregate of
     5,401,707 common shares are outstanding as of March 31, 2002 and December
     31, 2001. Class A warrants are immediately exercisable at $20 per share and
     expire September 19, 2002. In April 2002, 1,559,257 Class A warrants were
     canceled in exchange for 446,608 newly issued common shares.

     (4) Represents restricted common shares issued in connection with the
     capital infusion transaction. These restricted common shares are included
     in common shares at March 31, 2002.

                                       24


     POTENTIAL ADJUSTMENTS TO BOOK VALUE PER SHARE

     The following are potential adjustments to book value per share at March
31, 2002 and December 31, 2001, excluding the effects of stock options, that
could be made if certain future events described below occur. The pro forma
results at March 31, 2002 include the impact of the stock offering completed in
April 2002.



                                      (UNAUDITED)                    (UNAUDITED)
                                    MARCH 31, 2002                  MARCH 31, 2002                 DECEMBER 31, 2001
                                        ACTUAL                         PRO FORMA                         ACTUAL
                            ------------------------------  ------------------------------  ------------------------------
                                               CUMULATIVE                      CUMULATIVE                       CUMULATIVE
                                               POTENTIAL                       POTENTIAL                        POTENTIAL
                             CONTINGENTLY     ADJUSTMENTS     CONTINGENTLY    ADJUSTMENTS     CONTINGENTLY     ADJUSTMENTS
                               ISSUABLE         TO BOOK         ISSUABLE        TO BOOK         ISSUABLE         TO BOOK
                                COMMON         VALUE PER         COMMON       VALUE  PER         COMMON        VALUE  PER
                                SHARES          SHARE            SHARES         SHARE            SHARES          SHARE
                            ---------------   ------------  ---------------   ------------  ---------------   ------------
                                                                                                
Contingently issuable:
  Series A convertible
  preference shares (1).....     875,765          $(0.32)       875,765           $(0.28)        875,765          $(0.33)
  Series A convertible
  preference shares (2).....   2,831,174          $(1.27)     2,831,174           $(1.15)      2,831,174          $(1.31)
  Class B warrants (3)......      33,766          $(1.28)        33,766           $(1.16)         33,495          $(1.32)


     (1) Represents an estimate of the amount of additional Series A convertible
     preference shares that will be issued to the new investors during the
     second quarter of 2002 pursuant to a post-closing purchase price adjustment
     mechanism under the Subscription Agreement. The per share price is based on
     (i) total shareholders' equity as of June 30, 2001 as set forth on the
     audited balance sheet, adjusted for certain items as described in the
     Subscription Agreement, divided by (ii) the total number of common shares
     outstanding as of June 30, 2001.

     (2) Represents an estimate of the amount of additional Series A preference
     shares that would be issued under the Subscription Agreement in the event
     that on or prior to September 19, 2005 (1) the closing price of the our
     common shares is at least $30 per share for at least 20 out of 30
     consecutive trading days or (2) a change in control occurs. Pursuant to the
     Subscription Agreement, we have agreed to issue to the new investors
     additional Series A preference shares such that the audited per share price
     is adjusted downward by $1.50 per preference share.

     (3) Includes the number of common shares that would be issued under the
     Class B warrants for purposes of calculating diluted book value per share
     under the treasury stock method. Class B warrants to purchase an aggregate
     of 150,000 common shares were outstanding as of March 31, 2002 and December
     31, 2001 and expire September 19, 2005. Class B warrants are exercisable at
     $20 per share when the closing price of our common shares is at least $30
     per share for at least 20 out of 30 consecutive trading days or (2) a
     change in control occurs.

MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

     In accordance with the SEC's Financial Reporting Release No. 48, we
performed a sensitivity analysis to determine the effects that market risk
exposures could have on the future earnings, fair values or cash flows of our
financial instruments as of December 31, 2001. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our 2001
Annual Report on Form 10-K.) Market risk represents the risk of changes in the
fair value of a financial instrument and is comprised of several components,
including liquidity, basis and price risks. At March 31, 2002, there have been
no material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented as of December 31, 2001.

                                       25


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

   - our management's ability to successfully implement its business strategy;

   - 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;

   - integration of new management and operating personnel and the loss of key
     personnel;

   - 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

                                       26


     - rating agency policies and practices.

     In addition, 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 regulation 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.

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       27


PART II.  OTHER INFORMATION

ITEM 1. 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 March 31,
2002, 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

(a)     A special meeting of shareholders (the "Special Meeting") of Arch
        Capital Group Ltd. ("ACGL") was held on March 7, 2002.

(b)     Proxies for the Special Meeting were solicited pursuant to Regulation 14
        under the Securities Exchange Act of 1934, as amended (the "Exchange
        Act"). There was no solicitation in opposition to management's nominees
        as listed in ACGL's proxy statement, dated January 23, 2002 (the "Proxy
        Statement").

(c)     The shareholders of ACGL (1) approved the issuance of common shares upon
        conversion of the series A convertible preference shares or exercise of
        the class A warrants, as applicable, and the full voting rights of the
        preference shares, (2) adopted an amendment to ACGL's Bye-Law 45 set
        forth and described in the Proxy Statement, (3) adopted an amendment to
        ACGL's Bye-Law 75 set forth and described in the Proxy Statement, and
        (4) elected individuals as Designated Company Directors of certain of
        ACGL's non-U.S. subsidiaries, as described in the Proxy Statement. Set
        forth below are the voting results for these proposals. The results
        reflect the application of the limitations on voting as set forth in
        ACGL's bye-laws, including the certificate of designations relating to
        the preference shares, as in effect on the date of the Special Meeting,
        which limit the voting power of the "controlled shares" of each person
        or "group" (within the meaning of Section 13(d)(3) of the Exchange Act)
        to 9.9% of the total voting power of all shares. With respect to shares
        held in book-entry form, ACGL's tabulator, American Stock Transfer &
        Trust Company, informed us as to the total number of shares that
        voted "For," "Against" and "Abstain" with respect to each proposal.
        For purposes of applying these limitations, we assumed that each
        person (or persons filing jointly under Section 13(d) or 13(g) of the
        Exchange Act, which, for this purpose, were assumed to be a "group"
        within the meaning of Section 13(d)(3) of the Exchange Act) holding
        shares constituting 9.9% or more of the total number of ACGL shares
        (as disclosed in a Schedule 13D or Schedule13G filed with the
        Securities and Exchange Commission) voted "For" each proposal and
        reduced the votes represented by such shares to 9.9% of the total
        votes cast. The application of these limitations did not affect the
        outcome of the voting results.

        APPROVAL OF ISSUANCE OF COMMON SHARES UPON CONVERSION OF PREFERENCE
        SHARES OR EXERCISE OF CLASS A WARRANTS AND THE FULL VOTING RIGHTS OF
        PREFERENCE SHARES



                     FOR               AGAINST            ABSTAIN
                     ---               -------            -------
                                                     
                  13,569,438            16,325             3,852


        ADOPTION OF AMENDMENT TO BYE-LAW 45
                     FOR               AGAINST            ABSTAIN
                     ---               -------            -------
                                                     
                  13,532,365            33,125             24,125


        ADOPTION OF AMENDMENT TO BYE-LAW 75

                     FOR               AGAINST            ABSTAIN
                     ---               -------            -------
                                                     
                  13,129,018            28,225             2,425


                                       28


        ELECTION OF DESIGNATED COMPANY DIRECTORS FOR THE COMPANY'S NON-U.S.
        SUBSIDIARIES



                     FOR               AGAINST            ABSTAIN
                     ---               -------            -------
                                                     
                  15,209,746            28,600             9,025


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS.

EXHIBIT NO.             DESCRIPTION
-----------   ---------------------------------------------
        15    Accountants' Awareness Letter (regarding unaudited interim
              financial information)

(b)  REPORTS ON FORM 8-K.

     ACGL filed reports on Form 8-K during the three month period ended March
31, 2002 on January 4, 2002 (and an amendment thereto on January 7, 2002) to
report the closing of the capital infusion and to file certain related exhibits.
ACGL also filed a report on Form 8-K on April 3, 2002 to report the closing of
the offering of 7,475,000 common shares of ACGL.

                                       29


                                   SIGNATURES

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

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

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

                                     /s/ PETER A. APPEL
                                     -------------------------------------------
Date:  May 14, 2002                  Peter A. Appel
                                     President and Chief Executive Officer
                                     (Principal Executive Officer) and Director

                                     /s/ JOHN D. VOLLARO
                                     -------------------------------------------
Date:  May 14, 2002                  John D. Vollaro
                                     Executive Vice President and Chief
                                     Financial Officer (Principal Financial and
                                     Accounting Officer)

                                       30


                                  EXHIBIT INDEX

EXHIBIT NO.              DESCRIPTION
-----------   ---------------------------------------------
        15    Accountants' Awareness Letter (regarding unaudited interim
              financial information)