<Page>
EXHIBIT 99
ARCH CAPITAL GROUP LTD.
EARNINGS RELEASE SUPPLEMENT
AS OF SEPTEMBER 30, 2002
INDEX TO SUPPLEMENT
================================================================================
<Table>
<Caption>
PAGE
----
EARNINGS RELEASE....................................................... 1
CONSOLIDATED STATEMENTS OF INCOME...................................... 8
CONSOLIDATED BALANCE SHEETS............................................ 9
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............. 10
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME........................ 11
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. 12
SUPPLEMENTAL FINANCIAL INFORMATION..................................... 13
</Table>
<Page>
ARCH CAPITAL GROUP LTD. REPORTS THIRD QUARTER RESULTS
HAMILTON, BERMUDA, November 6, 2002 -- Arch Capital Group Ltd. (NASDAQ: ACGL)
reported that net premiums written for the 2002 third quarter were $318.7
million, of which the Company's reinsurance and insurance operations contributed
net premiums written of $204.5 million and $114.2 million, respectively. For the
nine months ended September 30, 2002, net premiums written were $822.4 million,
of which the Company's reinsurance and insurance operations contributed net
premiums written of $646.0 million and $176.4 million, respectively. The Company
also reported that, for the period from January 1 to October 31, 2002, its
reinsurance subsidiaries have entered into reinsurance treaties and other
reinsurance arrangements that are expected to provide approximately $1.1 billion
of annualized net reinsurance premiums, a substantial portion of which will be
reflected in calendar year 2002.
The Company also reported after-tax operating income for the 2002 third quarter
of $22.5 million, or $0.37 per share on a pro forma basis (as described below),
and $46.3 million, or $0.82 per share, for the nine months ended September 30,
2002. After-tax operating income is defined as net income or loss, excluding net
realized investment gains or losses on investments, foreign exchange gains or
losses, equity in net income or loss of investees and non-cash compensation
charges. A reconciliation of after-tax operating income to net income or loss is
included in the accompanying supplemental financial information.
The following table summarizes, on an after-tax basis, the Company's financial
performance for the three and nine month periods ended September 30, 2002.
Comparisons of 2002 and 2001 results of operations are not meaningful due to the
changes in the Company's business resulting from the Company's new underwriting
initiatives and the related capital infusions and, accordingly, 2001 amounts and
per share data are not reflected in the tables below. Refer to the consolidated
statements of income for 2001 results.
<Table>
<Caption>
(UNAUDITED) (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SUMMARY OF RESULTS SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 2002 2002
----------------- ----------------
Net premiums written....................................... $ 318,684 $ 822,420
Net premiums earned........................................ 183,979 364,965
Total revenues............................................. 200,808 416,108
Components of Net Income (Loss):
Operating income......................................... 22,452 46,334
Net realized investment gains (losses)................... (732) (1,505)
Net foreign exchange gains (losses)...................... (726) 2,518
Equity in net income of investees........................ 200 1,384
Reversal of deferred tax asset valuation allowance....... -- 7,421
----------------- ----------------
Net income before non-cash compensation.................. 21,194 56,152
Non-cash compensation.................................... (28,915) (40,681)
----------------- ----------------
Net income (loss)........................................ $ (7,721) $ 15,471
================= ================
</Table>
1
<Page>
<Table>
<Caption>
(UNAUDITED) (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SUMMARY OF RESULTS SEPTEMBER 30, SEPTEMBER 30,
(CONTINUED) 2002 2002
--------------------------------------- ------------------
ACTUAL(1) PRO FORMA(1) ACTUAL
------------------ ------------------ ------------------
Diluted Per Share Results:
Operating income.................................... $ 1.04 $ 0.37 $ 0.82
Net realized investment gains (losses).............. (0.03) (0.01) (0.03)
Net foreign exchange gains (losses)................. (0.03) (0.01) 0.04
Equity in net income of investees................... 0.01 0.00 0.02
Reversal of deferred tax asset valuation allowance.. -- -- 0.13
------------------ ------------------ ------------------
Net income before non-cash compensation............. 0.99 0.35 0.98
Non-cash compensation............................... (1.35) (0.48) (0.71)
------------------ ------------------ ------------------
Net income (loss)................................... $ (0.36) $ (0.13) $ 0.27
================== ================== ==================
Diluted average shares outstanding.................... 21,497,224 60,802,020 57,200,973
</Table>
(1) As a result of the acceleration of certain non-cash compensation expense,
as described below, the Company sustained a net loss for the 2002 third
quarter. Accordingly, based on generally accepted accounting principles
("GAAP"), actual diluted net loss per share and actual diluted average
shares outstanding do not include dilutive securities since the inclusion
of such securities is anti-dilutive to per share results. The 2002 third
quarter pro forma results shown above include such dilutive securities.
Since the Company reported net income for the nine months ended September
30, 2002, the computation of diluted average shares outstanding includes
dilutive securities for such year-to-date period.
In the 2002 third quarter, net foreign exchange losses of $0.7 million consisted
of an unrealized loss of $2.3 million and a realized gain of $1.6 million. Net
foreign exchange gains for the nine months ended September 30, 2002 of $2.5
million consisted of an unrealized gain of $0.9 million and a realized gain of
$1.6 million. The net unrealized gain resulted from the translation of foreign
denominated monetary assets and liabilities at September 30, 2002 as required
under GAAP.
As set forth in the above tables, net income for the nine months ended September
30, 2002 of $15.5 million included a benefit of $7.4 million resulting from a
reversal of a valuation allowance on certain of the Company's deferred tax
assets. Such reversal was based on the Company's restructuring of its U.S.-based
insurance underwriting operations and its business plan.
The net loss of $7.7 million for the 2002 third quarter included $28.9 million
of after-tax non-cash compensation expense which reflected the accelerated
recognition of certain non-cash compensation expense, as described below. Such
recognition had no impact on the Company's operating income or shareholders'
equity and will also have the effect of reducing non-cash compensation expense
in future periods. Net income before non-cash compensation expense was $21.2
million for the 2002 third quarter and $56.2 million for the nine months ended
September 30, 2002.
The following table details components of the combined ratio for the
reinsurance, insurance and total underwriting operations of the Company on both
a GAAP and statutory basis for the three and nine month periods ended September
30, 2002. The difference between the GAAP and statutory ratios shown
2
<Page>
below results from the fact that 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 a
portion of its underwriting expenses.
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
OPERATING INFORMATION BY SEGMENT SEPTEMBER 30, 2002
----------------------------------------------------------
(IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------------- ----------------- ----------------
Net premiums written.................................. $ 204,530 $ 114,154 $ 318,684
Net premiums earned................................... 143,497 40,482 183,979
GAAP underwriting income (loss)....................... 12,961 (570) 12,391
COMBINED RATIO:
Statutory Basis..................................... 97.1% 95.3% 95.0%
GAAP Basis.......................................... 91.0% 101.4% 93.3%
<Caption>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2002
----------------------------------------------------------
REINSURANCE INSURANCE TOTAL
----------------- ----------------- ----------------
Net premiums written.................................. $ 646,010 $ 176,410 $ 822,420
Net premiums earned................................... 295,360 69,605 364,965
GAAP underwriting income (loss)....................... 27,199 (4,019) 23,180
COMBINED RATIO:
Statutory Basis..................................... 90.4% 98.2% 91.9%
GAAP Basis.......................................... 90.8% 105.8% 93.6%
</Table>
Gross premiums written for the 2002 third quarter were $406.9 million, of which
52.9% were attributable to the Company's reinsurance operations and 47.1% were
attributable to the insurance operations. For the nine months ended September
30, 2002, gross premiums written were $965.3 million, of which 68.4% were
attributable to the Company's reinsurance operations and 31.6% were attributable
to the insurance operations.
For the 2002 third quarter, 64.2% of net premiums written for the Company's
reinsurance operations were generated from pro rata contracts and 35.8% were
derived from excess of loss treaties. For the nine months ended September 30,
2002, 50.2% of net premiums written were generated from pro rata contracts and
49.8% were derived from excess of loss treaties. Of net premiums earned recorded
for the 2002 third quarter, 46.5% were generated from pro rata contracts and
53.5% were derived from excess of loss treaties. For the nine months ended
September 30, 2002, 40.9% of net premiums earned were generated from pro rata
contracts and 59.1% were derived from excess of loss treaties. Typically, pro
rata business is written at a higher expense ratio and lower loss ratio than
excess of loss business.
The combined ratio of the Company's operating units, on a GAAP basis, was 93.3%
for the 2002 third quarter and 93.6% for the nine months ended September 30,
2002. The Company's loss ratio was 65.3% for the 2002 third quarter and 68.8%
for the nine months ended September 30, 2002. In establishing its reserves for
losses and loss adjustment expenses, the Company has made various assumptions
relating to the pricing of its reinsurance contracts and insurance policies,
historical industry experience and current industry conditions. In its reserving
process, the Company recognized that there is a possibility that the assumptions
made could prove to be inaccurate due to several factors primarily related to
the Company's start-up nature, including the fact that very limited historical
information has been reported to the Company as of September 30, 2002.
3
<Page>
The total expense ratio of the Company's operating units, on a GAAP basis, which
includes acquisition expenses and other operating expenses, was 28.0% and 24.8%
for the three and nine month periods ended September 30, 2002, respectively. For
the 2002 third quarter and nine months ended September 30, 2002, the acquisition
expense ratio, net of certain policy-related fee income, was 19.8% and 15.7%,
respectively. For the 2002 third quarter and nine months ended September 30,
2002, the other operating expense ratio was 8.2% and 9.1%, respectively.
Net investment income for the 2002 third quarter was $14.9 million, compared to
$11.6 million in the 2002 second quarter. The growth in net investment income
was primarily due to a significant increase in the Company's invested assets
resulting from cash flow provided by operating activities, as well as an
increase in the percentage of invested assets held in fixed maturity securities
during the 2002 third quarter. Consolidated cash flow provided by operating
activities for the 2002 third quarter and nine months ended September 30, 2002
was $228.5 million and $342.2 million, respectively. The Company's investment
portfolio primarily consists of high quality fixed income securities, which had
an average Standard & Poor's quality rating of "AA-" and an average duration of
3.1 years at September 30, 2002.
At September 30, 2002 and December 31, 2001, the Company's consolidated
shareholders' equity was $1.37 billion and $1.02 billion, respectively. Diluted
per share book value at September 30, 2002 increased to $21.37 from $19.59 at
December 31, 2001. The increase was primarily attributable to the effects of (i)
operating income for the nine months ended September 30, 2002, (ii) an increase
in unrealized appreciation of investments, (iii) the issuance of 7,475,000
common shares in the stock offering completed by the Company in April 2002, and
(iv) the issuance of 3,748,946 common shares upon the exercise of 3,842,450
Class A warrants in September 2002. These increases were partially offset by the
effects of the issuance on June 28, 2002 of 875,753 additional Series A
convertible preference shares pursuant to a post-closing purchase price
adjustment mechanism under the subscription agreement entered into in connection
with the November 2001 capital infusion. The diluted per share book value
reflects the Company's outstanding convertible preference shares, but does not
take into account certain potential adjustments. If such potential adjustments
were triggered, the diluted pro forma book value at September 30, 2002 would
have been reduced by $0.92 per share. The calculation of the Company's book
value per share amounts and the potential adjustments to book value per share
are included in (and described in) the accompanying supplemental financial
information.
In the 2002 third quarter, the Company's Board of Directors accelerated the
vesting terms of certain restricted common shares granted to Robert Clements,
Chairman of the Board, in connection with the November 2001 capital infusion,
and, at his request, Mr. Clements has agreed to repay the outstanding $13.5
million loan previously made to him by the Company on or before November 12,
2002. Mr. Clements was granted 1,689,629 restricted common shares which were
initially scheduled to vest in five equal annual amounts commencing on October
23, 2002. The vesting period and the amounts have been changed as follows: 60%
of the shares vested on October 23, 2002 and the balance of the shares will vest
in two equal annual amounts on October 23, 2003 and October 23, 2004.
After-tax non-cash compensation expense of approximately $28.9 million recorded
in the 2002 third quarter included approximately $26.8 million related to Mr.
Clements' award. Such amount includes $12.0 million related to the immediate
expensing of a portion of the award's value, $9.8 million arising from the
acceleration of the vesting terms and $5.0 million of amortization of the
unearned portion of the award. Approximately $12.1 million of non-cash
compensation related to the award will be recorded over the balance of the
vesting period, as follows: $4.1 million in the 2002 fourth quarter, $5.9
million in calendar year 2003 and $2.1 million in calendar year 2004.
4
<Page>
As previously announced, the $13.5 million loan made by the Company to Mr.
Clements was used by him to pay income and self employment taxes and Mr.
Clements receives additional compensation in cash in an amount sufficient to
defray the loan's interest costs. In order to facilitate the repayment of the
loan, the Company has agreed to repurchase, at Mr. Clements' option, an amount
of his shares equal to the principal balance of the loan less any cash payment
made by Mr. Clements on or before November 12, 2002. Any share repurchases by
the Company will be based on the market price for the common shares as reported
on the NASDAQ National Market. Mr. Clements will use all of the proceeds from
any share repurchase by the Company to repay the loan. To the extent that Mr.
Clements uses proceeds from repurchased shares to repay the loan, the Company's
book value per share will be reduced. Assuming that the entire $13.5 million
principal amount of the loan is repaid using proceeds from repurchased shares,
based on yesterday's closing price for the Company's shares, the Company's book
value per diluted share will be reduced by approximately $0.05. The
extinguishment of the loan will result in approximately $2.1 million in total
expense savings to the Company through April 2007 related to compensation Mr.
Clements would have received to defray the loan's interest costs.
The Company will hold a conference call for investors and analysts at 9:00 a.m.
EST on November 7, 2002. A live webcast of this call will be available at
http://www.vcall.com/eventpage.asp?ID=82557 and will be archived on VCall's
website from 12:00 p.m. EST on November 7, 2002 through midnight EST on December
7, 2002. A telephone replay of the conference call also will be available
beginning on November 7, 2002 at 12:00 p.m. Eastern Time until November 10, 2002
at midnight EST. To access the replay, domestic callers should dial 877-660-6853
(account 1628, conference ID 46542), and international callers should dial
201-612-7415 (account 1628, conference ID 46542).
Arch Capital Group Ltd., a Bermuda-based company with over $1.3 billion in
equity capital, provides insurance and reinsurance on a worldwide basis through
its wholly owned subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This release or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. All statements other than statements of
historical fact included in this release are forward-looking statements.
Forward-looking statements can generally be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or their negative or
variations or similar terminology.
Forward-looking statements involve the Company's current assessment of risks and
uncertainties. Actual events and results may differ materially from those
expressed or implied in these statements. Important factors that could cause
actual events or results to differ materially from those indicated in such
statements are discussed below and elsewhere in this release and include:
- the Company's ability to successfully implement its business strategy,
including implementing procedures and internal controls to support the
value of the Company's business and its regulatory and reporting
requirements;
- acceptance of the Company's products and services and security by
brokers and insureds;
- acceptance of the Company's business strategy, security and financial
condition by rating agencies and regulators;
5
<Page>
- 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 the Company operates;
- competition, including increased competition, on the basis of pricing,
capacity, coverage terms or other factors;
- the Company's ability to successfully integrate new management and
operating personnel and to establish and maintain operating procedures
to effectively support the Company's new underwriting initiatives and
to develop accurate actuarial data and develop and implement actuarial
models and procedures;
- the loss of key personnel;
- the integration of businesses the Company has acquired or may acquire
into its existing operations;
- greater than expected loss ratios on business written by the Company's
insurance and reinsurance subsidiaries and adverse development on
claim and/or claim expense liabilities related to business written by
its insurance and reinsurance subsidiaries;
- severity and/or frequency of losses;
- claims for natural or man-made catastrophic events in the Company's
insurance or reinsurance business could cause large losses and
substantial volatility in the Company's results of operations;
- 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 the Company may be
liable to the purchaser of its prior reinsurance business or to others
in connection with the May 5, 2000 asset sale;
- availability to the Company of reinsurance to manage its gross and net
exposures;
- the failure of reinsurers, managing general agents or others to meet
their obligations to the Company;
- the timing of loss payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company;
- changes in the financial environment, including interest rates;
- changes in accounting principles or the application of such principles
by accounting firms or regulators;
- statutory or regulatory developments, including as to tax policy and
matters and insurance and other regulatory matters (such as the
adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers) and government provision or back-stopping of insurance
(including for acts of terrorism); and
- rating agency policies and practices.
In addition, other general factors could affect the Company's results,
including: (a) developments in the world's financial and capital markets and the
Company's access to such markets; (b) changes in regulation or tax laws
applicable to the Company, its subsidiaries, brokers or customers; and (c) the
effects of business disruption or economic contraction due to terrorism or other
hostilities.
6
<Page>
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The foregoing review of important
factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included herein or elsewhere. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
7
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------------- --------------- --------------- ----------------
REVENUES
Net premiums written................................ $ 318,684 $ 14,448 $ 822,420 $ 24,005
Increase in unearned premiums....................... (134,705) (2,649) (457,455) (5,008)
----------------- --------------- --------------- ----------------
Net premiums earned................................. 183,979 11,799 364,965 18,997
Net investment income............................... 14,869 2,509 35,647 8,747
Net realized investment gains (losses).............. (836) (190) 175 18,419
Equity in net income of investees................... 185 966 1,761 1,887
Fee income.......................................... 3,337 3,524 11,042 8,950
Net commission income............................... -- -- -- 1,344
Net foreign exchange gains (losses)................. (726) -- 2,518 --
----------------- --------------- --------------- ----------------
TOTAL REVENUES...................................... 200,808 18,608 416,108 58,344
EXPENSES
Losses and loss adjustment expenses................. 120,120 9,196 250,964 16,267
Acquisition expenses................................ 39,027 337 64,092 --
Other operating expenses............................ 19,462 7,399 47,640 15,839
Non-cash compensation............................... 29,528 275 42,292 909
----------------- --------------- --------------- ----------------
TOTAL EXPENSES...................................... 208,137 17,207 404,988 33,015
INCOME (LOSS) BEFORE INCOME TAXES.................. (7,329) 1,401 11,120 25,329
Income tax (benefit) expense........................ 392 509 (4,351) 8,044
----------------- --------------- --------------- ----------------
NET INCOME (LOSS)................................... $ (7,721) $ 892 $ 15,471 $ 17,285
================= =============== =============== ================
NET INCOME (LOSS) PER SHARE DATA
Basic............................................... $ (0.36) $ 0.07 $ 0.84 $ 1.35
Diluted............................................. $ (0.36)(1) $ 0.07 $ 0.27 $ 1.35
AVERAGE SHARES OUTSTANDING
Basic............................................... 21,497,224 12,864,790 18,310,714 12,828,180
Diluted............................................. 21,497,224(1) 12,897,846 57,200,973 12,842,765
</Table>
(1) Due to the net loss for the three months ended September 30, 2002, diluted
average shares outstanding for the three months ended September 30, 2002 do
not include dilutive securities since the inclusion of such securities
would be anti-dilutive.
8
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------- -------------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2002,
$1,259,926; 2001, $467,154).......................................................... $ 1,304,530 $ 468,269
Short-term investments available for sale, at fair value (amortized cost: 2002,
$229,708; 2001, $477,058)............................................................ 229,708 476,820
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, $31,302; 2001, $41,587)...................... 31,473 41,608
------------------- -------------------
Total investments.................................................................... 1,565,711 1,009,088
------------------- -------------------
Cash................................................................................. 57,764 9,970
Accrued investment income............................................................ 16,811 7,572
Premiums receivable.................................................................. 290,351 59,463
Funds held by reinsureds............................................................. 50,096 --
Unpaid losses and loss adjustment expenses recoverable .............................. 156,360 90,442
Paid losses and loss adjustment expenses recoverable................................. 15,552 14,418
Prepaid reinsurance premiums......................................................... 97,436 58,961
Goodwill............................................................................. 28,558 26,336
Deferred income tax asset............................................................ 15,118 13,716
Deferred acquisition costs........................................................... 104,907 5,412
Loan to Chairman..................................................................... 13,530 --
Other assets......................................................................... 34,275 18,323
------------------- -------------------
TOTAL ASSETS......................................................................... $ 2,446,469 $ 1,313,701
=================== ===================
LIABILITIES
Reserve for losses and loss adjustment expenses...................................... $ 372,086 $ 113,507
Unearned premiums.................................................................... 584,470 88,539
Reinsurance balances payable......................................................... 63,257 47,029
Reserve for loss of escrowed assets.................................................. -- 18,833
Other liabilities.................................................................... 55,748 25,424
------------------- -------------------
TOTAL LIABILITIES.................................................................... 1,075,561 293,332
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2002,
36,563,488, 2001, 35,687,735)........................................................ 366 357
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2002,
27,586,184, 2001, 13,513,538)........................................................ 276 135
Additional paid-in capital........................................................... 1,358,657 1,039,887
Deferred compensation under share award plan......................................... (31,484) (8,230)
Retained earnings (deficit).......................................................... 3,861 (11,610)
Accumulated other comprehensive income consisting of unrealized appreciation
(decline) in value of investments, net of income tax................................. 39,232 (170)
------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY........................................................... 1,370,908 1,020,369
------------------- -------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................................. $ 2,446,469 $ 1,313,701
=================== ===================
</Table>
9
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------------- ---------------
PREFERENCE SHARES
Balance at beginning of year......................................................... $ 357 --
Preference shares issued............................................................. 9 --
----------------- ---------------
Balance at end of period............................................................. 366 --
----------------- ---------------
COMMON SHARES
Balance at beginning of year......................................................... 135 $ 127
Common shares issued................................................................. 141 2
----------------- ---------------
Balance at end of period............................................................. 276 129
----------------- ---------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year......................................................... 1,039,887 288,016
Common shares issued................................................................. 318,770 2,448
----------------- ---------------
Balance at end of period............................................................. 1,358,657 290,464
----------------- ---------------
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year......................................................... (8,230) (341)
Restricted common shares issued...................................................... (65,306) (1,772)
Deferred compensation expense recognized............................................. 42,052 909
----------------- ---------------
Balance at end of period............................................................. (31,484) (1,204)
----------------- ---------------
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........................................................................... 15,471 17,285
----------------- ---------------
Balance at end of period............................................................. 3,861 (16,341)
----------------- ---------------
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) in value of investments.................. 39,402 (14,813)
----------------- ---------------
Balance at end of period............................................................. 39,232 3,310
----------------- ---------------
TOTAL SHAREHOLDERS' EQUITY........................................................... $ 1,370,908 $ 276,358
================= ===============
</Table>
10
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------------- ----------------
COMPREHENSIVE INCOME
Net income........................................................................... $ 15,471 $ 17,285
Other comprehensive income, net of tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period.......................... 37,897 (3,275)
Reclassification of net realized losses (gains) included in net income........... 1,505 (11,538)
----------------- ----------------
Other comprehensive income (loss).................................................. 39,402 (14,813)
----------------- ----------------
COMPREHENSIVE INCOME................................................................. $ 54,873 $ 2,472
================= ================
</Table>
11
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
NINE MONTHS ENDED,
SEPTEMBER 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income........................................................................... $ 15,471 $ 17,285
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains................................................... (175) (18,419)
Non-cash compensation........................................................... 42,292 909
Net unrealized foreign exchange gains........................................... (911) --
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss
adjustment expenses recoverable................................................ 202,097 6,905
Unearned premiums, net of prepaid reinsurance premiums......................... 457,164 9,202
Premiums receivable............................................................ (230,089) (14,027)
Funds held by reinsureds....................................................... (50,068) --
Accrued investment income...................................................... (9,024) 162
Reinsurance recoverables....................................................... (17,354) (9,875)
Reinsurance balances payable................................................... 15,620 3,569
Deferred acquisition costs..................................................... (99,495) (984)
Deferred income tax asset...................................................... (1,267) 7,337
Other liabilities.............................................................. 36,292 (3,160)
Loan to Chairman............................................................... (13,530) --
Other items, net............................................................... (4,789) 4,800
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 342,234 3,704
------------ ------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments.............................................. (1,205,127) (90,334)
Release of escrowed assets........................................................... (18,833) --
Sales of fixed maturity investments.................................................. 391,686 85,084
Purchases of equity securities....................................................... -- (19)
Sales of equity securities........................................................... 13,726 43,523
Net sales (purchases) of short-term investments...................................... 278,246 (3,039)
Acquisition of Arch Specialty Insurance Company, net of cash and investments......... (2,513) --
Acquisition of ART Services, net of cash............................................. -- (34,211)
Acquisition of American Independent Insurance Holding Company, net of cash........... -- (225)
Purchases of furniture, equipment and other.......................................... (5,222) (912)
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES............................................... (548,037) (133)
------------ ------------
FINANCING ACTIVITIES
Common stock issued.................................................................. 253,459 90
Purchase of treasury shares.......................................................... -- (48)
Debt retirement and other............................................................ 138 (423)
------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................................. 253,597 (381)
------------ ------------
Increase in cash..................................................................... 47,794 3,190
Cash beginning of year............................................................... 9,970 11,481
------------ ------------
CASH END OF PERIOD................................................................... $ 57,764 $ 14,671
============ ============
</Table>
12
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------------- ---------------- -------------- --------------
INVESTMENT PORTFOLIO STATISTICS
Investment income yield (at amortized cost):
Pre-tax.............................................. 4.2% 3.5% 4.2% 4.3%
After-tax............................................ 4.1% 3.3% 3.7% 4.0%
</Table>
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- ----------------
Average duration (in years).......................... 3.1 1.9
Average credit quality (Standard & Poors)............ AA- AA-
</Table>
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 income 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.
The reinsurance segment consists of the Company's reinsurance underwriting
subsidiaries, Arch Reinsurance Ltd., based in Bermuda, and Arch Reinsurance
Company, 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 the Company's
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 (which includes non-standard auto, surety and
workers' compensation); marine, aviation and space; casualty clash; and
non-traditional business.
The insurance segment includes the Company's primary underwriting subsidiaries,
Arch Insurance Company (formerly known as First American Insurance Company),
Arch Specialty Insurance Company (formerly known as Rock River Insurance
Company), Arch Excess & Surplus Insurance Company (formerly known as Cross River
Insurance Company) and American Independent Insurance Company. The insurance
segment is comprised of six profit centers including property, casualty,
executive assurance, healthcare, professional liability insurance, program
business, and other (currently identified as the non-standard auto business of
American Independent Insurance Company and the lenders business of Arch
Insurance Company).
The corporate segment (non-underwriting) includes net investment income and net
realized gains or losses and other expenses incurred by the Company. The
corporate segment also includes the results of Hales & Company Inc., the
Company's merchant banking subsidiary. Due to the significant changes in the
Company's operations due to the new underwriting initiative, comparisons between
2002 and 2001 results are not meaningful. Accordingly, segment information
provided relates solely to 2002 periods. The following tables set forth an
analysis of the Company's underwriting income or loss by segment, together with
a reconciliation of underwriting income or loss to net income for the three and
nine month periods ended September 30, 2002.
13
<Page>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, 2002
---------------------------------------------------
OPERATING INFORMATION BY SEGMENT (IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------- --------- ----------
Net premiums written(1)...................................... $ 204,530 $ 114,154 $ 318,684
Net premiums earned.......................................... 143,497 40,482 183,979
Fee income................................................... -- 2,570 2,570
Losses and loss adjustment expenses.......................... (90,216) (29,904) (120,120)
Acquisition expenses......................................... (36,212) (2,815) (39,027)
Operating expenses........................................... (4,108) (10,903) (15,011)
----------- --------- ----------
GAAP underwriting income (loss).............................. $ 12,961 $ (570) $ 12,391
=========== =========
Net investment income........................................ 14,869
Other fee income............................................. 767
Other expenses............................................... (4,451)
----------
Pre-tax operating income..................................... 23,576
Income tax expense........................................... (1,124)
----------
Operating income, net of tax................................. 22,452
Net realized losses on investments, net of $104 tax benefit.. (732)
Net foreign exchange losses, net of $0 tax................... (726)
Equity in net income of investees, net of $15 tax benefit.... 200
Non-cash compensation, net of $613 tax benefit............... (28,915)
----------
NET LOSS..................................................... $ (7,721)
==========
PRO FORMA DILUTED PER SHARE RESULTS(2)
Operating income, net of tax................................. $ 0.37
Net realized losses on investments, net of tax............... (0.01)
Net foreign exchange losses, net of tax...................... (0.01)
Equity in net income of investees, net of tax................ 0.00
Non-cash compensation, net of tax............................ (0.48)
----------
NET LOSS PER SHARE........................................... $ (0.13)
==========
STATUTORY BASIS(3)
Loss ratio................................................... 62.9% 73.9% 65.3%
Acquisition expense ratio(4)................................. 30.2% 5.7% 21.4%
Other operating expense ratio................................ 4.0% 15.7% 8.3%
----------- --------- ----------
Combined ratio............................................... 97.1% 95.3% 95.0%
----------- --------- ----------
GAAP BASIS(3)
Loss ratio................................................... 62.9% 73.9% 65.3%
Acquisition expense ratio (4)................................ 25.2% 0.6% 19.8%
Other operating expense ratio................................ 2.9% 26.9% 8.2%
----------- --------- ----------
Combined ratio............................................... 91.0% 101.4% 93.3%
----------- --------- ----------
</Table>
(1) Reflects $16.9 million of net premiums written assumed by the reinsurance
segment from the insurance segment.
(2) Based on 60,802,020 pro forma diluted average shares outstanding. Due to the
net loss for the period, actual diluted average shares outstanding exclude
dilutive securities due to their anti-dilutive impact on per share results.
(3) 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.
(4) The acquisition expense ratio is adjusted to include certain policy-related
fee income.
14
<Page>
<Table>
<Caption>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2002
---------------------------------------------------
OPERATING INFORMATION BY SEGMENT (IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------- ----------- ----------
Net premiums written(1)....................................... $ 646,010 $ 176,410 $ 822,420
Net premiums earned........................................... 295,360 69,605 364,965
Fee income.................................................... -- 6,505 6,505
Losses and loss adjustment expenses........................... (198,221) (52,743) (250,964)
Acquisition expenses.......................................... (59,699) (4,393) (64,092)
Operating expenses............................................ (10,241) (22,993) (33,234)
----------- ----------- ----------
GAAP underwriting income (loss)............................... $ 27,199 $ (4,019) $ 23,180
=========== ===========
Net investment income......................................... 35,647
Other fee income.............................................. 4,537
Other expenses................................................ (14,406)
----------
Pre-tax operating income...................................... 48,958
Income tax expense............................................ (2,624)
----------
Operating income, net of tax.................................. 46,334
Net realized losses on investments, net of $1,680 tax expense. (1,505)
Net foreign exchange gains, net of $0 tax..................... 2,518
Equity in net income of investees, net of $377 tax expense.... 1,384
Reversal of deferred tax asset valuation allowance............ 7,421
Non-cash compensation, net of $1,611 tax benefit.............. (40,681)
----------
NET INCOME.................................................... $ 15,471
==========
DILUTED PER SHARE RESULTS
Operating income, net of tax.................................. $ 0.82
Net realized losses on investments, net of tax................ (0.03)
Net foreign exchange gains, net of tax........................ 0.04
Equity in net income of investees, net of tax................. 0.02
Reversal of deferred tax asset valuation allowance............ 0.13
Non-cash compensation, net of tax............................. (0.71)
----------
NET INCOME PER SHARE.......................................... $ 0.27
==========
STATUTORY BASIS(2)
Loss ratio.................................................... 67.1% 75.8% 68.8%
Acquisition expense ratio(3).................................. 20.1% 2.6% 16.4%
Other operating expense ratio................................. 3.2% 19.8% 6.7%
----------- ----------- ----------
Combined ratio................................................ 90.4% 98.2% 91.9%
----------- ----------- ----------
GAAP BASIS(2)
Loss ratio.................................................... 67.1% 75.8% 68.8%
Acquisition expense ratio(3).................................. 20.2% (3.0%) 15.7%
Other operating expense ratio................................. 3.5% 33.0% 9.1%
----------- ----------- ----------
Combined ratio................................................ 90.8% 105.8% 93.6%
----------- ----------- ----------
</Table>
(1) Reflects $53.9 million of net premiums written assumed by the reinsurance
segment from the insurance segment.
(2) The loss ratios for statutory and GAAP are based on earned premiums. The
statutory expense ratios are based on net premiums written, while the GAAP
expense ratios are based on net premiums earned.
(3) The acquisition expense ratio is adjusted to include certain policy-related
fee income.
15
<Page>
Set forth below is summary information regarding net premiums written by client
location and by line of business for the reinsurance and insurance segments for
the three and nine month periods ended September 30, 2002:
<Table>
<Caption>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
---------------------------- ---------------------------
PREMIUMS PREMIUMS
(in thousands) WRITTEN % OF TOTAL WRITTEN % OF TOTAL
---------- ----------- ---------- ----------
REINSURANCE SEGMENT
Net Premiums Written by
Client Location(1):
United States............................. $ 129,588 63.4% $ 338,438 52.4%
United Kingdom............................ 19,390 9.5% 126,462 19.6%
Bermuda................................... 16,782 8.2% 35,554 5.5%
Germany................................... 3,585 1.7% 30,309 4.7%
Canada.................................... 3,701 1.8% 21,610 3.3%
France.................................... 1,233 0.6% 21,352 3.3%
Japan..................................... (517) (0.3%) 11,539 1.8%
Switzerland............................... 9,550 4.7% 10,449 1.6%
Other..................................... 21,218 10.4% 50,297 7.8%
---------- ----------- ---------- ----------
Total..................................... $ 204,530 100.0% $ 646,010 100.0%
========== =========== ========== ==========
Property catastrophe...................... $ 23,105 11.3% $ 102,135 15.8%
Other property business................... 42,193 20.6% 126,068 19.5%
Casualty.................................. 76,896 37.6% 133,764 20.7%
Other specialty business.................. 38,341 18.7% 139,790 21.6%
Marine, aviation and space................ 9,724 4.8% 38,322 5.9%
Casualty clash............................ 3,661 1.8% 16,590 2.6%
Non-traditional business.................. 10,610 5.2% 89,341 13.9%
---------- ----------- ---------- ----------
Total..................................... $ 204,530 100.0% $ 646,010 100.0%
========== =========== ========== ==========
INSURANCE SEGMENT
Net Premiums Written by
Client Location(1):
United States............................. $ 113,650 99.6% $ 174,800 99.1%
United Kingdom............................ 244 0.2% 1,124 0.6%
Bermuda................................... 260 0.2% 260 0.2%
Canada.................................... -- -- 226 0.1%
---------- ----------- ---------- ----------
Total..................................... $ 114,154 100.0% $ 176,410 100.0%
========== =========== ========== ==========
Executive assurance....................... $ 15,388 13.5% $ 28,171 16.0%
Casualty.................................. 33,318 29.2% 43,897 24.9%
Program business.......................... 25,466 22.3% 34,162 19.4%
Property.................................. 18,553 16.3% 23,683 13.4%
Professional liability.................... 5,492 4.8% 7,630 4.3%
Healthcare................................ 3,453 3.0% 3,453 1.9%
Other..................................... 12,484 10.9% 35,414 20.1%
---------- ----------- ---------- ----------
Total..................................... $ 114,154 100.0% $ 176,410 100.0%
========== =========== ========== ==========
</Table>
(1) Reflects $16.9 million and $53.9 million of net premiums written,
respectively, for the three month and nine month periods ended September 30,
2002 assumed by the reinsurance segment from the insurance segment.
16
<Page>
CALCULATION OF BOOK VALUE PER SHARE
The following actual book value per share calculations are based on
shareholders' equity of $1,370,908 at September 30, 2002 (unaudited) and
$1,020,369 at December 31, 2001 (audited).
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------- -----------------------------------
COMMON COMMON
SHARES AND SHARES AND
POTENTIAL CUMULATIVE POTENTIAL CUMULATIVE
COMMON BOOK VALUE COMMON BOOK VALUE
SHARES PER SHARE SHARES PER SHARE
------------- -------------- ------------- ---------------
Per common share(1)................................ 27,586,184 $ 21.86 13,513,538 $ 20.05
Series A convertible preference shares(2).......... 36,563,488 $ 21.37 35,687,735 $ 20.74
Dilutive Class A warrants(3)....................... -- 1,206,206 $ 20.24
Restricted common shares(4)........................ -- 1,689,629 $ 19.59
------------- -------------
Common shares and potential common shares.......... 64,149,672 52,097,108
============= =============
</Table>
(1) Book value per common share at September 30, 2002 and December 31, 2001 was
determined by dividing (i) the difference between total shareholders' equity and
the aggregate liquidation preference of the Series A convertible preference
shares of $767.8 million and $749.4 million, respectively, by (ii) the number of
common shares outstanding.
(2) Includes preference shares that were issued by the Company on November 20,
2001 in exchange for $763.2 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) the Company's total shareholders' equity as of June
30, 2001 (adjusted for certain amounts as described in the subscription
agreement entered in connection with the capital infusion (the "Subscription
Agreement")), divided by (ii) the total number of common shares outstanding as
of June 30, 2001, which was 12,863,079. In addition, the amount of preference
shares at September 30, 2002 includes 875,753 preference shares that were issued
by the Company on June 28, 2002 pursuant to a post-closing purchase price
adjustment mechanism under the Subscription Agreement. 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 net number of common shares that would be issued under the
Class A warrants, primarily issued in connection with the capital infusion
transaction, calculated using the treasury stock method. Class A warrants to
purchase an aggregate of 5,401,707 common shares were outstanding as of December
31, 2001. Class A warrants were exercisable at $20 per share and were scheduled
to expire on September 19, 2002. In April 2002, 446,608 common shares were
issued upon the exercise of 1,559,257 Class A warrants on a cashless basis. In
September 2002, 3,748,946 common shares were issued upon the exercise of all
3,842,450 remaining outstanding Class A warrants. Of such amount, 35,839 common
shares of ACGL were issued upon the exercise of 129,343 Class A warrants on a
cashless basis. The proceeds from the exercise of Class A warrants on a cash
basis increased shareholders' equity by approximately $74.3 million.
(4) Represents restricted common shares issued in connection with the November
2001 capital infusion transaction. These restricted common shares are included
in common shares at September 30, 2002.
17
<Page>
POTENTIAL ADJUSTMENTS TO BOOK VALUE PER SHARE
The following are potential adjustments to book value per share at September 30,
2002 and December 31, 2001, excluding the effects of stock options, that could
be made if certain future events described below occur.
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------- ----------------------------------
CUMULATIVE CUMULATIVE
POTENTIAL POTENTIAL
CONTINGENTLY ADJUSTMENTS ADJUSTMENTS
ISSUABLE TO BOOK CONTINGENTLY TO BOOK
COMMON VALUE PER ISSUABLE VALUE PER
SHARES SHARE COMMON SHARES SHARE
--------------- -------------- --------------- ---------------
Contingently issuable:
Series A convertible preference shares(1)....... -- -- 875,765 $ (0.33)
Series A convertible preference shares(2)....... 2,831,174 $ (0.90) 2,831,174 $ (1.31)
Class B warrants(3)............................. 42,473 $ (0.92) 33,495 $ (1.32)
</Table>
(1) Amount at December 31, 2001 represented an estimate of the amount of
additional Series A convertible preference shares to be issued to the new
investors pursuant to a post-closing purchase price adjustment mechanism under
the Subscription Agreement. The per share price was based on (i) the Company's
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. Consistent with such estimate, 875,753 preference shares were
issued to the new investors on June 28, 2002 and are reflected in the amount of
preference shares at September 30, 2002.
(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 Company's 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 (either case, a "Triggering Event").
Pursuant to the Subscription Agreement, the Company has 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 September 30, 2002 and December 31, 2001
and will expire on September 19, 2005. Class B warrants are exercisable at $20
per share when (1) the closing price of the Company's 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, a post-closing purchase price adjustment
will be calculated in November 2003 (or such earlier date as agreed upon by the
Company and the investors thereunder) based on an adjustment basket. The
adjustment basket will be equal to (1) the difference between value realized
upon sale and the GAAP book value at the closing of the capital infusion
(November 2001) (as adjusted based on a pre-determined growth rate) of agreed
upon non-core businesses; plus (2) the difference between GAAP net book value of
the Company's insurance balances attributable to the Company's core insurance
operations with respect to any policy or contract written or having an effective
date prior to November 20, 2001 at the time of the final adjustment and those
balances at the closing; minus (3) reductions in book value arising from costs
and expenses relating to the transaction provided under the Subscription
Agreement, actual losses arising out of breach of representations under the
Subscription Agreement and certain other costs and expenses. If the adjustment
basket, which will be calculated by the Company's independent auditors, is less
than zero, the Company will issue additional preference shares to the investors
based on the decrease in value of the components of the adjustment basket. If
the adjustment basket is greater than zero, the Company is allowed to use cash
in an amount based on the increase in value of the components of the adjustment
basket to repurchase common shares (other than any common shares issued upon
conversion of the preference shares or exercise of the Class A warrants). If the
adjustment basket is less than zero and in the event that a Triggering Event
occurs, the Company agreed to issue additional preference shares to the
investors as a further adjustment. In addition, on the fourth anniversary of the
closing, there will be a calculation of a further adjustment basket based on (1)
liabilities owed to Folksamerica (if any) under the Asset Purchase Agreement,
dated as of January 10, 2000, between the Company and Folksamerica, and (2)
specified tax and ERISA matters under the Subscription Agreement.
18