4<Page>
EXHIBIT 99.1
ARCH CAPITAL GROUP LTD.
EARNINGS RELEASE SUPPLEMENT
AS OF DECEMBER 31, 2002
INDEX TO SUPPLEMENT
================================================================================
<Table>
<Caption>
PAGE
-----
EARNINGS RELEASE................................................... 1
CONSOLIDATED STATEMENTS OF INCOME.................................. 7
CONSOLIDATED BALANCE SHEETS........................................ 8
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY......... 9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME.................... 10
CONSOLIDATED STATEMENTS OF CASH FLOWS.............................. 11
SUPPLEMENTAL FINANCIAL INFORMATION................................. 12
</Table>
<Page>
ARCH CAPITAL GROUP LTD. REPORTS FOURTH QUARTER AND 2002 YEAR RESULTS
HAMILTON, BERMUDA, February 24, 2003 -- Arch Capital Group Ltd. (NASDAQ: ACGL)
reported that net premiums written for the 2002 fourth quarter were $439.2
million, of which the Company's reinsurance and insurance operations contributed
net premiums written of $236.7 million and $202.5 million, respectively. For the
year ended December 31, 2002, net premiums written were $1.26 billion, of which
the Company's reinsurance and insurance operations contributed net premiums
written of $882.7 million and $378.9 million, respectively.
The Company also reported after-tax operating income for the 2002 fourth quarter
of $48.6 million, or $0.72 per share, and $95.0 million, or $1.59 per share, for
the year ended December 31, 2002. Operating income is defined as net income or
loss before extraordinary items, excluding net realized investment gains or
losses, net foreign exchange gains or losses, other income 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 2002 fourth quarter and year ended December 31, 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>
THREE MONTHS TWELVE MONTHS
ENDED ENDED
SUMMARY OF RESULTS DECEMBER 31, DECEMBER 31,
(in thousands) 2002 2002
------------ -------------
Net premiums written ............................... $ 439,207 $ 1,261,627
Net premiums earned ................................ 290,011 654,976
Total revenues ..................................... 308,179 721,769
Components of Net Income (after-tax):
Operating income ................................. 48,618 94,952
Net realized investment losses ................... (1,114) (2,618)
Net foreign exchange gains (losses) .............. (69) 2,449
Other income ..................................... 370 1,754
Reversal of deferred tax asset valuation allowance -- 7,421
------------ -------------
Net income before non-cash compensation and
extraordinary item .......................... 47,805 103,958
Non-cash compensation ............................ (8,180) (48,862)
------------ -------------
Net income before extraordinary item ............. 39,625 55,096
Extraordinary gain -- excess of fair value of
acquired net assets over cost ............... 3,886 3,886
------------ -------------
Net income ....................................... $ 43,511 $ 58,982
============ =============
</Table>
1
<Page>
<Table>
<Caption>
THREE MONTHS TWELVE MONTHS
ENDED ENDED
SUMMARY OF RESULTS DECEMBER 31, DECEMBER 31,
(CONTINUED) 2002 2002
------------ -------------
Diluted Per Share Results (after-tax):
Operating income ................................. $ 0.72 $ 1.59
Net realized investment losses ................... (0.02) (0.04)
Net foreign exchange gains (losses) .............. 0.00 0.04
Other income ..................................... 0.01 0.03
Reversal of deferred tax asset valuation allowance -- 0.12
------------ -------------
Net income before non-cash compensation and
extraordinary item .......................... 0.71 1.74
Non-cash compensation ............................ (0.12) (0.82)
------------ -------------
Net income before extraordinary item ............. $ 0.59 $ 0.92
Extraordinary gain -- excess of fair value of
acquired net assets over cost ............... 0.06 0.07
------------ -------------
Net income ....................................... $ 0.65 $ 0.99
============ =============
Diluted average shares outstanding ................. 66,841,033 59,662,178
</Table>
The increase in diluted average shares outstanding in the 2002 fourth quarter
compared to the year ended December 31, 2002 is primarily due to the effect, on
a weighted average basis, of the issuance of (i) 7,475,000 common shares in the
stock offering completed by the Company in April 2002 and (ii) 3,748,946 common
shares upon the exercise of 3,842,450 Class A warrants in September 2002. In
addition, on December 16, 2002, 2,831,177 contingently issuable Series A
convertible preference shares were issued to investors who provided the
Company's November 2001 capital infusion pursuant to a purchase price adjustment
specified in the subscription agreement, as described in the accompanying
supplemental financial information. In computing diluted average shares
outstanding under generally accepted accounting principles ("GAAP") for the 2002
fourth quarter, the preference shares are included as of October 1, 2002, the
beginning of the quarter during which the applicable contingency was met. For
the year ended December 31, 2002, such shares are included on a weighted average
basis.
For the 2002 fourth quarter, net income of $43.5 million, or $0.65 per share,
includes operating income of $48.6 million, or $0.72 per share. Compared to the
2002 third quarter, operating income for the 2002 fourth quarter increased by
$26.2 million. Due to the level of catastrophic losses during 2002, the Company
reduced its loss reserves in the reinsurance segment by approximately $12.0
million, after-tax, or $0.18 per share. After-tax non-cash compensation expense
included in net income for the 2002 fourth quarter was $8.2 million, or $0.12
per share, of which $4.4 million, or $0.07 per share, related to certain
restricted common shares for which the vesting terms had been accelerated during
2002.
Net income in the 2002 fourth quarter also includes an extraordinary gain of
$3.9 million, or $0.06 per share, resulting from the Company's acquisition of
Personal Service Insurance Company ("PSIC"), a non-standard automobile insurer
located in Columbus, Ohio. The extraordinary gain represents the excess of the
fair value of acquired net assets of $6.4 million over the purchase price of
$2.5 million. PSIC is licensed in Ohio and Indiana and was assigned an "A-"
(Excellent) rating by A.M. Best.
Net income for the year ended December 31, 2002 of $59.0 million, or $0.99 per
share, includes net foreign exchange gains of $2.4 million, or $0.04 per share,
and a benefit of $7.4 million, or $0.12 per share, resulting from a reversal of
a valuation allowance relating to certain of the Company's deferred tax
2
<Page>
assets. Such reversal was based on the Company's restructuring of its U.S.-based
insurance underwriting operations and its business plan.
After-tax non-cash compensation expense included in net income for the year
ended December 31, 2002 was $48.9 million, or $0.82 per share, of which $39.5
million, or $0.66 per share, related to certain restricted common shares for
which the vesting terms had been accelerated during 2002. Non-cash compensation
expense has no effect on the Company's operating income or shareholders' equity.
The related restricted common shares are included in diluted average shares
outstanding using the treasury stock method.
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 2002 fourth quarter and the year ended
December 31, 2002. The difference between the GAAP and statutory ratios shown
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.
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31, 2002
OPERATING INFORMATION BY SEGMENT -----------------------------------------
(IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------- --------- ---------
Net premiums written ................... $ 236,690 $ 202,517 $ 439,207
Net premiums earned .................... 205,620 84,391 290,011
GAAP underwriting income ............... 33,775 2,264 36,039
COMBINED RATIO:
Statutory Basis ...................... 89.1% 90.7% 88.2%
GAAP Basis ........................... 83.6% 97.3% 87.6%
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31, 2002
------------------------------------------
REINSURANCE INSURANCE TOTAL
----------- --------- -----------
Net premiums written.................... $ 882,700 $ 378,927 $ 1,261,627
Net premiums earned..................... 500,980 153,996 654,976
GAAP underwriting income (loss)......... 60,974 (1,755) 59,219
COMBINED RATIO:
Statutory Basis....................... 88.6% 94.0% 89.7%
GAAP Basis............................ 87.8% 101.1% 90.9%
</Table>
Gross premiums written for the 2002 fourth quarter were $516.6 million, of which
47.0% were attributable to the Company's reinsurance operations and 53.0% were
attributable to the insurance operations. For the year ended December 31, 2002,
gross premiums written were $1.5 billion, of which 61.1% were attributable to
the Company's reinsurance operations and 38.9% were attributable to the
insurance operations.
For the 2002 fourth quarter, with respect to the Company's reinsurance
operations, 82.9% of net premiums written were generated from pro rata contracts
and 17.1% were derived from excess of loss treaties. For the year ended December
31, 2002, 59.0% of net premiums written were generated from pro rata contracts
and 41.0% were derived from excess of loss treaties. Of net premiums earned in
the reinsurance segment for the 2002 fourth quarter, 53.0% were generated from
pro rata contracts and 47.0% were derived from excess of loss treaties. For the
year ended December 31, 2002, 45.8% of net
3
<Page>
premiums earned in the reinsurance segment were generated from pro rata
contracts and 54.2% 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 87.6%
for the 2002 fourth quarter and 90.9% for the year ended December 31, 2002. The
Company's loss ratio was 59.9% for the 2002 fourth quarter and 64.8% for the
year ended December 31, 2002. The fourth quarter loss ratio benefited from the
reduction of loss reserves described above.
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, including the Company's start-up nature and the fact that very
limited historical information has been reported to the Company as of December
31, 2002.
The total expense ratio of the Company's operating units, on a GAAP basis, which
includes acquisition expenses and other operating expenses, was 27.7% for the
2002 fourth quarter and 26.1% for the year ended December 31, 2002. For the 2002
fourth quarter and year ended December 31, 2002, the acquisition expense ratio,
net of certain policy-related fee income, was 17.9% and 16.7%, respectively. For
the 2002 fourth quarter and year ended December 31, 2002, the other operating
expense ratio was 9.8% and 9.4%, respectively.
Net investment income for the 2002 fourth quarter was $15.6 million, compared to
$14.9 million in the 2002 third 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. Consolidated cash
flow provided by operating activities for the 2002 fourth quarter and the year
ended December 31, 2002 was $326.8 million and $669.1 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 2.1 years at December 31, 2002.
At December 31, 2002 and 2001, the Company's consolidated shareholders' equity
was approximately $1.4 billion and $1.0 billion, respectively. Diluted per share
book value at December 31, 2002 increased to $21.20 from $18.28 at December 31,
2001, as adjusted to give effect to the issuance during 2002 of an aggregate of
3,706,930 Series A convertible preference shares pursuant to agreed upon
purchase price adjustments under the subscription agreement, which are described
in the accompanying supplemental financial information. The increase in diluted
per share book value was primarily attributable to the effects of (i) operating
income for the year ended December 31, 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. The calculation of the Company's book value per share amounts
are included in the accompanying supplemental financial information.
The Company will hold a conference call for investors and analysts at 9:00 a.m.
EST on February 25, 2003. A live webcast of this call will be available at
http://www.vcall.com/eventpage.asp?id=83175 and will be archived on VCall's
website from 12:00 p.m. EST on February 25, 2003 through midnight EST on March
25, 2003. A telephone replay of the conference call also will be available
beginning at 12:00 p.m. Eastern Time on February 25, 2003 until February 28,
2003 at midnight EST. To access the replay, domestic callers should dial
877-660-6853 (account 1628, confirmation number 56882), and international
callers should dial 201-612-7415 (account 1628, confirmation number 56882).
4
<Page>
Arch Capital Group Ltd., a Bermuda-based company with over $1.4 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
(including the timely and successful implementation of its
information technology initiatives) 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;
- 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 reserves for losses and loss adjustment expenses
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;
5
<Page>
- 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
- rating agency policies and practices.
In addition, other general factors could affect the Company's results,
including: (a) developments in the world's financial and capital markets and the
Company's access to such markets; (b) changes in regulation or tax laws
applicable to the Company, its subsidiaries, brokers or customers; and (c) the
effects of business disruption or economic contraction due to terrorism or other
hostilities.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The foregoing review of important
factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included herein or elsewhere. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
6
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Net premiums written ........................... $ 439,207 $ 12,211 $ 1,261,627 $ 36,216
Increase in unearned premiums .................. (149,196) (290) (606,651) (5,298)
------------ ------------ ------------ ------------
Net premiums earned ............................ 290,011 11,921 654,976 30,918
Net investment income .......................... 15,602 3,373 51,249 12,120
Net realized investment (losses) gains ......... (1,014) (37) (839) 18,382
Fee income ..................................... 3,166 3,476 14,208 12,426
Other income ................................... 414 721 2,175 2,608
------------ ------------ ------------ ------------
TOTAL REVENUES ................................. 308,179 19,454 721,769 76,454
EXPENSES
Losses and loss adjustment expenses ............ 173,574 7,181 424,538 23,448
Acquisition expenses ........................... 54,869 2,157 118,961 813
Other operating expenses ....................... 29,059 11,852 76,699 27,692
Net foreign exchange (gains) losses ............ 69 -- (2,449) --
Non-cash compensation .......................... 7,188 1,863 49,480 2,771
Provision for loss of escrowed assets, net of
other related reserves ......................... -- (2,414) -- (2,414)
------------ ------------ ------------ ------------
TOTAL EXPENSES ................................. 264,759 20,639 667,229 52,310
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ............................. 43,420 (1,185) 54,540 24,144
Income taxes:
Current ........................................ 5,905 (222) 7,373 656
Deferred ....................................... (2,110) (5,694) (7,929) 1,472
------------ ------------ ------------ ------------
Income tax (benefit) expense ................... 3,795 (5,916) (556) 2,128
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM ............... 39,625 4,731 55,096 22,016
Extraordinary gain -- excess of fair value of
net assets acquired over cost (net of $0 tax) .. 3,886 -- 3,886 --
------------ ------------ ------------ ------------
NET INCOME ..................................... $ 43,511 $ 4,731 $ 58,982 $ 22,016
============ ============ ============ ============
NET INCOME PER SHARE DATA BASIC:
Income before extraordinary item ............... $ 1.56 $ 0.37 $ 2.74 $ 1.71
Extraordinary gain ............................. $ 0.15 -- $ 0.19 --
------------ ------------ ------------ ------------
Net income ..................................... $ 1.71 $ 0.37 $ 2.93 $ 1.71
============ ============ ============ ============
DILUTED:
Income before extraordinary item ............... $ 0.59 $ 0.16 $ 0.92 $ 1.29
Extraordinary gain ............................. $ 0.06 -- $ 0.07 --
------------ ------------ ------------ ------------
Net income ..................................... $ 0.65 $ 0.16 $ 0.99 $ 1.29
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING
Basic .......................................... 25,392,443 12,937,194 20,095,698 12,885,668
Diluted ........................................ 66,841,033 29,814,976 59,662,178 17,002,231
</Table>
7
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
2002, $1,334,637; 2001, $467,154) ................................................ $ 1,382,104 $ 468,269
Short-term investments available for sale, at fair value (amortized cost:
2002, $480,541; 2001, $477,058) .................................................. 480,541 476,820
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, $31,630; 2001, $41,587) ................... 31,536 41,608
----------- -----------
Total investments ................................................................ 1,894,181 1,009,088
----------- -----------
Cash ............................................................................. 91,717 9,970
Accrued investment income ........................................................ 17,127 7,572
Premiums receivable .............................................................. 343,716 59,463
Funds held by reinsureds ......................................................... 58,351 --
Unpaid losses and loss adjustment expenses recoverable ........................... 211,100 90,442
Paid losses and loss adjustment expenses recoverable ............................. 14,462 14,418
Prepaid reinsurance premiums ..................................................... 120,191 58,961
Goodwill ......................................................................... 28,867 26,336
Deferred income tax asset ........................................................ 16,514 13,716
Deferred acquisition costs, net .................................................. 148,960 5,412
Other assets ..................................................................... 46,142 18,323
----------- -----------
TOTAL ASSETS ..................................................................... $ 2,991,328 $ 1,313,701
=========== ===========
LIABILITIES
Reserve for losses and loss adjustment expenses .................................. $ 592,432 $ 111,494
Unearned premiums ................................................................ 761,310 88,539
Reinsurance balances payable ..................................................... 89,191 47,029
Reserve for loss of escrowed assets .............................................. -- 18,833
Investment accounts payable ...................................................... 45,960 1,746
Other liabilities ................................................................ 91,191 25,691
----------- -----------
TOTAL LIABILITIES ................................................................ 1,580,084 293,332
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2002,
38,844,665, 2001, 35,687,735) .................................................... 388 357
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2002,
27,725,334, 2001, 13,513,538) .................................................... 277 135
Additional paid-in capital ....................................................... 1,347,165 1,039,887
Deferred compensation under share award plan ..................................... (25,290) (8,230)
Retained earnings (deficit) ...................................................... 47,372 (11,610)
Accumulated other comprehensive income consisting of unrealized
appreciation (decline) in value of investments, net of tax ....................... 41,332 (170)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....................................................... 1,411,244 1,020,369
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................................... $ 2,991,328 $ 1,313,701
=========== ===========
</Table>
8
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
PREFERENCE SHARES
Balance at beginning of year ..................................................... $ 357 --
Preference shares issued ......................................................... 31 $ 357
----------- -----------
Balance at end of year ........................................................... 388 357
----------- -----------
COMMON SHARES
Balance at beginning of year ..................................................... 135 $ 127
Common shares issued ............................................................. 142 8
----------- -----------
Balance at end of year ........................................................... 277 135
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ..................................................... 1,039,887 288,016
Common shares issued ............................................................. 307,278 11,491
Preference shares issued ......................................................... -- 740,380
----------- -----------
Balance at end of year ........................................................... 1,347,165 1,039,887
----------- -----------
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year ..................................................... (8,230) (341)
Restricted common shares issued .................................................. (66,245) (10,466)
Deferred compensation expense recognized ......................................... 49,185 2,577
----------- -----------
Balance at end of year ........................................................... (25,290) (8,230)
----------- -----------
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 ....................................................................... 58,982 22,016
----------- -----------
Balance at end of year ........................................................... 47,372 (11,610)
----------- -----------
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 .............. 41,502 (18,293)
----------- -----------
Balance at end of year ........................................................... 41,332 (170)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....................................................... $ 1,411,244 $ 1,020,369
=========== ===========
</Table>
9
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
COMPREHENSIVE INCOME
Net income ....................................................................... $ 58,982 $ 22,016
Other comprehensive income (loss), net of tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period ...................... 38,884 (7,153)
Reclassification of net realized losses (gains) included in net income ....... 2,618 (11,140)
----------- -----------
Other comprehensive income (loss) .............................................. 41,502 (18,293)
----------- -----------
COMPREHENSIVE INCOME ............................................................. $ 100,484 $ 3,723
=========== ===========
</Table>
10
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income ......................................................................... $ 58,982 $ 22,016
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Net realized investment losses (gains) ........................................ 839 (18,382)
Provision for non-cash compensation ........................................... 49,480 2,771
Reserve for loss of escrowed assets ........................................... -- 3,733
Net unrealized foreign exchange gains ......................................... 36 --
Excess of fair value of acquired net assets over cost ......................... (3,886) --
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss
adjustment expenses recoverable .............................................. 348,268 8,309
Unearned premiums, net of prepaid reinsurance premiums ....................... 606,360 8,558
Premiums receivable .......................................................... (279,419) (8,331)
Funds held by reinsureds ..................................................... (58,294) --
Accrued investment income .................................................... (9,332) (5,181)
Reinsurance recoverables ..................................................... 6,823 (13,568)
Reinsurance balances payable ................................................. 41,554 560
Deferred acquisition costs ................................................... (143,548) (1,076)
Deferred income tax asset .................................................... (8,099) 1,665
Other liabilities ............................................................ 57,870 (1,605)
Other items, net ............................................................. 1,418 (5,098)
----------- -----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ............................... 669,052 (5,629)
----------- -----------
INVESTING ACTIVITIES
Purchases of fixed maturity investments ............................................ (1,385,430) (560,246)
Release of escrowed assets ......................................................... (18,833) --
Sales of fixed maturity investments ................................................ 536,240 182,904
Sales of equity securities ......................................................... 13,726 47,144
Net sales (purchases) of short-term investments .................................... 52,995 (365,238)
Acquisitions, net of cash .......................................................... (4,829) (34,444)
Purchases of furniture, equipment and other ........................................ (17,710) (6,311)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES ............................................. (823,841) (736,191)
----------- -----------
FINANCING ACTIVITIES
Common stock issued ................................................................ 236,604 457
Preference shares issued ........................................................... -- 740,737
Purchase of treasury shares ........................................................ -- (48)
Debt retirement .................................................................... (68) (450)
Shares issued in connection with acquisitions ...................................... -- (387)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................................... 236,536 740,309
----------- -----------
Increase (decrease) in cash ........................................................ 81,747 (1,511)
Cash beginning of year ............................................................. 9,970 11,481
----------- -----------
CASH END OF YEAR ................................................................... $ 91,717 $ 9,970
=========== ===========
Net income taxes paid .............................................................. $ 2,863 $ 330
=========== ===========
</Table>
11
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
INVESTMENT PORTFOLIO STATISTICS
Investment income yield (at amortized cost):
Pre-tax.............................................. 3.6% 3.0% 3.7% 5.2%
After-tax............................................ 3.2% 2.5% 3.2% 4.6%
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
FIXED MATURITIES AND SHORT-TERM INVESTMENTS
Average duration (in years).......................... 2.1 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. In addition, the Company does not
manage its assets by segment and, accordingly, investment income is not
allocated to each underwriting segment. The accounting policies of the segments
are the same as those used for the consolidated financial statements.
Inter-segment insurance business is allocated to the segment accountable for the
underwriting results in accordance with Statement of Financial Accounting
Standards No. 131.
The reinsurance segment consists of the Company's reinsurance underwriting
subsidiaries which are based in Bermuda and 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 insurance underwriting subsidiaries
which are based in the United States and Bermuda and write on a direct basis.
The insurance segment is comprised of six profit centers including property,
casualty, executive assurance, healthcare, professional liability insurance,
program business, and other (primarily non-standard auto and collateralized
protection business).
The corporate and other segment (non-underwriting) includes net investment
income, other fee income and other expenses incurred by the Company, net
realized investment gains or losses, net foreign exchange gains or losses and
non-cash compensation. The corporate and other segment also includes the results
of 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 2002 fourth quarter and year ended December 31, 2002.
Operating income is a non-GAAP measure. Operating income is defined as net
income or loss before extraordinary items, excluding net realized investment
gains or losses, net foreign exchange gains or losses, other income and non-cash
compensation charges. Management believes that, by excluding such items,
operating income provides useful information to the Company's shareholders about
its operating performance.
12
<Page>
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31, 2002
---------------------------------------------------
OPERATING INFORMATION BY SEGMENT (IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------- --------- ---------
Net premiums written (1)..................................... $ 236,690 $ 202,517 $ 439,207
=========== ========= =========
Net premiums earned.......................................... 205,620 84,391 290,011
Fee income................................................... -- 2,913 2,913
Losses and loss adjustment expenses.......................... (117,545) (56,029) (173,574)
Acquisition expenses......................................... (45,692) (9,177) (54,869)
Operating expenses........................................... (8,608) (19,834) (28,442)
----------- --------- ---------
GAAP underwriting income..................................... $ 33,775 $ 2,264 $ 36,039
=========== =========
Net investment income........................................ 15,602
Other fee income............................................. 253
Other expenses............................................... (617)
---------
Pre-tax operating income..................................... 51,277
Income tax expense........................................... (2,659)
---------
After-tax operating income................................... 48,618
Net realized investment losses, net of $100 tax expense...... (1,114)
Net foreign exchange losses, net of $0 tax expense........... (69)
Other income, net of $44 tax expense......................... 370
Non-cash compensation, net of $992 tax expense............... (8,180)
Extraordinary gain, net of $0 tax expense.................... 3,886
---------
NET INCOME................................................... $ 43,511
=========
DILUTED PER SHARE RESULTS
Operating income............................................. $ 0.72
Net realized losses on investments........................... (0.02)
Net foreign exchange losses.................................. 0.00
Other income................................................. 0.01
Non-cash compensation........................................ (0.12)
Extraordinary gain........................................... 0.06
---------
NET INCOME PER SHARE......................................... $ 0.65
=========
STATUTORY BASIS (2)
Loss ratio................................................... 57.2% 66.4% 59.9%
Acquisition expense ratio (3)................................ 27.9% 11.3% 20.2%
Other operating expense ratio................................ 4.0% 13.0% 8.1%
----------- --------- ---------
Combined ratio............................................... 89.1% 90.7% 88.2%
----------- --------- ---------
GAAP BASIS (2)
Loss ratio.................................................. 57.2% 66.4% 59.9%
Acquisition expense ratio (3)............................... 22.2% 7.4% 17.9%
Other operating expense ratio............................... 4.2% 23.5% 9.8%
----------- --------- ---------
Combined ratio.............................................. 83.6% 97.3% 87.6%
----------- --------- ---------
</Table>
(1) Reflects $32.2 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.
13
<Page>
<Table>
<Caption>
TWELVE MONTHS ENDED
DECEMBER 31, 2002
---------------------------------------------------
OPERATING INFORMATION BY SEGMENT (IN THOUSANDS) REINSURANCE INSURANCE TOTAL
----------- ---------- -----------
Net premiums written (1)...................................... $ 882,700 $ 378,927 $ 1,261,627
=========== ========== ===========
Net premiums earned........................................... 500,980 153,996 654,976
Fee income.................................................... -- 9,418 9,418
Losses and loss adjustment expenses........................... (315,766) (108,772) (424,538)
Acquisition expenses.......................................... (105,391) (13,570) (118,961)
Operating expenses............................................ (18,849) (42,827) (61,676)
----------- ---------- -----------
GAAP underwriting income (loss)............................... $ 60,974 $ (1,755) $ 59,219
=========== ==========
Net investment income......................................... 51,249
Other fee income.............................................. 4,790
Other expenses................................................ (15,023)
-----------
Pre-tax operating income...................................... 100,235
Income tax expense............................................ (5,283)
-----------
After-tax operating income.................................... 94,952
Net realized investment losses, net of $1,779 tax expense..... (2,618)
Net foreign exchange gains, net of $0 tax expense............. 2,449
Other income, net of $421 tax expense......................... 1,754
Reversal of deferred tax asset valuation allowance............ 7,421
Non-cash compensation, net of $618 tax benefit................ (48,862)
Extraordinary gain, net of $0 tax expense..................... 3,886
-----------
NET INCOME.................................................... $ 58,982
===========
DILUTED PER SHARE RESULTS
Operating income.............................................. $ 1.59
Net realized losses on investments............................ (0.04)
Net foreign exchange gains.................................... 0.04
Other income.................................................. 0.03
Reversal of deferred tax asset valuation allowance............ 0.12
Non-cash compensation......................................... (0.82)
Extraordinary gain............................................ 0.07
-----------
NET INCOME PER SHARE.......................................... $ 0.99
===========
STATUTORY BASIS (2)
Loss ratio.................................................... 63.0% 70.6% 64.8%
Acquisition expense ratio (3)................................. 22.2% 7.3% 17.7%
Other operating expense ratio................................. 3.4% 16.1% 7.2%
----------- ---------- -----------
Combined ratio................................................ 88.6% 94.0% 89.7%
----------- ---------- -----------
GAAP BASIS (2)
Loss ratio.................................................... 63.0% 70.6% 64.8%
Acquisition expense ratio (3)................................. 21.0% 2.7% 16.7%
Other operating expense ratio................................. 3.8% 27.8% 9.4%
----------- ---------- -----------
Combined ratio................................................ 87.8% 101.1% 90.9%
----------- ---------- -----------
</Table>
(1) Reflects $86.1 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. 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 2002 fourth quarter and year ended December 31,
2002:
14
<Page>
<Table>
<Caption>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2002
----------------------------- -----------------------------
NET PREMIUMS NET PREMIUMS
(in thousands) WRITTEN % OF TOTAL WRITTEN % OF TOTAL
------------- ------------- ------------- -------------
REINSURANCE SEGMENT
Client Location (1):
United States ........................ $ 131,147 55.4% $ 469,585 53.2%
United Kingdom ....................... 37,376 15.8% 163,838 18.6%
Bermuda .............................. 16,008 6.8% 51,562 5.8%
Canada ............................... 24,139 10.2% 45,749 5.2%
Germany .............................. 12,590 5.3% 42,899 4.9%
France ............................... 5,399 2.3% 26,751 3.0%
Japan ................................ 381 0.2% 11,920 1.4%
Switzerland .......................... 1,357 0.5% 11,806 1.3%
Other ................................ 8,293 3.5% 58,590 6.6%
------------- ------------- ------------- -------------
Total ................................ $ 236,690 100.0% $ 882,700 100.0%
============= ============= ============= =============
Major Line of Business (1):
Property catastrophe ................. $ 8,854 3.8% $ 110,989 12.6%
Other property business .............. 40,276 17.0% 166,344 18.8%
Casualty ............................. 111,472 47.1% 245,236 27.8%
Other specialty business ............. 33,297 14.1% 173,087 19.6%
Marine, aviation and space ........... 22,061 9.3% 60,383 6.8%
Casualty clash ....................... 93 0.0% 16,683 1.9%
Non-traditional business ............. 20,637 8.7% 109,978 12.5%
------------- ------------- ------------- -------------
Total ................................ $ 236,690 100.0% $ 882,700 100.0%
============= ============= ============= =============
INSURANCE SEGMENT
Client Location (1):
United States ........................ $ 200,925 99.2% $ 375,725 99.2%
United Kingdom ....................... 55 0.0% 1,179 0.3%
Bermuda .............................. 517 0.3% 777 0.2%
Canada ............................... 329 0.2% 555 0.1%
Switzerland .......................... 307 0.1% 307 0.1%
Other ................................ 384 0.2% 384 0.1%
------------- ------------- ------------- -------------
Total ................................ $ 202,517 100.0% $ 378,927 100.0%
============= ============= ============= =============
Major Line of Business (1):
Executive assurance .................. $ 21,308 10.5% $ 49,479 13.0%
Casualty ............................. 51,522 25.4% 95,419 25.2%
Program business ..................... 59,706 29.5% 93,868 24.8%
Property ............................. 27,089 13.4% 50,772 13.4%
Professional liability ............... 12,806 6.3% 20,436 5.4%
Healthcare ........................... 20,171 10.0% 23,624 6.2%
Other ................................ 9,915 4.9% 45,329 12.0%
------------- ------------- ------------- -------------
Total ................................ $ 202,517 100.0% $ 378,927 100.0%
============= ============= ============= =============
</Table>
(1) Reflects $32.2 million and $86.1 million of net premiums written,
respectively, for the 2002 fourth quarter and year ended December 31, 2002
assumed by the reinsurance segment from the insurance segment.
15
<Page>
CALCULATION OF BOOK VALUE PER SHARE
The following actual book value per share calculations are based on
shareholders' equity of approximately $1.4 billion and $1.0 billion at December
31, 2002 and 2001, respectively. Book value per share as of December 31, 2001 is
adjusted on a pro forma basis to reflect the issuance of additional preference
shares that were issued by the Company on June 28, 2002 and December 16, 2002
pursuant to post closing purchase price adjustment mechanisms under the
Subscription Agreement, as described below. Book value per share excludes the
effects of stock options and Class B warrants.
<Table>
<Caption>
DECEMBER 31, 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
------------- ------------ ------------- ------------
Common shares (1).................................. 27,725,334 $ 21.48 13,513,538 $ 20.05
Series A convertible preference shares (2)......... 38,844,665 $ 21.20 39,394,665 $ 19.29
Dilutive Class A warrants (3)...................... -- 1,206,206 $ 18.86
Restricted common shares (4)....................... -- 1,689,629 $ 18.28
------------- -------------
Common shares and potential common shares.......... 66,569,999 55,804,038
============= =============
</Table>
(1) Book value per common share at December 31, 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 $815.7 million and $749.4 million, respectively, by (ii) the number of
common shares outstanding. Restricted common shares are included in the number
of common shares outstanding as if such shares were issued on the date of grant.
(2) Includes 35,687,735 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 December 31, 2002 includes an additional 3,706,930
preference shares issued pursuant to the Subscription Agreement as follows; (i)
875,753 preference shares were issued by the Company on June 28, 2002 pursuant
to a post-closing purchase price adjustment mechanism under the Subscription
Agreement; and (ii) on December 16, 2002, the Company issued 2,831,177
preference shares under the Subscription Agreement because the closing price of
the Company's common shares was at least $30 per share for at least 20 out of 30
consecutive trading days on or prior to September 19, 2005 (a "Triggering
Event"). Pursuant to the Subscription Agreement, the Company had agreed to issue
to the new investors additional preference shares such that the per share price
is adjusted downward by $1.50 per preference share. As of the close of trading
on December 16, 2002, the closing price of the Company's common shares was at
least $30 for at least 20 out of 30 consecutive trading days. 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. In December 2002, 550,000 preference shares were converted
into an equal number of the Company's common shares.
(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 December 31, 2002.
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
16
<Page>
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.
17