<Page>
ARCH CAPITAL GROUP LTD.
EARNINGS RELEASE SUPPLEMENT
AS OF MARCH 31, 2003
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 2003 FIRST QUARTER RESULTS
HAMILTON, BERMUDA, May 12, 2003 -- Arch Capital Group Ltd. (NASDAQ: ACGL)
reports that net income for the 2003 first quarter was $52.5 million, or $0.78
per share, compared to $4.0 million, or $0.08 per share, for the 2002 first
quarter. The Company also reported after-tax operating income for the 2003 first
quarter of $49.2 million, or $0.73 per share, compared to $8.4 million, or $0.16
per share, for the 2002 first quarter. Net premiums written for the 2003 first
quarter were $776.9 million, compared to $280.7 million for the 2002 first
quarter. During the 2003 first quarter, diluted book value per share increased
by $0.96, or 4.5%, to $22.16.
The following table summarizes, on an after-tax basis, the Company's
consolidated financial data, including a reconciliation of operating income, a
non-GAAP measure, to net income (amounts in thousands except share data):
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Gross premiums written ........................... $ 860,100 $ 304,795
Net premiums written ............................. 776,863 280,710
Net premiums earned .............................. 404,451 67,527
Underwriting income - GAAP basis ................. 40,103 3,825
COMBINED RATIO:
Statutory Basis ................................ 87.7% 90.0%
GAAP Basis ..................................... 90.6% 94.3%
COMPONENTS OF NET INCOME (AFTER-TAX):
Operating income ............................... $ 49,178 $ 8,368
Net realized investment gains (losses) ......... 5,346 (1,161)
Net foreign exchange gains (losses) ............ 1,050 (108)
Other income ................................... 971 540
Non-cash compensation .......................... (4,059) (3,673)
------------ ------------
Net income ..................................... $ 52,486 $ 3,966
============ ============
DILUTED PER SHARE RESULTS (AFTER-TAX):
Operating income ............................... $ 0.73 $ 0.16
Net realized investment gains (losses) ......... 0.08 (0.02)
Net foreign exchange gains (losses) ............ 0.02 0.00
Other income ................................... 0.01 0.01
Non-cash compensation .......................... (0.06) (0.07)
------------ ------------
Net income ..................................... $ 0.78 $ 0.08
============ ============
Diluted average shares outstanding ............. 66,939,562 51,996,949
</Table>
1
<Page>
Operating income is defined as net income or loss excluding net realized
investment gains or losses, net foreign exchange gains or losses, other income
and non-cash compensation charges, net of tax. These items are excluded from
operating income because the Company does not believe that they are relevant
indicators of the performance of, or trends in, the Company's core business
operations. Management believes that operating income provides useful
information because it reflects the underlying fundamentals of the Company's
operations, follows industry practice and enables investors to compare the
Company's performance with its industry peer group. Operating income should not
be viewed as a substitute for net income determined in accordance with GAAP.
As set forth in the above table, the Company's underwriting profit, on a GAAP
basis, was $40.1 million for the 2003 first quarter, compared to $3.8 million
for the 2002 first quarter. The Company's combined ratio, on a GAAP basis, was
90.6% for the 2003 first quarter, compared to 94.3% for the 2002 first quarter.
The Company's loss ratio was 65.1% for the 2003 first quarter, compared to 74.8%
for the 2002 first quarter. A significant portion of the decrease was due to the
higher percentage of reinsurance segment net premiums earned in 2003 relating to
pro rata contracts. In addition, during the 2003 first quarter, the Company
recorded lower loss ratios on business that is primarily exposed to catastrophic
events based on a lower than expected level of such events. In establishing the
reserves for losses and loss adjustment expenses, the Company has made various
assumptions relating to the pricing of its reinsurance contracts and insurance
policies and also has considered available historical industry experience and
current industry conditions. The Company's reserving method is primarily the
expected loss method, which is commonly applied when limited loss experience
exists. Any estimates and assumptions made as part of the reserving process
could prove to be inaccurate due to several factors, including the fact that
very limited historical information has been reported to the Company through
March 31, 2003.
The total expense ratio of the Company's operating units, on a GAAP basis, which
includes acquisition expenses and other operating expenses, was 25.5% for the
2003 first quarter and 19.5% for the 2002 first quarter. The Company's
acquisition expense ratio, which is reflected net of certain policy-related fee
income, was 18.5% and 9.1% for the 2003 first quarter and 2002 first quarter,
respectively. A significant part of the increase was due to the higher
percentage of reinsurance segment net premiums earned in 2003 relating to pro
rata contracts. The other operating expense ratio was 7.0% and 10.4% for the
2003 first quarter and the 2002 first quarter, respectively. While aggregate
other operating expenses were higher for the 2003 first quarter compared to the
2002 first quarter, the other operating expense ratio decreased primarily due to
the significant growth in net premiums earned.
The Company's underwriting results for the 2003 first quarter reflect the
significant growth achieved by the Company's reinsurance segment over the past
fifteen months as well as the expansion of the insurance segment into additional
lines of business, which occurred primarily during the second half of 2002.
Results for the 2002 first quarter were primarily related to the Company's
reinsurance segment. The Company's reinsurance and insurance segments,
respectively, provided 70.5% and 29.5% of net premiums written for the 2003
first quarter, compared to 94.4% and 5.6% of net premiums written for the 2002
first quarter.
In addition, the results of the Company's reinsurance segment are influenced by
the amount of business written on a pro rata basis compared to business written
on an excess of loss basis. Typically, pro rata business is written at lower
loss ratios and higher acquisition expense ratios than excess of loss business.
For the 2003 first quarter, 64.6% of the reinsurance segment's net premiums
earned were generated from pro rata contracts, compared to 20.6% for the 2002
first quarter.
Net investment income for the 2003 first quarter was $18.4 million, compared to
$9.2 million for the 2002 first quarter. The growth in net investment income was
due to a significant increase in the Company's invested assets primarily
resulting from cash flow provided by operating activities during 2002 and 2003.
Consolidated cash flow provided by operating activities for the 2003 first
quarter was $300.5 million, compared to $48.3
2
<Page>
million for the 2002 first quarter. 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 2.5 years at March
31, 2003.
The Company's effective tax rate fluctuates from year to year consistent with
the relative mix of income reported by jurisdiction due primarily to the varying
tax rates in each jurisdiction. The Company's tax provision for the 2003 first
quarter is based upon the expected annual effective tax rates on net income and
operating income of 13.0% and 12.5%, respectively.
Non-cash compensation results primarily from restricted shares granted in
connection with the Company's capital infusion in 2001 and its underwriting
initiative. After-tax non-cash compensation expense for the 2003 first quarter
was $4.1 million, compared to $3.7 million for the 2002 first quarter. Absent
significant additional restricted share grants, after-tax non-cash compensation
expense during the remaining three quarters of 2003 is currently expected to be
approximately $3.3 million, $3.3 million, and $2.5 million, respectively.
The increase in diluted average shares outstanding in the 2003 first quarter
compared to the 2002 first quarter is primarily due to the effect of the
issuance of (i) 7,475,000 common shares in the stock offering completed by the
Company in April 2002, (ii) 3,706,930 preference shares issued in 2002 pursuant
to post-closing purchase price adjustments to investors who provided the
Company's November 2001 capital infusion and (iii) 3,748,946 common shares upon
the exercise of warrants from August to September 2002.
The following table summarizes selected underwriting results by segment,
including combined ratios on a GAAP and statutory basis (amounts in thousands):
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
------------ ------------
REINSURANCE SEGMENT
Gross premiums written ......................... $ 562,661 $ 264,861
Net premiums written ........................... 547,436 264,861
Net premiums earned ............................ 265,947 55,533
Underwriting income - GAAP basis ............... 33,174 3,849
COMBINED RATIO:
Statutory Basis ................................ 84.4% 88.8%
GAAP Basis ..................................... 88.2% 93.1%
INSURANCE SEGMENT
Gross premiums written ......................... $ 297,439 $ 39,934
Net premiums written ........................... 229,427 15,849
Net premiums earned ............................ 138,504 11,994
Underwriting income - GAAP basis ............... 6,929 (24)
COMBINED RATIO:
Statutory Basis ................................ 93.8% 94.5%
GAAP Basis ..................................... 94.9% 100.2%
TOTAL
Gross premiums written ......................... $ 860,100 $ 304,795
Net premiums written ........................... 776,863 280,710
Net premiums earned ............................ 404,451 67,527
Underwriting income - GAAP basis ............... 40,103 3,825
COMBINED RATIO:
Statutory Basis ................................ 87.7% 90.0%
GAAP Basis ..................................... 90.6% 94.3%
</Table>
3
<Page>
Gross and net premiums written for the Company's reinsurance segment were $562.7
million and $547.4 million, respectively, for the 2003 first quarter, compared
to gross and net premiums written of $264.9 million for the 2002 first quarter.
For the 2003 first quarter, 57.0% of net premiums written were generated from
pro rata contracts and 43.0% were generated from excess of loss treaties. For
the 2002 first quarter, 29.8% of net premiums written were generated from pro
rata contracts and 70.2% were derived from excess of loss treaties.
The Company's reinsurance subsidiaries have entered into reinsurance treaties
and other reinsurance arrangements during the 2003 first quarter that are
expected to provide approximately $854 million of annualized net reinsurance
premiums, compared to $506 million in annualized net reinsurance premiums for
the 2002 first quarter. The quarterly net premiums written for reinsurance
operations differ from the annualized net reinsurance premiums due to the timing
of recording premiums for contracts written on an excess of loss and pro rata
basis. For excess of loss contracts, the minimum premium, as defined in the
contract, is generally recorded as an estimate of premiums written as of the
date of the treaty. Estimates of premiums written under pro rata contracts are
recorded in the period in which the underlying risks are expected to incept and
are based on information provided by the brokers and the ceding companies.
The reinsurance segment's underwriting income, on a GAAP basis, was $33.2
million for the 2003 first quarter, compared to $3.8 million for the 2002 first
quarter. The combined ratio for the reinsurance segment, on a GAAP basis, was
88.2% for the 2003 first quarter, compared to 93.1% for the 2002 first quarter.
The loss ratio for the 2003 first quarter was 61.6%, compared to 73.7% for the
2002 first quarter. The acquisition expense ratio for the 2003 first quarter was
24.3%, compared to 13.1% for the 2002 first quarter, while the other operating
expense ratio for the 2003 first quarter was 2.3%, compared to 6.3% for the 2002
first quarter. The decrease in the loss ratio and the increase in the
acquisition expense ratio in the 2003 first quarter compared to the 2002 first
quarter were due, in part, to the increased percentage of net premiums earned
from pro rata contracts.
Gross and net premiums written for the Company's insurance segment were $297.4
million and $229.4 million, respectively, for the 2003 first quarter, compared
to gross and net premiums written of $39.9 million and $15.8 million,
respectively, for the 2002 first quarter. During 2002, the Company's insurance
segment established new profit centers in various specialty lines and began
writing business in its new areas of focus in the 2002 second quarter. In
addition, the insurance segment added a number of new programs during 2002.
Accordingly, premiums written by the insurance segment for the 2003 first
quarter are significantly higher than the 2002 first quarter.
The insurance segment's underwriting income, on a GAAP basis, was $6.9 million
for the 2003 first quarter, compared to an underwriting loss of $24,000 for the
2002 first quarter. The combined ratio for the insurance segment, on a GAAP
basis, was 94.9% for the 2003 first quarter, compared to 100.2% for the 2002
first quarter. The loss ratio for the 2003 first quarter was 71.6%, compared to
80.3% for the 2002 first quarter. The decrease in the insurance segment's loss
ratio primarily resulted from the increased contribution of business from its
new areas of focus. The acquisition expense ratio for the 2003 first quarter,
which is reflected net of policy-related fee income, was 7.4%, compared to
(9.3%) for the 2002 first quarter. The other operating expense ratio for the
2003 first quarter was 15.9%, compared to 29.2% for the 2002 first quarter,
reflecting the significant growth in net premiums earned in 2003.
At March 31, 2003 and December 31, 2002, the Company's consolidated
shareholders' equity was approximately $1.5 billion, or $22.16 per diluted
share, and approximately $1.4 billion, or $21.20 per diluted share,
respectively. The increase in diluted per share book value was primarily
attributable to the Company's operating income in the 2003 first quarter and an
increase in unrealized appreciation of investments. The calculation of the
Company's book value per share amounts is included in the accompanying
supplemental financial information.
4
<Page>
The Company will hold a conference call for investors and analysts at 9:30 a.m.
Eastern Time on May 13, 2003. A live webcast of this call will be available at
http://www.vcall.com/EventPage.asp?ID=83746 and will be archived on VCall's
website from 12:00 p.m. Eastern Time on May 13, 2003 through midnight Eastern
Time on June 13, 2003. A telephone replay of the conference call also will be
available beginning on May 13, 2003 at 12:00 p.m. Eastern Time until May 16,
2003 at midnight Eastern Time. To access the replay, domestic callers should
dial 877-660-6853 (account 1628, confirmation number 64287), and international
callers should dial 201-612-7415 (account 1628, confirmation number 64287).
Arch Capital Group Ltd., a Bermuda-based company with approximately $1.5 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 in the
Company's periodic reports filed with the Securities and Exchange Commission,
and include:
- the Company's ability to successfully implement its business strategy;
- 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 inflation, interest
rates 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 its 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
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;
5
<Page>
- acts of terrorism, political unrest and 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 and the cost of such reinsurance;
- 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 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>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
REVENUES
Net premiums written ............................. $ 776,863 $ 280,710
Increase in unearned premiums .................... (372,412) (213,183)
------------ ------------
Net premiums earned .............................. 404,451 67,527
Net investment income ............................ 18,438 9,167
Net realized investment gains (losses) ........... 6,199 (1,465)
Fee income ....................................... 5,676 2,755
Other income ..................................... 1,139 798
------------ ------------
TOTAL REVENUES ................................... 435,903 78,782
EXPENSES
Losses and loss adjustment expenses .............. 263,128 50,539
Acquisition expenses, net ........................ 78,152 7,311
Other operating expenses ......................... 31,080 12,505
Net foreign exchange (gains) losses .............. (1,050) 108
Non-cash compensation ............................ 4,264 4,128
------------ ------------
TOTAL EXPENSES ................................... 375,574 74,591
INCOME BEFORE INCOME TAXES ....................... 60,329 4,191
Income tax expense ............................... 7,843 225
------------ ------------
NET INCOME ....................................... $ 52,486 $ 3,966
============ ============
NET INCOME PER SHARE DATA
Basic ............................................ $ 2.02 $ 0.30
Diluted .......................................... $ 0.78 $ 0.08
AVERAGE SHARES OUTSTANDING
Basic ............................................ 26,017,313 13,018,631
Diluted .......................................... 66,939,562 51,996,949
</Table>
7
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost: 2003,
$1,976,678; 2002, $1,334,637) .................................................. $ 2,030,876 $ 1,382,104
Short-term investments available for sale, at fair value (amortized cost:
2003, $175,560; 2002, $480,541) ................................................ 175,560 480,541
Privately held securities (cost: 2003, $26,330; 2002, $31,630) ................ 27,926 31,536
------------ ------------
Total investments .............................................................. 2,234,362 1,894,181
------------ ------------
Cash ........................................................................... 88,882 91,717
Accrued investment income ...................................................... 20,506 17,127
Premiums receivable ............................................................ 573,329 343,716
Funds held by reinsureds ....................................................... 84,873 58,351
Unpaid losses and loss adjustment expenses recoverable ......................... 236,899 211,100
Paid losses and loss adjustment expenses recoverable ........................... 26,072 14,462
Prepaid reinsurance premiums ................................................... 128,164 120,191
Goodwill ....................................................................... 28,867 28,867
Deferred income tax asset ...................................................... 10,838 16,514
Deferred acquisition costs, net ................................................ 221,331 148,960
Other assets ................................................................... 52,659 46,142
------------ ------------
TOTAL ASSETS ................................................................... $ 3,706,782 $ 2,991,328
============ ============
LIABILITIES
Reserve for losses and loss adjustment expenses ................................ $ 836,056 $ 592,432
Unearned premiums .............................................................. 1,141,695 761,310
Reinsurance balances payable ................................................... 70,826 89,191
Investment accounts payable .................................................... 74,924 45,960
Other liabilities .............................................................. 102,683 91,191
------------ ------------
TOTAL LIABILITIES .............................................................. 2,226,184 1,580,084
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued:
2003, 38,844,665; 2002, 38,844,665) ............................................ 388 388
Common shares ($0.01 par value, 200,000,000 shares authorized, issued:
2003, 27,977,277; 2002, 27,725,334) ............................................ 280 277
Additional paid-in capital ..................................................... 1,354,686 1,347,165
Deferred compensation under share award plan ................................... (24,188) (25,290)
Retained earnings .............................................................. 99,858 47,372
Accumulated other comprehensive income consisting of unrealized
appreciation in value of investments, net of deferred income tax ............... 49,574 41,332
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................................................... 1,480,598 1,411,244
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 3,706,782 $ 2,991,328
============ ============
</Table>
8
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ------------
PREFERENCE SHARES
Balance at beginning of year ................................................... $ 388 $ 357
----------- ------------
Balance at end of period ....................................................... 388 357
----------- ------------
COMMON SHARES
Balance at beginning of year ................................................... 277 135
Common shares issued ........................................................... 3 23
----------- ------------
Balance at end of period ....................................................... 280 158
----------- ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ................................................... 1,347,165 1,039,887
Common shares issued ........................................................... 7,147 60,963
Common shares retired .......................................................... (254) --
Stock options .................................................................. 628 80
----------- ------------
Balance at end of period ....................................................... 1,354,686 1,100,930
----------- ------------
DEFERRED COMPENSATION UNDER SHARE AWARD PLAN
Balance at beginning of year ................................................... (25,290) (8,230)
Restricted common shares issued ................................................ (2,696) (61,301)
Deferred compensation expense recognized ....................................... 3,798 4,048
----------- ------------
Balance at end of period ....................................................... (24,188) (65,483)
----------- ------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year ................................................... 47,372 (11,610)
Net income ..................................................................... 52,486 3,966
----------- ------------
Balance at end of period ....................................................... 99,858 (7,644)
----------- ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED APPRECIATION (DECLINE) IN VALUE OF INVESTMENTS,
NET OF DEFERRED INCOME TAX
Balance at beginning of year ................................................... 41,332 (170)
Change in unrealized appreciation (decline) .................................... 8,242 (7,991)
----------- ------------
Balance at end of period ....................................................... 49,574 (8,161)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY ..................................................... $ 1,480,598 $ 1,020,157
=========== ============
</Table>
9
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ------------
COMPREHENSIVE INCOME (LOSS)
Net income ..................................................................... $ 52,486 $ 3,966
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period .................... 13,588 (9,152)
Reclassification of net realized (gains) losses included in net income ..... (5,346) 1,161
----------- ------------
Other comprehensive income (loss) ............................................ 8,242 (7,991)
----------- ------------
COMPREHENSIVE INCOME (LOSS) .................................................... $ 60,728 $ (4,025)
=========== ============
</Table>
10
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ------------
OPERATING ACTIVITIES
Net income ..................................................................... $ 52,486 $ 3,966
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Net realized investment (gains) losses .................................... (6,199) 1,465
Provision for non-cash compensation ....................................... 4,264 4,128
Net unrealized foreign exchange gains ..................................... (595) --
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses
and loss adjustment expenses recoverable ................................. 217,594 47,788
Unearned premiums, net of prepaid reinsurance premiums ................... 372,412 212,889
Premiums receivable ...................................................... (229,282) (183,323)
Deferred acquisition costs ............................................... (72,371) (29,432)
Funds held by reinsureds ................................................. (26,579) --
Reinsurance balances payable ............................................. (18,365) (5,862)
Accrued investment income ................................................ (3,379) (1,090)
Paid losses and loss adjustment expenses recoverable ..................... (11,610) (4,216)
Deferred income tax asset ................................................ 5,495 (359)
Other liabilities ........................................................ 13,547 2,408
Other items, net ......................................................... 3,052 (76)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 300,470 48,286
----------- ------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments ........................................ (984,053) (315,446)
Release of escrowed assets ..................................................... -- (18,833)
Sales of fixed maturity investments ............................................ 333,655 122,652
Sales of equity securities ..................................................... 7,121 232
Net sales of short-term investments ............................................ 342,995 175,405
Acquisitions, net of cash ...................................................... -- (2,513)
Purchases of furniture, equipment and other .................................... (5,570) (752)
----------- ------------
NET CASH USED FOR INVESTING ACTIVITIES ......................................... (305,852) (39,255)
----------- ------------
FINANCING ACTIVITIES
Proceeds from common shares issued ............................................. 2,801 --
Repurchase of common shares .................................................... (254) --
Debt retirement and other ...................................................... -- (24)
----------- ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........................... 2,547 (24)
----------- ------------
(Decrease) increase in cash .................................................... (2,835) 9,007
Cash beginning of year ......................................................... 91,717 9,970
----------- ------------
CASH END OF PERIOD ............................................................. $ 88,882 $ 18,977
=========== ============
</Table>
11
<Page>
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
INVESTMENT INCOME YIELD (AT AMORTIZED COST) 2003 2002
----------- ------------
Pre-tax ....................................................................... 3.5% 3.6%
After-tax ..................................................................... 3.1% 3.2%
</Table>
<Table>
<Caption>
(UNAUDITED)
MARCH 31, DECEMBER 31,
FIXED MATURITIES AND SHORT-TERM INVESTMENTS 2003 2002
----------- ------------
Average duration (in years) ................................................... 2.5 2.1
Average credit quality (Standard & Poors) ..................................... AA- AA-
</Table>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ------------
ANNUALIZED OPERATING RETURN ON BEGINNING EQUITY(1) 13.9% 3.3%
</Table>
(1) Annualized operating return on beginning equity, a non-GAAP measure,
equals operating income divided by shareholders' equity as of the
beginning of the year.
SEGMENT INFORMATION
The determination of the Company's business segments is based on the manner in
which the Company monitors the performance of its underwriting operations. The
Company classifies its businesses into two underwriting segments - reinsurance
and insurance - and a corporate and other segment (non-underwriting). The
Company does not manage its assets by segment and, accordingly, investment
income is not allocated to each underwriting segment. In addition, other revenue
and expense items are not evaluated by segment. Management measures segment
performance based on underwriting income or loss. The accounting policies of the
segments are the same as those used for the preparation of our consolidated
financial statements. Inter-segment insurance business is allocated to the
segment accountable for the underwriting results in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
The reinsurance segment consists of the Company's reinsurance underwriting
subsidiaries. The reinsurance segment generally seeks to write significant lines
on specialty property and casualty reinsurance treaties. Classes of business
focused on include casualty, other specialty, property excluding property
catastrophe (losses on a single risk, both excess of loss and pro rata),
property catastrophe, marine, aviation and space, non-traditional and casualty
clash.
The insurance segment consists of the Company's insurance underwriting
subsidiaries which primarily write on a direct basis. The insurance segment
consists of eight profit centers, including casualty, programs, property,
executive assurance, healthcare, professional liability, construction and surety
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 the Company's merchant banking operations.
The following tables set forth (i) underwriting income or loss by segment,
together with a reconciliation of underwriting income or loss to net income and
(ii) net premiums written and earned for each major line of business and net
premiums written by client location by segment. Certain prior period information
has been reclassified to conform to the current presentation.
12
<Page>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2003
------------------------------------------
(in thousands) REINSURANCE INSURANCE TOTAL
----------- ---------- -----------
Gross premiums written .......................................... $ 562,661 $ 297,439 $ 860,100
Net premiums written ............................................ 547,436 229,427 776,863
Net premiums earned ............................................. $ 265,947 $ 138,504 $ 404,451
Policy-related fee income ....................................... -- 3,213 3,213
Other underwriting-related fee income ........................... 1,927 -- 1,927
Losses and loss adjustment expenses ............................. (163,915) (99,213) (263,128)
Acquisition expenses, net ....................................... (64,666) (13,486) (78,152)
Other operating expenses ........................................ (6,119) (22,089) (28,208)
----------- ---------- -----------
GAAP underwriting income ........................................ $ 33,174 $ 6,929 40,103
=========== ==========
Net investment income ........................................... 18,438
Other fee income, net of related expenses ....................... 536
Other expenses .................................................. (2,872)
-----------
Pre-tax operating income ........................................ 56,205
Income tax expense .............................................. (7,027)
-----------
After-tax operating income ...................................... 49,178
Net realized investment gains, net of $853 tax expense .......... 5,346
Net foreign exchange gains, net of $0 tax expense ............... 1,050
Other income, net of $168 tax expense ........................... 971
Non-cash compensation, net of $205 tax benefit .................. (4,059)
-----------
NET INCOME ...................................................... $ 52,486
===========
DILUTED PER SHARE RESULTS
Operating income ................................................ $ 0.73
Net realized investment gains ................................... 0.08
Net foreign exchange gains ...................................... 0.02
Other income .................................................... 0.01
Non-cash compensation ........................................... (0.06)
-----------
NET INCOME PER SHARE ............................................ $ 0.78
===========
STATUTORY BASIS(1)
Loss ratio ...................................................... 61.6% 71.6% 65.1%
Acquisition expense ratio(2) .................................... 21.2% 10.6% 18.1%
Other operating expense ratio ................................... 1.6% 11.6% 4.5%
----------- ---------- -----------
Combined ratio .................................................. 84.4% 93.8% 87.7%
----------- ---------- -----------
GAAP BASIS(1)
Loss ratio ...................................................... 61.6% 71.6% 65.1%
Acquisition expense ratio(2) .................................... 24.3% 7.4% 18.5%
Other operating expense ratio ................................... 2.3% 15.9% 7.0%
----------- ---------- -----------
Combined ratio .................................................. 88.2% 94.9% 90.6%
----------- ---------- -----------
</Table>
(1) 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.
(2) The acquisition expense ratio is adjusted to include policy-related fee
income.
13
<Page>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2002
------------------------------------------
(in thousands) REINSURANCE INSURANCE TOTAL
----------- ---------- -----------
Gross premiums written .......................................... $ 264,861 $ 39,934 $ 304,795
Net premiums written ............................................ 264,861 15,849 280,710
Net premiums earned ............................................. $ 55,533 $ 11,994 $ 67,527
Policy-related fee income ....................................... -- 1,168 1,168
Losses and loss adjustment expenses ............................. (40,904) (9,635) (50,539)
Acquisition expenses, net ....................................... (7,262) (49) (7,311)
Other operating expenses ........................................ (3,518) (3,502) (7,020)
----------- ---------- -----------
GAAP underwriting income ........................................ $ 3,849 $ (24) 3,825
=========== ==========
Net investment income ........................................... 9,167
Other fee income, net of related expenses ....................... (612)
Other expenses .................................................. (3,286)
-----------
Pre-tax operating income ........................................ 9,094
Income tax expense .............................................. (726)
-----------
After-tax operating income ...................................... 8,368
Net realized investment losses, net of $304 tax benefit ......... (1,161)
Net foreign exchange losses, net of $0 tax benefit .............. (108)
Other income, net of $258 tax expense ........................... 540
Non-cash compensation, net of $455 tax benefit .................. (3,673)
-----------
NET INCOME ...................................................... $ 3,966
===========
DILUTED PER SHARE RESULTS
Operating income ................................................ $ 0.16
Net realized investment losses .................................. (0.02)
Net foreign exchange losses ..................................... 0.00
Other income .................................................... 0.01
Non-cash compensation ........................................... (0.07)
-----------
NET INCOME PER SHARE ............................................ $ 0.08
===========
STATUTORY BASIS(1)
Loss ratio ...................................................... 73.7% 80.3% 74.8%
Acquisition expense ratio(2) .................................... 13.0% (13.3%) 11.6%
Other operating expense ratio ................................... 2.1% 27.5% 3.6%
----------- ---------- -----------
Combined ratio .................................................. 88.8% 94.5% 90.0%
----------- ---------- -----------
GAAP BASIS(1)
Loss ratio ...................................................... 73.7% 80.3% 74.8%
Acquisition expense ratio(2) .................................... 13.1% (9.3%) 9.1%
Other operating expense ratio ................................... 6.3% 29.2% 10.4%
----------- ---------- -----------
Combined ratio .................................................. 93.1% 100.2% 94.3%
----------- ---------- -----------
</Table>
(1) 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.
(2) The acquisition expense ratio is adjusted to include policy-related fee
income.
14
<Page>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------------- -----------------
REINSURANCE SEGMENT % OF % OF
(in thousands) AMOUNT TOTAL AMOUNT TOTAL
--------- ----- --------- -----
MAJOR LINE OF BUSINESS:
NET PREMIUMS WRITTEN
Casualty ............................................... $ 163,960 30.0% $ 40,740 15.4%
Other specialty ........................................ 136,015 24.8% 30,255 11.4%
Property excluding property catastrophe ................ 112,600 20.6% 42,672 16.1%
Property catastrophe ................................... 48,773 8.9% 50,715 19.1%
Non-traditional ........................................ 47,635 8.7% 70,370 26.6%
Marine, aviation and space ............................. 31,421 5.7% 18,959 7.2%
Casualty clash ......................................... 7,032 1.3% 11,150 4.2%
--------- ----- --------- -----
Total .................................................. $ 547,436 100.0% $ 264,861 100.0%
========= ===== ========= =====
NET PREMIUMS EARNED
Casualty ............................................... $ 78,507 29.5% $ 6,516 11.7%
Property excluding property catastrophe ................ 61,067 23.0% 7,830 14.1%
Other specialty ........................................ 57,672 21.7% 7,482 13.5%
Property catastrophe ................................... 27,611 10.4% 11,932 21.5%
Non-traditional ........................................ 22,028 8.3% 14,950 26.9%
Marine, aviation and space ............................. 15,582 5.8% 4,020 7.2%
Casualty clash ......................................... 3,480 1.3% 2,803 5.1%
--------- ----- --------- -----
Total .................................................. $ 265,947 100.0% $ 55,533 100.0%
========= ===== ========= =====
CLIENT LOCATION:
NET PREMIUMS WRITTEN
United States .......................................... $ 328,888 60.1% $ 111,747 42.2%
United Kingdom ......................................... 109,498 20.0% 78,383 29.6%
Bermuda ................................................ 34,324 6.3% 12,324 4.7%
France ................................................. 19,431 3.5% 15,341 5.8%
Canada ................................................. 16,176 2.9% 7,931 3.0%
Germany ................................................ 13,727 2.5% 23,703 8.9%
Switzerland ............................................ 4,281 0.8% 527 0.2%
Australia .............................................. 3,245 0.6% 845 0.3%
Other .................................................. 17,866 3.3% 14,060 5.3%
--------- ----- --------- -----
Total .................................................. $ 547,436 100.0% $ 264,861 100.0%
========= ===== ========= =====
</Table>
15
<Page>
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------------- -----------------
INSURANCE SEGMENT % OF % OF
(in thousands) AMOUNT TOTAL AMOUNT TOTAL
--------- ----- --------- -----
MAJOR LINE OF BUSINESS:
NET PREMIUMS WRITTEN
Programs ............................................... $ 74,583 32.5% $ 2,267 14.3%
Casualty ............................................... 49,335 21.5% -- --
Executive assurance .................................... 25,264 11.0% 1,912 12.1%
Professional liability ................................. 19,843 8.7% -- --
Construction and surety ................................ 19,710 8.6% -- --
Healthcare ............................................. 16,264 7.1% -- --
Property ............................................... 14,238 6.2% -- --
Other .................................................. 10,190 4.4% 11,670 73.6%
--------- ----- --------- -----
Total .................................................. $ 229,427 100.0% $ 15,849 100.0%
========= ===== ========= =====
NET PREMIUMS EARNED
Programs ............................................... $ 43,629 31.5% $ 1,732 14.4%
Casualty ............................................... 25,255 18.2% -- --
Executive assurance .................................... 16,274 11.8% 96 0.8%
Property ............................................... 12,495 9.0% -- --
Construction and surety ................................ 9,829 7.1% -- --
Healthcare ............................................. 8,813 6.4% -- --
Professional liability ................................. 8,375 6.0% -- --
Other .................................................. 13,834 10.0% 10,166 84.8%
--------- ----- --------- -----
Total .................................................. $ 138,504 100.0% $ 11,994 100.0%
========= ===== ========= =====
CLIENT LOCATION:
NET PREMIUMS WRITTEN
United States .......................................... $ 228,328 99.5% $ 15,849 100.0%
Venezuela .............................................. 341 0.2% -- --
Japan .................................................. 209 0.1% -- --
Other .................................................. 549 0.2% -- --
--------- ----- --------- -----
Total .................................................. $ 229,427 100.0% $ 15,849 100.0%
========= ===== ========= =====
</Table>
16
<Page>
CALCULATION OF BOOK VALUE PER SHARE
The following actual book value per share calculations are based on
shareholders' equity of approximately $1.5 billion and $1.4 billion at March 31,
2003 and December 31, 2002, respectively. Book value per share excludes the
effects of stock options and Class B warrants.
<Table>
<Caption>
(UNAUDITED)
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------- ---------------------------
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) ........................ 27,977,277 $ 23.76 27,725,334 $ 21.48
Series A convertible preference shares .. 38,844,665 $ 22.16 38,844,665 $ 21.20
------------ ------------
Common shares and potential common shares 66,821,942 66,569,999
============ ============
</Table>
(1) Book value per common share at March 31, 2003 and December 31, 2002 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, 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.
Pursuant to the subscription agreement entered in connection with the November
2001 capital infusion (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). 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