General

The following is a discussion of the Company's financial condition and liquidity and results of operations. Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's and an individual segment's results of operations and financial condition.

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. These statements are based upon current plans, estimates and projections. Actual results may differ materially from those included in such forward-looking statements, and therefore undue reliance should not be placed on them. See "Cautionary Note Regarding Forward- Looking Statements" below for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement.

This discussion and analysis should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the audited Consolidated Financial Statements and notes thereto, presented under Item 7 and Item 8, respectively, of the Company's Form 10-K for the year ended December 31, 2007.

Executive Overview

See "Executive Overview" in Item 7 of the Company's Form 10-K for the year ended December 31, 2007.

Results of Operations

The following table presents an analysis of the Company's net income available
to ordinary shareholders and other financial measures (described below) for the
three months ended June 30, 2008 and 2007:


(U.S. dollars and shares in thousands, except per                     (Unaudited)
share amounts)                                                    Three Months Ended
                                                                       June 30,
                                                               2008                2007
Net income available to ordinary shareholders              $   237,851         $   544,535
Earnings per ordinary share and ordinary share
equivalents - basic                                        $      1.35         $      3.05
Earnings per ordinary share and ordinary share
equivalents - diluted                                      $      1.34         $      3.00
Weighted average number of ordinary shares and
ordinary share equivalents - basic                             176,655             178,378
Weighted average number of ordinary shares and
ordinary share equivalents - diluted                           176,910             181,613

The following table presents an analysis of the Company's net income available to ordinary shareholders and other financial measures (described below) for the six months ended June 30, 2008 and 2007:

(U.S. dollars and shares in thousands, except per                     (Unaudited)
share amounts)                                                     Six Months Ended
                                                                       June 30,
                                                             2008                  2007
Net income available to ordinary shareholders            $   449,724          $     1,094,253
Earnings per ordinary share and ordinary share
equivalents - basic                                      $      2.55          $          6.13
Earnings per ordinary share and ordinary share
equivalents - diluted                                    $      2.54          $          6.06
Weighted average number of ordinary shares and
ordinary share equivalents - basic                           176,453                  178,650
Weighted average number of ordinary shares and
ordinary share equivalents - diluted                         176,946                  180,570

1) Impact of credit market movements on the Company's investment portfolio and investment fund affiliates

In the first six months of 2008, particularly in the first quarter, financial market conditions continued to be extremely challenging as the global credit crisis that began in July 2007 continued to adversely impact global fixed income markets. While credit spreads on both corporate and structured credit rallied modestly in the second quarter, spread levels remain wide resulting in continuing depressed pricing on credit product. Continuing challenges included continued weakness in the U.S. housing market and increased mortgage delinquencies, investor anxiety over the U.S. economy, rating agency downgrades of various structured products and financial issuers, unresolved issues with structured investment vehicles and monolines, deleveraging of financial institutions and hedge funds and a significant dislocation in the inter-bank market.

The lingering issues in the credit market were compounded during the second quarter as government rates in the U.S., U.K. and Eurozone all increased markedly. As such, both the widening in credit spreads and the increase in interest rates were the primary drivers behind the increase of $1.8 billion in net unrealized losses and $100.2 million in net realized losses on investments reported for the six months ended June 30, 2008.

Realized losses and impairments as a result of securities where the Company determined its unrealized losses were other than temporary impairments totaled $74.7 million during the six months ended June 30, 2008 in the Company's holdings of sub-prime non-agency securities, second liens, ABS CDOs with sub-prime collateral as well as Alt-A mortgage exposures ("Topical Assets"). In addition, the Company realized losses of $19.5 million on lower-rated Jumbo mortgage securities. These losses and impairments continued to be principally concentrated in 2005, 2006, and 2007 vintage securities. The level of topical impairments have declined in the second quarter of 2008 relative to the first quarter of 2008 and the latter half of 2007, as a number of the lower tranched securities were previously written off to security values ranging from five to thirty percent of par value. Liquidations necessary to fund the repayment of the guaranteed investment contract ("GIC") liabilities following the downgrade of XL Capital Assurance Inc. ("XLCA") were funded through sales of assets in the Other Financial Lines segment investment portfolios as well as the general investment portfolios. Management's approach was to avoid the sale of assets where current market prices did not reflect intrinsic values or where transaction costs for liquidation were excessive. As a result, the Company continues to hold a number of the Topical Assets and these have been transferred to the general portfolio in exchange for those assets that were liquidated.

The following table details the current exposures to Topical Assets within the Company's fixed income portfolio as well as the current net unrealized (loss) gain position as at June 30, 2008 and December 31, 2007:

(U.S. dollars in thousands)                                   As at                                                              As at
                                                          June 30, 2008                                                    December 31, 2007
                                                             Percent                                                            Percent
                                                             of Fixed                Net                                        of Fixed                Net
                                      Holding at              Income             Unrealized              Holding at              Income             Unrealized
                                      Fair Value            Portfolio            (Loss) Gain             Fair Value            Portfolio            (Loss) Gain
Topical Assets:
Sub-prime first lien mortgages      $       724,368               2.1 %        $     (212,369 )        $       995,947               2.5 %        $     (145,785 )
Alt-A mortgages                             635,085               1.8 %              (174,505 )                924,783               2.3 %               (40,145 )
Second lien mortgages
(including sub-prime second
lien mortgages)                              66,265               0.2 %                (7,561 )                 97,647               0.3 %                   788
ABS CDOs with sub-prime
collateral                                   17,856               0.1 %                (4,857 )                 39,317               0.1 %                   101

Total exposure to Topical
Assets                              $     1,443,574               4.2 %        $     (399,292 )        $     2,057,694               5.2 %        $     (185,041 )

                                                     Three Months Ended                            Six Months Ended
                                                       June 30, 2008                                June 30, 2008
                                                                      Change                                       Change
                                                Realized              in Net               Realized                in Net
                                               (Loss) and           Unrealized            (Loss) and             Unrealized
                                             (Impairments)            (Loss)            (Impairments)              (Loss)
Topical Assets:
Sub-prime first lien mortgages               $      (5,311 )       $    (8,709 )        $     (37,109 )        $      (66,584 )
Alt-A mortgages                                     (9,344 )           (36,007 )              (23,431 )              (134,360 )
Second lien mortgages (including
sub-prime second lien mortgages)                    (2,818 )            (9,526 )               (7,466 )                (8,349 )
ABS CDOs with sub-prime collateral                  (3,416 )            (7,341 )               (6,681 )                (4,958 )

Total                                        $     (20,889 )       $   (61,583 )        $     (74,687 )        $     (214,251 )

The Company's sub-prime and Alt-A exposures remain primarily highly rated, have strong underlying loan characteristics and are supported by adequate subordination levels. The Company had approximately $208 million of topical investments downgraded during the quarter ended June 30, 2008 and approximately $353 million during the six months ended June 30, 2008.

Of the total Topical Asset exposure as at June 30, 2008 and December 31, 2007 of $1.4 billion and $2.0 billion, respectively, approximately $56.9 million and $76.8 million, respectively, of the related securities had ratings dependent on guarantees issued by third party guarantors (i.e. monoline insurers). Decreases in the ratings of such third party guarantors would typically decrease the fair value of guaranteed securities; however, at June 30, 2008, in the event of non-performance on the part of these third party guarantors, the Company estimates that the average credit quality of this portfolio would be 'A' and that approximately 95.9% would remain investment grade. In addition, of the total fixed income portfolio as at June 30, 2008 and December 31, 2007, of $34.3 billion and $39.1 billion, respectively, less than 2% were guaranteed by such third parties with no individual third party representing more than 1%.

As noted above, the remaining changes in net unrealized losses during the six months ended June 30, 2008 were primarily as a result of spread widening in both corporate credit, particularly financials, and CMBS assets, as well as increases in government interest rates. Spreads widened significantly in the first quarter, followed by modest tightening in second quarter. Government rates declined significantly in first quarter but increased even more significantly in second quarter. The Company believes these losses are a result of either technical spread widening as a result of the market events noted above, or changes in prevailing market rates for government securities, rather than any fundamental deterioration or other-than-temporary impairment.

Net realized and unrealized gains on investment derivatives for the six months ended June 30, 2008 resulted primarily from corporate credit deterioration and the resulting appreciation of certain credit derivative swaps held in the investment portfolio.

Net income from investment fund affiliates was marginally negative in the first half of 2008 as the markets were particularly challenging for strategies employed by the Company's alternative investment managers given the extreme volatility and overall pull back of credit availability. The Company's alternative investments are managed to maximize total-return on a risk-adjusted basis, and the results over the first half of 2007 as compared to the first half of 2008 are reflective of different market conditions and opportunities available over these periods.

As at June 30, 2008, approximately 13.2% of the asset and mortgage-backed holdings were classified as part of the Company's exposure to Topical Assets. This represented approximately 4.2% of the total fixed income portfolio and 17.6% of the total net unrealized loss position. Of the Topical Asset securities, approximately 97.2% were rated as investment grade. All portfolio holdings, including those with sub-prime exposure, are reviewed as part of the ongoing other-than-temporary-impairment monitoring process. The Company continues to actively monitor its exposures, and to the extent market disruptions continue, including but not limited to disruptions in the residential mortgage market and the related impacts on the assumptions embedded in the Company's

Consistent with the Company's overall focus on core property and casualty operations, management is committed to an overall strategic realignment of its property and casualty investment portfolio over time. Such realignment will support reduced volatility through reduced credit spread exposure, reduced exposure to lower-rated and particularly BBB-rated securities, reduced CMBS and financial sector exposure. The realignment will be achieved through bond maturity and coupon reinvestment, cash flows from business operations and certain opportunistic sales. This strategic realignment will also include an assessment of the Company's risk asset portfolio.

2) Relationships with SCA

The Company has multiple relationships with SCA as a result of SCA's initial origins as a wholly-owned subsidiary and its subsequent IPO. These relationships are detailed in Note 4 to the Consolidated Financial Statements, "Security Capital Assurance Ltd", and include, most significantly, a 46.9% investment along with certain guarantees and reinsurance arrangements. The Company is not a primary originator or insurer of mortgages, nor does it guarantee mortgages other than indirectly through the activities of SCA, and as such the impact to the Company with respect to credit enhancement activities is largely limited to the SCA investment and related reinsurance agreements and guarantees.

At December 31, 2007, the Company wrote down its investment in SCA to zero. The write down of SCA to zero in the fourth quarter of 2007 was based, in part, on the losses SCA recorded in the fourth quarter of 2007. No equity earnings have been recorded in the first six months of 2008 relating to the common equity interest in SCA as a result of their reported results throughout 2008.

As a result of a significant increase in expected losses in the SCA portfolio of insured credits the Company has recorded additional losses related to both the reinsurance agreements as well as pre-IPO guarantees. The following table summarizes the income statement impact of these relationships for both the three and six months ended June 30, 2008: